Working Paper No. 96-06:
The Illogic and Limits of Partnership Bankruptcy
Date Posted: 1996
Availability: Citation only
New partnership law, the development of new partnership-type business entities, the complex bankruptcies of large law and accounting partnership and proposals to substantially amend federal bankruptcy law dealing with partnerships have brought the formerly neglected area of partnership bankruptcy to center stage. This article is the first economic analysis of the application of federal bankruptcy law to partnerships. The article accepts the standard economic explanation for bankruptcy as a way to preserve asset values from dissipation through creditor grab races under state law. However, it shows that even if this rationale works in other debt collection contexts, it does not justify the substantial costs of federalizing partnership bankruptcy law. Because the partnership's assets are enlarged by the assets of the individual partners, there may be little need to hold creditors at bay in order to accomplish a reorganization or orderly liquidation. Accordingly, this article suggests limiting the extent to which federal bankruptcy law trumps state partnership law on such matters as creditor actions against solvent partners and the dissociation of insolvent partners. It also considers the extent to which bankruptcy law should be applied to partnership-type firms whose members have limited liability.