In re Sharps Run Associates, LP, Civ. A. No. 93-1650 (JEI)

CourtUnited States District Courts. 3th Circuit. United States District Courts. 3th Circuit. District of New Jersey
Citation157 BR 766
Docket NumberBankruptcy No. 91-10279,Adv. No. 91-1401.,Civ. A. No. 93-1650 (JEI)
PartiesIn re SHARPS RUN ASSOCIATES, L.P., Debtor. Steven R. NEUNER, Trustee, Appellant, v. C.G. REALTY CAPITAL VENTURES-I, L.P., Core Operations, Inc. and Wharton Hardware and Supply Corporation, Appellees.
Decision Date13 August 1993




Neuner & Ventura by Steven R. Neuner, Marlton, NJ, for appellant/trustee.

Silberman, Markovitz & Raslavich by Michael S. Silberman, Philadelphia, PA, for appellees/C.G. Realty Capital Ventures-I, L.P. and Core Operations, Inc.

Joseph Bastianelli, Pennsauken, NJ, for appellee/Wharton Hardware & Supply Corp.

IRENAS, District Judge:

This case comes before this court on appeal by the Trustee of the debtor from a decision of Chief Bankruptcy Judge William H. Gindin holding that a creditor did not have standing to institute an action against limited partners pursuant to N.J.S.A. 42:2A-46(a).1

The bankruptcy court had jurisdiction of this action pursuant to 28 U.S.C. § 157(b)(1).2 We have appellate jurisdiction pursuant to 28 U.S.C. § 158(a). Because Judge Gindin's ruling is based solely on conclusions of law, we exercise plenary review of his decision to dismiss the complaint. In re Hanratty, 907 F.2d 1418, 1422 (3d Cir.1990); J.P. Fyfe, Inc. v. Bradco Supply Corp., 891 F.2d 66, 69 (3d Cir. 1989).

We find that New Jersey law, which governs the interpretation of § 46(a), would permit a creditor to pursue the remedy against the limited partners and that, in any case, the crossclaim by the partnership against the limited partners would relate back to the date on which the original complaint was filed. Accordingly, we reverse and remand.

A. Factual Background

Appellant, Steven R. Neuner, is the Trustee of Sharps Run Associates, L.P., ("Sharps"), the Chapter VII debtor. Sharps is a New Jersey limited partnership which was once engaged in the business of real estate development. Appellees, C.G. Realty Capital Ventures — I, L.P. ("CG Realty") and Core Operations, Inc. ("Core"),3 are the two limited partners of Sharps. CG Realty had a 40% interest in Sharps by reason of an $800,000 capital contribution, while Core contributed $200,000, entitling it to a 10% share. The general partner, DEKO Development Associates-Sharps Run ("DEKO"), is not a party to this appeal.4 Wharton Hardware and Supply Corp. ("Wharton"), a New Jersey corporation, is the creditor of Sharps and is also an appellee.5

On January 26, 1989, Wharton paid $11,800,000 to purchase the Sharps Run Shopping Center, which was being built by Sharps. As part of the purchase agreement Sharps agreed to construct an additional 17,500 square feet of leasable space by August, 1989, at no additional cost. On the same day, Wharton loaned Sharps $300,000, at ten percent interest, to finance the completion of the space. The agreement required Sharps to finish construction in seven months and to repay the $300,000 loan, with interest, on or before January 26, 1991.

On January 31, 1989 and February 7, 1989, the net sale proceeds of $4,603,698.13 were distributed among the general partner and the limited partners. CG Realty and Core received $1,763,334.72 and $440,883.68, respectively. This distribution included the return of their initial $1,000,000 contribution.

At the time of distribution, sufficient assets existed to satisfy all partnership debts. There is no dispute that the distribution to the limited partners did not violate any provision of N.J.S.A. 42:2A-1 et seq., New Jersey's limited partnership statute. However, after the distribution, the general partner absconded with the partnership's funds and left Sharps defunct. Sharps failed to complete the construction.

B. Procedural Background

On January 18, 1990, Wharton filed a complaint in the Superior Court of New Jersey, Chancery Division, against, among others, Sharps, DEKO, CG Realty and Core. The first count against Sharps was for breach of contract. In the second count Wharton sought the appointment of a receiver for Sharps pursuant to N.J.S.A. 42:6-1. The fourth count was directed against the limited partners to recover the January 26, 1989 distribution "pursuant to N.J.S.A. 42:2A-46 and 42:2A-46(b)."6

Both the request for appointment of a receiver and the ad damnum to the fourth count make it clear that, consistent with the language of § 46(a), Wharton is asserting the partnership's cause of action as distinct from its own, which is covered by the first count.7

On March 2, 1990, Wharton amended its complaint to add two additional counts against parties who are no longer involved in this litigation. There was no change in the complaint insofar as it related to the dispute presently before the court.

On May 8, 1990, Robert J. Partlow was appointed receiver for Sharps. On August 2, 1990, the receiver filed a cross-claim against the limited partners seeking judgment and recovery of the returned capital contributions. Sharps then filed a Chapter 11 petition on January 18, 1991. The Superior Court sua sponte dismissed the case without prejudice subject to a full disposal of the issues during bankruptcy proceedings. Steven R. Neuner was appointed Trustee for Sharps. Neuner converted the Chapter 11 petition into a Chapter 7 proceeding. At the Trustee's request, the case was reinstated by the Superior Court on September 4, 1991.

On November 13, 1991, the limited partners petitioned to remove the case to the District Court pursuant to 28 U.S.C. §§ 1334(b) and 1452(a). In accordance with 28 U.S.C. § 157(b), the Honorable Garrett E. Brown, Jr. referred the case to the bankruptcy court on November 20, 1991.

On October 27 and November 12, 1992, the limited partners and the Trustee, respectively, filed cross motions for summary judgment pursuant to Fed.R.Bankr.P. 7056. Before these motions were decided, the Trustee moved and was granted leave to file an amended crossclaim against the limited partners, Core and CG Realty. This amendment, which was filed on January 27, 1993, did not change either the legal or factual basis of the claim.8

In a letter opinion filed March 8, 1993, Judge Gindin denied the Trustee's motion and granted the limiteds' cross motion for summary judgment. Although he found that Wharton had extended credit during the period that the contributions of Core and CG Realty had been held by the partnership, Judge Gindin interpreted N.J.S.A. 42:2A-46(a) to deny a creditor standing to assert a claim against the limited partners. Since neither the statutory receiver nor the Trustee filed its claim against the limited partners within one year of the distribution, the bankruptcy court granted the limiteds' summary judgment motion and dismissed the case without explicitly considering whether the receiver's crossclaim against the limiteds should relate back to the date on which Wharton's complaint was filed.

An order in conformance with the letter opinion was filed on March 9, 1993. This order is now appealed by the Trustee.

A. Creditor Standing

This appeal raises the issue of whether a creditor, purporting to act on behalf of a limited partnership, has a right of action against a limited partner under N.J.S.A. § 42:2A-46(a). The answer depends upon whether the words "liable to the limited partnership" in § 46(a) are interpreted to permit only the partnership to have standing to pursue the claim. In his letter opinion, Judge Gindin held that creditors do not have standing to sue the limited partners: "The statute makes the cause of action one which belongs only to the partnership and not to any individual creditor."

This issue is one of first impression in New Jersey, and case law in other states is sparse.9 However, the case law that does exist rejects defendants' construction of § 46(a). In the leading cases of Whitley v. Klauber, 51 N.Y.2d 555, 435 N.Y.S.2d 568, 416 N.E.2d 569 (1980), and Kittredge v. Langley, 252 N.Y. 405, 169 N.E. 626 (1930), reh'g denied 253 N.Y. 555, 171 N.E. 780 (1930), the New York Court of Appeals held that a creditor may recover, in the name of the limited partnership, from the limited partners. While the cases were considered under § 106(4) of New York's Partnership Law, § 106(4) is sufficiently similar to § 46(a) for this court to adopt the reasoning and holding of those cases.10

In Kittredge v. Langley,11 a creditor to a limited partnership received judgment against the partnership, but discovered that he could not recover from the general partners. Kittredge, the creditor, then initiated action against Langley, the limited partner, to recover previously distributed contributions. Despite the fact that Langley was originally dismissed from the suit because of his status as a special partner, Kittredge was permitted to recover against Langley. In Kittredge, Chief Judge Cardozo wrote that under the Uniform Limited Partnership Act, "a special partner is liable, to the extent of his withdrawn capital, for the payment of a partnership liability, where the assets left with the general partners irrespective of their valuation at the time of dissolution, are thereafter found to be inadequate." 169 N.E. at 630.

In Whitley v. Klauber,12 the Court of Appeals followed Kittredge and upheld the right of a creditor to recover withdrawn contributions on behalf of the partnership. 416 N.E.2d at 576. Whitley went further and held that a creditor who has received judgment against a limited partnership may recover the contributions from the limited partners, even if the limited partners were not parties to the initial action. 416 N.E.2d at 570. In coming to this conclusion, the court stated: "That the purpose of section 106(4) is the protection of creditors is crystal clear not only from the explicit references to `creditors who extended credit or whose...

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