By Mickey Maher
August 19, 2026
California Corporations Code Sections 15906.03(f)(1) and 15906.05(a)(1) provide that when the general partner of a limited partnership becomes a debtor in bankruptcy, the general partner is automatically dissociated from the limited partnership, and the rights of the general partner to manage the limited partnership are terminated. Partnership agreements of countless California limited partnerships include provisions tracking the text of the two statutes. Until the decision of the United States Bankruptcy Appellate Panel of the Ninth Circuit in In re LeFever Mattson, et al., filed June 29, 2026, all was copasetic.
Live Oak Investments, LP (“Live Oak“) is a California limited partnership the general partner of which is LFM, a California corporation (“LFM“). Live Oak sold an apartment project in 2024, netting approximately $4 million. LFM arranged for approximately $2.3 million of the proceeds to be paid to itself – approximately $324,000.00 as a commission on the sale, and the balance as a distribution attributable to its percentage interest in Live Oak. LFM did not arrange for any of the net proceeds to be distributed to the limited partners of Live Oak. The limited partners claimed the failure to distribute to them constituted a breach of LFM’s fiduciary duties as the general partner.
Shortly after the sale, LFM filed a Chapter 11 bankruptcy for itself and its affiliates, including Live Oak. A year after the bankruptcy filing, relying on the provisions in the Corporations Code, the limited partners of Live Oak voted to remove LFM as general partner and to appoint a new general partner.
The creditors’ committee challenged the limited partners’ removal of LFM as general partner, claiming the removal violated the automatic stay and was therefore void. The Bankruptcy Court ruled in favor of the creditors’ committee, concluding that the provisions of the Corporations Code were impermissible ipso facto clauses inconsistent with the Bankruptcy Code and violative of the Supremacy Clause of the United States Constitution. Consequently: (i) LFM was not automatically dissociated as the general partner of Live Oak, and (ii) the pre-bankruptcy management rights of LFM were an asset of LFM’s bankruptcy estate. The Bankruptcy Appellate Panel affirmed the decision of the Bankruptcy Court.
Practical effects — After LeFever Mattson, if the general partner of one or more limited partnerships becomes a debtor in bankruptcy, the general partner likely will not be able to exercise its rights to manage any of the limited partnerships without some level of approval obtained in its bankruptcy proceeding. Approvals may be on an ad hoc basis, or an approval may grant the general partner autonomy for some transactions or decisions, while requiring Court approval for other transactions or decisions (akin to a so-called major decisions provision). We don’t know yet how creditors of a bankrupt general partner may seek to leverage the decision, or how Bankruptcy Courts will apply the decision. One fairly safe bet — Provisions in a limited partnership agreement purporting to modify the management rights of a general partner upon the general partner’s becoming a debtor in bankruptcy will most likely be held to be void as ipso facto clauses.
Caution – Provisions of the California Corporations Code governing limited liability companies contain provisions similar, but not identical, to those at issue in LeFever Mattson.
One Immediate Strategy – Reconfigure hub-and-spoke arrangements in which one entity is the general partner of more than one limited partnership, is the manager of more than one manager-managed limited liability company or is a member of more than one member-managed limited liability company.
If you have any questions about specific arrangements, or in general, please feel free to contact Michael J. Maher at mmaher@hechtsolberg.com.