Direct Mail Specialist, Inc. v. Brown
673 F. Supp. 1540, 1987 U.S. Dist. LEXIS 11085, 1987 WL 20606 (1987)
Rule of Law:
A failure to substantially comply with statutory requirements for forming a limited partnership will render the intended limited partners liable as general partners to third parties who lack actual or constructive notice. The statutory right to renounce limited partner status to avoid general partner liability must be exercised promptly upon discovering the mistake in organizational setup. The usury laws of the place of performance, rather than the place where the contract was made, generally govern the enforceability of interest rates in cross-jurisdictional contracts.
Facts:
- On December 31, 1980, a Certificate of Limited Partnership for Peaceful Bay Partners was dated, stating its purpose was to acquire and operate property, including Peaceful Bay Resort & Club, for conversion to condominiums.
- On March 18, 1981, the Certificate of Limited Partnership was filed in the office of the Clerk and Recorder of Flathead County, but it was not recorded with the Secretary of State as required, lacked an Exhibit A detailing partner contributions and profit shares, and contained defective acknowledgements dated December 31, 1981, instead of 1980.
- On March 31, 1981, Murr L. Brown, on behalf of Peaceful Bay Partners, filed an application for registration of an assumed business name, Peaceful Bay Resort and Club, with the Secretary of State, listing all defendants as partners but without indicating their limited partner status.
- The plaintiff furnished services valued at $10,997.85 to Peaceful Bay Resort and Club on an open account, without actual or constructive knowledge that it was dealing with a limited partnership.
- On December 7, 1982, an oral agreement was reached between the plaintiff's lawyer, Mr. Hymas, and Murr L. Brown to delay a lawsuit if Brown signed a promissory note for the debt, which included a 15% annual interest rate and specified payment at the offices of Boyd, Kennedy and Rumney in Salt Lake, Utah, if no demand was made.
- A promissory note reflecting the oral agreement was prepared but never signed; some payments were made, but one check was returned for lack of funds.
- In November 1987, Cheryl L. Brown, one of the defendants, filed a renunciation of any interest in the profits or other compensation from the business, several years after learning in April 1984 that the plaintiff sought to hold the defendants liable as general partners.
Procedural Posture:
- The plaintiff initiated an action in the U.S. District Court for the District of Montana to collect a debt.
- A first amended complaint was filed in April 1984, naming all defendants.
- Both the plaintiff and the defendants subsequently moved the court for summary judgment.
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Issue:
1. Does failure to substantially comply with limited partnership filing requirements result in general partner liability for those who intended to be limited partners, when third parties lack actual or constructive notice? 2. May individuals who mistakenly believed they were limited partners renounce their interest and avoid general partner liability if they do not do so promptly upon learning of the defect in their partnership status? 3. Should penalties for usury be assessed on an oral agreement for a promissory note when the contract specifies a place of performance in another state where the agreed-upon interest rate is not usurious?
Opinions:
Majority - Russell E. Smith, District Judge
1. No, the defendants other than Murr L. Brown should not be treated as limited partners but rather as general partners, because the plaintiff had neither actual nor constructive notice of their limited partnership status. The court found that the Certificate of Limited Partnership was substantially defective: it was not filed with the Secretary of State, it lacked a required Exhibit A detailing partner contributions and profit shares, and its acknowledgements were incorrect. Due to these defects, there was not a substantial compliance in good faith with the provisions of Mont.Code Ann. § 35-12-201(3) (1979). Limited partnerships are creations of statute, and a failure to substantially comply with the authorizing statutes results in liability as general partners for third persons without knowledge of the limited nature of the partnership. (Citing 68 C.J.S. Partnership § 40, 60 Am.Jur.2d Partnership § 376, Bisno v. Hyde, and Hoefer v. Hall). 2. No, the defendants may not be permitted to renounce their interest to avoid general partner liability, because their renunciation was not timely. Mont.Code Ann. § 35-12-312 (1979) allows a person erroneously believing they are a limited partner to renounce their interest promptly upon ascertaining the mistake. The defendants, including Cheryl Brown, knew in April 1984 that the plaintiff was seeking to hold them as general partners. Cheryl Brown’s renunciation in November 1987 was not prompt enough, following the precedent set in Vidricksen v. Grover, which interpreted an identical California statute. The court further held that ignorance of the law, specifically Section 63(3) of the 1981 Montana Laws which preserved the old renunciation statute, was no excuse, particularly since Mont.Code Ann. § 35-12-704 (1987) offered an alternative method for limiting liability through withdrawal. (Citing Giles v. Vette and Rathke v. Griffith for liberal construction of renunciation, but distinguishing Vidricksen on timeliness). 3. No, penalties for usury should not be assessed because Utah law, under which the 15% interest rate was not usurious, applies to the agreement. Mont.Code Ann. § 28-3-102 (1979) dictates that a contract is interpreted according to the law of the place where it is to be performed. The oral agreement specified that the promissory note would be payable in Salt Lake, Utah. The general principle is that contracts made in one place but to be executed in another are governed by the law of the place of performance, allowing parties to stipulate for higher interest rates permitted there without incurring usury penalties. Utah's Consumer Credit Code in effect at the time did not consider a 15% interest rate usurious. (Citing Kemp v. Allstate Ins. Co., Seeman v. Phila. Warehouse Co., and Burr v. Renewal Guar. Corp.).
Analysis:
This case underscores the critical importance of strict compliance with statutory requirements for establishing limited partnerships, emphasizing that even good faith intent is insufficient without substantial adherence to filing procedures. It highlights that the burden is on those claiming limited partner status to ensure their filings provide adequate notice to third parties. Furthermore, the ruling serves as a cautionary tale regarding the timeliness of legal actions, specifically renunciation of partnership interests, reinforcing that delay in acting upon discovered errors can lead to significant liabilities. Finally, the decision clarifies choice-of-law principles for contract disputes involving interstate commerce, particularly concerning usury, by prioritizing the law of the place of performance.
