Your JV Partner Just Filed for Bankruptcy – Now What?

04.09.2026

Business entities often partner with another entity for the purpose of undertaking a large project, new acquisition, or other business activity.  At the time the business entities joined forces, they conducted reasonable due diligence into their prospective partner’s financial strength, leadership, and long-term viability.  After satisfying the due diligence inquiry, the entities formed a joint venture, whether in the form of a partnership or limited liability company, with the idea that the two entities together are stronger than each is individually.  But then, months or sometimes years into the project, things go awry, and your business partner begins to struggle financially and eventually files for bankruptcy .  What happens to the joint venture?

From Asset to Obligation: How the Debtor May Treat the JV

Upon the filing of a bankruptcy petition, the bankrupt entity’s interest in the joint venture becomes an asset of the bankruptcy estate.  As such, it can be administered for the benefit of the bankrupt entity’s creditors (which may, by the way, include the JV partner and the JV entity itself).  If the bankrupt entity (the “Debtor”) filed a voluntary chapter 7 bankruptcy, it generally ceases all business operations the day the bankruptcy petition is filed, and a chapter 7 trustee is appointed to administer its assets.  The chapter 7 trustee may sell the JV interests if they have value, or – if the chapter 7 trustee determines that the JV interests have no value or are otherwise not marketable, the JV interests will be “abandoned” back to the Debtor.  If the Debtor filed a voluntary chapter 11 bankruptcy, absent unusual circumstances, the Debtor will maintain control of its business and will continue operating in the ordinary course.  Through the chapter 11 proceedings, the Debtor may seek to sell valuable assets or jettison burdensome obligations.  Depending on the circumstances of the case, the JV interests may fall into either of these categories.  If the JV entity is deemed to have value, the Debtor may seek to sell the JV interests pursuant to section 363 of the Bankruptcy Code to fund another aspect of its business.  If the JV entity is deemed to be burdensome, the Debtor may seek to reject the underlying partnership or limited liability company agreement of the JV entity pursuant to section 365 of the Bankruptcy Code.

Contractual Rights vs. Bankruptcy Powers: Who Prevails

The JV entity is governed by a limited liability company operating agreement or a partnership agreement, which may contain provisions which prohibit the filing of bankruptcy by the members or partners or which grant rights of first refusal or other buy-out formulas for the purchase of JV interests.  While these types of provisions can give the JV partners some degree of comfort upon entering into the JV arrangement, they offer little or no practical benefit.  Prohibitions on bankruptcy filings are “ipso facto” provisions which are not enforceable, while sales pursuant to section 365 of the Bankruptcy Code are “free and clear” of liens, claims, and encumbrances, which may include rights of first refusal and formulaic purchase requirements.

Taking Control of the Outcome in a JV Bankruptcy Scenario

If your JV partner files for bankruptcy, the best course of action is to be proactive to protect your interests and that of the JV entity.  For example, you can make the initial offer to buy the JV interests, or you can agree to dissolve the JV entity and work out a settlement that provides for a sale of the JV assets or a fair and equitable distribution of the JV assets.  To secure the best possible outcome, you will need experienced bankruptcy counsel to guide you through the bankruptcy process.  If your JV partner appears to be in financial distress or files for bankruptcy, the bankruptcy and creditors’ rights attorneys at Hirschler are ready and able to assist.

Kristen Burgers represents debtors and creditors in bankruptcies and financial workouts in Virginia, the District of Columbia, and Maryland.  On the debtor side, she has represented business debtors in chapter 11 reorganizations and liquidations, chapter 7 liquidations, financial workouts, and dissolutions.  On the creditor side, Kristen has represented business and individual creditors, as well as unsecured creditor committees, in chapter 11, chapter 7 and chapter 13 bankruptcy cases, adversary proceedings, mediations, and related civil litigation.  She has also served as counsel to chapter 11 and chapter 7 trustees and to post-confirmation liquidating trusts.