Definition of Partner in Bankruptcy Reorganization Plan Controls Subordination of Claims Not Definitions under State Law

By: Jason L. Gould
St. John's Law Student
American Bankruptcy Institute Law Review Staff

The Seventh Circuit, in In re Altheimer & Gray,[1] held that the meaning of “partner” in a bankruptcy proceeding would be determined in accordance with the terms of the plan of reorganization, not state partnership law.[2] Altheimer & Gray filed for bankruptcy in 2003.[3] According to his contract, Mark Berens was a “Non-Unit Partner,”[4] meaning he possessed no interest in the firm’s profit-share and held no voting power, unlike the “Unit Partners.”[5] Altheimer & Gray’s reorganization plan subordinated the claims of both “Non-Unit Partners” and “Unit Partners” to those of its other creditors.[6] Berens argued that he was not a partner under the statutory definition of Illinois’ Uniform Partnership Act, and therefore, should not have his $300,000 claim subordinated.[7] Without looking to state law, the court relied on 11 U.S.C. § 1141(a), which states, “the provisions of a confirmed plan bind the debtor [and any other such entity under the plan] . . . whether or not the claim . . . is impaired under the plan.”[8]

The Seventh Circuit held that the plan’s definition of partner determined whether Berens’ claim would be subordinated.[9] Since the plan specifically used the firm’s language of “Unit Partners” and “Non-Unit Partners,” the court found it proper to classify Berens under these terms as well, subordinating his claims to other creditors.[10]  As the court stated, “[n]o rule of bankruptcy law (or any other law) requires a plan of reorganization to define terms in the same way as any particular statute.”[11] Furthermore, the court was not persuaded by Berens’ argument that he should not be classified as a “Non-Unit Partner,” because he labeled himself as one in his claim.[12]

Generally, partners’ claims in bankruptcy are subordinated to those of other creditors.[13]  The issue of whether a partner who is akin to a salaried employee should be considered a partner for bankruptcy proceedings due to his title as partner has not previously arisen. But various courts have held that a person who represents himself to be a partner may be held liable as such under partnership by estoppel.[14] Notwithstanding state-law issues, however, in bankruptcy, the plan of reorganization will control the duties to creditors, not definitions under state law.[15]

This decision means that parties must be exceedingly careful in defining who qualifies as partner when creating a plan of reorganization.  Even if an individual does not receive the benefits of partner, if that person is listed as one in the plan of reorganization then that individual’s claims will be subordinated to those of other creditors, if the plan so provides.