Cite as: Keith M. Lundin, Lundin On Chapter 13, § 10.4, at ¶ ____, LundinOnChapter13.com (last visited __________).
A partnership is not an individual and is not eligible for Chapter 13.1 Individual partners are eligible for Chapter 13. Identifying the boundaries between a partner and a partnership is often difficult and has created Chapter 13 eligibility problems for individual partners.
“Partnership” is not defined by the Bankruptcy Code. Most likely, an entity that would be defined as a partnership under state law is not eligible to be a Chapter 13 debtor.
Notwithstanding clear legislative intent to allow individuals engaged in business access to Chapter 13, in an overzealous effort to exclude ineligible partnerships several courts have barred individual debtors from Chapter 13 eligibility because the individual was also doing business in partnership. For example, two individuals were declared ineligible in separate Chapter 13 cases when the individuals had operated a business partnership under state law.2 The petitions of the individual debtors were held to be an impermissible, indirect attempt to adjust partnership debt.3 It has been stated that spouses who have held themselves out to the public as a partnership cannot file a joint Chapter 13 petition.4
Some of the confusion in the case law may result from confusing legislative history with respect to the ineligibility of partnerships for relief under Chapter 13.5 The 1977 legislative history does indicate that the assets and liabilities of a partnership cannot be administered in a Chapter 13 case. However, nothing in the legislative history suggests that an individual is not eligible for Chapter 13 just because that individual is also a partner in an ineligible partnership. That a Chapter 13 filing by a partner may indirectly affect the assets and liabilities of the partnership is not a reason to exclude individual partners from Chapter 13 relief. The individual partners may have to list partnership assets and/or liabilities in the schedules,6 but the individual partners, including spouses who have done business in partnership form, are eligible for Chapter 13 notwithstanding that the partnership is ineligible.7
When a partner files Chapter 13, creditor’s counsel should examine the schedules to determine whether the debtor has mistaken the boundaries of the partnership. The filing of a Chapter 13 case by an individual partner does not protect a partnership asset from creditor action.8 Creditor’s counsel may seek to prove ineligibility by inclusion of partnership assets and liabilities in the eligibility calculation for the individual partner.9 Eligibility of a partner may be defeated if, for example, the debt limitations for Chapter 13 are exceeded by including partnership debts for which each partner is individually liable.10
1 11 U.S.C. § 109(e). See § 10.1 Debtor Must Be an Individual; Spouses Allowed.
2 In re Monaco, 36 B.R. 882 (Bankr. M.D. Fla. Nov. 2, 1983) (Paskay).
3 In re Monaco, 36 B.R. 882 (Bankr. M.D. Fla. Nov. 2, 1983) (Paskay).
4 In re Krokos, 12 B.R. 520 (Bankr. S.D.N.Y. July 14, 1981) (Schwartzberg).
5 House Report No. 595 contains this discussion of the ineligibility of partnerships for relief under Chapter 13:
Whether a small business operated by a husband and wife, the so-called “mom and pop grocery store,” will be a partnership and thus excluded from Chapter 13, or a business owned by an individual, will have to be determined on the facts of each case. Even if partnership papers have not been filed, for example, this issue will be whether the assets of the grocery store are for the benefit of all creditors of the debtor or only for business creditors and whether such assets may be the subject of a Chapter 13 proceeding. The intent of the section [11 U.S.C. § 109(e)] is to follow current law that a partnership by estoppel may [not] be adjudicated in bankruptcy and therefore would not prevent a Chapter 13 debtor from subjecting assets in such a partnership to the reach of all creditors in a Chapter 13 case. However, if the partnership is found to be a partnership by agreement, even informal agreement, then a separate entity exists and the assets of that entity would be exempt from a case under Chapter 13.
H.R. Rep. No. 95-595, at 319–20 (1977).
6 See § 10.6 Partnership and Corporate Debts and Assets May Impact Eligibility for discussion of partnership and corporate assets and liabilities in a Chapter 13 case filed by an individual partner or corporate owner, officer or director.
7 See Miami Valley Prod. Credit Ass’n v. Tegtmeyer, 31 B.R. 555 (Bankr. S.D. Ohio July 21, 1983) (Anderson); In re Ward, 6 B.R. 93 (Bankr. M.D. Fla. Aug. 28, 1980) (Paskay). See also § 10.5 Partners and Corporate Owners May Be Eligible for the eligibility of individual partners for Chapter 13 relief.
8 See Fisk v. Allis Chalmers Credit Corp., 36 B.R. 924 (Bankr. W.D. Mich. Jan. 27, 1984) (Howard). See also § 10.6 Partnership and Corporate Debts and Assets May Impact Eligibility.
9 See § 10.6 Partnership and Corporate Debts and Assets May Impact Eligibility and § 15.2 Is Partnership Debt Contingent?. See, e.g., In re Schyma, 68 B.R. 52 (Bankr. D. Minn. Dec. 9, 1985) (Kishel) (Case discusses effect of partnership and personal assets on confirmation standards in a Chapter 13 case.); In re Ashline, 37 B.R. 136 (Bankr. N.D.N.Y. Feb. 3, 1984) (Marketos) (Tax claims against an individual debtor are affected by failure of claim holder to prove existence of a partnership.).
10 Miami Valley Prod. Credit Ass’n v. Tegtmeyer, 31 B.R. 555 (Bankr. S.D. Ohio July 21, 1983) (Anderson) (Three individual debtors exceed debt limitations for Chapter 13 eligibility because all of the unsecured obligations of their partnership must be attributed to each individual partner.).