Summit Inv. and Development Corp. v. Leroux

• Decision Date: 07 April 1995
• Docket Number: Nos. 94-2212,94-2213,s. 94-2212
• Parties: , 28 Bankr.Ct.Dec. 200, Bankr. L. Rep. P 76,695 SUMMIT INVESTMENT AND DEVELOPMENT CORPORATION, Plaintiff, Appellant, v. Edward G. LEROUX, Jr., Defendant, Appellee. SUMMIT INVESTMENT AND DEVELOPMENT CORPORATION, Plaintiff, Appellant, v. Albert F. CURRAN, Sr., Defendant, Appellee. First Circuit
• Court: U.S. Court of Appeals — First Circuit

Page 608

69 F.3d 608

64 USLW 2323, 28 Bankr.Ct.Dec. 200, Bankr.

L. Rep. P 76,695

SUMMIT INVESTMENT AND DEVELOPMENT CORPORATION, Plaintiff, Appellant, v. Edward G. LEROUX, Jr., Defendant, Appellee.

SUMMIT INVESTMENT AND DEVELOPMENT CORPORATION, Plaintiff, Appellant, v. Albert F. CURRAN, Sr., Defendant, Appellee.

Nos. 94-2212, 94-2213.

United States Court of Appeals,First Circuit.

April 7, 1995.

Decided Nov. 13, 1995.

Stephen F. Gordon, with whom Stanley W. Wheatley and Gordon & Wise, Boston, MA, were on brief, for appellant.

Andrew C. Griesinger, with whom Paul D. Moore, Theodore A. Lund and Choate, Hall & Stewart, Boston, MA, were on brief, for appellees.

Before TORRUELLA, Chief Judge, CYR and BOUDIN, Circuit Judges.

CYR, Circuit Judge.

Summit Investment and Development Corporation ("Summit"), one of three general partners in Belle Isle Limited Partnership, a Massachusetts limited partnership, appeals from a district court order affirming a bankruptcy court ruling denying Summit's claims for declaratory and injunctive relief against its two other general partners, debtors-in-possession Edward G. Leroux, Jr. and Albert F. Curran, Sr. The bankruptcy court held that Bankruptcy Code Sec. 365(e) preempted certain provisions in the limited partnership agreement which purported to convert the general partnership interests held by Leroux and Curran into limited partnership interests immediately upon the filing of their respective chapter 11 petitions. We affirm.

I BACKGROUND

Pursuant to written agreements [hereinafter, collectively: "Agreement"], Leroux, Curran, and Summit became the general partners in Belle Isle Limited Partnership. ¹ The general partners acquired the exclusive right to manage the business of the partnership by majority vote. Leroux was designated "managing general partner," which empowered him to conduct day-to-day partnership affairs. In the event a general partner were to file for bankruptcy, however, Section 7.5E of the Agreement purportedly converted the general partner's interest into a limited partnership interest, divesting the bankrupt partner of the contract right to participate in partnership management unless all remaining partners otherwise agreed. See Agreement Sec. 7.5E (also referred to as, "ipso facto provision"); see also Mass.Gen.Laws Ann. ch. 109, Sec. 23(4) (Massachusetts Limited Partnership Act) ("MLPA Sec. 23(4)"). ²

In October 1992, appellee Leroux filed a voluntary chapter 11 petition. Curran soon followed suit. Although Summit maintained that Section 7.5E automatically divested Leroux and Curran of their general partnership interests, and, by extension, ousted Leroux as the managing general partner, Leroux continued to act as Belle Isle's managing general partner, and appellee Curran as a general partner.

Summit initiated these adversary proceedings in June 1993, seeking a judicial declaration that appellees' general partnership interests terminated upon the filing of their voluntary chapter 11 petitions by operation of the ipso facto provisions in Section 7.5E and MLPA Sec. 23(4). Summit requested injunctive relief ousting appellees from any management role in Belle Isle. Leroux and Curran responded that Bankruptcy Code section 365(e) preempts contractual and statutory ipso facto provisions that purport to terminate contract rights solely because a contracting party institutes bankruptcy proceedings.

II DISCUSSION

The bankruptcy court entered judgment for Leroux and Curran, see Summit Inv. & Dev. Corp. v. LeRoux (In re LeRoux), 167 Statutory interpretations are subject to plenary review. See In re Erin Food Servs., Inc., 980 F.2d 792, 799 (1st Cir.1992). The "plain meaning" of statutory language controls its construction. See Laracuente v. Chase Manhattan Bank, 891 F.2d 17, 21-22 (1st Cir.1989). But the meaning, or "plainness," of discrete statutory language is to be gleaned from the statute as a whole, see Little People's Sch., Inc. v. United States, 842 F.2d 570, 573 (1st Cir.1988), including its overall policy and purpose, see Wilcox v. Ives, 864 F.2d 915, 926 (1st Cir.1988). "Literal" interpretations which lead to absurd results are to be avoided. See Sullivan v. CIA, 992 F.2d 1249, 1252 (1st Cir.1993).

B.R. 318 (Bankr.D.Mass.1994), and the district court affirmed on intermediate appeal, see Summit Inv. & Dev. Corp. v. LeRoux, Nos. 94-11251-DPW, 94-11252-DPW, 1995 WL 447800 (D.Mass. Oct. 20, 1994). We review the bankruptcy court's factual findings for clear error and the district court's rulings of law de novo. See Indian Motocycle v. Massachusetts Hous. Fin. Agency (In re Indian Motocycle ), 66 F.3d 1246, 1249 (1st Cir.1995); In re LaRoche, 969 F.2d 1299, 1301 (1st Cir.1992).

Plain statutory language does not prompt recourse to countervailing legislative history. See United States v. Bohai Trading Co., Inc., 45 F.3d 577, 581 (1st Cir.1995). On the other hand, the congressional intendment conveyed by unclear statutory language may be discernible from its legislative history. See O'Neill v. Nestle Libbys P.R., Inc., 729 F.2d 35, 36 (1st Cir.1984). Nevertheless, federal preemption under the Supremacy Clause, see U.S. Const. art. VI, cl. 2, will be found only if there is "clear" evidence of a congressional intent to preempt state law, or we are persuaded that the federal and state statutes, by their very terms, cannot coexist. See Greenwood Trust Co. v. Commonwealth of Mass., 971 F.2d 818, 828 (1st Cir.1992), cert. denied, --- U.S. ----, 113 S.Ct. 974, 122 L.Ed.2d 129 (1993).

A. Preemption Under Bankruptcy Code Sec. 365(e)(1)

The preemptive effect of Bankruptcy Code Sec. 365(e) upon a partnership agreement is a question of first impression in this circuit. Generally speaking, until the enactment of the Bankruptcy Reform Act of 1978, unambiguous contractual ipso facto provisions such as Section 7.5E were enforceable against chapter 11 debtors, debtors in possession, and their estates. Congress reversed course in 1978, however, with its enactment of various Code provisions, see Bankruptcy Code Secs. 365(e), 365(f), 541(c), which invalidate contractual ipso facto provisions for the reason that automatic termination of a debtor's contractual rights "frequently hampers rehabilitation efforts" by depriving the chapter 11 estate of valuable property interests at the very time the debtor and the estate need them most. S.Rep. No. 989, 95th Cong., 2d Sess. 59 (1978), reprinted in 1978 U.S.C.C.A.N. 5787, 5845.

Summit's first contention turns on one such Code provision, Bankruptcy Code Sec. 365(e)(1), which states in relevant part:

Notwithstanding a provision in an executory contract or unexpired lease, or in applicable law, an executory contract or unexpired lease of the debtor may not be terminated or modified, and any right or obligation under such contract or lease may not be terminated or modified, at any time after the commencement of the case solely because of a provision in such contract or lease that is conditioned on--

(A) the insolvency or financial condition of the debtor at any time before the closing of the case;

(B) the commencement of a case under this title; or

(C) the appointment of or taking possession by a trustee in a case under this title....

11 U.S.C. Sec. 365(e)(1) (emphasis added). ³

Summit argues that the general partnership interests held by LeRoux and Curran First, Summit's interpretation does not come to terms with the prefatory clause in section 365(e)(1), which plainly provides that the invalidation of contractual ipso facto clauses under section 365(e)(1) appertains "[n]otwithstanding a [supplemental termination] provision in applicable law;" that is to say, for example, in a state statute which in its own right would require automatic termination of a contract or contract right upon the filing of a bankruptcy petition. Thus, the effects of MLPA Sec. 23(4) are nullified by section 365(e)(1). Given the plain language of this prefatory clause, the word "solely"--though oddly placed--is more faithfully read to modify the word "conditioned," thereby clarifying that contractual termination clauses that are triggered by conditions other than the three listed in subsections 365(e)(1)(A), (B), and (C), would not be invalidated by operation of section 365(e)(1).

                were not terminated "solely because of a provision in [the partnership] contract," because the Massachusetts limited partnership statute, see MLPA Sec. 23(4);  supra note 2, operated independently to terminate the general partnership interests immediately upon the filing of their voluntary chapter 11 petitions.  Accord Matter of Phillips, 966 F.2d 926, 935 (5th Cir.1992). 4  The plain language of section 365(e)(1), as Summit views it, invalidates only private contractual ipso facto clauses, thus suggesting that Congress intended to respect the States' prerogative to enact statutory ipso facto provisions where the legislature determines that such provisions serve important purposes (e.g., preventing overreaching by contracting parties).  We think its interpretation is unsound
                

Second, even if this "plain language" reading were less conclusive, Summit has not cited, nor have we found, any legislative history supporting its suggested distinction between statutory and contractual ipso facto provisions. We are left, then, with no rationale which would warrant the categorical conclusion that Congress recognized a State interest sufficiently compelling to outweigh the important rehabilitative policies that section 365(e) was designed to serve. ⁵ Nor has Summit suggested a sound basis for concluding that Congress considered statutory ipso facto provisions a lesser impediment to chapter 11 rehabilitation efforts than contractual ipso facto clauses.

B. The Preemption Exception in Bankruptcy Code Sec. 365(e)(2)(A)

Summit's second contention relies on Bankruptcy Code Sec. 365(e)(2)(A), one of two express exceptions to the ipso facto provision ban in section 365(e)(1):

Paragraph (1) of...