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Bankruptcy Court Rules Limited Partnership Agreement Is Not an Executory Contract
The events of the past months and rapid increase of interest rates will put further pressure on certain sectors of the economy, including the real estate sector. While it is difficult to predict where all of this will lead, talk of capital calls and review of partnership interests brings back memories of recessions past when partnerships and their constituent general and limited partners were forced into bankruptcy. Certain types of agreements, such as real estate leases, clearly are executory contracts subject to assumption or rejection in bankruptcy cases. But what about the partnership agreement itself, or an option to purchase, or a right of first refusal contained in a partnership agreement? What happens to a limited partner's interest in a partnership when the limited partner files a bankruptcy case?
These issues were recently addressed by the U.S. Bankruptcy Court for the District of Idaho in In re Duncan (Case No. 16-40205-JMM), in a case where a limited partner in a partnership filed a Chapter 7 liquidation bankruptcy case. In an opinion issued on Feb. 24, 2023, the court concluded that the partnership agreement was not an executory contract and, consequently, had not been rejected when the Chapter 7 trustee appointed in the limited partner's bankruptcy case did not assume the agreement within 60 days of the bankruptcy case filing.
The Partnership and Chapter 7 Proceeding of a Limited Partner
According to the opinion, Duncan Limited Partnership was created in 1985 under Idaho law. A partnership agreement was executed in 2004. Jason Hepworth Duncan was one of the limited partners and held approximately a 10% interest in the partnership when he filed a Chapter 7 liquidation bankruptcy case on March 18, 2016. The Chapter 7 trustee did not assume the partnership agreement within 60 days of the filing, as required by Section 365 of the Bankruptcy Code to assume an executory contract in a Chapter 7 case.
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