Stumpf v. McGee

• Decision Date: 16 July 2001
• Docket Number: No. 00-31109,00-31109
• Citation: 258 F.3d 392
• Parties: (5th Cir. 2001) IN THE MATTER OF: MICKEY O'CONNOR, Debtor. HARRY C. STUMPF, Appellee, v. FRANK W. McGEE, Appellant, v. JOHN F. STUMPF, JR.; LINCOLN T. CASE, Appellees
• Court: U.S. Court of Appeals — Fifth Circuit

Page 392

258 F.3d 392 (5th Cir. 2001)

IN THE MATTER OF: MICKEY O'CONNOR, Debtor.

HARRY C. STUMPF, Appellee, v. FRANK W. McGEE, Appellant, v. JOHN F. STUMPF, JR.; LINCOLN T. CASE, Appellees.

No. 00-31109

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

July 16, 2001

[Copyrighted Material Omitted] Appeal from the United States District Court for the Eastern District of Louisiana

Before GARWOOD, HALL,¹ and BARKSDALE, Circuit Judges.

RHESA HAWKINS BARKSDALE, Circuit Judge:

For this Chapter 11 bankruptcy case, the executory partnership agreement at issue having been neither expressly assumed nor rejected, of primary concern is whether the Trustee is substituted for the Debtor as a partner and can maintain an action against the other partners for violations of transfer restrictions in the agreement and for distributions concerning those transfers, including whether the agreement was assumable under the Bankruptcy Code and Louisiana law. The bankruptcy court held the agreement passed through bankruptcy to the Reorganized Debtor, a liquidating trust managed by the Trustee. The district court reversed in part, holding the agreement was not assumable and passed through bankruptcy unaffected, resulting in the Trustee's having no right to assert claims regarding the interest-transfers. The Trustee, Frank W. McGee, appeals the district court's judgment in favor of those claiming to be the Debtor's partners. AFFIRMED and REMANDED.

I.

The facts are undisputed. In 1982, Mickey O'Connor (the Debtor), Ronald Case, Auby Smith, and Appellee John Stumpf formed a Louisiana general partnership, Westbank Inns. The partnership agreement restricts a partner's ability to transfer or assign his interest: (1) he cannot substitute another person as a partner without the written consent of a majority of the partners; (2) a majority must give written consent before a partner can assign, mortgage, or sell his interest in the partnership or its assets; (3) his sale, exchange, transfer, or assignment of his right to share in the partnership's profits or losses shall be valid only if his interest is first offered to the partnership, and then to the other partners; and (4) any transaction in violation of these restrictions will be null and void.

Shortly after its formation, Westbank Inns entered into a joint venture with LaQuinta Motor Inns, with Westbank Inns owning a 40 percent interest. The joint venture owns and operates a LaQuinta Inn in Gretna, Louisiana.

In May 1987, approximately five years after formation of Westbank Inns, O'Connor petitioned for relief under Chapter 11 of the Bankruptcy Code. O'Connor remained debtor-in-possession for almost four years; McGee was appointed Chapter 11 Trustee in 1991. Approximately two years later, the Trustee met with Appellee John Stumpf and his brother, Appellee Harry Stumpf, informing them that he was the Trustee of O'Connor's bankruptcy estate and requesting that correspondence regarding Westbank Inns be sent to him.² At that meeting, the Trustee received a check for $155,000, which represented the 1991 distributions being held by John Stumpf for the benefit of O'Connor's bankruptcy estate for its share of partnership distributions. Also at that meeting, the Stumpfs offered to purchase the Debtor's partnership interest. The Trustee responded that he could not sell without court approval, and needed to determine the interest's value. In mid-1993, John Stumpf offered $128,000 for the Debtor's interest.

In early 1994, the Trustee filed a Fourth Amended Disclosure Statement and a Second Amended Plan of Reorganization; no specific reference to the Debtor's partnership interest is included in either. The Disclosure Statement, in describing the Debtor's assets and liabilities, refers to a 1991 accountant's report. In that report, the Debtor's interest is valued at $150,000. The Disclosure Statement provides: "The Plan provides for the rejection of executory contracts not previously assumed or rejected, if any". (Emphasis added.) The section of the Disclosure Statement dealing with executory contracts does not specifically refer to any:

All executory contracts, with or for the benefit of employees, agents or brokers, not heretofore assumed or terminated by agreement, or assured within the time frame set forth in this plan are heretofore rejected. Debtor reserves the right to accept or reject executory contracts between the Effective Date and 60 days after the Effective Date.

(Emphasis added.) The "Effective Date" is defined as the date on which the order confirming the Plan becomes final and non-appealable.

The Plan establishes a liquidating trust, to which all of the Debtor's assets will be transferred, with McGee as Trustee and the creditors as beneficiaries. Regarding executory contracts, the Plan contains language essentially identical to that in the Disclosure Statement. No motion to assume or reject the partnership agreement was filed. The Plan was confirmed in May 1994.

As mentioned in footnote 2 supra, between 1988 and January 1994, during the pendency of the bankruptcy proceedings, O'Connor's partners engaged in various interest-transfers. Appellees John Stumpf and Lincoln Case each acquired one-half of Ronald Case's; John Stumpf acquired Smith's; and John Stumpf transferred a portion of his to his brother, Appellee Harry Stumpf. In April 1989, prior to transferring his interest, Ronald Case filed a petition for relief under Chapter 7 of the Bankruptcy Code. And, in March 1990, Smith's interest was seized by one of his creditors, from whom John Stumpf acquired it. Therefore, as of January 1994, those claiming partnership in Westbank Inns were O'Connor, and Appellees John and Harry Stumpf and Lincoln Case.

Following plan-confirmation, the Trustee filed an adversary complaint in bankruptcy court against John and Harry Stumpf and Lincoln Case. Of particular importance to this interlocutory appeal, as discussed infra, Westbank Inns was not sued. Nor did the Trustee seek to recover the economic value of the Debtor's interest. Instead, the complaint concerned only the interest-transfers. The Trustee sought: (1) a declaration that they were void for violating the partnership agreement restrictions; (2) a declaration of the Chapter 11 estate's proportionate ownership of the terminated interests of Ronald Case and Smith; and (3) an accounting for partnership distributions Appellees received attributable to the interest-transfers.

Following a trial, the bankruptcy court held: Ronald Case's partnership ceased upon his Chapter 7 filing in April 1989; Smith's partnership ceased in March 1990, when his interest was seized by a creditor and the seizure was not revoked within 30 days; all of the interest-transfers were void because, contrary to the agreement, the interests were not first offered to the partnership and then the other partners; the value of the interests formerly held by Ronald Case and Smith, as of the time their partnerships ceased, must be paid to them after determining the value in an evidentiary hearing; the Trustee did not specifically assume or reject the agreement; it passed through bankruptcy; O'Connor's interest is the property of the Reorganized Debtor's estate and it remains a partner; and the Trustee is therefore entitled to distributions and is probably entitled to purchase the former partners' interests. The parties were directed to schedule the evidentiary hearing to determine the value of the interests of Ronald Case and Smith at the time their partnerships ceased.

The district court affirmed in part, and reversed in part. It held the agreement was not assumable under 11 U.S.C. § 365(c)(1) because, under the applicable non-bankruptcy (Louisiana) law, the non-debtor partners had not consented to performance by the Trustee. It agreed with the bankruptcy court that the agreement passed through bankruptcy. But, it held: the bankruptcy court was incorrect in holding the pass-through resulted in the agreement becoming part of the Debtor's estate; instead, the agreement was unaffected by the bankruptcy proceedings and remains binding on O'Connor; and O'Connor, not the Trustee, can claim a right under the agreement to distributions and to determine the validity of interest-transfers.

II.

The Trustee contends: the district court lacked jurisdiction because leave to appeal was denied previously or because Appellees' notices of appeal were not timely; Appellees have no standing because they failed to challenge the bankruptcy court's finding that the transfers were void; the district court erred in holding that the partnership agreement passed through bankruptcy to the Debtor rather than to the Reorganized Debtor (liquidating trust); alternatively, the agreement was assumed; and Appellees did not raise the theory adopted by the district court.

"We review the decision of the district court by applying the same standards of review to the bankruptcy court's findings of fact and conclusions of law as applied by the district court." Kennard v. MBank Waco, N.A. (Matter of Kennard), 970 F.2d 1455, 1457 (5th Cir. 1992). Those findings of fact are reviewed for clear error; the conclusions of law, de novo. Fed. R. Bankr. P. 8013; Phoenix Exploration, Inc. v. Yaquinto (Matter of Murexco Petroleum, Inc.), 15 F.3d 60, 62 (5th Cir. 1994).

A.

The Trustee contends the district court lacked jurisdiction because leave to appeal had been denied previously or because Appellees' notices of, and motions for leave to, appeal were not timely filed. Although raised in district court, it did not address this issue.

District courts may hear appeals from interlocutory orders, such as the bankruptcy court's partial judgment, "with leave of the court", pursuant to 28 U.S.C. § 158(a) (district courts' jurisdiction to hear appeals from bankruptcy court final judgments, orders, and decrees, as well as from interlocutory orders and decrees). To appeal a bankruptcy court's interlocutory order, ...