PARTNERSHIPS; PERSONAL LIABILITY—A limited partner, though acting as the controlling officer of a corporate general partner, is not liable for the debts of the limited partnership where the creditor does not rely on the personal participation and control of the limited partner.
An owner of a rundown hotel sold the premises to an investment corporation. The sales agreement included a provision that the seller would receive a consulting fee of $27,000 per year for 16 years. The day after closing, the buyer assigned its rights and interests under the contract to an investment limited partnership of which the corporation was general partner. The limited partnership consisted of four limited partners including the seller, another individual, and two entities. Approximately two years after the sale of the property, at the direction of a limited partner, the consulting fee being paid to the seller was terminated. After several mortgages were obtained for the renovation of the property, the project failed, and both the corporation and limited partnership filed for bankruptcy protection. The seller sued a limited partner of the property owner, as an individual, for the $27,000 consulting fee agreement claiming that he was the “surviving partner and owner of the partnership assets” pertaining to the “purchase and transfer of” the hotel, and that he was in default of the seller’s consulting fees. Shortly thereafter, the corporate charter of the corporation was revoked by the New Jersey Secretary of State. The seller subsequently amended his complaint to add as defendants the limited partnership and the other limited partners. Several years later, the corporation’s corporate charter was reinstated. One and a half years later, the individual limited partner moved for summary judgment as to the claim against him and its motion was granted. The trial against the other defendants ensued, and a jury returned a verdict of $457,000 against these defendants. The seller appealed as to the judgment in favor of the individual, and the three defendants cross-appealed as to the judgment against them. The seller claimed that the suspension of the corporation’s charter provided a basis for imposing liability against the two other limited partners. The seller reasoned that once the corporation’s charter was suspended, the individual limited partner could no longer act as an officer of the corporation and thus would have been acting in an individual capacity when he directed the activities of the limited partnership. The motion judge rejected the argument as to the individual, and a separate trial judge accepted the argument as to the other limited partner. The Appellate Division, however, concluded that the charter suspension provided no basis for imposing liability against either limited partner. The Appellate Division, relying on N.J.S. 14A:4-5(7) and case law, held that a charter reinstatement is effective retroactively, as of the date the charter was revoked, and all corporate actions taken in the interim are validated back to the original suspension. In this regard, the summary judgment as to the individual was correctly granted. The Appellate Division, however, concluded that the liability imposed on the other limited partner was in error. The lower court had reasoned that the individual, acting as general partner of the limited partnership, was also acting as general partner of the other limited partner. The Appellate Division concluded that this reasoning “lacks any logic.” In this regard, the Appellate Division held that N.J.S. 14A:4-5(7) and relevant case law “require dismissal of [seller’s] complaint” against the limited partner.
As an alternative argument, the seller claimed that the limited partnership statute imposes general partner liability on the individual because he functioned as the operating head of the parties’ renovation project. The Appellate Division found this claim to be “inconsistent with both the policy and the language of the statute.” The Appellate Division concurred with the individual’s argument that, although he “took part in the control of the business,” such role was as a vice president of the corporation that was the sole general partner of the limited partnership and therefore, the limited partnership was the sole entity on which to base liability. The individual also relied on the safe harbor provision at subsection b(6) of section 27 of the Act. The Appellate Division concluded that here, the seller was an insider in the redevelopment project; he was a sophisticated, experienced developer and businessman, and that he understood completely that he was dealing with a limited partnership and corporation. To this end, “there is no claim that [seller] was misled, or that he relied on some impression that [the individual] was a general partner of [the limited partnership], and thus there is no basis for any finding of personal liability against [the individual] under N.J.S. 42:2A-27a.” The Appellate Division also held that there was no basis for imposing liability on the individual under the premise that his activities were “substantially the same as the exercise of powers of a general partner” of the limited partnership. Three out-of-state cases relied on by the seller were either deemed to be “distinguishable or, for other reasons, non-persuasive” by the Appellate Division. The Appellate Division concluded by remarking that the purpose of the limited partnership law is to “curtail the threat of personal liability unless there is some ‘reliance on the part of the outsider dealing with the limited partnership’,” and “there was no such reliance here.”
A third argument raised by the seller was that the individual incurred personal liability when he caused the partnership and corporation to terminate and breach the consulting contract. Although finding no New Jersey case law on point, the Appellate Division concluded that “an officer who causes his corporation to breach a contract for what he conceives to be the best interest of the corporation does not thereby incur personal liability.”
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