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WEIL v. DIVERSIFIED PROPERTIES

December 2, 1970

Martin L. WEIL, Plaintiff,
v.
DIVERSIFIED PROPERTIES, a limited partnership, et al., Defendants


Gesell, District Judge.


The opinion of the court was delivered by: GESELL

GESELL, District Judge.

 This is an equitable action brought by the general partner of a limited partnership asking the Court to declare the limited partners general partners and for the appointment of a receiver and an accounting. The case raises some factual issues and presents legal questions under the Uniform Limited Partnership Act, 41 D.C. Code § 401, et seq., apparently not previously determined in this jurisdiction. Testimony was taken on the issue whether the defendant limited partners became general partners and on the merits of two counterclaims filed by different limited partners.

 Diversified Properties is a limited partnership organized effective January 2, 1967, with varying degrees of ownership in several garden-type apartments and other real estate located mostly in Maryland. A formal written agreement was signed in July 1967, and the partnership was duly registered in the District of Columbia under the provisions of the Code. The origins of the partnership are not in dispute. Weil had been managing and dealing in real estate and had varying participations in several properties. He needed capital and approached defendant Baer with a view to placing some of his real estate interests in a limited partnership to be formed. Baer, a CPA, had several clients looking for tax shelter and mainly through his auspices a group of limited partners was assembled and the agreement signed by all parties on the advice of various attorneys and backdated to January in order to get maximum depreciation and loss carry-over tax deductions. Weil was the only general partner.

 All parties agree the limited partners remained strictly in that status until about May 1, 1968. By April, however, the partnership was hard pressed for cash, various mortgage obligations had to be satisifed or refinanced and the projected cash flow was very inadequate. Weil, who had been managing the properties from a partnership office at one of the apartment projects, looked for other employment and at a meeting of the partners on April 24 offered to discontinue his salary and close up the partnership office, steps which would effect a saving of something in the neighborhood of $75,000. This was a gloomy and revealing meeting. Weil's proposal was accepted with little consideration of what, if anything, Weil would do in the future. By the time of the next partnership meeting a week later, two individuals -- Rubenstein and Tempchin -- had been selected to manage one or more of the properties on a commission basis in accordance with a general proposal Weil had advanced. The partnership books and records had been transferred to Baer's office, the official business address of the partnership, and Weil commenced working for another real estate company as vice president. From then on the partners were involved in refinancing and meeting further capital demands. Although they put more money into the venture money pressures increased and the partnership remained very short of cash with early foreclosures threatening. All partners hoped to sell some properties and thus keep others afloat. Weil's name still appeared on various obligations which in fact had been assigned to the partnership. As general partner he had also naturally made numerous business commitments for the partnership. Creditors therefore turned to him with persistent demands for payment which could not be met. The limited partners had no obligation or willingness to come forward with still more capital sufficient to meet these demands.

 It is against this general background that the activities and relationships of the partners must be analyzed in more detail. Weil argues that the limited partners took control of the enterprise within the meaning of D.C. Code § 41-407, which provides:

 
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.

 Weil contends that after his withdrawal from a salaried position on May 1, 1968, he was supposed to continue as general partner, keeping an eye on the business, but that he was ignored. He claims that meetings of the other partners were held in his absence and without notice, and that Rubenstein and Tempchin not only refused to follow his instructions but took orders from the limited partners, particularly Baer, Kaye, Steinberg and Jerome Snider. He points to various isolated episodes suggesting interference by certain individual limited partners with matters Weil contends he should have handled as general partner. The limited partners by categorical testimony strenuously deny these charges and the over-all inferences that Weil seeks to draw from various incidents.

 The only significant independent witness, Rubenstein, who was brought into the enterprise on the recommendation of Weil, had managed three properties for the partnership, had no detailed knowledge of the partnership operations and could testify mainly only to impressions. He did not follow intermittent suggestions or instructions from Weil concerning disbursement of the limited funds available. In the first place, there was not enough money. Also, he felt he should consult all partners because he was not sure of Weil's status. Throughout he had difficulty communicating with the other partners and also with Weil. It does appear that both Rubenstein and Tempchin had been told by Baer that they could consult him on any matters of business judgment, and they did this on occasion. Baer's office had the books and records. Under the agreement, Baer could sign checks and he had probably the best over-all understanding of the partnership's complex and somewhat uncertain obligations. Rubenstein also was occasionally in contact with Steinberg, Kaye, Jerome Snider and Weil. All limited partners categorically deny that they ever gave explicit orders or instructions to either Rubenstein or Tempchin. The partnership was not well managed by anyone, and existed mainly through improvisation from crisis to crisis. Rubenstein gave little concrete testimony as to any directions he received and Tempchin was not called to testify by either side. Most of the witnesses, including Weil, reconstructed the confusing events of the post-May period from the vantage of hindsight with a considerable element of self-interest.

 Cases relating to whether or not limited partners have taken part in control of the business and are thus to be treated as general partners involve claims by creditors against the partners. See, e.g., Plasteel Products Corp. v. Helman, 271 F.2d 354 (1st Cir. 1959); Gilman Paint & Varnish Co. v. Legum, 197 Md. 665, 80 A. 2d 906 (1951); Rathke v. Griffith, 36 Wash. 2d 394, 218 P. 2d 757 (1950). No case has been found where a general partner has invoked Section 7 of the Act against his own limited partners. The purpose of Section 7 is to protect creditors:

 
The Act proceeds on the assumption that no public policy requires a person who contributes to the capital of a business, acquires an interest in its profits, and some degree of control over the conduct of the business to become bound for the obligations of the business, provided creditors have no reason to believe that when their credits were extended that such persons were so bound. (William Draper Lewis, 65 U. Pa. L. Rev. at 715 (1917)).

 Abendroth v. Van Dolsen, 131 U.S. 66, 9 S. Ct. 619, 33 L. Ed. 57 (1889) although decided under a New York statute which preceded the Uniform Partnership Act, is closely in point:

 
[The] statute, in fixing this liability on account of non-compliance with its provisions, does not change his special partnership into a general one, but simply makes him liable as a general partner to creditors. All his relations to his copartners, and their obligations growing out of their relation to him as a special partner, remain unimpaired. 131 U.S. at 73, 9 S. Ct. at 623.

 The remedy of a general partner who faces interference from his limited partners is to dissolve the partnership under Section 31 of the Uniform Partnership Act, 41 D.C. Code § 330. So long as the partnership continues, he is in a relationship of trust with his colleagues. Meinhard v. Salmon, 249 N.Y. 458, 164 N.E. 545 (1928). He ...


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