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Neal and Lakeside Mall, Ltd., v. Hill et al (3/6/92), 826 P 2d 1137
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NOTICE: This opinion is subject to formal correction
before publication in the Pacific Reporter. Readers are
requested to bring typographical or other formal errors to
the attention of the Clerk of the Appellate Courts, 303 K
Street, Anchorage, Alaska 99501, in order that corrections
may be made prior to permanent publication.
THE SUPREME COURT OF THE STATE OF ALASKA
LAKESIDE MALL, LTD., an Alaska )
limited partnership; PAUL NEAL )
III a/k/a TONY NEAL, an )
individual; and NEAL & COMPANY )
INC., an Alaska corporation, )
)
)
Appellants, ) File No. S-4319
)
v. ) 3AN 88 11204 CI
)
ROBERT B. and THERESA R. HILL; ) O P I N I O N
JACK F. BRENT; WILLIAM J. WINN )
FAMILY TRUST; RONALD A. HILL; )
KENNETH D. and MARY LOU )
FEENSTRA; EVELYN W. HOPKINS; )
BEN F. SMITH, JR., as partners )
of Lakeside Company, )
)
Appellees. ) [No. 3819 - March 6, 1992]
________________________________)
Appeal from the Superior Court of the State
of Alaska, Third Judicial District,
Anchorage, Peter A. Michalski, Judge.
Appearances: David P. Gorman, Wade &
DeYoung, Anchorage, for Appellants. Peter J.
Maassen, Burr, Pease & Kurtz, Anchorage, for
Appellees.
Before: Rabinowitz, Chief Justice, Burke,
Matthews, Compton and Moore, Justices.
BURKE, Justice.
In this foreclosure action, the Neal defendants appeal
the superior court's grant of summary judgment dismissing their
third party indemnity claims against the Lakeside partners.1 The
issue we address is whether Neal, previously a purported "limited
partner" himself, may raise various statutory filing defects to
claim that Lakeside Company was not properly formed as a limited
partnership and thereby expose the remaining "limited partners"
to liability as general partners. Based on a natural extension
of our reasoning in Betz v. Chena Hot Springs Group, 657 P.2d 831
(Alaska 1982), we hold that a former partner in a purported
limited partnership is estopped to deny the existence of a
limited partnership among the partners inter se for the purpose
of imposing general partnership liability on his former co-
partners.
I
In March 1978, Lakeside Mall, Ltd., an Alaska limited
partnership controlled by the Neal defendants, secured financing
from National Bank of Alaska (NBA) to purchase property and build
a shopping mall in Homer. The 1.575 million dollar loan was
secured by a promissory note and a deed of trust signed by one
Neal defendant in his capacity as general partner of Lakeside
Mall, Ltd. and by the other Neal defendants as guarantors of the
note and deed.
In 1979, Charles Harding, a Homer resident, formed
Lakeside Company to purchase and operate the shopping mall.
Harding recruited friends and relations from California to invest
in the company as "limited partners." On August 17, 1979, Neal,
acting on behalf of Lakeside Mall, Ltd., conveyed the mall
property to Lakeside Company. Harding, as general partner of
Lakeside Company, executed the deed which contained a hold
harmless clause designed to indemnify the Neal defendants from
exposure as guarantors of the NBA note and deed of trust. As
partial consideration for its sale of the mall, Lakeside Mall,
Ltd., received a 30% "limited partnership"interest in Lakeside
Company.
At the time of conveyance, the other Lakeside partners
had not made their capital contributions or executed the
partnership agreement, and the Certificate of Limited Partnership
had not been recorded in Los Angeles as required by its terms.
The other Lakeside partners executed the partnership agreement
and made their contributions within two months of the conveyance.
Harding filed the certificate in Homer in October 1979. However,
the certificate was not filed in Los Angeles County until
September 1981.
On October 29, 1979, NBA, Lakeside Company, and the
Neal defendants entered into an assumption agreement whereby
Lakeside Company agreed to assume the note and deed of trust.2
However, NBA did not agree to release the Neal defendants from
their obligations as original borrowers or guarantors.
In 1981, Neal and Harding had a dispute over management
of the mall property. Neal brought an action against Harding,
Lakeside Company, and the other Lakeside partners to recover his
investment in Lakeside Company. He also sought damages for
misrepresentation and various other remedies.3 The parties
settled the 1981 action and stipulated to dismiss the case with
prejudice. The settlement provided that Harding would buy out
Lakeside Mall's partnership interest and undertake "reasonably
necessary" steps to secure release of the Neal defendants from
the underlying debt to NBA.4 At the time of the settlement, the
Certificate of Limited Partnership was on file in Los Angeles and
Homer, and all partners had made their capital contributions and
signed the partnership agreement.
From 1982 until 1986, Harding and Lakeside Company ran
the shopping mall and serviced the mortgage. However, with the
severe economic downturn that hit Alaska in 1986, the company
could not meet its debt payments and eventually defaulted on the
loan. In 1988, NBA made a demand for payment on the Neal
defendants in their various capacities, and when they failed to
pay, brought a foreclosure action against Lakeside Mall as the
original debtor, the Neal defendants as guarantors, and Lakeside
Company under its 1979 assumption agreement.
Neal filed cross-claims and third party claims against
Harding, Lakeside Company, and the Lakeside partners based on the
hold harmless clause in the 1979 warranty deed. In his claim
against the Lakeside partners, Neal's theory was that the
Lakeside Company was not properly formed as a limited partnership
when the 1979 deed was executed and therefore all the partners
were "general partners"and obligated under the hold harmless
clause.
The Lakeside partners moved for summary judgment on the
third party claims against them. Among other things, they
claimed: 1) that the Neal defendants were estopped to deny the
validity of the limited partnership or their status as limited
partners, and 2) that the claims were barred by the 1981
settlement under the doctrines of res judicata and/or collateral
estoppel. The Neal defendants cross-moved for summary judgment
on the issue of the Lakeside partners' status as limited or
general partners.5
While the cross-summary judgment motions were pending,
the Neal defendants settled with NBA. In August 1990, the trial
court granted the Neal defendants' summary judgment motion
against Harding and Lakeside Company but also granted the
Lakeside partners' motion against the Neal defendants. The trial
court found no genuine issues of material fact and ruled that the
Neal defendants had "ample notice"of the limited partnership
status of the company when they became "limited partners"
themselves. The court also concluded that under Tolstrup v.
Miller, 726 P.2d 1304, 1306 (Alaska 1986), the Neal defendants'
"claims regarding unlimited liability are barred by the final
order in [the 1981] case." This appeal followed.
II
The Lakeside partners argue that Neal is estopped to
deny the existence of the limited partnership as a former partner
who had notice and dealings with Lakeside Company as a limited
partnership.6 Neal contends that the dispositive fact in this
case is that the certificate of limited partnership was not on
file in Los Angeles when either the warranty deed containing the
hold harmless clause or the assumption agreement were executed.7
Neal also points out that he was not only a partner in
the "purported limited partnership"but was also a creditor of
the partnership based on the 1979 sale of the mall property. As
a creditor of the partnership, he claims he should be able to
rely on the line of cases which holds that a limited partnership
exists "only if a certificate of limited partnership is signed
and recorded"regardless of whether the creditor had notice of
the purported limited partnership status of the company. Brown
v. Panish, 160 Cal. Rptr. 282, 283 (Cal. App. 1979).8 See also
Tiburon National Bank v. Wagner, 71 Cal. Rptr. 832 (Cal. App.
1968); Dwinell's Central Neon v. Cosmopolitan Chinook Hotel, 587
P.2d 191 (Wash. App. 1978). Neal argues that these cases
parallel the present action because he is not suing on any
rights, remedies or obligations related to his earlier
involvement in the partnership as a "purported limited partner"
but rather is suing in his creditor capacity to enforce his
rights under the hold harmless clause. He asserts that his
status as a former partner should be irrelevant to the present
action.9 We disagree with Neal's fundamental premise.
In Betz v. Chena Hot Springs Group, 657 P.2d 831, 833
(Alaska 1982), we stated:
The purpose of the recording
requirement is to provide notice to the
firm's creditors of a limited partner's
circumscribed liability. When a certificate
is not filed, most courts hold that a general
partnership is formed, with each partner
being fully liable for debts of the
partnership. While a partner's rights vis-a-
vis a creditor may be affected, failure to
record the certificate does not, in and of
itself, alter the rights of a [partner] vis-a-
vis other partners as set out in [a]
partnership agreement.
(Citations omitted). Similarly, the Iowa Supreme Court held in
Porter v. Barnhouse, 354 N.W.2d 227 (Iowa 1984), that the failure
to file a cancellation of limited partnership did not effect the
date of dissolution as among the partners. Citing Betz with
approval, the court concluded:
The statutory requirement for
filing a certificate of cancellation . . . is
a corollary to the requirement for filing a
certificate of limited partnership. . . . It
is designed to protect third parties dealing
with the partnership. For this reason,
several courts which have considered the
issue have concluded that such filing
requirements are designed for the protection
of third parties and do not affect the rights
of the limited and general partners inter se.
Id. at 231.
Many other jurisdictions have relied on the notice
function of the recording requirement to distinguish between
claims of defective limited partnership made by partners and
those made by third party creditors.10 See Hoefer v. Hall, 411
P.2d 230, 233 (N.M. 1966) (purpose of statutory requirement that
certificate be recorded is to acquaint third persons dealing with
the partnership with essential features of the partnership
arrangement); see also In re Rey Cafe Coffee Services, Ltd., 24
B.R. 680 (D.N.M. 1982); Brown v. Brown, 488 P.2d 689, 695 (Ariz.
App. 1971); Riviera Congress Associates v. Yassky, 268 N.Y.S.2d
854 (N.Y. 1966); Holvey v. Stewart, 509 P.2d 17 (Or. 1973);
Garret v. Koepke, 569 S.W.2d 568 (Tex. Civ. App. 1978); Rond v.
Yeaman-Yordon-Hale Productions, 681 P.2d 1240, 1242 (Utah 1984).11
Based on our reasoning in Betz, we conclude that Neal
is estopped, as a matter of law, from claiming that the Lakeside
partners are general partners and liable under the hold harmless
clause.12 The undisputed facts of the case establish that Neal
accepted a limited partnership interest in the company on the
same day that the deed containing the hold harmless clause was
executed. He was a partner when the assumption agreement was
signed and during the entire period when the defects that he
complains of existed.13 When he left the partnership, the
Certificate of Limited Partnership was recorded and all statutory
requirements were essentially satisfied.
Since the estoppel theory is sufficient to support the
superior court's order granting summary judgment in favor of the
Lakeside partners, it is not necessary for us to discuss the
substantial compliance and collateral estoppel arguments raised
by the parties. The superior court's order is AFFIRMED.
_______________________________
1. There are numerous individuals and business
enterprises involved in this complex foreclosure action. We
adopt the convention used by the parties themselves to refer
collectively to the third party plaintiffs (appellants here) as
the "Neal defendants"or "Neal." For ease of reference, we use
the masculine singular pronoun to refer to the collective "Neal."
The third party defendants (appellees) are the purportedly
limited partners of Lakeside Company and are referred to as the
"Lakeside partners"or "partners."
2. The agreement specifically refers to Lakeside
Company as a "California Limited Partnership."Harding executed
the agreement as "General Partner"for the company.
3. The central theories of Neal's case were: 1) that
Harding misrepresented to Neal that the limited partnership was
properly formed under California law at the time of conveyance;
2) that Harding's failure to file the certificate in Los Angeles
was a breach of his fiduciary duty to Lakeside Mall, Ltd., and
the other "purported limited partners"because it exposed them to
liability as general partners; and 3) that Harding mishandled
certain other properties.
4. The settlement agreement which was signed by all
parties, referred to Lakeside Company as a "California limited
partnership."
5. In their memorandum in support of the summary
judgment motion, the Neal defendants stated, "[f]or the most
part, the facts concerning this issue [i.e., the Lakeside
partners' liability under the hold harmless clause] are
undisputed."
6. Since the facts relating to the limited partner
status of the Lakeside partners are undisputed, a question of law
is presented. We review a question of law using our independent
judgment and adopt the rule which is most persuasive in light of
precedent, reason, and policy. Guin v. Ha, 591 P.2d 1281, 1284
n.6 (Alaska 1979).
7. Neal points out that the failure to record the
certificate violates AS 32.10.010 (1986 & Supp. 1990) which
provides:
(a) Two or more persons desiring to form
a limited partnership must (1) sign and swear
to a certificate . . . (2) record the
certificate in the office of the recorder for
the recording district in which the limited
partnership is located.
This section, as well as the remainder of our codified limited
partnership law, is taken from the Uniform Limited Partnership
Act (ULPA) and is identical to former California Corporations
Code 15502. Neal contends that under the ULPA failure to record
the limited partnership agreement results in the formation of a
general partnership.
8. Neal contends that pre-1983 decisions of the
California courts "should be highly persuasive, if not
controlling" on the question of the Lakeside Company's validity
as a limited partnership because the partnership agreement
identifies the company as a "California limited partnership."
This may be true if one accepts Neal's premise that he is simply
a creditor and the question is a matter of statutory
construction; namely whether the company complied or
"substantially complied"with California's version of the ULPA.
However all the important events in this case occurred in Alaska.
The Neal defendants and Harding are residents of Alaska and only
dealt with each other in Alaska; the loan was from an Alaskan
bank to finance an Alaskan business; the deed containing the hold
harmless clause and the assumption agreement were executed here;
and the 1981 action was brought in an Alaskan court. Only the
Lakeside partners reside in California, and, apparently, they had
no dealings with the company other than their initial
contributions and some early returns on their investment.
For the most part, we have adopted the "most
significant relationship"test for choice of law issues based on
the Restatement (Second) Conflict of Laws approach. See Ehredt v.
DeHavilland Aircraft Co. of Canada, 705 P.2d 446, 453 (Alaska
1985). The Restatement (Second) Conflict of Laws 292-295
(1971) applies this same test to issues involving the liability
of partners inter se and when third party creditors are involved.
California certainly has an interest in applying its law to
business entities specifically organized under its law. However,
as far as the Lakeside partners' status vis-a-vis Neal is
concerned, our interest is clearly dominant given the
overwhelming contacts with this state.
9. Neal further contends that the ULPA only provides
one "safe haven"for partners who erroneously believe themselves
to be limited partners: renunciation. AS 32.10.100 provides:
[a] person who has contributed to the
capital of a business . . . , erroneously
believing that the person has become a
limited partner in a limited partnership, is
not by reason of the person's exercise of the
rights of a limited partner a general partner
. . . provided that on ascertaining the
mistake the person promptly renounces the
person's interests in the profits of the
business or other compensation by way of
income.
He argues that the Lakeside partners should have renounced their
interest in Lakeside Company when they became aware of the filing
defects as a result of the 1981 lawsuit.
10. The fact that a partner's rights and obligations
may be different depending on who challenges the entity, a
partner or a creditor, flows from the fact that the ULPA was
meant to abrogate the common law rule that "an abortive attempt
to create a limited partnership resulted in a general
partnership."59A Am. Jur. 2d Partnership 1276 (1987). Courts
achieved a result similar to the old rule when creditors were
involved by "saying that, while a limited partnership was formed,
the limited partners are liable as if they were general
partners." Id. However "when no rights of a creditor are
involved, the partners are usually held to their agreement unless
they can show that they were injured by the fact that . . . no
certificate of limited partnership . . . was ever filed at all."
Id. at 1278.
11. Neal points out the string of cases relied on by
the Lakeside partners do not involve the question of limited
liability but rather involved other agreements made by partners
in the partnership agreements. For the most part this is true;
however, the Ninth Circuit Court of Appeals (applying Arizona
law) at least contemplated that the same rule would apply when
liability was the issue. In Heritage Hills v. Zion's First Nat'l
Bank, 601 F.2d 1023, 1026 (9th Cir. 1979), the court commented:
The fact that it was not a limited
partnership means no more than that the
liability of the limited partners upon
obligations of the partnership had not
effectively been limited to the amounts they
had subscribed in the venture. While the
intended partners might among themselves rely
upon their agreement as to the limited nature
of their liability, all of the partners had
general liability insofar as third parties
were concerned.
(Emphasis added).
12. This situation does not fit neatly under either
the doctrine of equitable or quasi-estoppel but has elements of
both. We recently discussed the requirements for both types of
estoppel in Sea Lion Corp. v. Air Logistics of Alaska, Inc., 787
P.2d 109, 114 n.2 (Alaska 1990):
Traditional [i.e., equitable] estoppel
requires the assertion of a position by
conduct or word, reasonable reliance thereon
by a party, and resulting prejudice. Quasi-
estoppel precludes a party from taking a
position inconsistent with one taken
previously when circumstances render the
assertion of [the second] position
unconscionable.
Here there is no question that a business entity of
some kind was formed on the day Neal and Harding executed the
deed and Neal certified that Lakeside Mall, Ltd., had itself
become a limited partner of Lakeside Company. In addition, Neal
has never claimed that he suffered any injury as a result of the
filing defects.
13. Significantly, in the settlement agreement Neal
signed to end the 1981 litigation, Lakeside Company was
identified as a limited partnership. This conveyance occurred
after Neal became aware of the filing defects. In other words,
he sold his partnership interest as a limited partnership
interest and therefore failed to do what he claims the other
partners should have done namely renounce his interest under AS
32.10.100.
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