1998 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

3-9-1998

Henkels & McCoy Inc v. Adochio

Precedential or Non-Precedential:

Docket 97-1170

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Recommended Citation

"Henkels & McCoy Inc v. Adochio" (1998). 1998 Decisions. Paper 40.

http://digitalcommons.law.villanova.edu/thirdcircuit_1998/40
Filed March 9, 1998 

UNITED STATES COURT OF APPEALS 

FOR THE THIRD CIRCUIT 

No. 97-1170 

HENKELS & McCOY, INC. 

v. 

ROBERT ADOCHIO, RALPH ANDERSON, ROBERT 

BADER, RALPH BARUCH, JOHN BUCK, ALAN 

GOLDBERG, FRED GREEN, LEONARD C. GREEN, 

C. BRUCE JOHNSTONE, HERBERT KAUFER, BILL 

LUCAS, WILLIAM MILLER, ARTHUR ROTHLEIN, EDWARD 

ROWAN, JOSEPH SCUTELLARO, CONRAD STRUDLER, 

BARRY WAGENBERG, ARTHUR WELLMAN, JAMES R. 

WILLING, and CHESTER DAVIS 

Ralph Anderson, Robert Bader, Ralph Baruch, John Buck, 

Fred Green, Leonard C. Green, C. Bruce Johnstone, 

Herbert Kaufer, Bill Lucas, Arthur Rothlein, Edward

Rowan, Joseph Scutellaro, Barry Wagenberg, Arthur 

Wellman, James R. Willing and Chester Davis, 

 Appellants 

An Appeal from the United States District Court 

for the Eastern District of Pennsylvania 

D.C. No. 94-cv-03958 

Argued: October 15, 1997 

Before: STAPLETON, ALITO, and ROSENN, Circuit Judges. 

(Opinion Filed March 9, 1998) 
 Robert J. Stern 

 Stradley, Ronon, Stevens & Young 

 2600 One Commerce Square 

 Philadelphia, PA 19103 

 Counsel for Appellee 

 Roger B. Kaplan 

 Wilentz, Goldman & Spitzer 

 90 Woodbridge Center Drive 

 P.O. Box 10 

 Woodbridge, NJ 07095 

 Counsel for Appellants 

OPINION OF THE COURT 

ROSENN, Circuit Judge. 

This appeal presents an important question pertaining to 

the obligation of limited partners to return capital 

contributions distributed to them in violation of their 

partnership agreement which required that they establish 

reasonably necessary reserves. The issue is rendered 

complex by an interrelated maze of corporations and

partnerships devised by the limited partners and the 

general partner in their efforts to develop two separate real 

estate projects. One of these, Timber Knolls, was aborted 

shortly after conception, and the other, Chestnut Woods, 

became the genesis of protracted litigation and of this 

appeal. 

The defendants-appellants are limited partners of Red 

Hawk North Associates, L.P. (Red Hawk) L.P., a New Jersey 

limited partnership. G&A Development Corporation (G&A) 

is the general partner of Red Hawk. Cedar Ridge 

Development Corporation (Cedar Ridge), a New Jersey

corporation, and Red Hawk entered into a joint venture 

agreement, the Chestnut Woods Partnership (Chestnut), to 

develop, construct, and market residential homes in Bucks 

County, Pennsylvania. Red Hawk and Cedar Ridge are both 

general partners of Chestnut Woods. Under the joint

venture agreement, Red Hawk would provide the funding 

and Cedar Ridge would provide the land which it previously 

 2 
had agreed to purchase. Cedar Ridge would act as the 

managing partner and general contractor. 

On December 29, 1989, Cedar Ridge, as general 

contractor for Chestnut Woods, entered into a written 

subcontract with Henkels & McCoy, Inc. (Henkels), the 

plaintiff herein, to have it furnish the labor, materials, and 

equipment for the installation of the storm and sanitary 

sewer systems for the project. Cedar Ridge agreed to pay 

Henkels a fixed-price of $300,270 under the contract. 

Henkels completed the installation of the storm and sewer 

systems but Chestnut Woods defaulted in making the 

payments due under the contract. Henkels, a Pennsylvania 

corporation, then filed three actions in the United States 

District Court for the Eastern District of Pennsylvania; 

Henkels filed the first in December 1990 against Cedar 

Ridge and Red Hawk, trading as Chestnut Woods, for the 

balance due on the contract plus interest. The court 

entered a default judgment which was not satisfied in 

whole or part. 

Henkels then filed suit against G&A in its capacity as a 

general partner of Red Hawk and obtained a default 

judgment in the same amount as it had obtained against 

Cedar Ridge and Red Hawk. Efforts to obtain payment on 

this judgment also proved fruitless and counsel for the 

defendants advised plaintiff 's counsel by letter dated 

October 26, 1993 that Red Hawk was worthless. Henkels' 

counsel also had been advised that G&A was unable to pay 

the judgment out of its assets. 

Henkels finally brought this suit against the nineteen 

limited partners of Red Hawk (the Partners), standing in the 

shoes of the Red Hawk limited partnership; sixteen of the 

partners are parties to this appeal. Henkels sought, inter 

alia, to compel replacement of certain capital distributions 

made by Red Hawk to the limited partners aggregating 

$492,000 during the period that Cedar Ridge was obligated 

under its contract with Henkels to pay Henkels $300,270. 

Henkels alleged that the capital distributions were made in 

violation of the Red Hawk limited partnership agreement 

and S 42:2A-46(b) of the New Jersey Uniform Limited

Partnership Law of 1976 (New Jersey ULPL). 

 3 
After the district court denied both Henkels's and the 

Partners' motions for summary judgment,1 it conducted a 

bench trial and on January 6, 1997, entered judgment in 

favor of Henkels. The court held each limited partner of Red 

Hawk liable to Henkels for his proportionate share of 

liability in the total amount of $371,101.84 plus interest to 

the date of payment of any judgment. The Partners 

appealed. We affirm.2 

I. 

The following facts are undisputed and are based upon 

the stipulation of the parties and the findings of fact made 

by the district court. The Red Hawk partnership, consisting 

of 20 (1 deceased)3 limited partners and one corporate 

general partner, G&A, was formed in 1986. Pursuant to 

their partnership agreement, the Partners contributed $3.5 

million in capital which ultimately they allocated to two 

distinct partnership projects, Timber Knolls and Chestnut 

Woods. 

In 1987, Red Hawk and Cedar Ridge entered into a joint 

venture agreement forming the Chestnut Woods 

Partnership, with both Red Hawk and Cedar Ridge as 

general partners. Under the joint venture agreement, Red 

Hawk would provide the capital funds for the project and 

Cedar Ridge would provide the general management and 

assign its contract for the purchase of the land. Red Hawk 

funded the Partnership with an initial capital contribution 

of $650,000 (and an additional contribution of $200,000 in 

1988). Cedar Ridge agreed to act as both the managing 

partner and the general contractor of the Chestnut Woods 

project. In addition, Cedar Ridge had the right to incur 

_________________________________________________________________ 

1. Henkels & McCoy, Inc. v. Adochio, 906 F. Supp. 244 (E.D. Pa. 1995). 

2. The district court had jurisdiction over this matter pursuant to 28 

U.S.C. S 1332, as it is a civil action involving parties of diverse 

citizenship and the amount in controversy at the time the suit was filed 

in 1994 was in excess of the then existing $50,000 jurisdictional 

amount. This Court has appellate jurisdiction of the district court's 

final 

order pursuant to 28 U.S.C. S1291. 

3. Conrad Strudler, a limited partner, died before trial and was no longer 

a defendant. 

 4 
liabilities on behalf of the partnership in connection with 

the partnership's reasonable and legitimate business, 

borrow money in the name of the partnership, and incur 

reasonable and legitimate expenses related to the Chestnut 

Woods property. Work on the Chestnut Woods project 

subsequently commenced. 

In 1988, Red Hawk and Cedar Ridge entered into a 

second and distinct joint venture agreement to form the 

Timber Knolls partnership, under which both Red Hawk 

and Cedar Ridge were also general Partners. Red Hawk 

contributed $2.3 million to the Timber Knolls partnership 

and Cedar Ridge again agreed to act as both the managing 

partner and the general contractor of the project. Unlike the 

Chestnut Woods project, the Timber Knolls project never 

commenced operations. Therefore, in 1988, the Red Hawk 

Partners entered into an agreement with Cedar Ridge

requiring the latter to return Red Hawk's $2.3 million 

capital contribution. As evidence of this obligation, Cedar 

Ridge executed promissory notes aggregating $2.3 million 

with interest and principal payable quarterly.4 Cedar Ridge 

made quarterly payments to Red Hawk on the notes, and 

G&A distributed these payments to the individual Red 

Hawk Partners, as follows: 

 Payments by Distributions by 

 Cedar Ridge G&A to the 

 to Red Hawk Red Hawk 

 Date On the Notes Partners 

 (1) Jan. 1989 $ 78,750 $ 76,200 

 (2) April 1989 $215,000 $207,900 

 (3) July 1989 $215,000 $207,900 

 Totals $508,750 $492,000 

Meanwhile, on December 29, 1988, Cedar Ridge, in its 

role as general contractor of Chestnut Woods, bound itself 

to a $300,270 fixed-price contract with Henkels, under 

which Henkels agreed to furnish and install storm and 

_________________________________________________________________ 

4. Each note initially called for quarterly interest of $78,750 only, with 

balloon payments of principal due on the third quarter of each year. In 

addition, the $2.3 million due was subsequently reduced to $2.1 million, 

with $200,000 transferred to Red Hawk's stake in Chestnut Woods, 

thereby increasing its investment to $850,000. 

 5 
sanitary sewer systems for the Chestnut Woods 

development. The contract identified Cedar Ridge as the 

"General Contractor," Henkels as the "Subcontractor," and 

Chestnut Woods as the "Property Owner." The contract did 

not mention the relationship between Cedar Ridge and the 

Chestnut Woods Partnership, and made no reference to Red 

Hawk. It provided that the General Contractor, Cedar 

Ridge, was obligated to pay Henkels, payments to be made 

against billed invoices 30 days after approved inspection. At 

that time, Henkels was unaware that Cedar Ridge and Red 

Hawk were partners in Chestnut Woods. 

On January 16, 1989, Henkels commenced the 

installation of the Chestnut Woods storm and sewer 

systems and completed the work according to the contract 

in late 1989. Under the contract, Cedar Ridge was required 

to pay Henkels in progress payments as invoiced. 

Accordingly, Henkels invoiced Cedar Ridge and received 

payments as follows: 

 Invoice Invoice 

 Date Amount Invoice Status

(1) Feb. 24, 1989 $ 37,632 paid in full 4/4/89 

(2) May 24, 1989 $ 33,421 paid in full 7/6/89 

(3) Aug. 14, 1989 $215,175 only $25,000 paid on 10/19/89 

(4) Sept. 28, 1989 $ 37,183 no payment 

(5) Nov. 9, 1989 $ 10,586 no payment 

 $333,996 Total amount paid = $ 96,053 

 Total amount unpaid = $237,943 

Thus, Henkels received a partial payment in October on 

its August invoice and no payments on its September and 

November invoices, leaving a total unpaid balance of 

$237,943. G&A, the general partner for Red Hawk, failed to 

establish any reserves from the cash receipts of the limited 

partnership. 

On March 16, 1990, Cedar Ridge sold its assets to Red 

Hawk. Shortly thereafter, in April 1990, G&A agreed with 

Henkels to pay Cedar Ridge's outstanding obligations to it, 

including accrued interest. However, Cedar Ridge paid only 

two small payments aggregating $8,000. 

On December 19, 1990, Henkels sued Cedar Ridge and 

Red Hawk, trading as Chestnut Woods, claiming breach of 

 6 
the installation contract and the April 1990 agreement, 

unjust enrichment, and conspiracy to defraud. Henkels 

obtained judgment against Cedar Ridge and Red Hawk in 

the amount of $282,421.55, including interest. Cedar Ridge 

and Red Hawk were unable to satisfy this judgment, in 

whole or in part. 

In June 1992, Henkels sued G&A in its capacity as 

general partner of Red Hawk for the amount of the 

judgment previously obtained against Cedar Ridge and Red 

Hawk. On August 12, 1992, the Henkels obtained a default 

judgment against G&A in the sum of $282,424.55 plus

interest at 6% per annum from October 15, 1991. When 

Henkels learned that G&A was unable to satisfy this

judgment in whole or in part, it filed the instant suit 

seeking to have the Partners return to Red Hawk the cash 

capital distributions they received in 1989 as limited 

partners so that Red Hawk could satisfy the judgment 

obtained by Henkels against it. 

The parties stipulated in the district court that the 

distributions made to the Red Hawk limited partners

constituted a return of capital and that the distributions 

did not violate the New Jersey Limited Partnership Act. The 

district court concluded, however, in a careful and

thorough opinion, that Paragraph 12(a) of the Red Hawk 

agreement of limited partnership governed the distribution 

of all cash receipts, except those derived from the operation 

of the property, and found that the payments on the

promissory note from Cedar Ridge to Red Hawk did not 

constitute cash receipts derived from operations. It 

therefore held that the general partner was obligated to 

follow the mandate of Paragraph 12(a)(iv) of the partnership 

agreement which required the establishment of reasonable 

reserves prior to distributing cash receipts to the limited 

partners. 

The district court found that the general partner in Red 

Hawk failed to establish any reserves and that Red Hawk 

had knowledge of its contingent obligations in the Chestnut 

Woods project and knew or should have known of the 

strong potential that the assets of Chestnut Woods would 

not cover the expenses it continued to incur for site 

improvements by Henkels and for which Red Hawk was 

 7 
ultimately responsible. Accordingly, it held that Red Hawk 

violated the partnership agreement by failing to establish 

reasonable reserves to cover the cost of the site 

improvements made by Henkels. 

The court accordingly entered a verdict in favor of

Henkels and against the Partners individually for their 

proportionate share of liability in accordance with the 

monetary sums set forth in its conclusions of law in the 

total amount of $371,101.84 to date plus interest to the 

date of payment of any judgment. 

The Partners appealed. 

II. 

On appeal, the Partners contend that the district court 

erred in holding that at the times of the distributions by 

Red Hawk to its limited partners, Henkels was a creditor of 

Red Hawk and that the distributions were made in violation 

of the partnership agreement. They also argue that even if 

Henkels were a creditor of Chestnut Woods, Red Hawk, as 

a Chestnut Woods partner, was not jointly and severally 

liable for the partnership debts (as a guarantor of payment) 

but rather only contingently liable as a guarantor of 

collection, and then only in the event Henkels obtained a 

judgment against the Chestnut Woods Partnership and

failed to collect on such judgment. 

This Court reviews a district court's construction and 

application of the New Jersey Uniform Limited Partnership 

Law de novo. See Salve Regina College v. Russell, 499 U.S. 

225, 231 (1991); Schreiber v. Kellogg, 50 F.3d 264, 266 (3d 

Cir. 1995). However, whether Red Hawk and G&A breached 

the Red Hawk limited partnership agreement by failing to 

establish reasonably necessary reserves, and thus the 

Partners ultimately received the distributions in violation of 

the agreement, is a mixed question of law and fact.

Accordingly, this Court exercises plenary review of the legal 

operation of the partnership agreement, but will vacate the 

district court's contract interpretations and subsidiary 

factual findings only if they are clearly erroneous. See 

Cooper Lab., Inc. v. International Surplus Lines Ins. Co., 802 

F.2d 667, 671 (3d Cir. 1986); Ram Constr. Co., Inc. v. 

 8 
American States Ins. Co., 749 F.2d 1049, 1053 (3d Cir. 

1984). 

As a preliminary matter, we must first address the Red 

Hawk Partners' argument that Henkels was not a creditor 

who had extended credit to Red Hawk at the time of the 

1989 capital distributions, and therefore the Partners were 

not liable to Henkels. The Partners base their argument on 

Section 42:2A-46(a) of New Jersey's ULPL, entitled "Liability 

upon return of contribution," which provides 

 a. If a limited partner has received the return of any 

 part of his contribution without violation of the 

 partnership agreement or this chapter, he is liable to 

 the limited partnership for a period of one year 

 thereafter for the amount of the returned contribution, 

 but only to the extent necessary to discharge the 

 limited partnership's liabilities to creditors who 

 extended credit to the limited partnership during the 

 period the contribution was held by the partnership. 

N.J. Stat. Ann. S 42:2A-46(a) (emphasis added). The

Partners' reliance on this section is, however, misguided for 

several reasons: first, and most importantly, Henkels 

brought suit under Section 42:2A-46(b) not (a); second, 

subsection (b) is not in any way dependent upon nor does 

it even make cross reference to subsection (a); third, 

subsection (b) does not require that Henkels have extended 

credit or have been a creditor, nor does it even mention the 

word "creditor." Finally, subsection (b) addresses an entirely 

different concern than subsection (a): contributions made 

in violation of a partnership agreement or the New Jersey 

ULPL as opposed to distributions made without such 

violations but to the prejudice of creditors. Accordingly, 

Section 42:2A-46(a) is irrelevant to the issues raised on this 

appeal. 

Our analysis does not end with this conclusion, however, 

because as just mentioned, Henkels does allege that the 

distributions made by G&A to the Partners were illegal 

under Section 42:2A-46(b) of the New Jersey ULPL. Henkels 

specifically alleges that the distributions violated the New 

Jersey ULPL because they were made in violation of the Red 

Hawk partnership agreement. Accordingly, we confine our 

 9 
analysis to the relevant sections of the partnership 

agreement in conjunction with Section 42:2A-46(b) which, 

in its entirety, reads as follows: 

 b. If a limited partner has received the return of any 

 part of his contribution in violation of the partnership 

 agreement or this chapter, he is liable to the limited 

 partnership for a period of six years thereafter for the 

 amount of the contribution wrongfully returned. 

(emphasis added). Section 12(a) of the Red Hawk 

partnership agreement specifically provided that cash 

receipts be used for the establishment of reasonable 

reserves (for creditors) before such receipts be distributed 

to the Partners.5 The Partners contend that the 

distributions were not made in violation of the partnership 

agreement because Henkels, under the sewer subcontract, 

at most was a creditor of only Cedar Ridge, not of either 

Chestnut Woods or Red Hawk. Thus Red Hawk, they argue, 

was not required to establish reserves. Pursuant to this 

reasoning, the Partners assert that because Henkels was 

not a creditor, they did not receive the 1989 distributions 

in violation of the partnership agreement and thus did not 

violate the New Jersey ULPL. 

The district court, however, committed no error when it 

found that Henkels was a creditor of Red Hawk even 

though Henkels was not in direct contractual privity with 

either Chestnut Woods or Red Hawk. The Partners contend 

that this was in error and that they could not be liable to 

Henkels because Cedar Ridge was acting solely in its 

capacity as general contractor and not as a partner in 

Chestnut Ridge when it entered into the contract with 

Henkels. Thus they contend that the contract did not bind 

Chestnut Woods or Red Hawk in any way. 

_________________________________________________________________ 

5. Section 12, in pertinent part, provides that: 

 (a) Application of Cash Receipts. Cash receipts shall be applied 

 in the following order of priority: 

 . . . 

 (iv) to the establishment of such reserves as the General Partner 

 shall reasonably deem necessary; and 

 (v) to distributions to the Partners . . . 

 10 
In support of their argument, the Partners note that the 

Subcontract Agreement with Henkels identifies Cedar Ridge 

as the "General Contractor," Henkels as the 

"Subcontractor," makes no mention of Red Hawk, and 

merely lists the Chestnut Woods Partnership as the 

"Property Owner." The contract, signed only by Henkels and 

Cedar Ridge, also states that Henkels shall invoice and be 

paid by Cedar Ridge, and provides that the Chestnut Woods 

property shall not serve as security for payment or be 

subjected to liens. The Partners also consider significant 

that Henkels acknowledged that the contract was with 

Cedar Ridge only and that Henkels had no knowledge that 

Cedar Ridge or Red Hawk were partners in Chestnut 

Woods. The Partners argue that these facts conclusively 

establish that Cedar Ridge entered into the contract solely 

in its capacity as general contractor, not as a general 

partner of Chestnut Woods, and therefore Cedar Ridge is 

solely liable under the contract.6 

This "two hats" argument, although creative, is merely 

one of form over substance, ignoring the essence of the 

Chestnut Woods partnership agreement as well as 

fundamental principles of agency and partnership law 

which largely control the outcome of this case. First, the 

essence of the Chestnut Woods partnership agreement was 

that Red Hawk would "fund the PARTNERSHIP" by 

providing the capital with which to develop the property, 

while Cedar Ridge would contribute its development 

expertise by "act[ing] as the MANAGING PARTNER and 

GENERAL CONTRACTOR." (App. 76a, "Joint Venture 

Agreement, Chestnut Woods Partnership"). Thus, when

Cedar Ridge signed the contract with Henkels as General 

Contractor, it simultaneously also was acting as a partner 

in the joint venture pursuant to its express authority to 

_________________________________________________________________ 

6. The Partners cite in their brief, In Re Moserbeth Assoc., 128 B.R. 716 

(E.D. Pa. 1991), as support for this argument. Moserbeth, however, is 

inapposite. In Moserbeth, the general contractor was not itself a partner 

in the limited partnership, but instead was a separate and distinct 

corporation owned 100% by a partner in the partnership. This separate 

and distinct corporate identity was critical to the Moserbeth court 

holding that the partnership was not liable for the debts of the general 

contractor. 

 11 
"act as the . . . GENERAL CONTRACTOR" as provided in 

the Chestnut Woods partnership / joint venture agreement. 

Second, it is elementary that "[e]very partner is an agent of 

the partnership for the purpose of its business, and the act 

of every partner . . . binds the partnership, unless the 

partner so acting has in fact no authority to act for the 

partnership in the particular matter." N.J. Stat. Ann. 

S 42:1-9(1); see also Eule v. Eule Motor Sales, 170 A.2d 241, 

243 (N.J. 1961); Restatement (Second) of AgencySS 12, 140 

(1958). This principle holds true even when, as here, the 

principal is undisclosed and the agent signs the contract in 

his individual capacity for the benefit of the partnership. 

But when a third party creditor ascertains an agency 

relationship, it may hold the partnership as principal liable 

(and ultimately the individual partners) even though the 

creditor was unaware of the agency relationship at the time 

that he extended the credit to the agent. See Looman Realty 

Corp. v. Broad St. Nat'l Bank of Trenton, 161 A.2d 247, 255- 

56 (N.J. 1960) ("The principal, if discovered, may also be a 

party to the contract."); Levy v. Iavarone, 154 A. 527 (N.J. 

1931) (seller can recover from partner, although seller did 

not know at the time credit was extended to the partner's 

agent that a partnership relationship existed between the 

partner and the agent); Yates v. Repetto, 47 A. 632, 633 

(N.J. 1900) (when credit is given to an agent, and the 

principal is unknown, the creditor may elect upon 

disclosure of the principal, to hold either the agent or the 

principal liable); Moss v. Jones, 225 A.2d 369, 371 (N.J. 

Super. Ct. App. Div. 1966) ("If the existence of the principal 

is not known until after [a judgment against the agent goes 

unsatisfied], then the undisclosed principal may be sued, 

notwithstanding the judgment against the agent."); 

Restatement (Second) of Agency SS 186, 190, 194, 195 

(1958). 

Here, it is undisputed that Red Hawk was a partner with 

Cedar Ridge in the Chestnut Woods Partnership, that Cedar 

Ridge had actual authority to enter into the contract with 

Henkels,7 that the sewer systems were being installed for 

_________________________________________________________________ 

7. Paragraph 13.1(b) of the Chestnut Woods partnership agreement 

delegated to the managing partner, Cedar Ridge, general management 

 12 
the benefit of the Chestnut Woods Partnership, and that 

Cedar Ridge was entitled to reimbursement from Chestnut 

Woods for all monies paid by Cedar Ridge to Henkels. 

Accordingly, the district court committed no error when it 

ruled that, although indirect, a creditor relationship existed 

between Red Hawk and Henkels based on the contract 

signed by Red Hawk's partner in the Chestnut Woods 

Partnership, Cedar Ridge. 

The Partners also argue that the district court erred in 

finding that Henkels was a creditor of Red Hawk, because, 

even assuming arguendo that a contractual relationship 

existed between Red Hawk and Henkels, Henkels had not 

extended any credit to Cedar Ridge, Chestnut Woods, or 

Red Hawk. The unpaid invoices at issue here are from 

August, September, and November 1989, whereas the 

distributions to the Red Hawk Partners were made prior, in 

January, April, and July 1989. Therefore, the Partners 

claim that this is in itself prima facie proof that Henkels 

was not a creditor -- i.e., Henkels was not owed any money 

at the time of the distributions. These arguments, however, 

take a very narrow and ultimately erroneous legal view of 

the contractual relationship with Henkels and even a more 

constricted view of the definition of creditor. 

Although the term creditor is undefined in the New 

Jersey ULPL and there is no New Jersey case law 

interpreting the term in this context, the term creditor is 

not foreign to New Jersey law. For instance, many New 

Jersey statutes define creditor very broadly to include "the 

holder of any claim, of whatever character, . . . whether 

_________________________________________________________________ 

authority and decision making power, including: "[t]he right to incur 

liabilities on behalf of the [Chestnut Woods Partnership] in connection 

with the reasonable and legitimate business of the [Chestnut Woods 

Partnership]." In addition, Paragraph 13.1(n) delegated the right and 

power "to enter into such contracts or agreements deemed necessary or 

appropriate on behalf of the [Chestnut Woods Partnership]." It is 

significant that these provisions, unlike paragraphs 13.1(d), (g), (j), 

(l), & 

(m), allowed Cedar Ridge to incur "on behalf of the [Chestnut Woods 

Partnership]," and did not require that it incur liabilities and enter 

contracts only "in the name of the [Chestnut Woods Partnership]." 

(emphasis added). 

 13 
secured or unsecured, matured or unmatured, liquidated or 

unliquidated, absolute or contingent." See N.J. Stat. Ann. 

S 14A:14-1(b) (Business Corporation Act); N.J. Stat. Ann. 

S 15A:12-18(c) (Nonprofit Corporation Act); and N.J. Stat. 

Ann. S 25:2-7 (Uniform Fraudulent Conveyance Act) 

(repealed), & N.J. Stat. Ann. S 12A:6-109 cmt. (UCC Bulk 

Transfers) (repealed). Cf. City of Philadelphia v. Stepan 

Chem. Co., 713 F. Supp. 1491, 1493 n.3 (E.D. Pa. 1989) (to 

qualify as creditor, a party's claim must be based on "some 

legal foundation, such as an underlying debt, a contract, or 

a lawsuit"). Also, the statute is remedial in nature, 

"designed to protect creditors and should be interpreted 

with this purpose in mind." Henkels & McCoy, Inc., 906 F. 

Supp. at 252-53. In addition, the generic common law 

definition of creditor is very broad and 

 includes every one having [the] right to require the 

 performance of any legal obligation [or] contract, . . . or 

 a legal right to damages growing out of [a] contract or 

 tort, and includes not merely the holder of a fixed and 

 certain present debt, but every one having a right to 

 require the performance of any legal obligation [or] 

 contract, . . . or a legal right to damages growing out 

 of [a] contract or tort. 

Black's Law Dictionary 368 (6th ed. 1990) (emphasis

added). Finally, the failure of the statute to define creditor 

is indicative of the New Jersey legislature's intent that the 

term "creditor" be construed consistent with the New Jersey 

ULPL's broad remedial purpose and its common usage. See 

N.J. Stat. Ann. S 1:1-1 (General rules of construction). The 

district court cited many of these reasons and found them 

sufficiently persuasive, as do we, to adopt a broad

definition of creditor which includes unmatured payments 

of a debt upon performance under a contract such as

Henkels's. 

Pursuant to the subcontract agreement, Henkels had a 

claim to payment for a fixed contract price to be paid in 

installments upon progressive completion of the sewer 

work. Although the Partners argue that Henkels did not 

have a claim at the time of the 1989 distributions, the 

contract between Henkels and Cedar Ridge was entered 

into on December 29, 1988. Thus Henkels and Cedar Ridge 

 14 
had definite obligations to each other under the contract 

over a week prior to the first distribution by the general 

partner to the Red Hawk limited partners. Those obligations 

required Henkels to make the site improvements and Cedar 

Ridge to make scheduled payments as performance was

rendered. In addition, G&A made the bulk of the 

distributions after Henkels had commenced work and was 

incurring costs and expenses in fulfilling its commitments 

under the contract. Thus Chestnut Woods and Red Hawk 

had incurred liability as early as December 29, 1988, 

although the bulk of the payment matured the month after 

the last distribution by Red Hawk to the Partners. The 

Partners' overly narrow definition of creditor is inconsistent 

with the obvious financial realities that existed at the time, 

the generally accepted common law meaning of the term, 

the broad definition used in other New Jersey statutory 

contexts, and the broad remedial purpose of the statute. 

Accordingly, we hold that under this broad definition and 

consistent with the principles of agency and partnership 

law previously discussed, Henkels was not only a creditor 

of Cedar Ridge, but of Chestnut Woods, and thus Red

Hawk and its partners. 

The Partners further argue that even if we conclude that 

Henkels was a creditor of Chestnut Woods, Red Hawk was 

not "jointly and severally" liable for the partnership's debts, 

but only "jointly" liable, as it was only a partner in 

Chestnut Woods. The Partners find this significant and 

contend that as a partner Red Hawk was only contingently 

liable as a guarantor of collection, not as a guarantor of 

payment. Furthermore, the Partners contend that even then 

Red Hawk was not liable until Henkels had obtained a 

judgment against the Chestnut Woods partnership, was 

unable to collect, and then sought payment from Chestnut 

Woods's partner, Red Hawk. Therefore, the Partners 

conclude, Henkels was not a creditor of Red Hawk until 

this eventuality ultimately did occur in October 1991-- 

more than two years after the distributions. Thus, they 

assert there was no violation of Section 42:2A-46(b) or the 

partnership agreement. Although the Partners make much 

of the distinction between "joint" and "joint and several 

liability," and between "guarantor of collection" and 

 15 
"guarantor of payment," the distinctions between these 

terms are illusory here and are not dispositive. 

Under the New Jersey ULPL, partners are only jointly 

liable for contract obligations of the partnership, and thus 

a contract creditor of the partnership must first exhaust 

the partnership's assets before it can pursue the assets of 

the individual partners. See N.J. Stat. Ann. S 42:1-15(b). 

The Partners dwell on their argument that joint liability 

means that partners are merely guarantors of collection 

rather than guarantors of payment, citing Seventy-Three 

Land, Inc. v. Maxlaw Partners, 637 A.2d 202 (N.J. Super. 

Ct. App. Div. 1994). They contend that this distinction 

means that Henkels was not a creditor of Red Hawk until 

after it obtained a judgment against Red Hawk's assets in 

October 1991, "long after the distributions to the limited 

partners were made." 

This argument is without merit, however, because the 

Partners overly emphasize the distinction between 

guarantor of collection and guarantor of payment by

ignoring the sentence in Seventy-Three Land, Inc. 

immediately preceding the courts' discussion of this 

distinction; that sentence actually supports an opposite 

conclusion. The court in Seventy-Three Land, Inc. merely 

stated that "[p]artners are liable for partnership contract 

debts, but their assets are not at risk until it is shown that 

the partnership cannot discharge the debt." Id. at 204 

(emphasis added). This language, consistent with the broad 

definition of creditor previously discussed, clearly 

demonstrates that jointly liable partners such as Red Hawk 

do have a present liability. The significance to the Red 

Hawk Partners is that payment of that liability out of their 

individual assets is contingent, rather than fixed, until the 

partnership's assets are first exhausted. Although the 

Partners' individual assets were only contingently at risk, 

the Partners nonetheless were liable to Henkels from the 

time the contract was signed and, as ultimately did happen, 

their assets did become available when the Red Hawk

partnership's assets proved insufficient to meet its debt 

with Henkels. 

Accordingly, we hold that the district court's finding that 

Henkels was a creditor of Red Hawk was correct. See

 16 
Henkels & McCoy, 906 F. Supp. at 252-53. At the time of 

the 1989 distributions, Henkels was a creditor of Red Hawk 

and the individual Red Hawk partners were liable for that 

debt.8 

III. 

Although Henkels was a creditor of Red Hawk, the 1989 

distributions were in violation of the partnership agreement 

only if, as Henkels argues, Red Hawk's distributions 

constituted a failure to abide by the partnership 

agreement's requirement to establish reasonably necessary 

reserves. The Partners, however, contend that the district 

court made several errors in interpreting the Red Hawk 

partnership agreement which resulted in its finding that 

the distributions were in violation of the agreement by 

failing to establish such reasonable reserves. 

Section 9(b) of the partnership agreement grants the 

general partner, G&A, certain rights and powers, including, 

under subsection (ix), the power "to establish reasonable 

reserve funds from income derived from the Partnership's 

operations to provide for future . . . debt service or similar 

requirements." The Partners argue that this subsection is 

the only subsection of the agreement that permits or 

authorizes the general partner to reserve funds. Thus, 

according to the Partners, all reserves had to be (1) 

authorized by this subsection, (2) taken from income 

derived from operations, and (3) used for debt service. 

Therefore, had G&A reserved funds against the Henkels 

_________________________________________________________________ 

8. The dissent would extend our holding far beyond its limit. It concludes 

that the majority holds "by necessary implication. . . that a distribution 

could not be made to Red Hawk partners unless cash reserves had been 

established to fund the payment of all anticipated future liabilities of 

the 

joint venture partnerships (owned in part by others) that might accrue 

over some unspecified period of time . . . ." Dissent at p. 30. We are not 

called upon in this case to decide whether reserves are required for "all 

anticipated future liabilities" and therefore the majority does not decide 

that question, either directly or by implication. The focus of our holding 

is merely that when there is clear liability under an existing contract, 

the 

equity partners cannot ignore that liability, recapture their capital 

investments, and leave the creditor spinning in the wind. 

 17 
contract, the Partners contend that such reserves would 

have been taken in violation of this subsection of the 

partnership agreement because the funds would not have 

been derived from operations but from distributions of 

capital. 

The Partners' argument fails, however, because it 

selectively presents the language of Sections 9 and 12 and 

omits other relevant language which demonstrates that the 

Partners greatly overemphasize the significance of 

subsection (ix). First, the express language of Section 9(b) 

provides that the general partner possess all "rights and 

powers required for or appropriate to its management of the 

partnership's business which, by way of illustration but not 

by way of limitation, shall include the following: . . . (ix) to 

establish reasonable reserve funds from income derived 

from the partnership's operations to provide for future . . . 

debt service or similar requirements." This unambiguous 

language demonstrates that G&A had the right and power 

to establish reserves, even if not expressly authorized under 

subsection (ix), if it deemed them required or appropriate 

for the management of Red Hawk's business. The list of 

rights and powers in subsection (ix) is merely illustrative 

and is not an exclusive limitation on the general partner's 

rights and powers. 

Equally important, as the district court properly found, 

the distributions at issue here were not taken from income 

derived from operations, but were merely returns of capital 

of the aborted Timber Knolls partnership, which, as Red 

Hawk admits, "never got off the ground." Income from 

"operations," as used in this subsection, refers to income 

derived from the active, normal, on-going activities of the 

partnership. Timber Knolls never functioned, and thus 

there never was any income from operations. Therefore, 

subsection (ix) is not applicable to the distributions at issue 

here.9 It is completely irrelevant because the distributions 

_________________________________________________________________ 

9. This point is significant in interpreting Section 12(a) as well. 

Following 

the order of priority for the distributions of cash receipts in Section 

12(a)(i)-(v) is a provision which prohibits the general partner from 

"retain[ing] and invest[ing] any Cash Receipts derived from the operations 

of the Property, except . . . (2) for investments of reserves permitted to 

be established under clause (ix) of Paragraph 9(b)." (emphasis added). 

Because the cash receipts used to fund the distributions were not 

derived from income from operations of Red Hawk property, this 

prohibition is not relevant to this appeal. 

 18 
constituted capital funds retrieved by Red Hawk from its 

abandoned project, Timber Knolls. Although the Partners 

emphasize that the funds were derived from the Timber 

Knolls project, Subsection (ix) only addresses the reserving 

of funds derived from operations; the germinating project is 

immaterial. 

Finally, as previously discussed, Henkels qualified as a 

creditor of Red Hawk at the time the distributions were 

made. Therefore, pursuant to Section 12(a) of the Red Hawk 

limited partnership agreement governing the distribution of 

all cash receipts, the Red Hawk general partner was

required to establish reasonable reserves from the cash 

received on the Timber Knolls promissory notes to meet its 

ongoing liability before distributing such cash to the 

individual limited partners. We, therefore, turn to the issue 

as to what would constitute a "reasonable" reserve to meet 

the outstanding liability under the Henkels subcontract. 

Although neither party provided the district court with 

any case law or treatise defining reasonable reserves, the 

court used the Black's Law Dictionary definition of

"reasonable" and of "reserves" in the insurance context to 

define reasonable reserves in the business context before 

us. We agree with them that the insurance context is 

inappropriate for analysis because the nature of the 

insurance business differs significantly from that of an 

ordinary business partnership. Unlike an ordinary business 

partnership, an insurance company essentially is required 

to meet future, contingent obligations, and these reserves 

are required. The Partners instead propose that the highly 

deferential corporate "business judgment" standard is the 

appropriate standard. However, as Henkels correctly

argues, the business judgment rule also is inapposite in the 

partnership context because it is a function of a unique 

corporate setting. See 3A William Meade Fletcher et al., 

Fletcher Cyclopedia of the Law of Private Corporations 

SS1036-37 (perm. ed. rev. vol. 1994). 

Although the New Jersey courts have not yet addressed 

the issue of what constitutes reasonable reserves, we do not 

need to expressly define reasonable reserves in the context 

of this case because it is unnecessary to the disposition of 

this appeal. See Rush v. Scott Specialty Gases, Inc., 113 

 19 
F.3d 476, 486 (3d Cir. 1997) (declining to decide issues 

unnecessary to the appeal); Georgine v. Amchem Products, 

Inc., 83 F.3d 610, 623 (3d Cir. 1996) ("[W]e believe it 

prudent not to decide issues unnecessary to the disposition 

of the case."). Regardless of what standard the New Jersey 

courts will ultimately adopt, under any standard and using 

any definition of reasonable reserves, the Red Hawk general 

partner's failure to establish any reserves in the face of the 

fixed obligation and imminent payments due under the 

contract with Henkels and the operations of the Chestnut 

Woods development was callous and not reasonable. 

It is undisputed that of the approximately $500,000

monies received by Red Hawk in 1989, the Red Hawk 

general partner (G&A) did not set aside any of these funds 

to establish reserves, even in the face of a contracted 

liability. Red Hawk argues, however, that this was not 

unreasonable because (1) the Red Hawk partnership had no 

liabilities and $3 million in assets at the time of the 

distributions; (2) Henkels had not yet invoiced Chestnut 

Woods; (3) the financial outlook of Red Hawk (& Chestnut 

Woods) was healthy; and (4) the express terms of the 

partnership agreement prohibited the taking of such

reserves. Each of these contentions is without merit. 

First, the $3 million of assets included on Red Hawk's 

January 1, 1989 balance sheet is somewhat illusory. Of the 

$3 million in assets, a scant $22,000 was in the form of 

cash or other liquid assets. The remaining were almost 

exclusively illiquid: the $800,000 investment in the 

Chestnut Woods project itself which consisted of land and 

infrastructure and the $2.1 million Timber Knolls notes 

receivable from Cedar Ridge -- which were substantially 

distributed to the limited partners. Neither of these assets 

were readily available to satisfy Red Hawk obligations, 

especially not after the payments on the notes were

distributed to the partners. Moreover, Red Hawk repeatedly 

left almost no money in its checking account after each 

distribution to the Partners, other than several thousand 

dollars to cover incidental operating expenses. Additionally, 

the absence of any formal liabilities from its balance sheet 

and the failure of Henkels to physically invoice Cedar Ridge 

did not mean that Red Hawk had no liabilities; it simply 

 20 
was an "off-balance sheet" liability. In the accounting 

profession, an "off-balance sheet" liability is a financial 

obligation that is not formally recognized in an entity's 

accounting statements because no "accounting" obligation 

arises until the exchange transactions is completed; 

nonetheless, they do have real current and future cash flow 

consequences. See Accountant's Handbook, 10.29 (7th ed. 

1991). Under the broad definition of creditor established 

above, Red Hawk had an unmatured, fixed, off-balance 

sheet liability to Henkels. 

Although by itself this may be not determinative, more 

telling is the Partners' failure to identify any other source of 

funds from which the Red Hawk Partnership would be able 

to meet its obligations, including its contract obligation to 

Henkels. The Timber Knolls project never got off the 

ground, literally and figuratively, and based on the record, 

Chestnut Woods generated no earnings during the 1989 tax 

year and Red Hawk generated none during both 1988 and 

1989. Because the Chestnut Woods property was under

development at the time, Chestnut Woods reported a loss 

during 1989 and Red Hawk reported losses on both its 

1988 and 1989 tax returns, and both Chestnut Woods and 

Red Hawk appear to have had negative cash flows during 

these years. Without any other source of cash or liquid 

assets, short of liquidating the Chestnut Woods property 

itself, it clearly was unreasonable for G&A to distribute to 

the Partners Red Hawk's only available source of payment 

without setting aside any reserves to meet the Henkels debt.10 

_________________________________________________________________ 

10. As we noted above, see supra p. 10, under the New Jersey 

partnership statute and fundamental principles of agency law, every 

partner is an agent of the partnership and the act of every partner binds 

the partnership for the purpose of its business. Accordingly, the 

liability 

of the Red Hawk partnership to Henkels was committed by written 

contract between Henkels and Red Hawk's partner, Cedar Ridge, in 

December 1988, before any retrieval by the Partners of their capital 

investment in Timber Knolls. In addition, Red Hawk's project, Chestnut 

Woods, had current liabilities as of January 1, 1989, according to its tax 

returns, which disclosed debts of over $1.7 million. These liabilities 

also 

were in place prior to the retrieval of the Partners' investments in Red 

Hawk. Nevertheless, the dissent would relieve the Partners of any 

liability under the contract to creditor Henkels on the theory that from 

January to August 1989, Red Hawk "had no significant liabilities of any 

kind." Dissent at p. 29. 

 21 
Second, and equally telling, G&A knew, or at least had 

ample notice, that the financial outlook of Red Hawk and 

Chestnut Woods was not as rosy at the time of the 

distributions as the Partners attempt to assert now. 11 For 

example, the Partners fail to mention or accurately state 

many of the following facts: (1) Red Hawk and G&A, in 

December 1988, received notification from Cedar Ridge that 

four separate and distinct types of delays in the Chestnut 

Woods project were resulting in additional financial 

burdens to it; (2) Cedar Ridge also informed Red Hawk that 

these financial burdens were worrisome given the decline 

already experienced in the housing market; (3) Red Hawk 

had a scant $22,000 in cash or other liquid assets on hand 

as of January 1, 1989; (4) Chestnut Woods had an equally 

scant $12,000 in cash or other liquid assets on hand as of 

January 1, 1989; (5) Chestnut Woods' January 1, 1989 

balance sheet showed over $1.7 million in current 

liabilities, with the land and construction in progress of 

Chestnut Woods comprising over 90% of its $2.4 million in 

assets, leaving meager resources available to pay for the 

planned 1989 site improvements, such as the $300,000 of 

sewer systems from Henkels;12 (6) as of March 7, 1989, Red 

Hawk had, at a minimum, imputed knowledge from its 

bank's written notice that interest on the Chestnut Woods 

mortgage would no longer be paid out of the interest 

reserve fund and that Cedar Ridge was responsible to pay 

_________________________________________________________________ 

11. Even assuming arguendo that Red Hawk and G&A did not have 

actual notice or knowledge of the precarious financial condition of 

Chestnut Woods, "[t]here are many cases stating the general rule that 

knowledge of one partner [(Cedar Ridge)] will be imputed to the others." 

Harold Gill Reuschlein & William A. Gregory, The Law of Agency and 

Partnership S200 at 304 (1990); see also N.J. Stat. Ann. S 42:1-12 

("Knowledge to any partner of any matter relating to partnership affairs 

. . . operate[s] as notice to or knowledge of the partnership . . . ."); 

Claflin 

v. Wolff, 96 A. 73, 79 (N.J. 1915) ("If any of [the partners] had notice 

or 

knowledge . . . they would all be affected by it."). 

12. Red Hawk states, and its 1989 tax return shows, that Chestnut 

Woods' assets were $2.4 million, not $1.8 million. Although the district 

court found the number to be $1.8 million, this difference is 

inconsequential; either amount consisted almost exclusively of the 

project's land and work-in-progress -- i.e., illiquid assets, leaving next 

to 

nothing to pay its $1.7 million in current liabilities. 

 22 
interest out of its own funds due to "the past unfortunate 

circumstances [which] caused slower than expected 

[progress on the Chestnut Woods project,]" and which 

caused the remaining interest reserve to become 

substantially depleted and potentially "insufficient to carry 

this loan;" and (7) the August 1989 $2.7 million appraisal 

of the Chestnut Woods project was merely a potential future 

retail estimate and contained the express caveat that this 

"value estimate[ ] assume[s] that all site improvements will 

be completed in a workmanlike manner and within a 

reasonable period of time."13 

Finally, as previously discussed, the Red Hawk 

partnership agreement did not prohibit G&A from reserving 

funds for the payment of Henkels. Section 9(b)(ix) is merely 

an illustration of G&A's rights and powers and, because the 

funds at issue were not derived from operations, ultimately 

was irrelevant to the funds at issue. More importantly, 

Section 12(a) expressly required that the available cash 

funds be used to establish reserves before they were 

distributed to the Partners. 

_________________________________________________________________ 

13. The dissent ignores the foregoing realities of Red Hawk's and 

Chestnut Woods' financial straits while the Chestnut Woods project was 

still under development, and already beset by a negative cash flow in the 

project, while at the same time the Partners were retrieving all of their 

total capital investments in the Timber Knolls project. The dissent, 

again, would permit the Partners to escape liability in the face of 

Henkels' 1988 contract on the infirm premise that at the end of August 

1989, when all partner contributions had been repaid, Chestnut Woods 

had the project appraised at $2.7 million and Red Hawk "had significant 

net worth throughout this period." Dissent at p. 30. In the first place, 

the appraisal obtained by Chestnut Woods was merely an optimistic, 

potential, retail figure dependent on the market price for the lots, when 

and if sold, and the completion of the project "in a workmanlike manner 

and within a reasonable period of time." Second, even if the appraisal of 

the project were accurate, the frozen nature of the real estate -- not yet 

marketable -- provided no liquid source for payment of ongoing 

obligations. To illustrate, it could not meet the payment due of $215,175 

for the August delivery by Henkels. Further significant, Red Hawk and 

Chestnut Woods both reported losses during 1989, and both appear to 

have had negative cash flows. Both had meager sums of cash on hand, 

and Chestnut Woods had significant current liabilities with 90% of its 

assets frozen. 

 23 
Although neither Henkels nor the district court attempted 

to determine what level of reserves was reasonable, no 

determination was needed because Red Hawk and G&A 

failed to establish any reserves. It is patently obvious that 

at least some level of reserves was reasonably necessary, 

and that the general partners' distributions and failure to 

reserve any money for the Henkels contract obligation, in 

light of Chestnut Woods' and Red Hawk's precarious 

financial condition, was unreasonable. Thus, the district 

court did not need to determine what level of reserves was 

reasonable; it clearly had an ample factual basis upon 

which to determine that the complete failure to establish 

any reserves was a violation of the Red Hawk partnership 

agreement's requirement that G&A establish some level of 

reserves before making distributions to the Partners. 

Accordingly, we hold that Red Hawk's failure to establish 

any reserves in light of both partnerships' then existing 

financial condition was not reasonable. 

IV. 

In conclusion, we find no merit to appellants' 

contentions. We see no error in the district court's 

conclusion that Henkels was a creditor of Red Hawk, and 

therefore the 1989 capital distributions to the Partners and 

failure to establish any reserves to fund its contract 

obligation to Henkels was a violation of the Red Hawk 

partnership agreement. The Partners are therefore obligated 

to return the improper capital distributions to Red Hawk. 

Because the plaintiff stands in the shoes of Red Hawk for 

the purpose of recovering these funds on behalf of the 

partnership, In re: Sharps Run Associates, 157 B.R. 766, 

772-73 (D.N.J. 1993), and because of the multiple suits it 

already has been compelled to undergo to enforce collection 

of its debt, judicial resources will be conserved and 

economies of time and expenses effectuated, to hold the 

Partners directly liable to Henkels. 

Accordingly, the judgment of the district court will be 

affirmed. Costs taxed against the appellants. 

 24 
STAPLETON, Circuit Judge, Dissenting: 

The critical issue posed by this appeal is one of intent - 

the intent of the Red Hawk partners when they negotiated 

their partnership agreement. Given the text of that

agreement and the context in which it was executed, I 

believe the district court clearly erred when it interpreted 

Section 12(a)(iv) as precluding the three challenged 

payments to Red Hawk's limited partners. 

The relevant facts are documented and undisputed. Red 

Hawk is a limited partnership organized under the New 

Jersey Uniformed Limited Partnership Law to facilitate the 

investment of its corporate general partner and its

individual limited partners in two specific real estate 

developments. The sole declared purpose of the partnership 

was to participate in two joint ventures pursuant to 

identified, previously executed joint venture agreements, 

each of which would independently develop a parcel of real 

estate in Bucks County, Pennsylvania. The Timber Knoll 

joint venture was to develop the Timber Knoll property; the 

Chestnut Woods joint venture was to develop the Chestnut 

Woods property. In each instance, management of the joint 

venture was placed in the hands of an unrelated 

corporation with experience in the business of real estate 

development, the Cedar Ridge Development Corporation. 

The partners of Red Hawk contributed to it capital of $3.5 

million. Of this capital, $2.3 million was committed to the 

Timber Knoll joint venture, and $850,000 was committed to 

the Chestnut Woods joint venture. It was understood that 

Cedar Ridge would be simultaneously involved in other real 

estate development projects in New Jersey, Pennsylvania, 

and other states. 

Under the Chestnut Woods joint venture agreement, 

Cedar Ridge, as the "Managing Partner," was authorized to 

borrow money and to mortgage and sell assets. Red Hawk 

was to receive a Preferred Minimum Return on Capital prior 

to any distribution of profits to Cedar Ridge. The preferred 

return was equal to 15% "per annum based on simple 

interest payable quarterly on the amount of capital

outstanding and not returned." J.A. at 91. However, "in the 

event the net cash working reserve of the [joint venture fell] 

below $500,000, the quarterly preferred return [could] be 

 25 
deferred by the MANAGING PARTNER until the net cash

working reserve has sufficient cash in excess of $500,000 

to pay the unpaid preferred return." J.A. at 91-92. The 

agreement further provided that no partners would have 

"the right to compel a distribution of profits or cash, unless 

the [joint venture] has accumulated an unwarranted 

amount of cash not reasonably needed for future business 

activities." J.A. at 93-94. Red Hawk's capital contribution 

was to be returned at the minimum rate of $12,400 per lot 

sold after the sale of the first 20 lots. In addition, the 

managing partner committed itself to "make a good faith 

effort to make minimum annual cash distributions equal to 

thirty-five percent (35%) of the distributive share of profits 

allocated to each PARTNER" for tax purposes. J.A. at 94. 

Distributions could be made in cash or property. 

It was in the context of this joint venture agreement and 

the similar Timber Knoll joint venture agreement that the 

Red Hawk Partnership Agreement was negotiated. Since the 

Red Hawk partners understood that cash flow would be 

coming to Red Hawk from the managing partner of the joint 

ventures only after Cedar Ridge had established reserves to 

service the only business operations in which Red Hawk 

would ever have an interest, the Red Hawk limited partners 

understandably sought assurance that joint venture profits 

and return of capital would not be accumulated in the Red 

Hawk partnership by its general partner, G&A. 

The Red Hawk Partnership Agreement thus provided for 

a mandatory pass-through of cash receipts, whether 

generated by the joint ventures in the regular course of 

business or otherwise, after the general partner had paid all 

of the currently due debt obligations of Red Hawk and had 

set aside specifically limited reserves. Any reserves were 

expressly limited to such revenue from operations as the 

general partner, in its discretion, considered appropriate for 

the purpose of paying anticipated administrative expenses 

and, in the event of the distribution of joint venture 

property in kind, anticipated property management 

expenses. Section 12(a) of the agreement thus provided: 

 (a) Application of Cash Receipts. Cash Receipts shall 

 be applied in the following order of priority: 

 26 
 (i) to the extent required, to the creditors of the 

 Partnership, except to any Partner or any 

 Affiliate thereof; 

 (ii) to the extend required, to the payment of any 

 debts or liabilities to any Partner or any 

 Affiliate thereof (other than a loan to the 

 Partnership by the Partner); 

 (iii) to the payment in full of any loans to the 

 Partnership by a Partner; 

 (iv) to the establishment of such reserves as the 

 General Partner shall reasonably deem 

 necessary; and 

 (v) to distributions to the Partners in accordance 

 with Paragraphs 12(b) and (c) hereof. 

 Notwithstanding the foregoing, the General Partner 

 shall not retain and invest any Cash Receipts derived 

 from the operations of the Property, except (1) to defray 

 expenditures for any repair or improvement to any 

 Property, which it, in its sole discretion, deems 

 appropriate or (2) for investments of reserves permitted 

 to be established under clause (ix) of Paragraph 9(b) 

 hereof, nor shall the General Partner invest the net 

 proceeds derived and retained by the Partnership from 

 the sale or other disposition of any Property (including 

 any total condemnation or destruction of any portion of 

 the Property) except as otherwise provided herein. 

J.A. at 274. 

The term "Property" is defined in the Red Hawk 

Agreement to mean "the Buildings and Land in Bucks 

County, Pennsylvania." J.A. at 261. "Cash Receipts" means 

"all cash receipts of the Partnership from whatever source 

derived." J.A. at 259. Section 9 of that Agreement is entitled 

"Rights and Duties of the General Partner." It imposes no 

duty on the General Partner to set aside reserves for any 

purpose. In subsection (b)(ix), the subsection referenced in 

Section 12(a), the general partner is given the authority "to 

establish reasonable reserve funds from income derived 

from the Partnership's operations to provide for future 

 27 
maintenance, repair, replacement, debt service or similar 

requirements." J.A. at 265. 

Read in the context of the Agreement and the 

expectations of the Partners, it is apparent that the 

dominant portion of Sections 12(a) is the paragraph

commencing with the clause "Notwithstanding the 

foregoing." Indeed, that lead clause requires that this 

paragraph be given controlling significance over the 

preceding text. It mandates disbursement to the partners of 

all cash whether received by Red Hawk in the course of the 

normal operations of the joint venture properties or 

whether received by it from dispositions of joint venture 

property other than in the course of its regular business 

operations. The two exceptions recognize that the General 

Partner, in its sole discretion, should have the ability to 

retain cash derived from operations to establish reasonable 

reserves for property repairs and improvement, debt

service, and other operating expenses. 

The subordinate portion of Section 12(a) that precedes 

the "notwithstanding" clause establishes the priorities 

among various interests that may compete for distributions 

of cash receipts. The purpose of subsection 12(a)(iv), in 

particular, is (1) to recognize the possibility that the 

General Partner may wish to withhold some funds 

pursuant to the two express exceptions from theflow

through mandate; and (2) to emphasize that the General 

Partner's authority to do so is limited to such reserves as it 

might "reasonably deem necessary." Thus, subsection 12(a) 

is designed both to recognize the possibility of retention of 

cash receipts for authorized reserves at the discretion of the 

General Partner and, at the same time, to assure the 

limited partners that there will be no accumulation of even 

funds for reserves when the general partner, in the exercise 

of business judgment, could not reasonably regard them as 

necessary for the designated purposes. 

The Timber Knoll project never got off the ground. The 

requisite governmental approvals for development were not 

obtained by the owner of the Timber Knoll site, and the 

property was never purchased by the joint venture. When it 

appeared that the objective of the joint venture would have 

to be abandoned, an amendment to the joint venture 

 28 
agreement was executed that called for the conversion of 

Red Hawk's $2.3 million capital contribution into 

promissory notes of Cedar Ridge. Pursuant to these notes, 

payments were received by Red Hawk in January 1989,

April 1989, and July 1989. These payments represented a 

return of the capital contribution made by Red Hawk to the 

Timber Knoll joint venture and interest accrued thereon 

after the conversion. 

The Chestnut Woods project did get underway in late

1988. Cedar Ridge served the Chestnut Woods joint venture 

not only as managing partner, but also as "general 

contractor" for the site improvements. The site 

improvements were to be financed, at least in part, through 

bank borrowing. Among these improvements were, of 

course, storm and sanitary sewer systems. Cedar Ridge, in 

its capacity as "general contractor," contracted with plaintiff 

Henkels & McCoy in December of 1988. Henkels 

commenced its work at the Chestnut Woods site on 

January 16, 1989, shortly after Red Hawk received the first 

payment on the return of its capital contribution to the 

Timber Knoll joint venture. 

In January, April and July of 1989, Red Hawk's general 

partner made the decisions that gave rise to this lawsuit. 

When each return of capital from the Timber Knoll project 

was received, G&A decided to deposit a few thousand

dollars in Red Hawk's checking account to cover 

anticipated administrative expenses and to return the 

remainder to the limited partners. Henkels seeks to compel 

return of those distributions to Red Hawk for application to 

a default judgment it later obtained against Red Hawk. 

During the period from January to August 1989, Red 

Hawk had satisfied its entire capital commitment to the 

Chestnut Woods joint venture, and it had no significant 

liabilities of any kind. It was receiving reports from Cedar 

Ridge that site improvements, after some initial delays, 

were progressing. Cedar Ridge estimated at the start of this 

period (i.e., December 1988) that, even without 

improvements, the entire property could be sold for

approximately $78,000 per lot, i.e., $1.8 million. At the end 

of this period (i.e., August 1989), the Chestnut Woods 

 29 
project was appraised at $2.7 million. It is undisputed that 

Red Hawk had significant net worth throughout this period. 

The district court found it significant that Red Hawk and 

its partners understood that site improvements were ongoing during the period from January to July 1989 and 

that the Chestnut Woods joint venture was, accordingly, 

incurring liabilities. It did not find, however, that this joint 

venture was insolvent during this period. To the contrary, 

the record relevant to this period indicates that the 

liabilities of the Chestnut Woods joint venture did not 

exceed $1.7 million, that it thus remained solvent, and that 

trade creditors were being paid on a current basis. In 

particular, all invoices that were submitted to Cedar Ridge 

by Henkels during this period were paid in full. 

New Jersey's Uniform Limited Partnership Law provides 

that a partner may not receive a distribution from a limited 

partnership "to the extent that, after giving effect to the 

distribution, all liabilities of the limited partnership, other 

than liabilities to partners on account of their partnership 

interests, exceed the fair value of the partnership assets." 

N.J. Stat. Ann. S 42:2A-45. This is the sole mandatory 

restriction in the law for the benefit of partnership creditors 

on distributions to partners. Any additional restriction for 

the benefit of creditors must thus be one voluntarily 

undertaken by the Red Hawk partners in their partnership 

agreement. 

Our court today holds that the Red Hawk partners, 

although mandating a pass-through to themselves of cash 

receipts, intended in Section 12(a) of their partnership 

agreement voluntarily to impose on themselves a very 

significant restriction for the benefit of joint venture 

creditors. This voluntary restriction, the court holds by 

necessary implication, was intended to be sufficiently broad 

that a distribution could not be made to Red Hawk partners 

unless cash reserves had been established to fund the 

payment of all anticipated future liabilities of the joint 

venture partnerships (owned in part by others) that might 

accrue over some unspecified period of time, even though 

those other partnerships were expected to pay their own 

liabilities with their own or borrowed funds. The record 

suggests no reason, however, why the partners, when

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setting up the Red Hawk partnership, would have imposed 

such an unnecessary and ill-defined burden on themselves, 

and the text of Section 12(a) does not require such a 

conclusion that they did. 

The court resolves the central issue in this appeal in one 

sentence: Section 12(a)(iv) "of the Red Hawk partnership 

agreement specifically provided that cash receipts be used 

for the establishment of reasonable reserves (for creditors) 

before such receipts be distributed to the [limited

partners]." Slip opinion at 10. Because Red Hawk's general 

partner had reason to believe that Henkels might submit 

invoices in the future for site improvement work, the court 

accordingly concludes that the three challenged 

distributions violated Section 12(a)(iv). 

In my view, the court errs for at least five reasons: (1) In 

context, Section 12(a)(iv) was intended for the protection of 

the limited partners, not as a creditor protection device 

even for creditors of Red Hawk; (2) Section 12(a)(iv), even if 

viewed as a creditor protection provision, was not intended 

for the protection of joint venture creditors for whom the 

joint ventures were to make other provision; (3) the 

challenged distributions were a return of capital that the 

partners had agreed to devote to an abandoned venture, 

and it is not reasonable to find an intent in Section 12(a)(iv) 

to commit that capital contribution to the creditors of a 

different, fully capitalized venture; (4) Section 12(a)(iv) 

permits the general partner to retain reserves only from 

"Cash Receipts derived from the operations of the Property" 

and the challenged distributions did not come from funds 

generated by operations;1 and (5) even if Section 12(a)(iv) 

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1. The district court correctly found that the three payments 

representing a return of the capital committed to the Timber Knoll joint 

venture did not constitute a "cash receipt from the operations of the 

Property." It inexplicably concluded from this, however, that the general 

partner was thus "plainly obligated" to follow the terms of Section 

12(a)(iv) and establish a reserve for anticipated future liabilities to 

Henkels. At the time the Red Hawk partnership agreement was 

negotiated, the parties were not, of course, anticipating the 

abandonment of the Timber Knoll venture, and the"notwithstanding" 

clause does not literally read as applying to a return of capital that 

does 

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could reasonably be read to require Red Hawk's general 

partner to set aside funds for creditors in Henkels' position 

whenever a reasonable general partner exercising business 

judgment would do so, this record provides no basis for a 

conclusion that the failure of Red Hawk's general partner to 

set aside funds for Henkels in January through July of 

1989 was a decision beyond the bounds of business 

judgment. 

I would reverse and remand with instructions to enter 

judgment for the defendants. 

A True Copy: 

Teste: 

 Clerk of the United States Court of Appeals 

 for the Third Circuit 

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not result from a sale of the joint venture property. Nevertheless, I 

believe the intent behind the provision governing such sales, and the 

provisions strictly limiting the objectives of the partnership to 

participation in specified joint ventures with specified capitalization, 

required a pass-through of the payments from the Timber Knoll joint 

venture. But whether or not this is the case, Ifind no authority in the 

agreement for the establishment of reserves other than out of operating 

revenues. 

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