When a general partner files bankruptcy, its non-debtor partners often assume that state law or the partnership agreement removes the general partner automatically and immediately. Partnership statutes call this removal event "dissociation," which is the event that ends a person’s status as a general partner. Many state laws and partnership agreements also provide that a general partner is automatically dissociated and its management rights terminate once a bankruptcy is filed. Limited partners often then seek to vote in a replacement and remove the debtor as a partner. A recent Ninth Circuit BAP decision, In re LeFever Mattson, BAP No. NC-25-1238-BCN, 2026 WL 1871535 (9th Cir. BAP June 29, 2026), holds that these state statutes are unenforceable ipso facto clauses. The management rights remain property of the estate and any attempt by the limited partners to strip them away violates the automatic stay.

LeFever Mattson Inc. (“LFM”) was the general partner of Live Oak Investments, LP (“Live Oak”), a California limited partnership that owned an apartment complex. After the complex was sold and a dispute arose over distribution of the proceeds, LFM and Live Oak , in addition to certain affiliates, filed chapter 11 bankruptcies. Of the nearly $4 million in sale proceeds attributable to Live Oak, LFM paid approximately $2.3 million to itself, which it maintained represented its 21.24% ownership interest and a 3% sale commission, and distributed nothing to the limited partners. The limited partners claimed that the retention of those funds violated the LPA and breached LFM's fiduciary duties as general partner. One year after the filing, the limited partners of Live Oak voted to remove LFM as general partner and installed their own general partner. The Official Committee of Unsecured Creditors sought a declaration that the removal of LFM as the general partner was a violation of the automatic stay in LFM’s bankruptcy case and was therefore void.

In LeFever, the partnership agreement did not contain a dissociation clause upon the filing of a bankruptcy, so the limited partners’ defense was based solely on two California statutes: (a) Cal. Corp. Code § 15906.03 provides that a person is dissociated as a general partner upon “becoming a debtor in bankruptcy;” and (b) section 15906.05 then states that, upon dissociation, “the person’s right to participate as a general partner in the management and conduct of the partnership’s activities terminates.” The limited partners’ argument was that LFM’s management rights were never property of the estate, so there was nothing for the stay to protect.

The BAP affirmed the bankruptcy court and rejected the limited partners’ argument, holding that LFM’s rights in the partnership were “property of the estate” and LFM was not dissociated upon the filing of a bankruptcy.

First, the court confirmed that LFM possessed pre-petition management rights. Under both the California Uniform Limited Partnership Act and the parties’ limited-partnership agreement, the general partner alone held decision-making authority over the partnership’s business. Those contractual and statutory rights are “property” under California law.

Second, the California statutes that automatically dissociate a general partner and terminate its management rights upon a bankruptcy filing are unenforceable ipso facto clauses. An ipso facto clause is any provision, whether in a statute or a contract, that purports to terminate a party’s rights based solely on the filing of a bankruptcy, which has the effect of stripping the bankruptcy estate of valuable property interests at the precise moment the estate is created. Section 541(c)(1)(B) of the Bankruptcy Code directly invalidates ipso facto clauses by providing that an interest of the debtor becomes property of the estate “notwithstanding any…applicable nonbankruptcy law (B) that is conditioned on…the commencement of a case under this title…and that effects or gives an option to effect a forfeiture, modification, or termination of the debtor’s interest in property.” The California dissociation statutes are textbook examples of ipso facto clauses that terminate a general partner’s management rights solely because of the bankruptcy filing and are therefore preempted by the Bankruptcy Code via the Supremacy Clause. See In re Envision Healthcare Corp., 655 B.R. 701, 710 (Bankr. S.D. Tex. 2023) (“[P]arties cannot contract around what becomes estate property, and states cannot legislate estate property away”).

Third, because the management rights became property of LFM’s estate, the limited partners’ vote to remove LFM and install a replacement was an act seeking “to exercise control over property of the estate,” which is expressly prohibited by section 362(a)(3) of the Bankruptcy Code. The removal of LFM as general partner was therefore void, as are all actions in violation of the automatic stay. In re Magallanez, 403 B.R. 558, 561 (Bankr. N.D. Ill. 2009) (“The general rule is that acts taken in violation of the automatic stay are deemed void ab initio”).

Notably, the limited partners also argued that the removal was valid, and outside the automatic stay, because cause existed to remove LFM based on its prepetition breach of the LPA. The BAP declined to address that argument because the bankruptcy court did not determine whether LFM breached the LPA and it was therefore not an issue on appeal. Removal for cause therefore remains a potential path forward. However, because the management rights are property of the estate, limited partners pursuing that path must first obtain relief from the automatic stay rather than resorting to self-help.

For a principal who is a general partner of another entity, the consequences of a bankruptcy filing cut both ways. On one hand, with respect to the debtor, any management rights do not vanish under an automatic dissociation statute or clause in an agreement. Rather, those rights become property of the bankruptcy estate and remain under the control of the debtor or trustee. On the other hand, the non-debtor partners are constrained, as they cannot simply vote a debtor/partner out because of the bankruptcy filing. If the non-debtor partners attempt to remove the debtor, amend the agreement, or seize control after the petition is filed, they risk violating the automatic stay, and the bankruptcy court may simply restore the pre-petition management structure.

Simply put, automatic dissociation statutes that many parties treat as self-executing do not survive a bankruptcy filing. Management rights are property of the estate, the automatic stay protects them, and any attempt to take away those rights is void. Principals who hold such interests, and trustees who administer them, should treat those rights as valuable estate assets, and should act accordingly the moment a petition is filed.