Pick Your Partner versus the U.S. Bankruptcy Code

Abstract

Colorado law and the law of other states contemplate owners of small businesses formed as LLCs, partnerships, and corporations, being able to pick-your-partner and avoid finding yourself in business with strangers who may not have the same goals. The Uniform Commercial Code (9-406 and 9-408, especially) limit transferability restrictions which may defeat a secured creditor. More significantly, however, are the limitations imposed by Section 541(c)(1) of the Bankruptcy Code in defining property of the estate. These limitations may be softened where the operating agreement, partnership agreement, or other governing document is held to be an executory contract under Section 365 of the Bankruptcy Code. This paper concludes with some suggestions on how best to protect the pick-your-partner provisions of the small business organization where that is a goal.