Opinion ID: 70731
Heading Depth: 2
Heading Rank: 1

Heading: The Appellants Are Liable Under Section 106(1)(b), New York Partnership Law

Text: 22 The bankruptcy court held the appellants liable to contribute additional capital pursuant to New York Partnership Law Sec. 106(1)(b) (McKinney 1988), which makes limited partners liable to the partnership for their promised capital contributions, on the conditions stated in the publicly-filed limited partnership certificate. We affirm the appellants' liability under Sec. 106(1)(b). 4 The certificates of limited partnership for TSG, TMG, and TSG 80 all state that, if necessary to satisfy the partnership's recourse obligations, each limited partner has agreed, upon demand, to make an additional capital contribution of up to three times the limited partner's original investment. These certificates were recorded publicly in New York County. Accordingly, the capital of the Limited Partnerships upon which creditors properly could rely included the limited partners' stated obligation to make additional capital contributions. See Arno Management Corp. v. 115 East 69th Assocs., 173 A.D.2d 258, 260, 569 N.Y.S.2d 656, 657 (1st Dept.1991) (holding that the information contained in the certificate of limited partnership binds the partnership and the partners with respect to third parties). 23 Section 106(1)(b) explicitly provides a means of enforcing a limited partner's capital commitments that are expressed in the certificate of limited partnership. It provides: 24 (1) A limited partner is liable to the partnership 25 . . . . . 26 (b) For any unpaid contributions which he agreed in the certificate to make in the future at the time and on the conditions stated in the certificate. 27 N.Y. Partnership Law Sec. 106(1)(b) (McKinney 1988). Pursuant to this statutory provision and the terms of the publicly recorded certificates, the trustee's capital call triggered each limited partner's obligation to contribute additional capital to the partnerships. 28 Although Sec. 106(1)(b) speaks of a limited partner's liability to the partnership, it is clear that Sec. 106(1)(b) also serves to protect the legitimate expectations of creditors with regard to a limited partner's promised capital contributions. New York Partnership Law Sec. 106(3) provides: 29 The liabilities of a limited partner as set forth in this section [Sec. 106] can be waived or compromised only by the consent of all members; but a waiver or compromise shall not affect the right of a creditor of a partnership, who extended credit or whose claim arose after the filing and before a cancellation or amendment of the certificate, to enforce such liabilities. 30 N.Y. Partnership Law Sec. 106(3) (McKinney 1988). Moreover, the fact that the appellants sold their limited partnership interests more than two years before the trustee's capital call does not affect their liability for the additional contributions under Sec. 106(1)(b). New York Partnership Law Sec. 108(7) provides: 31 The substitution of the assignee as a limited partner does not release the assignor from liability to the partnership under Secs. 95 and 106. 32 N.Y. Partnership Law Sec. 108(7) (McKinney 1988). Plainly, the limited partners' assignment of their interests, and the substitution of new limited partners, did not release the original limited partners from their liability under Sec. 106(1)(b)--at least with respect to creditors who extended credit or whose claims arose before the limited partnership certificates were amended. 33 The appellants attempt to avoid liability under Sec. 106(1)(b) by arguing that their obligation to contribute additional capital was eliminated by fraud on the part of the partnerships and their general partners. The appellants base their fraud defense upon the following events. In 1987, Atkins and several other general partners 5 were convicted of income tax fraud arising out of activities related to the partnerships. See United States v. Atkins, 869 F.2d 135 (2d Cir.) (affirming Atkins' conviction), cert. denied, 493 U.S. 818, 110 S.Ct. 72, 107 L.Ed.2d 39 (1989). Atkins and the others were convicted for using rigged straddles and rigged repurchase agreements to create fraudulent income tax losses, which were then passed through to investors such as the appellants. Although the appellants apparently were unaware of the general partners' criminal wrongdoing, the Internal Revenue Service disallowed all of the appellants' previously-taken tax losses. 34 The appellants' fraud argument relies heavily on dicta expressed in Partnership Equities, Inc. v. Marten, 15 Mass.App.Ct. 42, 443 N.E.2d 134 (1982), which involved Sec. 17(1)(b) of the 1916 Uniform Limited Partnership Act (ULPA). 6 The Partnership Equities case involved two limited partners who had agreed to make annual capital contributions to a partnership engaged in the construction business. Alleging that the general partners had breached a term of the limited partnership agreement, the limited partners refused to make their scheduled capital contributions. The court held that, despite any alleged breach of the limited partnership agreement by the general partners, ULPA Sec. 17(1)(b) and the publicly-filed certificate of limited partnership obligated the limited partners to make their capital contributions as scheduled. See id. 443 N.E.2d at 134. 35 The court explained the difference between a limited partnership agreement, which is a bilateral contract between partners, and a certificate of limited partnership, which is a publicly recorded document relied upon by creditors and others. Under traditional contract law principles, a general partner's breach of a limited partnership agreement might excuse a limited partner's further performance under the agreement. However, ULPA Sec. 17(1)(b) protects creditors who rely on the certificate of limited partnership, a public expression of the limited partners' obligation to contribute additional resources to the partnership. Id. at 136. In light of such creditor reliance, a material breach of the limited partnership agreement--including mismanagement or unauthorized acts of the general partners, or disappointed expectations--would not excuse a limited partner's commitment to contribute additional capital on the conditions stated in the certificate. Id. at 138; see also Arno, 173 A.D.2d at 260, 569 N.Y.S.2d at 657 (Where ... the liability of a limited partnership to a third party is in issue and the certificate of limited partnership materially contradicts an agreement by and among the partners, the partnership and its members are estopped to dispute the information contained in the certificate.). 36 The limited partners in the Partnership Equities case were not excused from their statutory obligation to contribute additional capital. Nevertheless, the court commented that, under some circumstances, a limited partner might avoid payment of promised contributions. The court stated: 37 Although the payment obligation imposed by statute may not be absolute, the circumstances in which payment of further capital contributions are excused are few and they are narrow. Payment may be excused when there has occurred a failure to meet a condition expressed in the certificate of limited partnership or when there has been a profound failure of consideration such as a repudiation of, or fraud incident to, the essentials of the venture to which the subscription was made. 38 Id. 443 N.E.2d at 136. The appellants argue that the general partners' tax fraud convictions, which caused the appellants to lose their previously-recognized tax losses, constitute a repudiation of, or fraud incident to the essential purpose of the Limited Partnerships. Accordingly, they seek to be excused from their statutory obligation to repay the Limited Partnerships' creditors. 39 We need not decide whether to follow the dicta expressed in Partnership Equities. In light of Sec. 106(1)(b)'s strong statutory purpose to favor creditors over limited partners, we readily conclude that the appellants have not demonstrated the degree of fraud that might implicate the dicta in Partnership Equities. Therefore, we hold that the bankruptcy court committed no error in holding the appellants liable to make additional contributions pursuant to New York Partnership Law Sec. 106(1)(b).