In re Smith, Bankruptcy No. 92-30515
| Decision Date | 03 August 1995 |
| Docket Number | Adv. No. 94-3013.,Bankruptcy No. 92-30515 |
| Citation | 185 BR 285 |
| Parties | In re Jacqueline SMITH, Debtor. Donald M. SAMSON, Trustee, Plaintiff, v. Lawrence R. PROKOPF and Prokopf Family Partnership, a Limited Partnership, Defendants. |
| Court | U.S. Bankruptcy Court — Southern District of Illinois |
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Donald M. Samson, Trustee, Belleville, IL.
Phillip H. Hamilton, Godfrey, IL, for defendants.
The Chapter 7 trustee filed this adversary proceeding to recover property held by a limited partnership formed by debtor, Jacqueline Smith, and her brother, Lawrence Prokopf. Count I of the trustee's amended complaint seeks to avoid as a fraudulent conveyance the debtor's transfer of property to the limited partnership, known as the Prokopf Family Partnership.1 Count II of the complaint, which is at issue in this proceeding, seeks to dissolve the limited partnership pursuant to Illinois law for failure to comply with partnership purposes or, alternatively, to have the debtor's interest in the partnership property reconveyed to her bankruptcy estate because of the invalidity of the partnership.
Defendants, Lawrence Prokopf and the Prokopf Family Partnership, filed a motion to dismiss Count II of the trustee's complaint. The Court subsequently construed the defendants' motion as a motion for summary judgment pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure. See Fed.R.Civ.Proc. 12(b)(6).2 The trustee has not filed a cross-motion for summary judgment.
The undisputed facts are as follows: In July 1990, the debtor and her brother entered into a written agreement to form an Illinois limited partnership. The stated purpose of the limited partnership, which was to operate under the name "Prokopf Family Partnership," was "to hold and invest family real estate," with "the general character of . . . its business" being "to hold, develop and lease real estate and equipment, and conduct a general business as thereto related." Contemporaneous with entering into the limited partnership agreement, and as their initial capital contributions to the partnership, Lawrence Prokopf and the debtor each conveyed to the limited partnership his or her undivided one-half interest in certain real estate valued at $50,000, which both occupied as a residence. Lawrence Prokopf was designated as the general partner and as a limited partner with a 50% interest in the limited partnership, and the debtor was designated as a limited partner holding the remaining 50% interest.3
The limited partnership agreement provided that the partnership would continue for twenty-five years from its inception, unless sooner terminated by law, by the sale, disposition or abandonment of all of its property interests, or by dissolution and termination in accordance with the partnership agreement. During its existence, no limited partner could withdraw or demand the return of any part of his or her capital contribution except upon dissolution of the partnership. However, no further capital contributions were required from the partners unless all partners agreed.
The partnership agreement allowed a limited partner to sell his or her economic interest in the partnership to a third party but only after first offering the interest to the partnership for purchase. The agreement provided that if sale to a third party did transpire, the third party would not become a limited partner unless the general partner gave his consent and certain other requirements were met.
The partnership agreement further provided that the bankruptcy of a limited partner would not dissolve the limited partnership. Dissolution would take place only upon the occurrence of certain events set forth in the partnership agreement, one of which was the entry of a dissolution decree or judicial order by a court of competent jurisdiction. In the event of dissolution and final termination, the general partner was to wind up the partnership affairs, sell all assets, pay all liabilities and distribute any remaining monies to the partners.
In Count II of the trustee's complaint seeking dissolution of the limited partnership, the trustee alleges that Illinois law requires a limited partnership to be a business entity whose purpose is to conduct business and that the Prokopf Family Partnership has failed to act as a limited partnership because its purpose is to hold title to the residence rather than to conduct business. The trustee further asserts that the debtor and Lawrence Prokopf have failed to treat the residence as partnership property in that they have not maintained a partnership bank account and have used personal funds to pay for taxes, insurance, and upkeep of the residence. The trustee contends that since the partnership is not conducting business nor complying with its stated partnership purposes, he is entitled, as holder of the debtor's interest in the limited partnership, to dissolution of the partnership pursuant to Illinois law. Alternatively, he argues that there is no valid partnership and that he is entitled to have the debtor's undivided one-half interest in the real estate reconveyed from the limited partnership to the bankruptcy estate or to have the debtor's conveyance of this interest to the limited partnership set aside.
The defendants seek summary judgment on Count II of the complaint,4 setting forth a five-fold argument in support of their motion. The defendants contend, first, that the bankruptcy trustee of a limited partner may not seek dissolution of the partnership because the estate's interest is confined to the personal property interest which the limited partner holds in partnership property. This argument, which is jurisdictional in nature, requires the Court to determine what property interest is included in the bankruptcy estate of the debtor as limited partner.
A limited partnership is a "type of partnership comprised of one or more general partners who manage the business and who are personally liable for partnership debts, and one or more limited partners who contribute capital and share in profits but who take no part in running the business and incur no liability with respect to partnership obligations beyond contribution." Black's Law Dictionary 928 (6th ed. 1990).5 A limited partner is granted limited liability for partnership debt in exchange for relinquishing participation in the control of the business. 805 ILCS 210/303; see, e.g., Allen v. Amber Manor Apartments Partnership, 95 Ill.App.3d 541, 51 Ill.Dec. 26, 31, 420 N.E.2d 440, 445 (1981).
A limited partner's interest in the partnership of which he or she is a member is personal property. 805 ILCS 210/701. It consists of the "partner's share of the profits and losses of . . . the limited partnership and the right to receive distributions of partnership assets." 805 ILCS 210/101(10). It is this economic interest which is included in the limited partner's bankruptcy estate and not any specific asset owned by the partnership itself. See, e.g., Matter of Pentell, 777 F.2d 1281, 1285 (7th Cir.1985); In re Olszewski, 124 B.R. 743, 746 (Bankr.S.D.Ohio 1991).
However, the rights of a limited partner consist of more than his or her right to share in partnership income and in the distribution of partnership assets. See, e.g., In re Priestley, 93 B.R. 253, 257-58 (Bankr. D.N.M.1988). A limited partner also has contractual rights arising from the partnership which include "the right to have full information . . . and to have the same rights as a general partner in reference to dissolution and winding up by a decree of court." Curtis v. Johnson, 92 Ill.App.2d 141, 234 N.E.2d 566, 572 (1968); see In re Priestley, 93 B.R. at 257-58; 805 ILCS 210/305; 805 ILCS 210/802; 805 ILCS 210/803. When a limited partner is a debtor in bankruptcy, these rights are legal or equitable interests of the debtor within the ambit of 11 U.S.C. § 541(a)(1)6 and become property of the bankruptcy estate. See, e.g., In re Antonelli, 4 F.3d 984, 29 C.B.C.2d 935, 943 (4th Cir. 1993) (); In re Cardinal Indus., Inc., 105 B.R. 834, 848-849 (Bankr.S.D.Ohio 1989); Matter of Plunkett, 23 B.R. 392, 393-394 (Bankr.E.D.Wis. 1982) ().
The decisions cited by the defendants, In re Funneman, 155 B.R. 197 (Bankr.S.D.Ill. 1993), and Turner v. Central Nat'l Bank of Mattoon, Ill., 468 F.2d 590 (7th Cir.1972), do not provide otherwise. In Funneman, this Court ruled that because a partnership is a separate entity which holds property in its own right, the Chapter 7 trustee of a debtor partner could not sell real estate belonging to the partnership but was limited to selling the partner's personal property interest in the partnership. Funneman, 155 B.R. at 200. Similarly, in Turner, the Seventh Circuit Court of Appeals held that the Chapter 7 trustee of a debtor partner could not recover, as a preferential transfer, monies paid to a creditor by the partnership from partnership funds. Turner, 468 F.2d at 591. The court, noting that the partner had no interest in specific partnership property, ruled that the trustee's interest in partnership property was limited to the individual partner's share of partnership property, if any, remaining after payment of partnership debts. Id.
Both Turner and Funneman are distinguishable from the present case in that they were concerned with the ability of the trustee of the debtor partner to reach specific assets which belonged to the partnership. In contrast, the present case is concerned with the limited partner's right to obtain dissolution of the partnership — a right which belongs to the...
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