Business Organizations

NATURE OF CASE: Appeal of affirmance of judgment for defendants in action to attach liability to limited partners.

FACT SUMMARY: Frigidaire Sales Corporation (Frigidaire) (P) attempted to hold the limited partners of Commercial Investors (Commercial) generally liable after Commercial breached its contract with Frigidaire (P).

RULE OF LAW

Limited partners do not incur general liability for the limited partnership’s obligations simply because they are officers, directors, or shareholders of the corporate general partner.

FACTS: Frigidaire Sales Corporation (Frigidaire) (P) entered into a contract with Commercial Investors (Commercial), a limited partnership. Mannon (D) and Baxter (D) were limited partners of Commercial and also officers, directors, and shareholders of Union Properties (Union) (D), the only general partner of Commercial. Mannon (D) and Baxter (D) controlled Commercial by exercising day-to-day control and management of Union (D). Commercial breached the contract and Frigidaire (P) filed suit against Union (D), Mannon (D), and Baxter (D), asserting that they should incur general liability for the limited partnership’s obligations because they exercised day-today control and management of Commercial. Mannon (D) and Baxter (D) argued that Commercial was controlled by Union (D), a separate legal entity, and not by them in their individual capacities. The trial court declined to hold Mannon (D) and Baxter (D) generally liable, the state’s intermediate appellate court affirmed, and Frigidaire (P) appealed. The state’s highest court granted review.

ISSUE: Do limited partners incur general liability for the limited partnership’s obligations simply because they are officers, directors, or shareholders of the corporate general partner?

HOLDING AND DECISION: [Judge not stated in casebook excerpt.] No. Limited partners do not incur general liability for the limited partnership’s obligations simply because they are officers, directors, or shareholders of the corporate general partner. In Washington, parties may form a limited partnership with a corporation as the sole general partner. To hold that Mannon (D) and Baxter (D) incurred general liability for the limited partnership’s obligations would require the court to totally ignore the corporate entity of Union (D), when Frigidaire (P) knew it was dealing with that corporate entity. Although Mannon (D) and Baxter (D) controlled Commercial through their control of Union (D), they scrupulously separated their actions on behalf of Commercial from their personal actions and the corporations were clearly separate entities. Frigidaire (P) knew that Union (D) was the sole general partner of Commercial and that Mannon (D) and Baxter (D) were only limited partners. If Frigidaire (P) had not wished to rely on the solvency of Union (D) as the only general partner, it could have insisted that Mannon (D) and Baxter (D) personally guarantee contractual performance. When the shareholders of a corporation, who are also the corporation’s officers and directors, conscientiously keep the affairs of the corporation separate from their personal affairs, and no fraud or manifest injustice is perpetrated upon third persons who deal with the corporation, the corporation’s separate entity should be respected. Affirmed.

ANALYSIS

The court’s opinion does not preclude a finding of general liability of limited partners where there is a showing of fraud or deception. Other courts have been less lenient in protecting limited partners and have held them generally liable if their actions constituted control of the corporation. In some states, on the other hand, a corporate entity is not permitted to be a general partner because such arrangements are viewed as shams.

GENERAL PARTNERSHIP A voluntary agreement entered by two or more parties to engage in business whereby each of the parties is to share in any profits and losses therefrom equally and each is to participate equally in the management of the enterprise.

LIMITED PARTNERSHIP A voluntary agreement entered by two or more parties whereby one or more general partners are responsible for the enterprise’s liabilities and management and the other partners are only liable to the extent of their investment.