Imagine you are a limited partner in a real estate partnership. The general partner sells the building, keeps the proceeds, and files Chapter 11. The obvious instinct: call a meeting, vote the general partner out, take the wheel. In July 2026, the Ninth Circuit Bankruptcy Appellate Panel held that this exact move was a legal nullity, because the debtor’s management rights became estate property the moment it filed. In re LeFever Mattson, BAP No. NC-25-1238-BCN (9th Cir. BAP July 2026). The decision construes California statutes, but New Mexico’s partnership and LLC acts contain the same bankruptcy-dissociation triggers, and the Tenth Circuit’s stay rule is at least as strict. Investors in Albuquerque real estate partnerships, Permian Basin working-interest vehicles, and family LLCs should understand why self-help removal fails — and what works.
What happened in In re LeFever Mattson?
LeFever Mattson Inc. was general partner of Live Oak Investments LP, a California limited partnership holding an apartment complex for passive investors. After the property sold for roughly $10.8 million, the general partner took about $2.3 million for itself — its claimed ownership share plus a sale commission — and distributed nothing to the limited partners. It then filed Chapter 11 for itself and its affiliates, including the partnership. A year into the case, the limited partners voted to remove the debtor as general partner, install one of their own, and hire separate counsel.
The creditors’ committee obtained a bankruptcy court order declaring the removal void as a stay violation. The BAP affirmed on an issue of first impression: California’s statute automatically dissociating a general partner that “becomes a debtor in bankruptcy” is an unenforceable ipso facto provision, so the debtor’s management rights survived the filing, entered the estate, and could not be taken by a postpetition vote.
Why are a general partner’s management rights property of the bankruptcy estate?
The starting point is 11 U.S.C. § 541(a)(1), which sweeps into the estate “all legal or equitable interests of the debtor in property as of the commencement of the case” — language the Supreme Court reads expansively. United States v. Whiting Pools, Inc., 462 U.S. 198 (1983). State law defines the underlying interest, Butner v. United States, 440 U.S. 48 (1979), but federal law decides what enters the estate. A general partner’s right to manage is both a statutory entitlement and a contract right under the partnership agreement — and contract rights are property. The limited partners argued that only the “transferable interest” (the right to distributions) counts, but the BAP rejected the premise: a right does not stop being property because state law makes it non-transferable. And under In re Computer Communications, Inc., 824 F.2d 725 (9th Cir. 1987), even a non-assignable executory contract remains estate property protected by the stay.
What makes a state dissociation statute an unenforceable “ipso facto” provision?
Section 541(c)(1)(B) provides that a debtor’s interest becomes estate property “notwithstanding any provision in an agreement, transfer instrument, or applicable nonbankruptcy law” that is conditioned on insolvency or a bankruptcy filing and that “effects or gives an option to effect a forfeiture, modification, or termination of the debtor’s interest in property.” A parallel rule, 11 U.S.C. § 365(e)(1), invalidates bankruptcy-triggered termination clauses in executory contracts. The phrase “applicable nonbankruptcy law” dooms statutes like California’s: as the panel put it, parties “cannot contract around what becomes estate property, and states cannot legislate estate property away.” A statute stripping management rights the instant a partner “becomes a debtor in bankruptcy” is a forfeiture conditioned on filing, and the Supremacy Clause preempts it. Courts had already so held for LLC statutes, e.g., In re Envision Healthcare Corp., 655 B.R. 701 (Bankr. S.D. Tex. 2023); the BAP found the limited-partnership setting a distinction without a difference.
Do New Mexico’s partnership and LLC statutes have the same bankruptcy triggers?
Yes — and that is why LeFever Mattson matters here. Under New Mexico’s Uniform Revised Limited Partnership Act, NMSA 1978, § 54-2A-603 dissociates a general partner that becomes a debtor in bankruptcy, and NMSA 1978, § 54-2A-605 then terminates its “right to participate as a general partner in the management and conduct of the partnership’s activities.” The New Mexico Limited Liability Company Act works the same way: under NMSA 1978, § 53-19-38, a member is dissociated upon filing a voluntary bankruptcy petition unless the operating agreement provides otherwise or all members consent in writing to continued membership.
These are textbook statutory ipso facto clauses. Under the logic of LeFever Mattson and the LLC cases it followed, a New Mexico bankruptcy court would very likely hold them unenforceable against the estate — along with the mirror-image clauses lawyers routinely copy into partnership and operating agreements.
Is a removal vote void or merely voidable in the Tenth Circuit?
The stay question is where the federal overlay bites hardest. The vote in LeFever Mattson was an “act to exercise control over property of the estate,” prohibited by 11 U.S.C. § 362(a)(3). In the Ninth Circuit, stay violations are void, not voidable. In re Schwartz, 954 F.2d 569 (9th Cir. 1992). The Tenth Circuit — home of the District of New Mexico — took the same position even earlier: “it is well established that any action taken in violation of the stay is void and without effect.” Ellis v. Consol. Diesel Elec. Corp., 894 F.2d 371 (10th Cir. 1990). Some circuits treat violations as merely voidable; in this circuit the removal simply never happened.
Void is only half the problem. Under 11 U.S.C. § 362(k)(1), an individual injured by a willful stay violation recovers actual damages, costs, and attorney’s fees — sometimes punitive damages; courts can also hold entities in civil contempt. “Willful” does not require bad intent; knowing about the bankruptcy and acting anyway is generally enough. Partners who orchestrate a postpetition removal vote are volunteering to be sanctions respondents. The stay’s reach surprises non-debtors in other contexts too, as the firm has written about the automatic stay and non-debtor spouses in New Mexico.
What can investors lawfully do when their general partner files bankruptcy?
The Bankruptcy Code channels every investor grievance into court-supervised remedies. First, they can seek relief from the stay under 11 U.S.C. § 362(d) — permission to exercise removal rights, with “cause” including mismanagement or conflicts. Second, in Chapter 11 they can seek an independent trustee under 11 U.S.C. § 1104 for fraud, dishonesty, or gross mismanagement, or move to convert or dismiss under 11 U.S.C. § 1112(b). Third, misconduct claims — in LeFever Mattson, the allegation that the general partner pocketed sale proceeds in breach of fiduciary duty — belong in the bankruptcy court as estate claims, often prosecuted by a committee with derivative standing. Finally, investors can negotiate: debtors in possession routinely trade governance concessions for plan support. What they cannot do is act first and ask forgiveness later.
How would this play out for an Albuquerque real estate partnership?
Picture a Northeast Heights apartment portfolio held by an Albuquerque limited partnership: one corporate general partner, eighteen limited partners, and a recent building sale whose proceeds never reached the investors. The general partner files Chapter 11 in the District of New Mexico. Week one, counsel reads the petition, calendars the section 341 meeting — and tells the clients not to schedule a removal vote. Week two, counsel demands an accounting of the sale proceeds. By weeks three and four, the investors choose a track: a section 1104 trustee motion if the accounting suggests diversion, or a section 362(d) motion to exercise removal rights if the problem is drift rather than dishonesty. Meanwhile they press for creditors’ committee formation, since a committee can seek standing to sue insiders. Within ninety days, most such cases settle into a negotiated framework — a chief restructuring officer, reporting covenants, or a consensual plan — because the investors kept sanctions risk off the table.
| Investor option | Statutory basis | Who decides | Practical effect |
|---|---|---|---|
| Postpetition removal vote | State dissociation statute / agreement | No one — void ab initio | No effect; § 362(k) sanctions exposure |
| Motion for relief from stay | § 362(d) | Bankruptcy judge | Court may authorize exercising removal rights |
| Motion to appoint Chapter 11 trustee | § 1104(a) | Bankruptcy judge | Independent fiduciary displaces debtor management |
| Motion to convert or dismiss | § 1112(b) | Bankruptcy judge | Case converts to Chapter 7 or ends for cause |
| Estate claims for fiduciary breach | §§ 541, 1109; derivative standing | Bankruptcy judge | Money recovery for diverted proceeds through the case |
Frequently Asked Questions
Does a bankruptcy filing automatically remove a general partner under New Mexico law?
Outside bankruptcy, NMSA 1978, § 54-2A-603 says yes — becoming a debtor in bankruptcy is a dissociation event. But under In re LeFever Mattson and 11 U.S.C. § 541(c)(1)(B), that statutory forfeiture is an unenforceable ipso facto provision, so the debtor’s management rights survive the filing as estate property.
Can limited partners vote out a general partner that is in Chapter 11?
Not without court permission. A postpetition removal vote is an act to exercise control over estate property under 11 U.S.C. § 362(a)(3), and such acts are void in the Tenth Circuit. The lawful routes are stay relief, a trustee motion, or negotiation.
What is an ipso facto clause in bankruptcy?
An ipso facto provision is a contract term — or, as LeFever Mattson confirms, a state statute — that forfeits or terminates a debtor’s rights solely because of insolvency or a bankruptcy filing. Bankruptcy Code sections 541(c)(1)(B) and 365(e)(1) make such provisions generally unenforceable.
Are actions that violate the automatic stay void in New Mexico?
Yes. The District of New Mexico sits in the Tenth Circuit, which held in Ellis v. Consolidated Diesel Electric Corp. that any action violating the stay is void and without effect. Willful violations can also draw damages, fees, and punitive damages under 11 U.S.C. § 362(k)(1).
Does the LeFever Mattson rule apply to New Mexico LLCs?
Its logic almost certainly does. Courts nationwide have held that LLC statutes stripping a bankrupt member’s rights are preempted, and the BAP called the LLC-versus-partnership distinction meaningless. New Mexico’s LLC Act, NMSA 1978, § 53-19-38, contains the same bankruptcy-dissociation trigger.
How North Star Law Firm Can Help
North Star Law Firm counsels New Mexico clients statewide — Albuquerque, Santa Fe, Las Cruces, and beyond — on both sides of these disputes: investors confronting a general partner or LLC manager in bankruptcy, and business debtors preserving control through a Chapter 11 reorganization. Phillip Zagotti, JD/CPA, is admitted to practice before the federal courts in the District of New Mexico and handles bankruptcy matters across the state, pairing legal strategy with a CPA’s read of partnership accounting. To discuss a partnership or LLC caught in a bankruptcy, contact the firm for a free consultation.