Finkelstein v. Security Properties, Inc.
| Decision Date | 23 January 1995 |
| Docket Number | No. 33521-9-I,33521-9-I |
| Citation | 76 Wn.App. 733,888 P.2d 161 |
| Court | Washington Court of Appeals |
| Parties | Linda FINKELSTEIN, individually and as personal representative of the Estate of Stephen A. Finkelstein, Appellant, v. SECURITY PROPERTIES, INC.; Security Properties-'73; Security Properties, a Washington general partnership; Paul H. Pfleger; Donald W. Bell; Roger A. Rieger; William M. Noe II; John Doe, personal representative of the Estate of Paul Askland, or alternatively, the heirs of Paul Askland; Stanley D. Ruble; Alan L. Axelrod; Peter H. Leach; P & R Investment Services, a Washington partnership composed of Paul H. Pfleger and MAT Partners Limited Partnership and formerly including Margaret Pfleger and Roger A. Rieger; and MAT Partners Limited Partnership, a Washington limited partnership whose general partners are Theodore L. McCaugherty, Paul H. Pfleger and Steve Troner, the Shareholders of First Columbia Corporation, a dissolved Washington corporation; Security Management, Inc., formerly known as First Columbia Management, Inc., a Washington corporation; Security Properties Investments, Inc., formerly known as Fraser Agencies, Inc., a Washington corporation; Residual Associations Limited Partnership, a Washington limited partnership whose general partners are John Taylor and John M. Orehek; SP Properties 1982 Limited Partnership, a Washington limited partnership whose general partners are Paul H. Pfleger and SP Consolidated Limited Partnership; Security Properties '81A, a Washington general partnership, whose general partners are Paul H. Pfleger and SP Consolidated Limited Partnership; and SP Consolidated Limited Partnership, a Washington limited partnership whose general partners are Paul H. Pfleger, James L. Young, Russell E. Lomax, Martin M. Madson, John Taylor, John M. Orehek and Theodore L. McCaugherty, and Michael Utt; Security Properties Real Estate Services, Inc., f/k/a Security Pacific Realty, Inc., Respondents. |
John H. Strasburger, Seattle, for appellant.
Charles P. Nomellini, Seattle, for respondents.
Stephen Finkelstein's estate (Finkelstein) 1 appeals an order dismissing most of his claims against Security Properties as barred by the statute of limitations. We affirm the trial court's disposition, but on different grounds. We hold that under state partnership law, which is not superseded by federal bankruptcy law, a partnership dissolves upon the Chapter 7 bankruptcy filing of one of the partners. We also affirm the trial court's ruling that Finkelstein does not have standing to bring a derivative action on behalf of the limited partners.
Finkelstein, while serving as general counsel for Security Properties, became a minority partner in two general partnerships. 2 These partnerships each served as general partner for several limited partnerships. Finkelstein's employment with Security Properties ended in 1974. In 1976 and 1977 each general partnership agreement was amended to provide that the partnership would not dissolve or terminate upon the death, incapacity, or bankruptcy of any partner. Finkelstein filed Chapter 11 bankruptcy in 1981, which converted to Chapter 7 in 1982. Also in 1982, each general partnership amended its partnership agreement with specific reference to Finkelstein's bankruptcy.
Finkelstein continued to receive correspondence and tax forms from Security Properties which referred to him as a partner in the two general partnerships. In 1984 the 1982 amendments were produced during a deposition of the majority partner taken by the bankruptcy trustee.
In 1991 Finkelstein filed the instant actions against Security Properties and the general partnerships for an accounting, breach of fiduciary duties, and a derivative action on behalf of several limited partnerships. After the actions were consolidated, the trial court dismissed the derivative action for lack of standing. On cross motions for summary judgment regarding the remaining claims, the trial court ruled in part that RCW 25.04.310(5), which states that the bankruptcy of a partner dissolves a general partnership, is superseded by the federal Bankruptcy Code, and if the statute is not superseded, the 1976 and 1977 amendments negate its effect. The court also ruled that the partnership agreements were executory contracts which were deemed rejected when not assumed by the bankruptcy trustee, and the rejection dissolved the partnerships under RCW 25.04.310(2); the 1982 amendments reformed the partnerships to continue without Finkelstein, and subsequent communications did not nullify this reformation; the federal Bankruptcy Code's automatic stay provision does not affect a dissolved partnership; Finkelstein is entitled to equitable tolling of the statute of limitations until 1984 when he became aware of the 1982 amendments; and the surviving partners owed a duty to account and pay the value of Finkelstein's share calculated at time of dissolution.
The majority of appellant's claims were then dismissed based on the 6-year statute of limitations for actions arising from written contracts.
Neither party disputes the application of a 6-year limitations period. See also Taplett v. Khela, 60 Wash.App. 751, 754, 807 P.2d 885 (1991) (). The disagreement is over when Finkelstein's cause of action accrued. We review the summary judgment ruling de novo. See Hiatt v. Walker Chevrolet Co., 120 Wash.2d 57, 65, 837 P.2d 618 (1992).
The trial court found that even if the partnerships did not dissolve as a matter of law, Finkelstein was aware he had a cause of action no later than 1984, when he attended the majority partner's deposition. At that deposition, amendments to both partnerships were produced which the trial court found unambiguously expressed the intent of the parties to exclude Finkelstein from the partnerships. Exclusion and dissolution each give rise to a cause of action for an accounting. RCW 25.04.220, .430. Finkelstein argues that the amendments had the opposite effect; they were really reaffirmations of his membership in the partnerships.
The amendments may be read to show an intent of the remaining partners to continue without Finkelstein due to Finkelstein's bankruptcy. Some ambiguity can be noted in the documents, such as references to Finkelstein as "a member". More ambiguity appears when the amendments are considered in light of subsequent correspondence Finkelstein received from the partnerships, as well as other partnership documents, referring to him as a partner. A genuine issue of fact exists regarding the meaning of these amendments, and therefore whether Finkelstein became aware of his cause of action by virtue of the production of these amendments at the deposition. The trial court's ruling to the contrary was error. The error does not require a reversal of the result below, however, because we hold that the partnerships were dissolved by the 1982 Chapter 7 bankruptcy proceeding.
The trial court ruled that each general partnership agreement was an executory contract, which was deemed rejected by the trustee in bankruptcy because it was not assumed by the trustee within 60 days of conversion of the bankruptcy to a Chapter 7 proceeding under the Bankruptcy Code, 11 U.S.C. § 365(d)(1). "[C]ourts have generally assumed that partnership agreements are, at least in part, executory contracts." In re Cutler, 165 B.R. 275, 279-80 (Bankr.D.Ariz.1994) (). However, Finkelstein's bankruptcy trustee was not free to assume the contract under § 365 because the other partners were not obligated to accept such an assumption. Partnerships are voluntary associations, and partners are not obligated to accept a substitution for their choice of partner. The restraint on assumability also makes the deemed rejection provision of § 365 inapplicable to the partnership agreement. See In re Sunset Developers, 69 B.R. 710, 713 (1987). Therefore, § 365(e)'s invalidation of ipso facto provisions does not apply, and state partnership law is not superseded. 3 See Sunset Developers, 69 B.R. at 713; In re Clinton Court, 160 B.R. 57 (Bankr.E.D.Pa.1993) ().
The Sunset Developers analysis has recently been followed and expanded. In re Cutler, supra. 4 In Cutler the court reconciled § 365 with state partnership law by describing the executory aspect of a partnership contract to be the management rights and duties of a partner, and finding a partner's economic interest in the partnership to be nonexecutory, thus placing the bankruptcy trustee in the position of a creditor against the partnership. See Cutler, 165 B.R. at 280. Section 365 is clearly not applicable to the executory portion of the partnership contract because partnership agreements are purely consensual and the freedom of the partners to associate and dissociate is the heart of partnership law. The court allowed the partnership to "dissolve" under state partnership law while retaining the debtor-partner's economic interest, as protected by other sections of the bankruptcy code. See Cutler, 165 B.R. at 278.
RCW 25.04.310(5) provides that dissolution of a partnership is caused "[b]y the bankruptcy of any partner of the partnership[.]" Security Properties argued below pursuant to this statute that the partnerships dissolved upon Finkelstein's bankruptcy filing. The court rejected that argument and ruled that the statute was superseded by the Bankruptcy Code, 11 U.S.C. § 365. We find that § 365 is not applicable, and does not supersede RCW 25.04.310(5). Therefore, the...
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