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

Heading: The Lease Claims

Text: 40 The bankruptcy court held the appellants liable only for those obligations of the Limited Partnerships that were outstanding as of the date that the appellants withdrew; the court found that the appellants' withdrawal from the Limited Partnerships became effective on January 3, 1983 (the Withdrawal Date). 7 The appellants argue that the bankruptcy court erred by holding them liable for two lease claims; they argue that those debts arose after the Withdrawal Date. 41 The first disputed lease claim was asserted by The Equitable Life Assurance Society of the United States (The Equitable). On December 31, 1979, Groups leased from The Equitable office space at 500 Park Avenue in New York. The lease became effective on February 15, 1980, and would expire on March 1, 1990. In July 1983, Groups became in arrears on its lease payments to The Equitable. The second disputed lease claim was asserted by 767 Third Avenue Associates (767 Third Avenue). On August 9, 1982, Groups, TSG, TMG, and TSG 80 all agreed jointly and severally to guarantee a five year lease entered by Groups' affiliate, Ameribond Securities Associates (Ameribond). Ameribond entered the lease in 1981, and defaulted under the lease in August 1983. 42 The bankruptcy court held the appellants liable for the debts owed to The Equitable and to 767 Third Avenue, reasoning that the landlords and the Limited Partnerships entered the leases long before the appellants' withdrawal. The appellants assert that, under New York law, a debt under a lease does not arise until the default in rent occurs. Because the Limited Partnerships did not miss any rent payments until after the Withdrawal Date, the appellants argue that they cannot be held liable for the lease claims. 43 The bankruptcy court correctly rejected the appellants' argument. At the time the leases were entered, the certificates of limited partnership stated that, if necessary to satisfy the recourse obligations of the Limited Partnerships, the appellants agreed to contribute an amount up to three times their initial capital contributions. Because Sec. 106(1)(b) obligated the appellants to contribute additional capital in accordance with the terms of the certificates, the landlords were entitled to rely on the certificates in determining whether to extend credit by leasing their properties. It would make little sense to allow the appellants to deprive the landlords of their right to rely on the certificates by withdrawing from the partnerships while the leases were still in effect. New York Partnership Law Sec. 106(3) prevents such an absurd result. 44 Section 106(3) explicitly protects creditors who extended credit or whose claim arose after the filing and before a cancellation or amendment of the certificate. N.Y.Partnership Law Sec. 106(3) (McKinney 1988) (emphasis added). Under this statutory provision, even if a debt to a partnership creditor arises after the limited partner's withdrawal, the withdrawn limited partner is nevertheless liable for the debt if the creditor extended credit before the amendment of the limited partnership certificate. In this case, the landlords extended credit long before the certificates were amended to reflect the appellants' withdrawal from the Limited Partnerships. Thus, even if the debts under the leases arose after the appellants withdrew, the appellants are liable for the lease claims under the extension of credit prong of Sec. 106(3). 45 Our holding with respect to the lease claims is compelled by the language of Secs. 106(1)(b) and 106(3), and we believe that the courts in New York would reach the same result. In Whitley v. Klauber, 51 N.Y.2d 555, 435 N.Y.S.2d 568, 416 N.E.2d 569 (1980), New York's highest court explained the strong and crystal clear creditor protection policy underlying New York Partnership Law Sec. 106, although in a different context. In light of the strong statutory policy to protect creditors, the court broadly construed Sec. 106(4). 8 Whitley involved a partnership in which all of the general and limited partners sold their partnership interests to a third party in exchange for some stock. The plaintiff, who became a creditor of the partnership prior to the sale, sought to hold the limited partners liable under Sec. 106(4) on the theory that they had received a return of capital. The court agreed that the limited partners had received a return of capital under Sec. 106(4), even though they sold their partnership interests to a third party. See id. 435 N.Y.S.2d at 571, 416 N.E.2d at 572 ([P]rimary in the determination whether a particular transaction constitutes a return of capital is not the limited partner's purpose or intent or how the transaction is structured but its effect upon partnership creditors.). 46 The Whitley court supported its holding by referring to Kittredge v. Langley, 252 N.Y. 405, 169 N.E. 626 (1930) (Cardozo, C.J.), another case in which the interests of a partnership's creditor prevailed over those of its limited partner. Kittredge held that a partnership creditor may hold a limited partner liable to the extent of his withdrawn capital contribution even where, at the time of the withdrawal of his capital contribution, the assets left with the general partners are sufficient at a fair valuation to discharge the outstanding liabilities, but have become inadequate thereafter. Id. 169 N.E. at 631. The court reasoned that the limited partner, not the creditor, should bear the risk that the partnership's assets could become worthless: 47 A case may be supposed where a special partner receives in cash his capital contribution, the general partners retaining property sufficient at a fair valuation to pay the debts in full, but the next day or the next hour the property is destroyed by earthquake, flood, or fire. The conclusion is hardly thinkable that the special partner may keep the cash, and leave the creditors with nothing. His contribution, like the capital of a corporation, and to a similar extent, is to be treated as a trust fund for the discharge of liabilities.... 48 Id. The strong policy to protect creditors cited in Whitley and Kittredge is also evident in Secs. 106(1)(b) and 106(3). Therefore, we hold that the appellants are liable for the two disputed lease claims. 49 We disagree with the appellants' argument that 59th and Park Assocs. v. Inselbuch, 68 A.D.2d 838, 414 N.Y.S.2d 537 (1st Dept.1979) compels a different result. In Inselbuch, a partnership in 1969 executed a fifteen year lease for two floors of a building. One of the partners at the time the lease was entered, Klineman, withdrew from the partnership in 1972. In March 1974, the remaining partners executed a surrender agreement with the landlord, under which the landlord purported to reserve all rights under the lease. Some years later, the landlord sued several former partners (including Klineman) to recover unpaid rent that became due after March 1974. Because the 1974 surrender agreement superseded the 1969 lease, the court held that the landlord's rights could be derived only from the terms of the surrender agreement.... Id., 68 A.D.2d at 839, 414 N.Y.S.2d at 539. Because Klineman was not a party to the surrender agreement, the court held that Klineman could not be bound by its terms. Id. See also id. (Fein, J., concurring) (With respect to Klineman, I concur only upon the ground that the execution and delivery of the surrender agreement, at a time when there was no default and when he was no longer a partner, terminated any contingent liability he may have had since it affected whatever rights he had under the lease, without his consent.); id., 68 A.D.2d at 840-41, 414 N.Y.S.2d at 540 (Lupiano, J., concurring) (explaining that because the termination of the lease effectively discharged Klineman from any of his obligations thereunder, and because Klineman was not a party to the surrender agreement, there was no basis to predicate liability against Klineman). 50 Thus, Inselbuch 's holding is that the surrender agreement terminated any rights the landlord might have had against Klineman under the lease. The majority opinion, however, also states that Klineman could not be held liable under the lease because there was no debt at the time of [Klineman's] withdrawal. Id., 68 A.D.2d at 838-39, 414 N.Y.S.2d at 538. The court explained that, under New York law, the obligation in a lease to pay rent does not create a debt until the time stipulated for payment arrives. See id. 9 Thus, Klineman could not be held liable for the missed rent payments, despite having been a partner when the lease was signed, because he withdrew from the partnership before the time stipulated for payment. Id. 51 We decline the appellants' invitation to apply this dicta from Inselbuch to the instant situation, primarily because Inselbuch does not address the effect of New York Partnership Law Sec. 106. As we have stated, supra, Sec. 106(3) makes a former limited partner personally liable to a partnership creditor who extended credit to the partnership prior to the amendment of the limited partnership certificate--even if the creditor's claim arises after the certificate is amended. Moreover, Inselbuch is a lower court opinion that was issued before Whitley v. Klauber, 51 N.Y.2d 555, 435 N.Y.S.2d 568, 416 N.E.2d 569 (1980) articulated the crystal clear creditor protection policy underlying New York Partnership Law Sec. 106. 52 Accordingly, we hold that the bankruptcy court did not err in holding the appellants liable for the lease claims asserted by The Equitable and 767 Third Avenue. 53