A bankruptcy filing can preempt state law, permitting termination of a General Partner’s management right. Generally speaking, partnership agreements provide and state laws provide for the removal of a General Partner’s management rights when a General Partner files bankruptcy. But, what happens when the General Partner files bankruptcy and such management rights become property of the estate?
Violation of the Ipso Facto Clause
This question was presented to the Bankruptcy Court in Andrew v. Official Committee of Unsecured Creditors (In re Lefever Mattson Corp.), 25-1238 (9th Cir. B.A.P. June 29, 2026). Here, the court ruled that such state law and/or contractual provision violate the so-called ipso facto clause in Section 541(c)(1)(B) of the US Bankruptcy Code and if done during the course of a bankruptcy such action violates the automatic stay.
In Andrew, a corporation was the General Partner in a limited partnership that had several limited partners. The General Partner was given broad decision-making powers including the right to refinance the property owned by the limited partnership. A dispute arose between the limited partners and the General Partner and as a result, the General Partner filed bankruptcy under Chapter 11 of the United States Bankruptcy Code and also filed the limited partnership into Chapter 11. A year after the bankruptcy was filed, the limited partners moved under state law to remove the General Partner and install a new General Partner. The bankruptcy court found that such action constituted a violation of the automatic stay and that the state law was inconsistent with the prohibition of ipso facto clauses. The new General Partner appealed.
Former General Partner Rights Remain Property of the Estate
The issue before the court was “whether certain California limited partnership statutes are preempted by the Bankruptcy Code.” The Ninth Circuit Bankruptcy Appellate Panel (the “BAP”) found that the former General Partner’s rights included its statutory and contractual right to manage the limited partnership and that such rights were property of the estate. And, even though such rights cannot be transferred/assigned, such rights remain property of the estate.
After finding that the management rights were property of the estate, the BAP found that the ipso facto clause in Section 541(c)(1)(B) precluded the removal of the General Partner and the installation of a new General Partner. Section 541(c)(1)(B) states in pertinent part:
“an interest of the debtor in property becomes property of the estate . . . notwithstanding any provision in an agreement, transfer instrument, or applicable nonbankruptcy law . . . (B) that is conditioned on the insolvency or financial condition of the debtor [or] on the commencement of a case under this title. . . .”
As a result, the BAP found parties cannot contract around the ipso facto clause and these clauses are preempted by the Bankruptcy Code.
Further, even though the new General Partner argued that the general partnership interest was not assignable and could not be assumed as an executory contract, the BAP found that regardless of whether the partnership agreement was assumable or assignable, it was still property of the estate protected by the automatic stay.
