IN THE UNITED STATES BANKRUPTCY COURT
FOR THE NORTHERN DISTRICT OF CALIFORNIA
|DO NOT PUBLISH
This case disposition has no value as precedent and is not intended for publication. Any publication, either in print or electronically, is contrary to the intent and wishes of the court.
ARCANUM ONE PARTNERS, LTD., No. 92-12612
CHARLES SIMS, Trustee,
v. A.P. No. 94-1313
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
, 68 B.R. 264 (Bkrtcy.S.D.N.Y. 1986); Liebowitz v. Columbia Packing
, 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 _______________________