Kazanjian v. Rancho Estates, Ltd.

• Decision Date: 19 November 1991
• Citation: 1 Cal.Rptr.2d 534,235 Cal.App.3d 1621
• Court: California Court of Appeals Court of Appeals
• Parties: Gary J. KAZANJIAN, Plaintiff and Appellant, v. RANCHO ESTATES, LTD., etc., et al., Defendants and Respondents. D010325.

Page 534

1 Cal.Rptr.2d 534

235 Cal.App.3d 1621

Gary J. KAZANJIAN, Plaintiff and Appellant, v. RANCHO ESTATES, LTD., etc., et al., Defendants and Respondents.

D010325.

Court of Appeal, Fourth District, Division 1, California.

Nov. 19, 1991.

Jones, Hatfield, Penfield, Barden and Finegold and Thomas E. Polakiewicz, Escondido, for plaintiff and appellant.

Raffee, Edwards & Leuthold and Richard R. Leuthold, San Diego, for defendants and respondents.

BACKGROUND

FROEHLICH, Associate Justice.

Gary J. Kazanjian (Kazanjian) owned a parcel of undeveloped property in Rancho Santa Fe. He experienced financial difficulty in servicing the encumbrances on the property, and determined he would be required either to sell or find some means of developing the property in order to avoid foreclosure by the lienholders. Kazanjian Hops advised that construction of a high-value residence on the Kazanjian property would be profitable. The plan was to utilize Kazanjian's equity in the property to obtain the necessary financing for construction. Hops could add nothing to the financial credibility of the project, however, because he had recently suffered foreclosures on two properties he owned, resulting in impairment of his credit. It was concluded that the parties would need additional financial guarantees to make the project work.

contacted Herbert Hops of the Hops Development Corporation (Hops) for assistance in resolving his problem.

The added guarantor was found in the person of Lawrence Haber (Haber). Haber agreed to lend his financial credit to the venture in return for an interest in profits. Upon the advice of Hops, who had had experience in such structures previously, the enterprise was established as a limited partnership. Kazanjian was to contribute his realty in return for a limited partner's interest. Hops was to contribute, as a general partner, his services and expertise. Haber's contribution was his advancing credit to the partnership by becoming a general partner, thus providing an unlimited guarantee of partnership obligations. While none of the three partners expected to advance additional cash to the venture, the agreement did contain a provision permitting assessments for additional capital contributions. No assessments were ever made. However, Hops advanced sums from time to time for the benefit of the project, and claimed a right of reimbursement when the project was completed.

The partnership agreement gave Hops broad authority to manage the business of the partnership. The object of the venture was to plan and construct a residence on the realty, to obtain and utilize appropriate financing, to sell the finished product for a profit, and upon sale to divide the proceeds and terminate the partnership. At time of dissolution Kazanjian was first to recover the equity in his realty as of the time of commencement of the venture, a sum later determined to be $101,001. The balance of available funds was then to be divided (after payment of all debts and return of any "advances" made by partners) 40% to Hops, 30% to Haber and 30% to Kazanjian.

During the period of the venture Hops was engaged in other construction projects. An urgent obligation came due which he could not meet. Unbeknownst to his two partners, but in accordance with literal authority vested in him by the partnership agreement, Hops imposed an encumbrance upon partnership property to secure the loan which provided the necessary funds. Hops intended to repay the loan on the sale of the completed residence, and testified that he assumed there would be sufficient funds to his credit to cover the amount of the misappropriation. The improper lien was not discovered by the other partners until sale of the new residence was in process. At that time they agreed to pay off the stray lien rather than contest it, in order to terminate the transaction and obtain funds from the sale.

The construction had taken longer than expected. The building cost more than the partners had projected. The market for high-priced homes turned out to be soft. The net result of these factors was that the proceeds from sale were insufficient (after payoff of the unauthorized lien) to return all advances and Kazanjian's $101,001 entitlement. Kazanjian brought suit. The matter was referred to a referee for an accounting. The referee, after a full hearing on the merits, calculated the partnership dissolution accounting by excluding consideration of the payoff of the unauthorized lien (or, alternatively, upon the hypothetical assumption that Hops would reimburse the partnership for the amount of the diversion). On this basis the referee determined that Hops was entitled to a return of certain advances, that Kazanjian was entitled to a return of his $101,001, and that a small profit of some $2,295 remained, which should be split 40-30-30 in accordance with the partnership agreement. However, because the foreign lien funds in the sum of $45,998 had been first removed, the remaining cash was insufficient to return Kazanjian his full entitlement The trial court rendered judgment in accordance with the referee's findings. The judgment included an appropriate award in favor of the partnership and against Hops, in recognition of Hops's misappropriation of the funds resulting from the foreign lien. Since the misappropriated sums directly caused Kazanjian's loss, the court also awarded judgment against Hops and in favor of Kazanjian in the net amount of the loss (some $41,884 and also hefty punitive damages). The court denied Kazanjian's claim against Haber, however, finding that Haber was "not personally liable to the limited partner, Gary J. Kazanjian, for damages suffered caused by the acts of the co-general partner, Hops Development Corporation."

much less pay anything by way of profit to the partners.

On appeal, the mathematics and basic factual findings of the referee, as adopted by the court, are not challenged. The appeal directs itself to the question of Haber's liability for Hops's misdeeds. As might be expected, Hops and his corporation are now bankrupt, and Kazanjian's only practical source of recovery for his lost equity is the deep pockets of Haber, the "financial" general partner.

ISSUE PRESENTED

The issue thus presented is: When a limited partner suffers loss because of the misappropriation of partnership funds by one general partner, is the other general partner liable jointly to the limited partner for such loss? Surprisingly, this question seems not previously to have been answered, either in terms of provisions of the uniform partnership acts or by judicial decision.

DISCUSSION

We conclude that an innocent general partner is not jointly and severally liable with a malfeasant general partner for misappropriations which cause loss to a limited partner. We believe the general partner's exposure to liability to a limited partner should not be as extensive as his potential liability to creditors. However, we reverse the decision of the trial court because it did not consider partners' rights and obligations of contribution when dissolution results in loss. A proper consideration of such rights would result in a sharing of limited partner Kazanjian's loss by general partner Haber.

At the outset, we dismiss arguments based upon classification of the tortious partner's acts as either within or outside the scope of business of the partnership. It may be presumed that the typical partnership agreement will hardly ever contain a provision authorizing misappropriation of partnership funds by a general partner. While the partnership agreement gave Hops, in this case, the power to execute liens on partnership property, it did not authorize him in the process to steal money from the partnership. On the other hand, it is clear that tortious acts done in connection with, or in the process of, the business of the partnership will subject the general partners to liability to creditors. (See Blackmon v. Hale (1970) 1 Cal.3d 548, 83 Cal.Rptr. 194, 463 P.2d 418; innocent partner in law firm liable for misappropriation of client trust funds by co-partner). However, the fact that a misdeed will subject all partners to liability to a creditor does not necessarily mean the misdeed causes equal liability to a losing limited partner.

We state the obvious when we remind that a limited partner in his capacity as a limited partner is not a creditor. To find what the limited partner's rights are we look to the Revised Uniform Limited Partnership Act, as contained in Corporations Code section 15611 et seq. Corporations Code section 15643, subdivision (b) states: "... Except as provided in this chapter or in the partnership agreement, a general partner of a limited partnership has the liabilities of a partner in a partnership without limited partners to the partnership and to the other partners."

The word "partner" in the California Revised Limited Partnership Act means both a general and a limited partner. (Corp.Code, § 15611, p. 615.) Literally, therefore The obligations of a misappropriating partner are set forth in Uniform Partnership Act section 21, subdivision (1), contained in Corporations Code section 15021, subdivision (1): "Every partner must account to the partnership for any benefit, and hold as trustee for it any profits derived by him without the consent of the other partners...." It is notable in this reading that the accounting is to the partnership, rather than to individual co-partners. It is also to be noted that the misappropriating partner holds "as trustee" the profits improperly derived. Partnership law thus incorporates the fiduciary concepts generated in trust law. (See Tri-Growth Centre City, Ltd. v. Silldorf, Burdman, Duignan & Eisenberg (1989) 216 Cal.App.3d 1139, 1150, 265 Cal.Rptr. 330: "[W]hen a partnership is created, the parties acquire rights and duties based on a fiduciary relationship.") Civil Code section 2239 (at the time applicable to this...