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socrateaser, Attorney
Category: Bankruptcy Law
Satisfied Customers: 38910
Experience:  Attorney and Real Estate Broker -- Retired (mostly)
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A Business Partner of Mine is in Personal Chapter 11 BK. I

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A Business Partner of Mine is in Personal Chapter 11 BK. I am not in anytype of BK. We are negotiating a settlement and release of liabilty contract between the two of us. Do we need to get BK Court Approval for this document to be valid OR can we execute the contract between us? I would really like this contract to be signed and the plan is to sign it today. If we need bk approval it could take many months and this guy changes his mind all the time. With that being said I do not want to have a totally worthless contract.

The answer to your question depends on the legal relationship between you and your "partner." People tend to use the term "partner" with extreme informality -- however, with respect to bankruptcy law, the legal relationship matters.

For example: (1) If you and your "partner" have a handshake deal to operate a dry cleaners business, then you are jointly liable for any partnership debts, if the business is operated as a general partnership, without legal formalities other than a DBA/fictitious business name and a federal tax EIN. And, that means you are liable to your partner's creditors to the extent that their claims are against the dry cleaners business operation. Whereas, (2) if you are each owners of a corporation that operates the dry cleaners, then you have no liability, and you probably don't need a contract releasing you from liability.

Given that background, a Chapter 11 debtor cannot grant you a release from obligations to the bankruptcy unsecured creditors, if doing so impairs those creditor's from receiving at least as much as they would have received from your partner and you, without the release agreement. In order to release you, the court must order it, or the creditor's committee must consent to the release, again, unless you can guarantee that the creditors will be paid what they are would have received, regardless of your release.

If you were to pay any unsecured creditors what they are owed, to the extent that it satisfies the requirement of creditors receiving what they would have received in a Chapter 7, then that would validate the release -- because the creditors would not be injured. But, if your agreement is one in which you are not paying the necessary consideration to protect the creditors, then the agreement will be ruled unenforceable by the bankruptcy court.

I realize that this is pretty complicated, but I don't know how I can simplify the issue any further. If you aren't following the explanation, feel free to ask for clarification, and I will try to assist you further.

Hope this helps.
Customer: replied 4 years ago.

All of our dealings are through Limited Liabilty Companies. The signing of this Agreement between partner in BK and myself would have zero impact in the money owed to his creditors. The creditors would not be injured. My concern comes more from my partner... What I mean is he is not a very trustworthy guy. I want to make sure he cant come back and say something like, "When I signed that I was in BK. We never got court approval so its not valid." I hope that makes sense... Thanks so much for you help and detailed replies so far.

LLC members are shielded from liability for the debts of other partners, beyond the value of the LLC member's contribution to the LLC accounts. So, I'm unclear as to why you believe you need a liability release. That said, if you are certain that your release would have no impact on the creditors in your "co-member's" bankruptcy (you're not "partners," under bankruptcy law, and the bankruptcy estate only extends to your the co-member's contribution to the LLC, and his independent right to income from the LLC) -- then the agreement would not be voidable -- and, even if it were, there would be no reason for the court to void the agreement -- since it has no effect on the bankruptcy estate.

Note: the above asssumes that the Chapter 11 debtor is the trustee of his bankrutpcy estate, and that the court has not appointed a U.S. Trustee to manage the Chapter 11. If the court has done so, then your co-member cannot enter into this contract without the trustee's consent.

Hope this helps.
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