GRAINGER v. ANTOYAN

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District Court of Appeal, Second District, Division 2, California.

Kyle Z. GRAINGER, Jr., as Trustee of the Estate of Marback Motor Company, a co-partnership, Bankrupt, Plaintiff and Appellant, v. Albert ANTOYAN, Defendant and Respondent.

Max H. GEWIRTZ, Dora Mesnick, Nathan Gerwin and Sidney Gerwin, as executors (substituted in place of William Gewirtz, deceased), Plaintiffs and Appellants, v. Sidney MARBACK et al., Defendants, A.L. Antoyan, Respondent.

Civ. 21785, 22232.

Decided: March 13, 1957

Joseph W. Fairfield, Ethelyn F. Black, J. Martin Smith and Max H. Gewirtz, Los Angeles, for appellants. Stratton & Taylor, Chas. C. Stratton and Joseph Ball, Long Beach, for respondent.

These are appeals by plaintiffs from judgments in favor of the defendant in two actions seeking to hold the defendant liable as a general partner on the claims of creditors of a bankrupt limited partnership.

Appellant Kyle Z. Grainger, Jr., as Trustee of the Estate of Marback Motor Company, a co-partnership, Bankrupt, is plaintiff in one action brought for the benefit of the creditor claimants in the bankruptcy estate, and appellants Max H. Gewirtz, et al., as Executors of the Estate of William Gewirtz, deceased, a creditor and assignee of creditors of Marback Motor Company, are the substituted plaintiffs in the other. Each action involved a single and common defendant, Albert Antoyan, and each involved common questions of law and fact and were consolidated for trial.

Prior to April 9, 1951, Marback Motor Company was a limited partnership consisting of Sidney S. Marback as the sole general partner and his son, Philip Marback, as the limited partner. The firm was in the business of selling new and used automobiles in Los Angeles and the business premises occupied by it were owned by the defendant Albert Antoyan and his mother and were under lease to the partnership. The defendant was employed by the firm in 1948 as a saleman and in 1950 became the sales manager. In April 1951 the defendant and Sidney Marback negotiated and consummated a transaction evidenced by four written documents as a result of which the defendant paid $50,000 to the partnership. It is the legal effect of these documents which gave rise to the controversies of the parties. Without regard to the order of their execution, the first executed document dated April 9, 1951 is entitled “Chattel Mortgage” and is in the common form of a mortgage of chattels. This document recites that the Marbacks, individually and as partners, as mortgagors, hypothecate all the fixed assets in the motor company to the defendant, as mortgagee, to secure the payment to the defendant of $50,000, without interest, payable in monthly installments of $750 or 10 per cent of the net profits of the firm, whichever is greater. While no note was given to the defendant, the instrument itself contains a promise to pay the monthly installments until the $50,000 is paid to the defendant.

The second executed document dated April 9, 1951, is entitled “Articles of Limited Partnership” and is in the common form of a limited partnership agreement. It recites that Sidney S. Marback, as “general partner”; Philip Marback, as “first limited partner”; and defendant Albert Antoyan, as “second limited partner” agree to become partners in the business of selling new and used cars upon the terms and conditions set forth; that the partnership shall commence on April 9, 1951 and shall continue until dissolved. It further provides for the payment of 10 per cent of the net profits to the defendant except that he shall be entitled to a guaranteed payment of $750 per month or 10 per cent of the profits, whichever is greater; that this provision shall be read in conjunction with the chattel mortgage and that the provisions for payment of the $50,000 contained in the chattel mortgage are concurrent and not separate from the provisions for payment in the articles except that the payment of $750 per month or 10 per cent shall continue after the $50,000 is paid.

A Certificate of Limited Partnership having been filed and published in 1949 upon the formation of the original limited partnership between Sidney Marback and his son, the third executed document dated April 9, 1951, is an “Amendment of Certificate of Limited Partnership” and is in the required form of such certificate, Corp.Code, sec. 15502, and recites a cash contribution by the defendant of $1,000 and his right to receive 10 per cent of the profits or $750 per month, whichever is greater. The formal requirements of the California law in respect to the filing and recordation of the chattel mortgage and the certificate of limited partnership are conceded to have been fulfilled. On April 16, 1951, there was executed a document entitled “Agreement Supplementing and Modifying Limited Partnership” by the terms of which the payments to defendant are limited to 10 per cent of the profits after he had been repaid $50,000. The books of the firm reflect that the cash contribution of $1,000 provided for in the Amended Certificate of Limited Partnership was not paid and further reflect that none of the $50,000 advanced by the defendant was ever credited as a contribution to capital and that the monthly payments to defendant were charged to a mortgage-payable account.

After April 9, 1951, the defendant became a co-signer on checks of Marback Motor Company but otherwise took no part in the control or management of the business beyond his prior duties as an employee and salesman and in April 1952, the defendant terminated his employment. By September 1, 1953, $21,000 had been repaid to the defendant. Notwithstanding an apparently profitable operation, the partnership was financially straitened. Rents due to the defendant and his mother on the premises were in arrears and in August 1953, defendant served notice of cancellation of the lease and shortly thereafter commenced an action to recover past-due rent and to cancel the lease. Default was declared on the $750 monthly payments due to the defendant and he commenced proceedings for the foreclosure of the chattel mortgage by making demand for payment and serving a notice of default.

Without a prior dissolution of the limited partnership, the defendant, on September 22, 1953, agreed to buy from the Marbacks the good will and tangible equipment used by the firm in the operation of its business and certain intangible assets. Not included in the sale were the repossession reserves, bank accounts, customers' notes and certain prepaid expenses. The Marbacks agreed to terminate their dealer's franchise and the sale was contingent upon the defendant's obtaining a dealer's franchise for the same line of cars. Upon execution of the agreement, Marback Motor Company went out of active business and defendant took over the operation of a similar business upon the same premises under a different name.

The sale was later consummated, the cash purchase price of $50,000 was paid to certain creditors at the direction of Sidney Marback, and the defendant Antoyan assumed and agreed to pay the balance due on the chattel mortgage which had been assigned by him to his mother.

In June 1954, Marback Motor Company, a Limited Partnership, was adjudicated a bankrupt. The bankruptcy schedules listed liabilities of approximately $126,000 but at the time of the trial the claims filed with the trustee aggregated $38,158.28 not including the claims of $8,673.69 held by the plaintiff Gewirtz.

The principal questions for consideration on this appeal are whether the defendant Albert Antoyan became a limited partner of Marback Motors on April 9, 1951, or merely a creditor, and, if he became a limited partner, did he thereafter take part in the control of the business so as to become liable as a general partner to the partnership creditors.

A limited partnership is formed if there is a substantial compliance in good faith in the execution, acknowledgment and recordation of a Certificate of Limited Partnership, Corp.Code, sec. 15502(2). This we construe to mean, so far as the rights of third parties are concerned, that a limited partnership is created in praesenti, by the execution, acknowledgment and recordation in good faith of a certificate of limited partnership in substantially proper form. It is not contended that the certificate failed in any particular to comply with the requirements of the law and it is conceded that the certificate was filed and recorded as required by law. Moreover, the Articles of Limited Partnership expressly provided that the partnership would commence on April 9, 1951 and would continue until dissolved. The defendant, however, contends that the effect of the transaction in 1951 was only to secure and provide for the repayment of a $50,000 loan and to provide for the formation of a limited partnership in futuro when the loan was paid, and, not having been paid before the firm went out of business, the defendant Albert Antoyan never became a limited partner. The Limited Partnership Act, Corp.Code, secs. 15501–15531, clearly contemplates that a person may be both a limited partner in a firm and a creditor of the firm and there is nothing in the act which prevents the simultaneous creation of this dual relationship. The relationships of creditor and limited partner are not mutually exclusive and may co-exist. In re Mission Farms Dairy, 9 Cir., 56 F.2d 346, upon which great reliance is placed by defendant, is clearly distinguishable on the facts. The fact that the limited partner's share in the profits is first to be applied toward the payment of a loan made by him to the partnership does not negate his status as a limited partner. The further contention, predicated on the law of general partnership, that the absence of the defendant's right of ultimate control precludes the existence of any partnership, is not persuasive, for the absence of control, present or ultimate, is the essence of the relationship of a limited partner as under the Limited Partnership Act he is in no sense a partner, Henningsen v. Howard, 117 Cal.App.2d 352, 360, 255 P.2d 837. In re Marcuse & Co., 7 Cir., 281 F. 928, and Henningsen v. Howard, supra, relied upon by the defendant, serve mainly to teach that a limited partner's lack of participation or control in the management of the business is the principal criterion which distinguishes him from a general partner. We conclude, contrary to the court's finding, that, pursuant to express provisions of the written memorials of the 1951 transaction, the defendant became a limited partner of Marback Motor Company on April 9, 1951.

Contrary to the appellants' contention, the $50,000 advanced by the defendant was not his capital investment in the limited partnership. The fact that the $1,000 contribution specified in the Certificate of Limited Partnership was not paid does not necessitate a holding that the defendant's loan of $50,000 to Marback Motors was his capital investment or contribution. A limited partner is liable to the partnership for any unpaid portion of the contribution specified in the Certificate, Corp.Code, sec. 15517, but a failure to pay the specified contribution does not transform a limited partner into a general partner. See Henningsen v. Howard, supra. By clear and unambiguous language the $50,000 advanced by the defendant was documented as a loan with provisions for security and rate of repayment. An immediate and regular installment repayment of a limited partner's contribution is inconsistent with the concept of a capital investment. Moreover it is not claimed that any Amended Certificate of Limited Partnership was ever filed as required by law setting forth any reduction of the defendant's contribution, Corp.Code, sec. 15516. No violence is done to San Joaquin Light & Power Corp. v. Costaloupes, 96 Cal.App. 322, 274 P. 84, in so holding, for in that case there was no provision for the repayment of an advance claimed to be a loan and the distribution of profits did not decrease any loan obligation of the firm. Here the chattel mortgage set forth the terms of repayment and each payment to the defendant reduced the unpaid balance of the firm's obligation to him.

We turn now to the question of the exercise of control of the partnership by the defendant. A limited partner as such is not bound by the obligations of the partnership, Corp.Code, sec. 155011 , nor is he liable as a general partner unless, in addition to the exercise of his rights and powers as a limited partner, he takes part in the control of the business, Corp.Code, sec. 15507.2 In the Uniform Limited Partnership Act the Commissioners' Note reads in part as follows: “The business reason for the adoption of acts making provisions for limited or special partners is that men in business often desire to secure capital from others. There are at least three classes of contracts which can be made with those from whom the capital is secured: One, the ordinary loan on interest; another, the loan where the lender, in lieu of interest, takes a share in the profits of the business; third, those cases in which the person advancing the capital secures, besides a share in the profits, some measure of control over the business.” Uniform Laws Anno., vol. 8. “In Black's Law Dictionary, ‘control’ is defined as follows: ‘Power or authority to manage, direct, superintend, restrict, regulate, direct, govern, administer, or oversee.’ In Rose v. Union Gas & Oil Co., 6 Cir., 297 F. 16, 18, it is defined as follows: ‘The word “control” does not import an absolute or even qualified ownership. On the contrary it is synonymous with superintendence, management, or authority to direct, restrict, regulate.’ ” Speirs & Co. v. Underwriters at Lloyd's, 84 Cal.App.2d 603, 604, 191 P.2d 124, 125. Defendant's only participation in the management of the firm prior to September 1953, to which appellants point as constituting an exercise of control, is the authority given to and exercised by the defendant in countersigning checks on the firm's bank account. This authority gave him no control over the bank account for he could neither withdraw funds himself nor prevent their withdrawal by the other co-signators, which is far short of the control exercised by the limited partners in Holzman v. De Escamilla, 86 Cal.App.2d 858, 195 P.2d 833, where the firm consisted of one general partner and two limited partners who were authorized to sign checks on an account which required that checks be signed by two of the three thus giving the limited partners control over the withdrawal of funds. In addition, the limited partners frequently consulted the general partner on the operation of the firm business and they required the general partner to resign as general manager and selected his successor and the court properly held these activities to be such control by the limited partners as to make them liable as general partners. Defendant's limited participation in the management prior to September 1953 did not constitute such management or control as to make him liable as a general partner.

However in September 1953, as has been previously pointed out, the defendant initiated a foreclosure of his chattel mortgage, commenced proceedings to cancel the firm's lease on the business premises, purchased a substantial part of the firm's physical assets used in the operation of the business and in effect took over the entire operation of the firm's business and the question is whether these acts constituted such an exercise of such control of the business as to then make the defendant liable as a general partner to the partnership creditors. The price of a limited partner's freedom from liability as a general partner is his abstention from substantial intervention in the ultimate destiny of the partnership. Turning again to the Commissioners' notes appended to the Uniform Limited Partnership Act we find a statement that the act was drafted upon various assumptions, one of them being “That persons in business should be able, while remaining themselves liable without limit for the obligations contracted in its conduct, to associate with themselves others who contribute to the capital and acquire rights of ownership, provided that such contributors do not compete with creditors for the assets of the partnership.” Uniform Laws Anno., vol. 8, p. 4. If, to protect himself as a creditor, a limited partner induces the general partner to sell the firm assets to a third person and go out of business, there could be little question but that the limited partner had exercised such control over the business of the partnership as to make him liable as a general partner and we can see no difference when the limited partner himself becomes the purchaser. Here the defendant did not merely pursue his rights as a creditor or a landlord but with the pending proceedings of foreclosure and dispossession facing the firm, virtually bought it out and put it out of business. We are convinced that the defendant's course of conduct culminating in the transfer of the operation of the firm's business to himself and regardless of the adequacy of the price he paid for the firm assets, constituted an exercise of control of the business over and beyond an exercise of his rights and powers as a limited partner and that he thereby became liable as a general partner to the creditors. The only authority found on this point is First National Bank of Canandaigua v. Whitney, 4 Lans., N.Y., 34, affirmed 53 N.Y. 627, decided in 1871, and arising under the New York statute respecting limited partnerships which, after setting forth the extent to which a limited partner could participate in the operation of the firm's business, provided that interference contrary thereto made him liable as a general partner. Whitney, a limited partner, purchased the entire business from the general partner without a dissolution of the partnership. In holding him liable as a general partner for the partnership debts, 4 Lans., N.Y., at page 39, the court said: “Here it is manifest, beyond dispute or contradiction, that the special partner did interfere, ‘contrary to these provisions' of section seventeen. He put an end to the business of the partnership, and took title to the entire property and effects thereof, real and personal, to himself and took its business and carried it on in his own name and for his exclusive benefit. If this is not an interference with the concerns and business of a partnership, by a special partner, it is difficult to conceive what would be interference. It was an act which not only terminated the existence of the partnership, but divested the general partners of all title to the partnership property and effects, and transferred it to another, to wit, himself.”

We recognize that the defendant Antoyan did not acquire the entire assets of the partnership yet the cumulative effect of his actions resulted in the full payment of his claim and the termination of the limited partnership as a going concern, and this we hold an exercise of control sufficient to cast upon the defendant the liability of a general partner to the then partnership creditors.

The trial court properly held that a trustee in bankruptcy has no cause of action on behalf of the bankrupt partnership creditors against a limited partner for his liability as a general partner arising out of his control of the business. The trustee in bankruptcy is vested by operation of law with title to the assets of the estate in bankruptcy, Bankruptcy Act, § 70, sub. a, 11 U.S.C.A. § 110, sub. a, but the only property, including rights of action, which passes to the trustee is that which is transferable by the bankrupt or subject to levy and sale in his hands, Bankruptcy Act, § 70, sub. a (5), 11 U.S.C.A. § 110, sub. a (5). The so-called “strong-arm clause”, Bankruptcy Act, § 70, sub. c, 11 U.S.C.A. § 110, sub. c, does not add additional assets to the bankruptcy estate but only gives the trustee additional powers with respect to the estate which vests assets in him. The question presented is whether liability of a general partner to the partnership creditors is an asset of the bankrupt partnership estate which passes to the bankruptcy trustee and which he may enforce against the partners for the benefit of the partnership creditors. This question is definitively answered by First National Bank of Herkimer v. Poland Union, 2 Cir., 109 F.2d 54, 56, certiorari denied 309 U.S. 682, 60 S.Ct. 723, 84 L.Ed. 1026, in which the court was passing upon a reorganization plan of a partnership. In answer to a contention that in case the existence of individual partnership liability is disputed, the bankruptcy trustee may accept and administer part of the individual partner's property, leave the individual partner in possession of the rest, and enjoin all partnership creditors from suing the individual partner, the court said: “We believe that this argument ignores the fundamental distinctions between suits against the individual and levies on his property, as well as between the trustee's power to claim and administer the property of the individual partner and the trustee's power to control the claims of creditors against the partner individually. The latter power the trustee does not possess. The property of the partner is in many ways the property of the partnership, or at least the property of the trustee. * But the creditor's right to an in personam judgment against the partner is not the property of the partnership, nor is it a right which can be enforced by the partnership trustee. The trustee is given some of the rights of an attaching creditor, but only those rights which are rights against property, in or out of the custody of the court. Bankruptcy Act, § 70, sub. c, 11 U.S.C.A. § 110, sub. c.” The liability of a limited partner exercising control of the partnership is the liability of a general partner and the rights of the creditors with respect to such limited partner come within the holding of the foregoing case. Dean v. Shingle, 198 Cal. 652, 246 P. 1049, 46 A.L.R. 1156, upon which appellants rely, was an action by the trustee of a bankrupt corporation to recover from one director under a constitutional liability provision, sums misappropriated by another director and which the court held to be a loss to the corporation and construed the action as one brought by the trustee to recover assets of the corporation, which distinguishes it from the case at bar.

Appellants claim that the defendant failed to raise the point of lack of capacity to sue by a special demurrer and it was therefore waived, Code Civ.Proc. sec. 434. A special demurrer for want of capacity to sue raises only the question of whether any general legal disability exists, such as infancy or insanity, or want of title in the plaintiff to the character in which he sues, Klopstock v. Superior Court, 17 Cal.2d 13, 17, 108 P.2d 906, 135 A.L.R. 318. The right to relief, on the other hand, goes to the existence of a cause of action, and where the complaint states a cause of action in someone, but not in the plaintiff, a general demurrer for failure to state a cause of action will be sustained and this objection is not waived by failure to raise it by demurrer or answer and may be raised at any point in the proceedings. Parker v. Bowron, 40 Cal.2d 344, 351, 254 P.2d 6.

In view of the conclusions we have reached with respect to the liability of defendant in exercising control over the limited partnership it becomes unnecessary to determine his liability under Corp.Code, sec. 15513, under the record before us. Summarizing: the defendant Albert Antoyan became a limited partner and creditor of Marback Motor Company on April 9, 1951; in purchasing the operating assets and good will of the partnership he took such part in the control of the business that he became liable to the then creditors of the partnership; the trustee in bankruptcy did not succeed to the rights of the partnership creditors to maintain an action based on the creditors' right to an in personam judgment against the defendant; and the right to assert that the bankruptcy trustee had no such course of action was not waived by his failure to demur specially to the complaint upon the ground of lack of capacity to sue.

For the reasons stated, the judgment in favor of defendant in appeal number 22232, Max H. Gewirtz, et al., appellants, is reversed and the judgment in appeal number 21785, Kyle Z. Grainger, Jr., as Trustee of the Estate of Marback Motor Company, a co-partnership, Bankrupt, is affirmed.

FOOTNOTES

1.  “A limited partnership is a partnership formed by two or more persons under the provisions of Section 15502, having as members one or more general partners and one or more limited partners. The limited partners as such shall not be bound by the obligations of the partnership.” Corp.Code, sec. 15501.

2.  “A limited partner shall not become liable as a general partner unless, in addition to the exercise of his rights and powers as a limited partner, he takes part in the control of the business.” Corp.Code, sec. 15507.

PHILIP H. RICHARDS, Justice pro tem.

MOORE, P.J., and ASHBURN, J., concur.