Evans v. Galardi

• Citation: 16 Cal.3d 300,546 P.2d 313,128 Cal.Rptr. 25
• Parties: , 546 P.2d 313 Lewis W. EVANS, Plaintiff and Appellant, v. John N. GALARDI et al., Defendants, EL DORADO IMPROVEMENT CO., Third-Party Claimant and Respondent. L.A. 30470.
• Decision Date: 02 March 1976
• Court: United States State Supreme Court (California)

Page 25

128 Cal.Rptr. 25

16 Cal.3d 300, 546 P.2d 313

Lewis W. EVANS, Plaintiff and Appellant, v. John N. GALARDI et al., Defendants, EL DORADO IMPROVEMENT CO., Third-Party Claimant and Respondent.

L.A. 30470.

Supreme Court of California,

In Bank.

March 2, 1976.

Robert S. Sturges, San Jose, for plaintiff and appellant.

No appearance for defendants.

Hodge & Hodges and John R. Skoog, Los Angeles, for third party claimant and respondent.

SULLIVAN, Justice.

El Dorado Improvement Co. (El Dorado), a limited partnership, made and delivered pursuant to Code of Civil Procedure section 689 ¹ its verified third party claim to certain personal property upon which a writ of execution had been levied to enforce a judgment for money in favor of plaintiff Lewis W. Evans and against defendants John N. Galardi and Richard E. Hodge. After a hearing, the court sustained the claim and entered a judgment on third party claim declaring that at the time of levy of the writ the title to the property in question was vested in the third party claimant. Plaintiff appeals from the judgment.

The facts are not in dispute. El Dorado is a limited partnership formed for the purpose of owning and managing certain real property in the City of South Lake Tahoe, California, and of constructing, owning and managing a motel on the premises. Eventually, a motel known as the Rodeway Inn was built. When the partnership was formed in June 1969, plaintiff and defendants were the limited partners and entitled to receive all of the partnership net profits. The general partner at all times material herein was a California corporation known as El Dorado Improvement Corporation which operated the motel and whose stock initially was owned entirely by plaintiff and defendants. Raymond Haley was the president of the corporate general partner and in this position was charged with the over-all management of the business and with the supervision of its large number of employees.

About September 15, 1970, plaintiff, defendants and El Dorado Improvement Corporation entered into a written contract whereby plaintiff agreed to sell and defendants agreed to purchase for the sum of $50,000 all of plaintiff's right, title and interest in the limited partnership and all of plaintiff's stock in the corporate general partner. Defendants executed and delivered to plaintiff their promissory note for the full amount of the purchase price. The respective obligations were undertaken by the parties as individuals, and not in their status as limited partners or shareholders of the corporate general partner. El Dorado was not a party to the agreement of purchase and sale and did not sign either the agreement or the promissory note. As a result of this transaction, defendants as limited partners in El Dorado each became entitled to 50 percent of its net profits, if any, and became the owners of all of the stock of the corporate general partner.

Defendants defaulted on the promissory note and about April 2, 1971, plaintiff brought an action against them in their individual capacity to recover on it. Ultimately judgment was entered in favor of plaintiff and against defendants individually in the sum of $60,008.15. ²

On May 9, 1973, plaintiff obtained a writ of execution for the full amount of the judgment, ³ and instructed the Sheriff of El Dorado County to levy execution upon the Rodeway Inn and to place a keeper there to collect the receipts of the business until the judgment was satisfied.

El Dorado filed a third party claim (see fn. 1, Ante) to the property and business receipts alleging that it was the sole owner of the Rodeway Inn and its receipts and that defendants had no interest in the property upon which a writ of execution could properly be levied to enforce plaintiff's judgment. It further alleged that plaintiff could have reached defendants' partnership interests to satisfy his judgment only by means of a charging order, which had not been utilized in the instant case. As previously stated, the claim was sustained.

Plaintiff does not dispute that the legal title to the Rodeway Inn and to the money receipts generated by the motel is vested in El Dorado. Rather, he asserts that since defendants in their capacities as limited partners are each entitled to one-half of the net profits, they together in fact own the entire equitable and beneficial interest in El Dorado's assets. ⁴ On this basis, he contends: First, that he should be permitted to reach the partnership assets in satisfaction of his judgment against these defendants as individuals; and second that El Dorado is not a bona fide third party and hence may not assert a claim under Code of Civil Procedure section 689.

We begin our analysis by observing that as a general rule '(a)ll goods, chattels, moneys or other property, both real and personal, or any interest therein, of the judgment debtor, not exempt by law . . . are liable to execution.' (Code Civ.Proc., § 688.) Thus, the initial and most important question confronting us is whether defendants, in their capacities as limited partners, have any interest in the assets of El Dorado as such which renders these assets potentially subject to execution in satisfaction of a personal judgment against defendants. In answering this question, we find it helpful to discuss briefly some of the basic principles underlying the law governing limited partnerships.

The form of business association known as a 'limited partnership' was not recognized at common law and is strictly a creature of statute. (2 Rowley on Partnership (2d ed. 1960) Limited Partnerships, § 53.0, pp. 549--550; 2 Barrett & Seago, Partners and Partnerships, Law and Taxation (1956) Limited Partnerships, § 1, p. 483; Alley v. Clark (E.D.N.Y.1947) 71 F.Supp. 521, 524; Skolny v. Richter (1910, 139 App.Div. 534, 124 N.Y.S. 152, 154.) ⁵ It can generally be described as a type of partnership comprised of one or more general partners who manage the business and who are personally liable for partnership debts, and one or more limited partners who contribute capital and share in the profits, but who take no part in running the business and incur no liability with respect to partnership obligations beyond their capital contribution. (Corp. Code, § 15501; ⁶ 2 Barrett & Seago, Partners and Partnerships, Law and Taxation, Supra, Limited Partnerships, § 1, p. 482; 2 Rowley on Partnership, Supra, Limited Partnerships, § 53.0, p. 549.) The obvious purpose underlying legislative recognition of this type of business entity was to encourage trade by permitting 'a person possessing capital to invest in business and to reap a share of the profits of the business, without becoming liable generally for the debts of the firm, or risking in the venture more than the capital contributed, provided he does not hold himself out as a general partner, or participate actively in the conduct of the business.' (Skolny v. Richter, supra, 124 N.Y.S. 152, 155; see also Clapp v. Lacey (1868) 35 Conn. 463, 466.)

The California Legislature first legitimated limited partnerships in this state in 1870 by enacting a 'special partnership' statute (Stats.1869--1870, ch. 129, p. 123). These provisions were subsequently repealed in 1929, when the Legislature adopted the Uniform Limited Partnership Act. ⁷ Among other things, this act sets forth with considerable specificity the rights and obligations of the general and the limited partners, including a detailed description of their proprietary interest in the business. With certain specified limitations, the general partner has all of the rights and powers enjoyed by partners in 'non-limited' partnerships. (§ 15509.) Thus, by reference to the Uniform Partnership Act (§ 15001 et seq.), his property rights include: '(1) His rights in specific partnership property, (2) his interest in the partnership, and (3) his right to participate in the management.' (§ 15024, italics added.) ⁸ In sharp contrast, the limited partner is given no property interest in the specific partnership assets as such. Rather, he is entitled, among other things, ⁹ 'to receive a share of the profits or other compensation by way of income, and to the return of his contribution as provided in Sections 15515 and 15516.' (§ 15510, subd. 2.) ¹⁰ This unwillingness on the part of the Legislature to grant the limited partner a property interest in the specific assets owned by the partnership, while at the same time providing for such an interest in the general partner, compels the conclusion that the limited partner has no interest in the partnership property by virtue of his status as a limited partner. Thus, such assets are not available to satisfy a judgment against the limited partner in his individual capacity. (Code Civ.Proc., § 688.)

While our research has disclosed no reported California decision which has considered this question, we note that our conclusion in this regard finds ample support in the decisions of our sister states and of the federal courts as well as in various treatises and other legal authorities. (See, e.g., Riter v. Greenberg (1968) 21 N.Y.2d 388, 288 N.Y.S.2d 57, 60, 235 N.E.2d 118, 120; In re Panitz & Co. (D.Md.1967) 270 F.Supp. 448, 453, affirmed Sub nom. Hammerman v. Arlington Federal Sav. & Loan Assoc., 3 Cir., 385 F.2d 835; Alley v. Clark, supra, 71 F.Supp. 521, 526--527; Sanderson v. Cooke (1931) 256 N.Y. 73, 175 N.E. 518, 521--522; Appeal of Silberman (1926) 105 Conn. 192, 134 A. 778, 785, e.g., Reiter v. Greenberg (1968) 21 N.Y.2d Blodgett v. Silberman (1927) 277 U.S. 1, 48 S.Ct. 410, 72 L.Ed. 749; Harris v. Murray (1864) 28 N.Y. 574, 86 Am.Dec. 268, 269, 270; 2 Barrett & Seago, Partners and Partnerships, Law and Taxation, Supra, Limited Partnerships, § 1, p. 485; 2 Rowley on Partnership, Supra, Limited Partnerships, §§ 53.18, 53.26, pp. 582, 594; Comment, The Limited Partnership (1954) 2 U.C.L.A.L.Rev. 105, 118--119.)

Thus, in a case substantially identical to the one at...