Case Law Summaries

United Jersey Bank v. GSM Company

• Opinion Date: March 8, 2002
• Business Law
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PARTNERSHIPS; DISSOLUTION— A partner who takes over the partnership’s assets following dissolution may not be entitled to collect pre-dissolution contribution deficiencies from the other partners.

A partnership with two equal partners executed a note which was secured by a mortgage. One of partners made disproportionate contributions to the partnership. The non-contributing partner admitted that “he did not have sufficient funds to continue to fund his share of the partnership debt” and he conceded that the funding would have to be repaid “before distributions, by sale or otherwise.” Eventually, the non-contributing partner, executed a withdrawal agreement transferring his interest in the partnership to the contributing partner. The agreement contained the following language: “4. Liability on mortgage loans. [The two partners] shall each remain liable for the mortgage loans on the property, and [the contributing partner] agrees to use his best efforts to reduce or eliminate said liability.” The lender extended the loan maturity, but the non-contributing former partner refused to make any further contributions, notwithstanding his obligation under a joint and several guaranty. He stated in a letter: “You took the property, you get the debt.” The contributing partner, now the sole owner of the property, paid off the loan and took an assignment of it. He then sought contribution for the former partner’s proportionate share of the former partnership’s obligations to the lender. The lower court found that the non-contributing lender was liable for one-half of the excess contributions made by the contributing partner, but found no promise by the non-contributing partner to indemnify the other for the loan obligation. The lower court also found that there was no fraud in connection with the withdrawal agreement. Importantly, the Court said that it did not matter whether the case was decided under the old Uniform Partnership Law or under the new Uniform Partnership Act effective on December 8, 2000. Under either, the remaining partner “had a statutory duty to wind up the affairs of [the partnership], which included dealing with [the lender], and a contractual duty to use his best efforts to reduce or eliminate the liability to [the lender].” To the Court, it was important that instead of liquidating the partnership assets and applying the funds toward the loan obligation, or even giving the lender a deed in lieu of foreclosure, the contributing partner “made a reasoned business decision to retain the property… .” Had the contributing partner used the partnership assets to pay down the loan obligation, instead of acquiring the property himself, he might have been entitled to contribution from the non-contributing partner. The Court believed that “[the contributing partner] cannot have it both ways; he chose to retain the property and cannot seek contribution from [the non-contributing partner] for a portion of the note obligation.”

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