Frigidaire Sales Corp. v. Union Properties, Inc.
| Decision Date | 07 April 1977 |
| Docket Number | No. 44262,44262 |
| Citation | 562 P.2d 244,88 Wn.2d 400 |
| Parties | FRIGIDAIRE SALES CORPORATION, Petitioner, v. UNION PROPERTIES, INC., et al., Respondents. |
| Court | Washington Supreme Court |
Williams, Lanza, Kastner & Gibbs, Peter E. Peterson, Joel D. Cunningham, Seattle, for petitioner.
Jerome R. Cronk, Seattle, for respondents.
Petitioner, Frigidaire Sales Corporation, sought review of a Court of Appeals decision which held that limited partners do not incur general liability for the limited partnership's obligations simply because they are officers, directors, or shareholders of the corporate general partner. Frigidaire Sales Corp. v. Union Properties, Inc., 14 Wash.App. 634, 544 P.2d 781 (1975). We granted review, and now affirm the decision of the Court of Appeals.
The facts of the case are adequately set out in the Court of Appeals opinion, and only a cursory summation need be repeated here. Petitioner entered into a contract with Commercial Investors (Commercial), a limited partnership. Respondents, Leonard Mannon and Raleigh Baxter, were limited partners of Commercial. Respondents were also officers, directors, and shareholders of Union Properties, Inc., the only general partner of Commercial. Respondents controlled Union Properties, and through their control of Union Properties they exercised the day-to-day control and management of Commercial. Commercial breached the contract, and petitioner brought suit against Union Properties and respondents. The trial court concluded that respondents did not incur general liability for Commercial's obligations by reason of their control of Commercial, and the Court of Appeals affirmed.
We first note that petitioner does not contend that respondents acted improperly by setting up the limited partnership with a corporation as the sole general partner. Limited partnerships are a statutory form of business organization, and parties creating a limited partnership must follow the statutory requirements. In Washington, parties may form a limited partnership with a corporation as the sole general partner. See RCW 25.04.020 and RCW 25.04.060(3); RCW 25.08.010 and RCW 25.08.070(2)(a).
Petitioner's sole contention is that respondents should incur general liability for the limited partnership's obligations under RCW 25.08.070, 1 because they exercised the day-to-day control and management of Commercial. Respondents, on the other hand, argue that Commercial was controlled by Union Properties, a separate legal entity, and not by respondents in their individual capacities.
Petitioner cites Delaney v. Fidelity Lease Ltd., 526 S.W.2d 543 (Tex.1975), as support for its contention that respondents should incur general liability under RCW 25.08.070 for the limited partnership's obligations. That case also involved the issue of liability for limited partners who controlled the limited partnership as officers, directors, and shareholders of the corporate general partner. The Texas Supreme Court reversed the decision of the Texas Court of Civil Appeals and found the limited partners had incurred general liability because of their control of the limited partnership. See Delaney v. Fidelity Lease Ltd., 517 S.W.2d 420 (Tex.Civ.App.1974), Rev'd, 526 S.W.2d 543 (Tex.1975).
We find the Texas Supreme Court's decision distinguishable from the present case. In Delaney, the corporation and the limited partnership were set up contemporaneously, and the sole purpose of the corporation was to operate the limited partnership. The Texas Supreme Court found that the limited partners who controlled the corporation were obligated to their other limited partners to operate the corporation for the benefit of the partnership. "Each act was done then, not for the corporation, but for the partnership." Delaney v. Fidelity Lease Ltd., 526 S.W.2d 543, 545 (Tex.1975), quoting from the dissenting opinion in Delaney v. Fidelity Lease Ltd., 517 S.W.2d 420, 426 (Tex.Civ.App.1974). This is not the case here. The pattern of operation of Union Properties was to investigate and conceive of real estate investment opportunities and, when it found such opportunities, to cause the creation of limited partnerships with Union Properties acting as the general partner. Commercial was only one of several limited partnerships so conceived and created. Respondents did not form Union Properties for the sole purpose of operating Commercial. Hence, their acts on behalf of Union Properties were not performed merely for the benefit of Commercial.
Further, it is apparently still undecided in Texas whether parties may form a limited partnership with a corporation as the sole general partner. See Delaney v. Fidelity general partner. See Delaney v. Fidelity Lease Ltd., 526 S.W.2d 543, 546 (Tex.1975). The Texas Supreme Court was concerned with the possibility that limited partners might form the corporate general partner with minimum capitalization:
In no event should they be permitted to escape the statutory liability which would have devolved upon them if there had been no attempted interposition of the corporate shield against personal liability. Otherwise, the statutory requirement of at least one general partner with general liability in a limited partnership can be circumvented or vitiated by limited partners operating the partnership through a corporation with minimum capitalization and therefore minimum liability.
Delaney v. Fidelity Lease Ltd., supra at 546.
However, we agree with our Court of Appeals analysis that this concern with minimum capitalization is not peculiar to limited partnerships with corporate general partners, but may arise anytime a creditor deals with a corporation. See Frigidaire Sales Corp. v. Union Properties, Inc., supra 14 Wash.App. at 638, 544 P.2d 781. Because our limited partnership statutes permit parties to form a limited partnership with a corporation as the sole general partner, this concern about minimal capitalization, standing by itself, does not justify a finding that the limited partners incur general liability for their control of the corporate general partner. See A. Bromberg, Crane and Bromberg on Partnership § 26 at 146--47 (1968). If a corporate general partner is inadequately capitalized, the rights of a creditor are adequately protected under the 'piercing-the-corporate-veil' doctrine of corporation law. See 1 W. Fletcher, Cyclopedia of the Law of Private Corporations § 44.1 (rev. vol. M. Wolf 1974); H. Henn, Handbook of the Law of Corporations and other Business Enterprises § 147 (2d ed. 1970).
Furthermore, petitioner was never led to believe that respondents were acting in any capacity other than in their corporate capacities. The parties stipulated at the trial that respondents never acted in any direct, personal capacity. When the shareholders of a corporation, who are also the corporation's officers and directors, conscientiously keep the affairs of the corporation separate from their personal affairs, and no fraud or manifest injustice is perpetrated upon third persons who deal with the corporation, the corporation's separate entity should be respected. See J. L. Cooper & Co. v. Anchor Sec. Co., 9 Wash.2d 45, 113 P.2d 845 (1941); Garvin v. Matthews, 193 Wash. 152, 74 P.2d 990 (1938); H. E. Briggs & Co. v. Harper Clay Prods. Co., 150 Wash. 235, 272 P. 962 (1928); Nursing Home Bldg. Corp. v. DeHart, 13 Wash.App. 489, 535 P.2d 137 (1975).
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