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Gateway Potato Sales v. G.B. Investment Co.

Court of Appeals of Arizona
822 P.2d 490, 170 Ariz. 137 (1991)
ELI5:

Rule of Law:

Under Arizona's limited partnership statute, a limited partner whose participation in the control of the business is substantially the same as the exercise of a general partner's powers is liable for the partnership's obligations, regardless of whether the creditor had direct contact with or knowledge of the limited partner's control.


Facts:

  • Sunworth Corporation, as general partner, and G.B. Investment Company, as limited partner, formed the Sunworth Packing limited partnership for potato farming.
  • The partnership agreement stated that G.B. Investment would not participate in the control of the business.
  • Robert Ellsworth, president of Sunworth Corporation, sought to buy seed potatoes from Robert Pribula of Gateway Potato Sales.
  • Pribula was hesitant because of Ellsworth's prior bankruptcy, but Ellsworth assured him that G.B. Investment was providing financing, was actively involved in the business operations, and had approved the purchase.
  • Based on these assurances, Gateway sold substantial quantities of seed potatoes to Sunworth Packing.
  • Pribula never communicated directly with G.B. Investment before the sales and was unaware that Sunworth Packing was a limited partnership.
  • After the dispute arose, Ellsworth testified via affidavit that G.B. Investment's employees controlled the day-to-day affairs of the partnership, approved most significant decisions, and managed partnership funds.

Procedural Posture:

  • Gateway Potato Sales (Gateway) sued G.B. Investment Company (G.B. Investment) in an Arizona trial court to recover payment for goods sold to a limited partnership in which G.B. Investment was a limited partner.
  • G.B. Investment filed a motion for summary judgment, arguing it was not liable for the partnership's debts.
  • The trial court granted G.B. Investment's motion for summary judgment.
  • Gateway appealed the trial court's judgment to the Arizona Court of Appeals.

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Issue:

Under Arizona Revised Statutes § 29-319, does a genuine issue of material fact exist as to a limited partner's liability for partnership debts when a creditor, who had no direct contact with the limited partner, presents evidence that the limited partner exercised control over the business substantially the same as that of a general partner?


Opinions:

Majority - Taylor, Judge.

Yes. A genuine issue of material fact exists, and summary judgment was improper. Under A.R.S. § 29-319, a limited partner's liability for partnership obligations is determined by a two-part test. First, if the limited partner’s participation in control is 'substantially the same as the exercise of the powers of a general partner,' they are liable to all creditors, even those without knowledge of their control. Second, if their control is less than 'substantially the same,' they are liable only to creditors who had 'actual knowledge' of their participation in control. The trial court erred by imposing a threshold requirement that the creditor must have direct contact with the limited partner in all circumstances. The legislative history of Arizona's statute, which is based on the 1976 version of the RULPA and not the 1985 version, confirms that direct contact is not required under the 'substantially the same as' test. Gateway presented affidavit testimony from Ellsworth detailing extensive control by G.B. Investment, creating a factual dispute as to whether G.B. Investment acted as a de facto general partner, which must be resolved by a trier of fact.



Analysis:

This decision clarifies the two-tiered liability standard for limited partners who participate in the control of a partnership under statutes based on the 1976 RULPA. It establishes that a limited partner cannot escape liability by exercising significant control while strategically avoiding direct contact with creditors. The court's holding reinforces that the 'limited liability' shield is contingent on the partner remaining passive; extensive involvement can expose them to the full liability of a general partner. This case serves as a crucial precedent for creditors, showing that they can pierce the limited liability shield by demonstrating a limited partner's de facto control, even without direct reliance on the limited partner's conduct.

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