Central District Consumer Bankruptcy Attorney's Association

Possible asset Chapter 7 case. Debtor has a limited partnership
interest. Partnership agreement prohibits sale of limited partner
interest without consent of general partner. Trustee seeking to sell
interest. In meantime discretionary monthly distributions being made
to limited partners including debtor. Said distributions are
taxable, but as is the nature of limited partnerships there is also
nondistributed income passed through to the debtor limited partner on
the K-1. Trustee demands debtor write him a check each month for the
distribution amount received. The debtor would then continue to
receive the K-1 under her social security number for her portion of
the distributed and undistributed partnership income even though she
was just a conduit for the Chapter 7 Estate.
Question 1. Is it not more appropriate for the trustee to make the
payment demand to the general partner and provide the estate's
employer identification number rather than have this go through the
debtor? Should not this situation work similarly to outside of
bankruptcy as if there were a charging order in place?
Debtor asserted almost all the wildcard exemption under CCP 703.140(b)
(5) for her interest in the limited partnership. It would take more
than 3 years of gross distributions to exceed the asserted exemption.
Question 2.
Am I off base in asserting that the net postpetition distributions
should be considered exempt proceeds for those amounts distributed
from the partnership up to the asserted wildcard exemption amount or
can the exemption only apply to principal received if the partnership
interest is sold?
Question 3.
Regardless of whether the distributions are exempt, the proceeds
distributed should be taxable to the estate and not the debtor unless
all the distributions are abandoned back to the debtor, right?
Question 4.
Assuming the distributions are exempt, what portion, if any, can the
trustee use to pay administrative expenses of the bankruptcy estate?
The bankruptcy estate's postpetition income tax on the limited
partnership income and tax return preparation costs appear
appropriate. Doesn't the rest have to go to the debtor until the
exempt amount is exceeded?
Even if the trustee were willing to allow the debtor to keep the
distribution proceeds until the exempt amount is exceeded, other than
the obvious help to the debtor's monthly bottom line, I am not sure
that would be very smart because of the taxes due on both the
distributed and undistributed income would mean a lower net recovery
for the debtor.
Thoughts?
Mark Jessee

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