McCully v. Radack

Gilbert, J., delivered the opinion of the Court. History is uncertain whether William Arthur Dunkerly 1 ever uttered the signal remark that, “This is just like that only it’s different,” but if he did he may well have been referring to that hybrid of the law, the limited partnership. It is neither a partnership, as that term is usually defined, nor is it a corporation, although it bears a strong resemblance to both. It has been said that a limited partnership is in the nature of an investment, In re Panitz & Co., 270 F. Supp. 448 (D. Md. 1967) aff'd sub nom.

Hammerman v. Arlington Fed. Sav. & Loan Ass’n, 385 F. 2d 834 (4th Cir. 1967). A limited partner is not bound by the obligations of the partnership, nor is he subject to any personal liability beyond his investment in the venture. Gilman Paint & Varnish Co. v. Legum, 197 Md. 665 , 80 A. 2d 906 (1951). ³⁵² The limited partnership, unknown at common law, nevertheless historically can be traced to the medieval enterprise known as the commenda, whereby a passive investor financed a trader’s operations and received a share of profits, but risked no more than the sum of his capital contribution. 2 To afford investors “the same sense of security from any possibility of unlimited liability as the subscribers to the shares of a corporation”, 3 the National Conference of Commissioners on Uniform State Laws promulgated in 1916 the Uniform Limited Partnership Act. Adopted in forty-eight states, 4 the ULPA “is in effect, the limited partnership law of the United States.” 5 The General Assembly of Maryland adopted the ULPA by Laws 1918, ch. 280.

It is now codified as Md. Ann. Code art. 73. 6 The article spells out in unambiguous terms what constitutes a limited partnership, its formation, business purposes, name, rights and liabilities. This appeal arises from the ruins of a limited partnership which had purchased a marina located at Galesville, Maryland, and operated it under the name of West River Marina Limited Partnership. In March, 1973, the partnership entered into a deed of trust with the Maryland West River Marina Corporation. In February, 1974, the partnership defaulted on its obligation, and the trustees instituted foreclosure proceedings in the Circuit Court for Anne Arundel County.

The property was sold at auction to John Harms and Vincent Pirro, Jr., a partnership, both of whom were limited partners in the West River Marina Limited Partnership. After the payment of prior liens, trustees’ commissions, ³⁵³ costs and counsel fees, the sum of $20,882.21 remained for distribution. The general partner, David H. Radack, the appellee, filed an exception to the report of the Auditor. Radack noted that an escrow deposit of $17,000.00, which sum was to be used for the purchase of insurance and the payment of taxes on July 1, 1974, was not accounted for in the Auditor’s report.

The limited partnership, as distinguished from the limited partners, also filed an exception. The partnership alleged that the report contained mathematical errors and erroneous conclusions. Further, the partnership objected to the payment of a counsel fee of $39,036.51 to the attorney for the trustees, characterizing the fee as “overly generous” and “unreasonable on its face.” Radack, through his attorneys, was successful in negotiating a settlement of the dispute with the trustees, who agreed to surrender to the partnership the sum of $46,646.69 in consideration of the partnership’s withdrawal of their exceptions. The claim as to the $17,000.00 escrow monies alleged by Radack to be due the partnership, was not to be affected by the agreement.

The limited partners, however, thought that $46,646.69 was insufficient. Under the terms of the limited partnership agreement, after payment of debts of the partnership, surplus funds were to be distributed to the limited partners to the extent of their investment, plus other payment not here applicable, before the general partner could participate. The limited partners had invested the sum of $230,000.00, 7 and obviously, there were not sufficient funds available to make the limited partners “whole”. Patently, the general partner would not share in the proceeds.

The general partner noted that the limited partners could not be held responsible beyond their investment, while he was liable personally for the entire debts of the partnership, and he observed that the limited partners were gambling with his liability. There is ³⁵⁴ an indication in the briefs and pleadings that the general partner would have declined the settlement offer if the limited partners would have agreed to indemnify him to the extent of the trustees’ offer. That, however, did not take place because the limited partners offered to post only $20,000.00 as indemnity. The battle line was drawn when the general partner ordered his counsel to accept the trustees’ offer.

All of the limited partners then filed in the foreclosure proceeding a petition for an injunction. Additionally, or alternatively, they prayed the right to file an exception to the Auditor’s report. The trustees filed a motion raising preliminary objection and motions to strike. A hearing was held, and the court dismissed the petition that was brought on behalf of the limited partners on the ground that they had no standing, under Md. Ann. Code art. 73, § 26.

At the same time that all of the limited partners filed their motions in the foreclosure case, some of them filed a separate Bill of Complaint in the Circuit Court for Anne Arundel County. The relief sought by the Bill was substantially the same as that sought in the petition filed in the foreclosure proceeding. The court sustained a motion raising a preliminary objection to the Bill, ruling that the action was identical to that “already before the court” and already decided. The petition of the appellants that was filed in the foreclosure is replete with allegations of the trustees’ breach of their fiduciary duties and alleged concealment of facts from the court Auditor, as well as charges of fraud and collusion on the part of the general partnér, supposedly acting in concert with the trustees.

The merit of the charges has never been decided because, as we have stated, the trial court, relying on ULPA, § 26, dismissed the petition on the ground that the limited partners were without authority to bring the action. There appears to be no Maryland appellate decision dispositive of the issue presented. The Court of Appeals in Safe Deposit Co. v. Cahn, 102 Md. 530 , 62 A. 819 (1906) held: “Whilst . . . the limited partnership is a going ³⁵⁵ concern, in which the cash contributed by the special [limited] partner stands for and takes the place of a personal liability in his part; it is entirely appropriate that sec. 19 oí Art. 73 I 8 9 ] should enact that ‘all suits respecting the business of the partnership shall be brought by and against the general partners only,’ except in cases mentioned in the section. 1®1 And even after a dissolution whilst the cash contribution still forms part of the social assets, it is also proper that the liability due by the firm should be enforced by suit against only the general partners; because in both instances there is no individual liability attaching to the special [limited] partner, since his cash contribution itself measures the limit of his responsibility. . . .” 102 Md. at 546-47 . Cahn was not only decided twelve years before the adoption by Maryland of the ULPA, but it is factually inapposite.

In that case a suit was brought against a limited partner who withdrew his cash capital contribution and was released “from all responsibility .. . [by the partnership] whilst there . . . [were] outstanding debts due by the firm. . . .” The Court refused to allow the limited partner to escape liability because such action “would subvert the whole intent of the legislation in this subject.” Furthermore, the Cahn Court was construing the erstwhile limited partnership act in a strict manner, Gilman Paint & Varnish Co. v. Legum, supra, as the act was in derogation of the common law. With the adoption of the Uniform Act, the legislature commanded in Md. Ann. Code art. 73, § 28: “(1) The rule that statutes in derogation of the ³⁵⁶ common law are to be strictly construed shall have no application to this article.” The ULPA is by legislative mandate to “be so interpreted and construed as to effect its general purpose to make uniform the law of those states which enact it”, Md. Ann. Code art. 73, § 28 (2). It would seem, therefore, that we need but examine the case law of such of our sister states as have heretofore considered the problem. Unfortunately, there is not a uniformity of decision, notwithstanding the lofty language of the ULPA relative thereto.

The Court of Chancery of Delaware in Oil and Gas Ventures, Inc. v. Cheyenne Oil Corp., 41 Del. Ch. 596 , 202 A. 2d 282 (1964), applying the New Jersey law, held that: “. . . [I]t would appear that in a case of limited partnership only a general partner is a proper party to a proceeding on behalf of or against such a partnership unless the purpose of the suit is to enforce a limited partner’s right against or liability to the partnership. N.J.S.A. 42: 2-30. [Cf. Md. Ann. Code art. 73, § 26]” 41 Del.

Ch. at 601 . A similar view has been taken by the Supreme Court of Washington in Lieberman v. Atlantic Mutual Insurance Co., 62 Wash.2d 922 , 385 P. 2d 53 (1963), and the First District Court of Appeal of Florida in Vulcan Furniture Manufacturing Corp. v. Vaughn, 168 So. 2d 760 (Fla. 1964). See also In re Panitz & Co., sub nom. Hammerman v. Arlington Federal Savings & Loan Ass’n, supra.

We note the courts of New York, both State and Federal, have taken a view quite to the contrary of that of Delaware, Washington and Florida. Judge Friendly, writing for the United States Court of Appeals in Klebanow v. New York Produce Exchange, 344 F. 2d 294 (2d Cir. 1965) 10 discussed a case wherein plaintiffs, Klebanow and others, were limited partners in a brokerage firm in New York. The partnership agreement provided that ³⁵⁷ upon termination or dissolution of the partnership, the managing partners should, as liquidating trustees, effect the liquidation. Notwithstanding the term “managing partners”, however, one Kamerman was the sole managing partner, and he and the other general partners entered into an agreement with various creditors whereby the general partners