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Homework answers / question archive / In March 1988, Daniel E
In March 1988, Daniel E. Beren, John M. Elliot, and Edward, F. Mannino formed Walnut Street Four, a general partnership, to purchase and renovate an office building in Harrisburg, Pennsylvania. They borrowed more than $200,000 from Hamilton Bank to purchase the building and begin renovation. Disagreements among the partners arose when the renovation costs exceeded their estimates. When Beren was unable to obtain assistance from Elliot and Mannino regarding obtaining additional financing, the partnership quit paying its debts. Beren filed an involuntary petition to place the partnership into Chapter 7 Bankruptcy. The other partners objected to the bankruptcy filing. At the time of the filing, the partnership owed debts of more than $380,000 and had approximately $550 in the partnership bank account.
1.Should the petition for involuntary bankruptcy be granted? Explain.
Plan of Reorganization
Richard P. Friese (Debtor) filed a voluntary petition for Chapter 11 bankruptcy. In May 1989, Debtor filed a plan of reorganization that divided his creditors into three classes. The first class, administrative creditors, were to be paid in full. The second class, unsecured creditors, were to receive 50% on their claims. The IRS was the third class. It was to receive $20,000 on confirmation and the balance in future payments. No creditors voted to accept the plan. The unsecured creditors are impaired because their legal, equitable, and contractual rights are being altered.
2.Can the bankruptcy court confirm the debtor's plan of reorganization? Explain.
The position cannot be approved as presented because of the basis of partnership law. A partnership is not a separate legal entity under the law and therefore could not file a petition as presented. A partnership is a flow through entity which reports separately but who liabilities have recourse back to the partners. The individual(s) would have to file Chapter 7 separately, and each would be wholly or severally liable for the total debts of the partnership. Of course, there are always exceptions to the general partnership rules, and litigation in this area is very common. Secondly, there are non recourse loans which may preclude creditors coming through the partnership to the individual partners. Third, a limited partner can truly be limited in his exposure to liability following a rather strict set of protocols. You can see that the issue is not simple, as the volume of case law would demonstrate.
2. The Chapter 11 filing will not be approved as presented because the court is mandated to follow an ordering of creditors. Which creditors shall be paid in full and which will only receive partial relief has to do with the class of creditor. IRS, being as special as they as, comes first...almost always. The fact that the plan for the IRS involves full payment over time would still be a less desirable position than to be paid in full now. There is no guarantee that a Ch 11 would succeed, and if not, it could be converted to a Ch 7 at any time. I was also surprised to hear that the unsecured creditors might vote to accept a plan. Normally, there are secured creditors ahead of unsecured, and that class of creditor usually controls the plan.
