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Canter v. Lakewood of Voorhees

A-1795-10T1 (N.J. Super. App. Div. 2011) (Unpublished)

LIMITED PARTNERSHIPS; VEIL PIERCING — Corporate veil-piercing principles can apply to a New Jersey limited partnership.

A limited partnership owned and operated a nursing home. A Pennsylvania corporation held an 84% limited partnership interest in the nursing home owner. That Pennsylvania corporation was also the sole shareholder of the limited partnership’s 1% general partner. It also owned the company that managed the nursing home operation.

A nursing home negligence action was brought against the limited partnership, its majority limited partner, its general partner, and the management company. The plaintiff’s expert “opined, in part, that [the limited partnership, its majority limited partner, and the management company] ‘operate as one seamless long[-]term care organization,’ and [the majority limited partner and management company] ‘exercised significant control’ over [the nursing home’s] operation.” The majority limited partner moved for partial summary judgment on the grounds that “corporate veil-piercing principles do not apply to a limited partnership” and the New Jersey Uniform Limited Partnership Law (NJULPL) “alone governs a limited partner’s liability to third parties.” In the alternative, it “contended that even if corporate veil-piercing principles could apply to a limited partnership, there was no genuine issue of material fact that [it] did not dominate [the limited partnership] or use the [limited partnership] to perpetrate a fraud, injustice, or otherwise circumvent the law.”

The lower court applied corporate veil-piercing principles and also concluded “there was a genuine of material fact” as to whether the majority limited partner controlled the limited partnership, sufficient to hold it liable to third parties for negligence on the part of the limited partnership. Its conclusions were supported by the following of its findings: (1) the majority limited partner was the sole shareholder of the general partner and of the management company; (2) it owned 84% of the limited partnership (as a limited partner), whereas the general partner only owned 1%; (3) “the entities did not observe corporate formalities”; (4) there was “extensive commonality of ownership of officer involvement” among the entities; and (5) the limited partnership “did not carry liability insurance, regardless of whether it was required to have such insurance.” What the lower court did not find was that the majority limited partner had been “substantially involved” in the nursing home’s day-to-day operations. Instead, it did find that the management company and its employees were involved in the day-to-day operations. Lastly, there was “no finding whether [the majority limited partner] used [the limited partnership] to perpetrate a fraud, injustice, or otherwise circumvent the law.” The majority limited partner appealed and the Appellate Division was satisfied that the lower court “properly concluded that corporate veil-piercing principles can apply to a limited partnership.” On the other hand, it did not agree with the lower court that the record supported veil-piercing in this case.

Notably, according to the Court, the question as to whether corporate veil-piercing principles can apply to a limited partnership had never been addressed by New Jersey’s courts. It looked, however, to a section of the NJULPL that said the law “shall be interpreted and construed as to effect its general purpose to make uniform the law of those states which enact it.” Accordingly, the Court looked to other states to see how they applied corporate veil-piercing principles in the limited partnership context. It first consulted Delaware corporate law and learned that Delaware law applies veil-piercing principles to a limited partnership. Other states did as well. So, it concluded that New Jersey law did so too.

To pierce the veil however, the Court insisted that “there must be evidence that the limited partner participated in the control of the limited partnership’s business by taking or attempting action not within the safe harbor of [the NJULPL] or [that it] dominated the limited partnership and used the limited partnership to perpetrate a fraud or injustice, or otherwise circumvent the law.” As to the issue of dominance, New Jersey law requires that a court consider whether “the parent so dominated the subsidiary that it had no separate existence but was merely a conduit for the parent.” This is a fact-specific inquiry that takes into consideration “whether the subsidiary was grossly undercapitalized, the day-to-day involvement of the parent’s directors, officers and personnel, and whether the subsidiary fail[ed] to observe corporate formalities, [paid] no dividends, [was] insolvent, lack[ed] corporate records, or [was] merely a facade. According to the Court, “[o]wnership alone is not enough for piercing” and “the mere fact that several corporations may be subsidiaries of one parent does not prevent their individual identities from being respected.” In fact, “[i]t is only when one entity owns an interest in another entity ‘for the purpose of control, so that the subsidiary company may be used as a mere agency or instrumentality for the [holding] company, [that the owner] will be liable for injuries due to the negligence of the subsidiary.’” As a further explanation, the Court pointed out that “[t]he hallmarks of domination for an illegitimate purpose ‘are typically the engagement of the subsidiary [here, the limited partnership] in no independent business of its own but exclusively the performance of a service for the parent [or here, the majority limited partner] and, even more importantly, the undercapitalization of the subsidiary [limited partnership] rendering it judgment-proof.’”

This being a limited partnership, the test as to whether it observed “corporate formalities” was inapplicable.

Furthering its analysis, the Court found that, contrary to the lower court’s findings, the limited partner did not participate in the limited partnership’s business by being or serving as a shareholder of the general partner. Further, it did not participate in the limited partnership’s business just because it owned the management company and even if the management company could have been construed as controlling the limited partnership, it would only be doing so as a contractor and that could not constitute the requisite participation in control of the business. Further, common ownership and officership involvement does not establish participation in control. According to the Court, there is nothing wrong with a single individual “being or serving as [the general partner’s] officer or director, while at the same time being or serving as [the limited partner’s] officer, director, or shareholder.” As a bottom line, the Court held that there was “also nothing wrong with the structuring of the various entities in this case.” It found this arrangement to be a legitimate business structure and not one that was designed to commit fraud or defeat the ends of justice. Lastly, it found that the limited partnership was properly funded, that it was not insolvent, there was single operating company, and there was no evidence of commingling of funds. For all of those reasons, the Court reversed the decision of the lower court.

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