Weil v. Diversified Properties
319 F.Supp. 778, 1970 U.S. Dist. LEXIS 9323 (1970)
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Rule of Law:
A general partner may not invoke the provision of the Uniform Limited Partnership Act that imposes general partner liability on limited partners who take part in the control of the business. This provision is intended to protect third-party creditors, and the relationship between partners is governed by their partnership agreement.
Facts:
- Martin L. Weil was the sole general partner of Diversified Properties, a limited partnership formed to own and manage real estate.
- The partnership agreement stipulated that Weil would conduct the day-to-day management of the business, but all decisions not in the normal day-to-day course, such as refinancing or sale of property, required a majority vote of the partners.
- By April 1968, the partnership was experiencing a severe financial crisis and was short on cash.
- Weil proposed to forego his management salary and close the partnership office to save money, and he subsequently took a job with another real estate company.
- The partnership hired two new individuals, Rubenstein and Tempchin, to manage some of the properties on a commission basis.
- The limited partners became more actively involved in the partnership's affairs, consulting with the new managers, moving the books to the office of Baer (a limited partner), holding meetings, and making decisions regarding refinancing and property sales to keep the partnership from failing.
- Creditors of the partnership made persistent demands for payment to Weil, who was still listed on various obligations.
Procedural Posture:
- Martin L. Weil, the general partner, filed an equitable action in the U.S. District Court for the District of Columbia against the limited partners of Diversified Properties.
- The complaint sought a declaratory judgment to have the limited partners declared general partners, the appointment of a receiver, and an accounting.
- Various limited partners filed two separate counterclaims against Weil.
- The District Court held a trial on the merits of Weil's complaint and the counterclaims.
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Issue:
Does a limited partner's active involvement in partnership affairs during a financial crisis, particularly concerning non-routine matters, constitute taking 'part in the control of the business' under the Uniform Limited Partnership Act, thereby making them liable as a general partner to the existing general partner?
Opinions:
Majority - Gesell, District Judge
No. A limited partner's involvement in major, non-routine business decisions during a financial crisis does not convert them into a general partner, especially when challenged by the general partner. The statutory provision imposing liability for 'control' is meant to protect third-party creditors, not to be used as a tool by a general partner against their limited partners. First, the court found no precedent for a general partner invoking Section 7 of the Uniform Limited Partnership Act against their own limited partners. The purpose of this section is to protect creditors who might have been led to believe that the limited partners were, in fact, general partners. The proper remedy for a general partner who faces interference is to dissolve the partnership, not to enlarge the liability of their partners. Second, the relationship between the partners is governed by their partnership agreement. Here, the agreement explicitly gave limited partners voting power over non-day-to-day matters like refinancing and property sales. Given the partnership's severe financial crisis, its business consisted almost entirely of such abnormal problems, making the limited partners' involvement consistent with the rights granted to them in the agreement. Therefore, the limited partners did not breach the agreement, and Weil has no cause of action against them.
Analysis:
This decision significantly clarifies the scope of the 'control rule' under the Uniform Limited Partnership Act. It establishes that the rule's primary function is to protect external creditors, not to settle internal partnership disputes. The court draws a critical distinction between a general partner's claim and a third party's claim, effectively preventing general partners from using the statute to shift liability onto limited partners. Furthermore, the opinion emphasizes the primacy of the partnership agreement in governing internal relations and provides a practical, context-sensitive interpretation of 'control,' recognizing that increased involvement by limited partners during a financial crisis may be a reasonable effort to protect their investment rather than an improper usurpation of management.
