Memorandum of Decision Re: Subordination

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Decisions
IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re ARCANUM ONE PARTNERS, LTD.,                                                                                              No. 92-12612        Debtor. ___________________________/ CHARLES SIMS, Trustee,        Plaintiff,     v.                                                                                                                                                   A.P. No. 94-1313 STUART GRODD,        Defendant. ______________________________/
Memorandum of Decision
     Defendant Stuart Grodd is a former limited partner of the debtor. In 1991, he exercised his contractual right with the debtor to withdraw from the partnership and receive his "liquidating share." Upon Grodd's withdrawal, the debtor acknowledged that Grodd was entitled to receive $494,200.00 as his liquidating share but never paid Grodd. The issue before the court, in this action brought by the trustee to subordinate Grodd's claim, is whether a partnership and one of its partners may by contract elevate an equity interest in the partnership to a general unsecured claim. For the reasons set forth below, the court concludes that they cannot unless the partnership is solvent.      While the court has found no cases dealing with partnership interests, it has found numerous cases which hold that a claim based on a corporate debtor's obligation to repurchase stock in the debtor must be equitably subordinated to the claims of the general unsecured creditors. See, e.g., In re Otis & Edwards, P.C., 115 B.R. 900 (Bkrtcy.E.D.Mich. 1990); In re Dino & Artie's Automatic Transmission, 68 B.R. 264 (Bkrtcy.S.D.N.Y. 1986); Liebowitz v. Columbia Packing Co., 56 B.R. 222 (D.Mass. 1985). The reasoning of these cases, that the underlying equity nature of the transaction survives, is equally applicable to the interest of a limited partner.      In this circuit, claims of equity holders based on repurchase agreements are to be equitably subordinated pursuant to section 510(c) of the Bankruptcy Code, even when the former equity holder is guilty of no wrongdoing, except to the extent the debtor was solvent when the obligations were due. Matter of Poole, McGonigle & Dick, Inc., 796 F.2d 318 (9th Cir.1986), mod. 804 F.2d 576. Since the debtor's estate is clearly insolvent, and allowance of Grodd's claim would seriously dilute the dividend of the general unsecured creditors, it appears that the trustee's motion for summary judgment should be granted. However, the possibility that the debtor was solvent for some period of time after Grodd's notice precludes the court from fully granting summary judgment at this time. The court will however, grant partial summary judgment declaring it to be without controversy that Grodd's claim will be subordinated except to the extent that the debtor was solvent when any particular payment to him was due.      Counsel for the trustee shall submit an appropriate form of order.
Dated: January 10. 1994                                                                                                       _______________________                                                                                                                                                   Alan Jaroslovsky                                                                                                                                                  U.S. Bankruptcy