Anthony v. Padmar, Inc.

Decision Date02 May 1995
Docket NumberNo. 2419,2419
CourtSouth Carolina Court of Appeals
PartiesW.E. ANTHONY, Sr., D.L. Cannon, J.T. Craig, W.L. Carpenter, J.A. Flanagan, L.D. Freeman, R.S. Gaddis, J.T. Gressette, T.A. Kingsmore, C.F. McElrath, R.E. McKinnell, N.M. Perrin, R.L. Smith, W.V. Hughes, III, JES Properties Limited, a South Carolina Limited Partnership, Individually and Derivatively on behalf of JES Properties Limited, a South Carolina Limited Partnership, Respondents, v. PADMAR, INC., Kenneth R. Padgett, Jr., and Fred M. Martin, Appellants. . Heard

O.G. Calhoun and Jesse C. Belcher, both of Haynsworth, Marion, McKay & Guerard, Greenville, for appellants.

William H. Thomas, III, of Dobson, Jones & Layman, Greenville; and Paul E. Tinkler, of Wallace & Tinkler, Charleston, for respondents.


This is the second appeal of this derivative action involving the conduct of the general partners of JES Properties Limited (JES), a South Carolina Limited Partnership, in selling all of the assets of the partnership. On behalf of the partnership, fourteen limited partners sued the two general partners, the management corporation owned by the general partners, Padmar, Inc., and the purchaser of the assets, Horsham-BVI, alleging six causes of action: (1) breach of the partnership agreement; (2) fraud; (3) negligence; (4) breach of fiduciary duties; (5) breach of the management agreement by Padmar; and (6) violations of the South Carolina Uniform Securities Act.

In our prior decision, Anthony v. Padmar, Inc., 307 S.C. 503, 415 S.E.2d 828 (Ct.App.1992), we upheld the sale to Horsham on the ground the limited partners were estopped to deny the validity of the sale because Horsham relied upon their conduct and acquiescence to its detriment both before and after the closing. We, thus, reversed the trial court's denial of summary judgment to Horsham, but preserved the limited partners' causes of action against the general partners and Padmar. 1 The issue of the actual authority of the general partners to consummate the sale of the partnership's assets was remanded to the trial court with instructions to specifically consider the "validity of [the altered and challenged Facey] ballot and its effect on the issue of actual authority." 307 S.C. at 512, 415 S.E.2d at 834. We also remanded the issue of whether the limited partners were estopped to question the actions of the general partners in the sale of the assets, and whether the limited partners ratified the general partners conduct. 307 S.C. at 513, 415 S.E.2d at 834.

On remand, the trial judge held the general partners breached both the partnership and management agreements and also their fiduciary duties to the limited partners. He found the general partners lacked the actual authority to sell the partnership's assets to Horsham because they failed to receive the required majority vote from the limited partners. He further concluded the general partners violated their fiduciary duties to the limited partners by intentionally failing to disclose material information, misrepresenting and manipulating the voting process, and by the manner in which they conducted the sale to Horsham. Since the general partners failed to disclose the significance of the Facey ballot to the limited partners, the judge held the general partners' defenses of ratification and estoppel were inapplicable. Consequently, the judge found the general partners jointly and severally liable to the partnership for damages in the amount of $6,768,162. This figure represents the difference between the net economic value of the transaction received by the partnership and the fair market value of the partnership's assets at the time of closing. The general partners appeal.

On appeal the following issues are presented for review: (1) our scope of review; (2) whether the general partners violated terms of the partnership and management agreements in obtaining approval for the sale; (3) whether the general partners breached their fiduciary duties to the limited partners in the manner in which they obtained approval for and in effectuating the sale; (4) whether the limited partners are estopped to contest the balloting process and whether they ratified the sale by accepting the proceeds of the closing; (5) whether the general partners should be absolved and/or indemnified from liability under provision of the partnership and management agreements; and (6) whether the damages are supported by the evidence. We affirm as modified.


To evaluate the conduct of the general partners, it is important that we point out the circumstances of the partnership at the operative periods of time preceding the sale of its assets to Horsham. JES (the partnership) was formed in 1983 by the management of J.E. Sirrine Company as a result of the acquisition of most of the assets of Sirrine by CRS Company. 2 CRS refused to acquire Sirrine's real estate holdings and assume its mortgage debt; consequently, the partnership was formed to purchase these real estate assets from Sirrine. The office buildings acquired by the partnership in the real estate purchase were leased back to Sirrine following its acquisition by CRS for a term of 10 years expiring July 30, 1993 (collectively referred to as "Sirrine Leases"). The lease payments were fixed at artificially high (above market) rates, designed to cover the partnership's expenses including its monthly mortgage payments on the office buildings. The rentals were not sufficient, however, to enable the partnership to meet all of its operational expenses or to make the 7.5 million dollar balloon mortgage payment due April 1, 1993. The partnership experienced "every day" cash flow problems.

Accordingly, the general partners were receptive when approached in June 1986 by Horsham, a British Virgin Island Corporation which expressed interest in purchasing all of the partnership's assets. Negotiations between the general partners and Horsham ensued over a period of several months. The general partners reported all developments to William Carpenter, the former CEO of Sirrine and a respondent in this action. When Horsham finally made an offer, the general partners held meetings with Carpenter and other limited partners who held top level management positions at Sirrine. The consensus at the meetings was overwhelmingly in favor of proceeding with the sale.

In November of 1986, the negotiations finally resulted in a contract. Assisted by the partnership's attorney and CPA, the general partners negotiated an Agreement For Purchase and Sale of Assets with Horsham which the parties executed on November 3, 1986. 3 The contract was contingent upon the approval of more than one-half of the limited partners pursuant to the terms of the partnership agreement. The general partners submitted the contract to the limited partners for their approval in early 1987.

Prior to the vote on the question of approval of the sale to Horsham, the general partners prepared and sent to the limited partners a Solicitation Statement 4 setting forth in great detail the particulars of the proposed sale. The Solicitation Statement revealed that since inception, the partnership's most serious problem had been a weak cash position, as its mortgage debt represented approximately 84% of the appraised value of its assets. It further stated the partnership's major source of income was the Sirrine Leases, which were not structured to fully cover its operational costs, or the costs associated with improving, maintaining and developing its properties. Since its formation, the partnership had covered these operating deficits through a combination of debt refinancing, the sale of some of its land, and borrowing from rent deposits that had not yet been earned. Finally, the Solicitation Statement concluded with a recommendation that all limited partners' consent to the sale because converting the partnership's assets into a cash distribution and a secured receivable would be in the limited partners' best interests and better serve their needs.

Attached to the Solicitation Statement was a ballot. The top portion of the ballot provided places for the limited partners to mark their "consent to the sale", "withhold consent to the sale", or "abstain." Following these choices was a statement indicating that by consenting to the sale, the limited partners authorize the general partners to consummate the sale substantially in accordance with the terms of the sales agreement. The statement further provided the general partners discretion "to amend the sales agreement to the extent that the aggregate amount of cash and the purchase money note to be received by the partnership is reduced by [no] more than 5%." At the bottom of the ballot was a place for the limited partner to sign.

Prior to the vote, the general partners also held meetings with groups of limited partners in Greenville, S.C., Raleigh, N.C., and Houston, Tx. to explain the terms of the proposed sale. At the Greenville meeting, one of the limited partners asked whether the discretionary authority of the general partners could be further limited by writing a qualification on the ballot. In the presence of the general partners, W. Lindsay Smith, attorney for the partnership, advised the inquiring limited partner that he would recommend to the general partners that any ballot containing a condition or limitation be counted as a "no" vote. The general partners present at this meeting did not comment on the question, nor did they object to the explanation.

Moreover, a limited partner who was unable to attend the Greenville meeting went to Smith's office prior to the meeting to discuss the sale. When he arrived, one of the general partners was also present. Among the topics the limited partner raised was the 5% discretionary authority granted in the ballot. He informed Smith and the general partner...

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