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Colonial Conversion, Limited Partnership v. Bathgate

A-732-98T3 (N.J. Super. App. Div. 2000) (Unpublished)

LIMITED PARTNERSHIPS; CREDITORS—A creditor may not be a third party beneficiary of a partnership agreement if the agreement expressly excludes third party beneficiaries; a certificate of limited partnership must reflect the obligation that a creditor is seeking to enforce.

An investor borrowed money from a bank to purchase the stock of two real estate holding corporations that owned a total of three residential properties to be converted into condominiums. Unable to raise funds, the developer offered another investor a fifty-percent limited partnership interest in the largest of the three buildings. The investment was to be made by a corporation that managed all of the investor’s personal real estate investments. A letter of intent was signed to memorialize the parties’ intention to join into a 50/50 joint venture “for the purpose of owning and developing” the particular building. The real estate company was to make a small capital contribution and also to cover the monthly interest payments on the overall loan that had been secured by the three properties. The individual investor also signed the letter of intent to “guarantee[] the performance of all of the obligations of [his management company], as set forth in the” letter of intent, to the extent of one-half of the original loan taken out by the developer. The commitment letter required that the bank receive the “corporate guarantees” of the management company, the corporation that owned the property in question, and personally from the developer, the new investor, and their respective spouses. As an accommodation to the developer, the parties agreed to close the new, small loan and form the joint venture at the same time. At the closing of the loan, the bank dispersed the new money in exchange for a mortgage note and mortgage and the new investor’s personal guarantee of that new, smaller loan. The small loan was due and payable in two weeks from the date that the borrowers received a satisfactory revised commitment letter dealing with the issue of the release of part of the collateral secured by the mortgage. It was intended that the note and the sums due on the original loan would “be merged into one obligation, which merger shall occur at a closing to be held on the maturity date established herein above.” In addition, the note stated that the new loan had “been advanced by the bank before the terms of the new loan could be finalized as an accommodation to the borrower, but no commitment can or has been made by the bank to release” the other properties from the mortgage. On the same day, the original investor and the new investor’s management company formed a limited partnership composed of the developer’s company as general partner. The original developer and the new investor’s management company were equal limited partners. The partnership agreement essentially tracked the wording of the letter of intent. The management company’s principal, however, did not guarantee the management company’s contribution. A short while later, the management company, through its principal, repaid the new, small loan. The original loan was then restructured and was guaranteed by the developer and the general partner, but not by the management company nor its principal. Subsequently, the loan went into default. In the litigation that followed, the bank made a claim against the management company’s principal alleging that the bank was “an intended third party beneficiary to the [principal’s] guarantee set forth in the Letter of Intent.” With respect to both the principal and the management company, the bank argued at trial that: “1) it was a third party beneficiary of the Limited Partnership Agreement and the letter of intent; 2) it could recover directly against [both of them] on a commitment letter for additional financing; and 3) the defendants were estopped from denying their obligation on the loan.” The lower court rejected each of those arguments and the Appellate Division upheld the lower court. At oral argument, the bank acknowledged that it could not recover against the management company under the terms of the partnership agreement because the terms of the agreement [made] it clear that the promises made by each limited partner were not intended to benefit third parties.” Further, it agreed that even if the new individual investor’s guarantee was somehow incorporated into the partnership agreement, liability under that agreement could rise no higher than the limited partner’s liability to the bank itself. In effect, the bank conceded that if it had third party beneficiary rights, they would stem from the law, or not from any written documents. Under the New Jersey Limited Partnership Law, N.J.S. 42:2A-36, “unless otherwise provided in the partnership agreement, the obligation of a partner to make a contribution or return money or other property paid or distributed in violation of this chapter may be compromised only by consent of all the partners. Notwithstanding the compromise, a creditor of a limited partnership who extends credit, or whose claim arises, after the filing of the certificate of limited partnership of an amendment thereto which, in either case, reflects the obligation, and before the amendment or cancellation thereof to reflect the compromise, may enforce the original obligation.” The lower court, with the Appellate Division’s approval, held that the original preexisting debt that was used to acquire the buildings in the first place did not arise after the filing of the certificate of limited partnership. Therefore, the statute did not give the bank or its successors the right to enforce that obligation. To be able to do so, the partnership agreement would have to have been created before the loan. When the loan was restructured, it was basically the same obligation. The bank was aware of the dispute between the partners regarding this obligation, and was aware that the management company’s principal had paid off the new loan prior to the restructuring of this particular loan. It was also aware that both the management company and its principal refused to guarantee the restructured loan. The bank was not aware of the obligation assumed by the management company under the limited partnership agreement to pay one-half of the preexisting loan. According to the Appellate Division, in point of fact, “the monetary obligation [under the restructured loan] did not change, only the time period in which to pay it was extended ..., ostensibly creating no greater burden on the partnership.” Even though this was a matter of first impression in New Jersey, the plain language of the statute was held to support the investor’s contention. New Jersey law requires a certificate of limited partnership to “reflect[] the obligation” that the creditor seeks to enforce. As public notice, the certificate is intended to “acquaint third persons dealing with the partnership with the essential features of the partnership arrangement ... and provide notice to the firm’s creditors of a limited partner’s circumscribed liability.” When the Revised Uniform Limited Partnership Act of 1976 was promulgated, it did away with the requirement that the obligation be reflected in the certificate of limited partnership, but New Jersey did not adopt that change. As to the bank’s argument that equity requires that the Court engraft the management company’s promise to contribute to the payment of the restructured loan to the certificate, the Court refused to do so because even if the full agreement between the parties had been set forth in certificate, it would have provided no basis on which the bank claimed reliance. After all, the agreement between the parties (other than the bank) provided that it, itself, was not intended to benefit third parties.


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