Memorandum of Decision Re: Proceeds of Sale of Partnership Priority

IN THE UNITED STATES BANKRUPTCY COURT FOR THE NORTHERN DISTRICT OF CALIFORNIA
In re JOHN M. WAHLUND,                                                 No. 92-10299      Debtor. ___________________________/
Memorandum of Decision
     Prior to his Chapter 11 filing, debtor John Wahlund was a general partner in Cutten Realty. The other general partner was Lee Hobbs, who died before Wahlund filed his bankruptcy petition.      During the Chapter 11 proceedings and before a plan was confirmed, Wahlund became involved in a dispute with Hobbs' widow, Peggy Hobbs, over ownership of real property which had belonged to the partnership. After a trial, the court entered a judgment declaring that Peggy had no ownership rights in these properties, including Victoria Ranch Estates, notwithstanding that legal title may have been in her name.      In March, 1994, Wahlund's plan of reorganization was confirmed. Pursuant to that plan, Wahlund's creditors agreed to accept fifty cents on the dollar. Wahlund has sold Cutten Realty's share of Victoria Ranch Estates, and now wishes to use the proceeds to pay his creditors pursuant to his plan. Peggy objects, arguing that the proceeds must first go to pay Cutten Realty's creditors. For the reasons set forth below, the court sustains this objection.      The partnership's affairs have never been formally wound up, even though the death of Lee Hobbs dissolved the partnership. Pursuant to California Corporations Code section 15030, a dissolved partnership is not terminated until winding up of partnerhsip affairs is completed. See Boulder Creek Co. v. Maruko, Inc., 772 F.Supp. 1150 (C.D.Cal.1991). Accordingly, Cutten Realty continues to exist as a separate entity with its own assets and creditors.      Wahlund points to the wording of the court's judgment and the terms of his confirmed plan to support his argument that he may now distribute partnership assets directly to his creditors in satisfaction of his obligations under the plan. However, neither document was meant to deprive the partnership's creditors of their right to be paid from partnership assets before any funds can be used by Wahlund for his personal obligations.      The judgment in the adversary proceeding does make reference to the property being vested in Wahlund. However, Cutten Realty was not separately represented at the trial. The court's essential ruling was that the property did not belong to Peggy Hobbs, notwithstanding the form of legal title. The court did not intend to deny the partnership creditors their right to be paid from partnership assets. The intended ruling was that the property belonged to the partnership and that Peggy Hobbs, by virtue of insurance and agreement of the parties, had no remaining interest in the partnership. Counsel for Hobbs shall prepare and submit an appropriate amended judgment to correct this error of the court.       At the time Wahlund's plan came on for confirmation, the court was concerned about the separate estate of the partnership. It therefore included in the order confirming the plan the express provision that confirmation of the plan did not prejudice the rights of any partnership creditor of Cutten Realty. Pursuant to section 1141(c) of the Bankruptcy Code, a provision in an order confirming a plan trumps any contrary provision in the plan itself as to property dealt with by the plan. The right of the partnership creditors to be paid from partnership assets has therefore been preserved, notwithstanding any contrary terms in the plan.      For the foregoing reasons, the objection of Peggy Hobbs to Wahlund's use of partnership assets to pay creditors pursuant to his plan of reorganization will be sustained, and Wahlund's motion for use of the proceeds of the sale of Victoria Estates is denied until such time as the partnership affairs have been wound up according to California law. Counsel for Hobbs shall submit an appropriate form of order.
Dated: July 19, 1994                                                                                                  _______________________                                                                                                                                                    Alan Jaroslovsky                                                                                                                                                    U.S. Bankruptcy