[00:00:00] Speaker 04:
May it please the court.

[00:00:01] Speaker 01:
Tell me how much time you want to reserve.

[00:00:03] Speaker 04:
I would like to reserve five minutes, Your Honor.

[00:00:04] Speaker 01:
Thank you.

[00:00:08] Speaker 04:
May it please the court. Appellee appears today because the bankruptcy court in this case held that the removal of Lefevre-Matson as the general partner of Live Oak violated the automatic stay because Lefevre-Matson retained a property interest in Live Oak. Again, two bankruptcy cases going on simultaneously.

[00:00:27] Speaker 04:
And the court held that that interest was an asset of the bankruptcy estate. Hence, any removal of Riffleaver-Matson as the managing partner was a stay violation. As the court held, the pertinent language of California Corporations Code 15906 and 16603 is an impermissible ipso facto clause. And they struck that down on the basis saying that there is no disassociation upon the filing of a bankruptcy case, despite the fact that California Statutory law says specifically that they're disassociated. And in my brief, I cited a series of California cases showing that disassociation occurs.

[00:01:03] Speaker 04:
Court held it was an impermissible ipso facto clause and then backed into the property interest. As I argue in my brief, there is only one property interest created in a partnership for California law, which is the AK statute, which is, and I had that right here, Yeah, it's California Corporations Code 15901.02AK.

[00:01:28] Speaker 04:
Transferable interest means a partner's right to receive distributions.

[00:01:33] Speaker 04:
That is the only property interest that a partner has. California Corporations Code 15907.01A holds the only interest of a partner, which is transferable, is the partner's transferable interest, which is limited to the right to distributions. In this instance, the bankruptcy court held that the property interest in the form of the management rights was transferred from Live Oak to Lefevre-Matson, and upon the filing of the bankruptcy cases, Lefevre-Matson owns the management interest in Live Oak.

[00:02:05] Speaker 04:
And hence, when we conducted a partnership vote to remove Lefevre-Matson, that was alleged to be a violation of the automatic stay. The reason we're appearing here today is because California appears to not create a management interest And the bankruptcy court relied on an Ohio case in Ray Cardinal Industries where it says very specifically that it's citing Ohio law, the Ohio Partnership Code. And specifically, I'm quoting it right now, and this is what the bankruptcy court said in its order, Lefevre-Matson's pre-petition property rights thus included its general partnership duties under the agreement, And the bankruptcy court cited to Ohio revised code section 1775 and 1782.

[00:02:50] Speaker 04:
The bankruptcy court did not apply California law here. And as both myself and appellee have presented, the Butner case, the U.S. Supreme Court case, says that property interests are governed by state law. And hence, we have to look to California law, not Ohio law, Or any of the other cases that are presented here, and again, I would reiterate my objections to many of these cases, which are unreported and also irrelevant, because they deal with LLCs, not with partnerships. They are very different creatures.

[00:03:23] Speaker 04:
Partnerships are a voluntary association, and one of the problems you have with partnerships is somebody files a bankruptcy. All of a sudden, you have a new partner that you never consented to. And again, that's a basic constitutional premise of freedom of association. You have a bankruptcy trustee. If the bankruptcy estate owns that interest because of the filing of a bankruptcy, you're not only striking out the disassociation provision, you're also creating a property interest, which I haven't been able to locate a California case saying that there is an ownership interest in management rights.

[00:03:56] Speaker 01:
Well, doesn't the California Corporation Code say that general partners have equal rights in the management and conduct of limited partnerships activities?

[00:04:06] Speaker 04:
Absolutely they do, Your Honor, and that's why we held a partnership vote, so that everybody and Lefevre-Matson participated in that partnership vote. They were represented by both the bankruptcy trustee or strike that the – anyway, their counsel appeared and so did the representative of Lefevre-Matson, Mr. Sharp.

[00:04:28] Speaker 02:
Was there an alternative method under the bankruptcy code if you don't like the general partner and the limited partners want to change that and now this entity is in bankruptcy?

[00:04:40] Speaker 02:
There is a mechanism where you can seek a trustee or do something else to get somebody else to manage the affairs, convert to seven, get a trustee appointed in 11.

[00:04:49] Speaker 04:
We did in this case, again, it's beyond the scope of the matter that's here, but we did bring a motion to appoint a Chapter 11 trustee in this case that dragged on for more than a year. Also, there's the possibility of a receiver. Again, there's several different methods. But in this instance, we were following the terms of the partnership agreement for Live Oak, which required us to give notice, required us to provide that to all the partners on a specified manner, which we did. We also filed it in the record of the case. We told everybody. Everybody that wanted to appear was able to appear and vote and comment.

[00:05:22] Speaker 04:
A straightforward partnership vote. The position that Little Fever Mattson took and also that the bankruptcy court took is we can't hold a partnership vote because there's a bankruptcy.

[00:05:33] Speaker 04:
I find that extraordinary because that means you can't change the partner once the bankruptcy case starts.

[00:05:39] Speaker 01:
Well, this is a unique situation here, too, because you have both the the partnership Live Oak in bankruptcy and the general partner also in bankruptcy. Oh, yeah. All right. So that's what makes it unique. And so ordinarily, you know, if just the partnership was in bankruptcy, then, you know, perhaps it would be a clearer path for you. But where the general partner is also in bankruptcy, you know, it seems like under California law, they're the manager.

[00:06:12] Speaker 01:
They have the right to. the manager of the property, and if you take them out of the partnership after the bankruptcy has been filed, then you are affecting their rights. And, you know, you make some arguments like, well, kind of a no harm, no foul argument, right? Because, well, they couldn't assume this contract anyway because of this Ipsos. We'll just call it an Ipsos factor clause for shorthand. Sure. Right? They couldn't assume it anyway or they, you know, you know, They couldn't continue as manager.

[00:06:44] Speaker 01:
So no harm, no foul. But doesn't that also put the cart before the horse? Didn't you have been asking the bankruptcy court for these things first?

[00:06:52] Speaker 04:
Well, Judge, hindsight's 20-20, as we always know.

[00:06:57] Speaker 04:
What would I have done different? A lot of different things. But the point I'm trying to make here is that what is the bankruptcy court's ruling has the effect of saying that Live Oak can't manage itself. even though it's in its own bankruptcy case. Is that the case you said? Go ahead.

[00:07:13] Speaker 00:
Sorry, that's not how I read the case. It just says you violated the stay by doing that. You could have gone and gotten relief from stay, and then you could have managed it. I don't think the bankruptcy court said you had no options. It's just you violated the stay in doing it the way that you did.

[00:07:29] Speaker 04:
Then we're into what property interest was affected by the actions of calling a general partnership vote, because you have to show that Lefevre-Matson owns this interest. And that's where we're back to state law because you have to look at California state law as to what property interests Lefevre-Matson had. And if you look at state law, it says there is only the transferable interest. There is no managerial interest. That's not a property right created by California law. And we're here saying you need to apply California law on this subject. And I've looked for cases, and my bet is you guys are going to find that one magic case that solves everything.

[00:08:03] Speaker 04:
I don't know if you remember, but I was back here in September and you handed me a case in the middle of oral argument.

[00:08:10] Speaker 04:
But anyway, the reason I'm bringing this up is because we have to abide by the ruling in Butner that says you look at state law for the creation of property interests. And if you look to California law, you're back to 15907 and you're back to 15901, the transferable interest.

[00:08:30] Speaker 02:
My colleague to my left. asked the question that I was about to say the same thing. It was right, exactly the same thing. But you said the limited partners were put in a position that they can't do this. And I don't think that that's right. I think even if it was a property interest, it's not that they can't. There was just a condition preceding. They had to ask the bankruptcy court for permission to do so. In other words, get relief from the state to do so.

[00:09:00] Speaker 02:
So I don't think it's a can't.

[00:09:02] Speaker 04:
Well, no, it's not a can't, Your Honor. What I'm saying is that there's no property interest the state applies to because California law doesn't create a managerial interest. And that's why I believe the bankruptcy court used the Cardinal case because it's applying Ohio's partnership law, which says that there is a managerial interest. It creates it specifically by statute. California lacks such a statute. Hence, there is no state violation here because there's no property interest held by Lefevre-Matson, at least under California law, as I read it.

[00:09:32] Speaker 04:
And with that, I'm just about out of time.

[00:09:34] Speaker 01:
So thank you. Thank you. The rest of your time will be reserved.

[00:09:38] Speaker 04:
Thank you.

[00:09:49] Speaker 03:
Good morning.

[00:09:51] Speaker 03:
I'm John Fero of Pachulski-Stang, appearing for the Official Committee of Unsecured Creditors, which argues before you today pursuant to a standing stipulation entered in the bankruptcy court.

[00:10:01] Speaker 03:
First of all, I want to thank you for holding a hearing in this beautiful room. I haven't been here in a very long time, and it's just stunning. And I'm glad we're not on Zoom. That said, I'd like to just sort of highlight how we look at this and how I think Judge Novak looked at this and how I know Judge Lopez looked at this in the Envision Healthcare case.

[00:10:23] Speaker 03:
Property of the estate is about the most fundamental concept that we have in bankruptcy law. When I teach the course at UC Law SF, It's the first thing we talk about.

[00:10:34] Speaker 03:
And the question here is, in looking at property of the estate, do we slavishly apply state law?

[00:10:41] Speaker 03:
Or does state law sometimes yield to bankruptcy law? And for that, we go to the very first case in the casebook that I use, which is Butner. And Butner says very clearly, property interests are created and defined by state law. And then there's a second sentence. And I know you've read it.

[00:11:03] Speaker 03:
Unless some federal interest requires a different result, there is no reason why such interest should be analyzed differently simply because an interested party is involved in a bankruptcy.

[00:11:14] Speaker 03:
OK, so here Congress has told us that there is a different result that is mandated under this situation. And that's embodied in 541 C1B, which was not front and center in the appellant's argument and which is the real roadblock. to any argument that they wish to make. Um, uh, yes.

[00:11:37] Speaker 03:
Uh, there's no question that we're going to define property of this state as broadly as possible. And we do, uh, judge Lopez said, Hey, all means all. Uh, and of course that's the case. So the question is, what is the bundle of sticks that Lafever Mattson had as the general partner and front and center in that bundle of sticks is the right to manage and control the affairs of, uh, of Live Oak as the general partner. It's right there in the partnership agreement. It's a contract right. It doesn't go away.

[00:12:09] Speaker 03:
Nothing that happens on the day a bankruptcy case is filed suspends that in any fashion. And instead, what we have is a situation where maybe that interest can't be transferred. Maybe there's a catapult problem. It doesn't matter. Until someone tries to assume or reject that contract, it's a binding contract right under which Lefevre-Matson as the general partner had specific rights and obligations. It discharged all those obligations in the way that it saw fit.

[00:12:40] Speaker 03:
The limited partners who ultimately voted to remove Lefevre-Matson disagreed, but they did have a path.

[00:12:49] Speaker 03:
The stay was absolutely in place because it was property of the estate. And as a result, what they needed to do was come to the bankruptcy court, and they could have done it at any time, right? I mean, it's not like this matter arose at the last second. They were warned before their meeting in a letter written by Mr. Sharp, which is in the court's file. They were warned after the meeting in a letter that I wrote explaining what the situation was. And it was only when neither of those letters were successful in any way that we had to bring the motion that we did, which ultimately, after careful consideration...

[00:13:25] Speaker 03:
the judge chose to grant for the reasons in his very well-thought-out opinion. So I'm almost finished.

[00:13:36] Speaker 03:
I will say that, yes, in Envision Healthcare, Judge Lopez was looking at a provision of the Delaware Limited Liability Company Act, but it's the same provision that's in 16601 of the California Corporations Code relating to limited partnerships. It says exactly the same thing. It works exactly the same way. It was not allowed in Envision Healthcare for obvious reasons. And there is no meaningful distinction.

[00:14:08] Speaker 03:
The fact that it was under Delaware law just doesn't matter. It's the same thing. It's an ipso facto effort by the state of California and the legislature. And they have many. There's a different one that I teach in my class about CalPERS in the city of Stockton, as there's a case. But in any event, Your Honors, this is not even a close call between limited partnerships and LLCs. They're functionally identical for this purpose and with regard to that statute and how it works.

[00:14:41] Speaker 03:
So I'd just like to go quickly over...

[00:14:54] Speaker 03:
No, Your Honors, I've covered it all. I have nothing to add. I'm ready to answer your questions.

[00:14:59] Speaker 01:
So the argument is that the statute doesn't provide any management rights to the general partner that would be considered a property interest. That's what Mr. Kelly is arguing. And I pointed out and he agreed that there's a statute that says in California that says you know, the general partner has a right to manage the property, manage the assets of the company.

[00:15:32] Speaker 01:
Does that create a property right? Does that statute create a property right in addition to the contract right that you mentioned?

[00:15:39] Speaker 03:
You're right. I think so. And how could it be otherwise? How could the code not give the general partner that responsibility in a limited partnership? The whole business purpose of limited partnerships would fall down.

[00:15:53] Speaker 03:
without that. So I think that is an additional right, but it's very clear that every limited partner signed the limited partnership agreement. That's where the right exists. There are cases that have looked at that exact situation, and therefore we think that there's only one conclusion here. There was a property interest in the right to manage that company, and it was protected by the automatic stay, and there was no motion for relief.

[00:16:23] Speaker 01:
All right. Any questions? No. Thank you very much, Mr. Piro.

[00:16:28] Speaker 04:
Thank you.

[00:16:34] Speaker 04:
Your Honors, thank you again. I want to respond to one thing about the 541C1 ipso facto clause.

[00:16:42] Speaker 04:
There is a distinction between a multi-party and single-party entity, and I cite this in the brief, and I cited to the In re Cutler case and In re Eman.

[00:16:53] Speaker 04:
This is not true of multi-party entities where other partner interests are protected by limiting the bankruptcy state's interest to economic rights only. Again, back to the freedom of association argument. Again, Mr. Fierro said that we should not slavishly follow California law. Well, Butner says, yes, you should, except where, as he pointed out, where there's some other interest. The ipso facto clause is one thing, but the property interest still needs to exist. And I'm not finding that in California law, and I'm not finding any cases that say that.

[00:17:27] Speaker 04:
Instead, we're backing into this contract interest, which, again, as I point out in my brief, personal service contracts are not assumable under 365. And if you're saying that there's a property interest in a contract because it's the partnership agreement, well, once the contract is breached, the debtor in possession can no longer enforce its provisions. And that's cited to In re Warner, which is the bankruptcy case from – 2012 in my brief. If you hold it, there's a property interest in a contract and the debtor in possession has breached that contract, they can't seek to enforce its provisions anymore.

[00:18:00] Speaker 01:
But that doesn't make it not property of the estate, does it? I mean, that means you get to decide what's property of the estate, not me as the bankruptcy judge. How does that work?

[00:18:10] Speaker 04:
Well, right. But then you're back to you're no longer treating it as a partnership. You're treating it as a contract. And this is a partnership, and California deals very differently with partnerships than general contract rights. And in this instance, there is only the transferable interest created under the California corporate code, as I cited earlier.

[00:18:26] Speaker 01:
But that doesn't deal with my issue, which is you're going to come and, you know, you've got this situation. We're in bankruptcy court, and you're going, well, we don't need to worry about it. Kind of back to my no harm, no foul concern, which is. Well, they can't assume it anyway, so we can just do what we want without involving the bankruptcy court. We can just do it because we get to decide whether this is correct or not.

[00:18:50] Speaker 01:
They can't assume it, so they never had that. So therefore, they never had the right. It's not property of the estate. I feel like that's backwards. Is that not backwards?

[00:18:59] Speaker 04:
Well, the way I'm looking at it is how does Live Oak not own the right to govern itself? How can someone else, when it's in its own bankruptcy case? Because it has its own bankruptcy estate as well.

[00:19:11] Speaker 04:
And this is something that is fundamental.

[00:19:12] Speaker 01:
He asked for relief from the state. That's how it works. You go to the bankruptcy court and say, help me deal with this. Help me. Because that was the only issue that he decided, Judge Novak, was this violates the automatic state. He didn't say, I'm not deciding. He said, I'm not deciding any executory contract issue or whether or not this Lefevre-Madsen should still be the general partner I'm managing. I'm not deciding that. All I'm saying is, for this action here, you violated the stay. And I feel like what you're saying is, you know, it doesn't really matter because they couldn't assume it anyway.

[00:19:47] Speaker 01:
Doesn't that turn the bankruptcy code on its head?

[00:19:50] Speaker 04:
Well, I don't believe so. I was responding to Mr. Fierro's comments when he referenced contract, because what you just quoted is what Judge Novak said. He said, I'm not deciding this issue. But again, I'm responding to Appellee's argument. What I see going on here is that the appellant or Pelley is arguing or Lefevre Mattson is arguing that they own the managing interest and that upon the filing of bankruptcy, that property became property of their bankruptcy estate. And Butler says if you're going to determine property rights, you then look to state law.

[00:20:25] Speaker 04:
And under state law, there is no such partnership or no such management interest. And that's why the Cardinal case keeps getting cited over and over again because Ohio corporate law, does create a managerial interest. And it's specific. It sets out like there's actually like there's several interests that it creates specifically. And I ran through those in my brief. And what I'm trying to point out is that California does not have the same statute. It's not there. And if it's not there under state law, then you are creating a property interest which does not exist under California law.

[00:20:56] Speaker 04:
And then when Mr. Fierro quotes the second sentence from Butner saying there's some compelling interest, I don't think that they meant you can start creating property interests under state law where they don't exist.

[00:21:08] Speaker 01:
Your argument is you never get to that second sentence or second issue because there never was a property interest in the first place because that's what the statute says.

[00:21:19] Speaker 04:
Precisely. And that's the argument, and that's why we appear today. And if you have any further questions, I'm happy to answer them, but it doesn't sound right.

[00:21:26] Speaker 01:
Thank you. Does anybody have any other questions?

[00:21:29] Speaker 04:
No.

[00:21:29] Speaker 01:
All right. Thank you very much. Thank you. Thank you all. This will be submitted, and we will try to get a decision promptly.