Klein v. Weiss

• Decision Date: 20 November 1978
• Docket Number: No. 163,163
• Citation: 284 Md. 36,395 A.2d 126
• Parties: Gerald S. KLEIN, Receiver v. Frederick K. WEISS et al.
• Court: Maryland Court of Appeals

Page 36

284 Md. 36

395 A.2d 126

Gerald S. KLEIN, Receiver v. Frederick K. WEISS et al.

No. 163.

Court of Appeals of Maryland.

Nov. 20, 1978.

Gerald S. Klein, Baltimore (Thomas E. Webb, Baltimore, on brief), for appellant.

Raymond S. Smethurst, Jr., Salisbury (Sally D. Adkins, Adkins, Potts & Smethurst, Salisbury, on brief), for Harry Hammond and Chris J. Christ by Risque W. Plummer, Baltimore, for Frederick K. Weiss and by Brian E. Barkley, Silver Spring, for Constantine A. Anthony.

Argued before MURPHY, C. J., and SMITH, DIGGES, LEVINE, ^* ELDRIDGE, ORTH and COLE, JJ.

MURPHY, Chief Judge.

This case involves an ill-fated business venture in Ocean City, Maryland, known as the Seventy-Sixth Street Limited Partnership (the Limited Partnership), which the parties intended to form pursuant to the provisions of the Maryland Uniform Limited Partnership Act (the Uniform Act), Maryland Code (1975) §§ 10-101 through 10-129 of the Corporations and Associations Article. The central issue in the appeal is whether the receiver of the Limited Partnership, appointed on behalf of creditors, may enforce agreements executed by the limited partners for capital contributions to the Limited Partnership.

The Uniform Act provides for the formation of a limited partnership, consisting of one or more general partners and one or more limited partners, the latter not being bound by the obligations of the partnership. § 10-101. Persons desiring to form a limited partnership under the Act's provisions must, as a statutory prerequisite to formation, execute a certificate of limited partnership and record it with the clerk of the appropriate circuit court; the certificate must set forth a number of details of the partnership, including the identity of the partners, and the capital contributions to be made by each limited partner. § 10-102. Section 10-115 of the Act governs the withdrawal of the capital contributions made by limited partners; it generally provides that such contributions may not be returned until the liabilities of the partnership have been satisfied. Section 10-116 provides that a limited partner's liability, as set forth in the certificate of partnership, cannot be waived or compromised to adversely affect the right of a creditor of the partnership who extended credit to it after the certificate was filed, and before it was canceled or amended, to enforce his claims against the partnership.

The Limited Partnership evolved from these facts: John Fulton, an Ocean City real estate broker, and Victoria Rinaldi, his associate, devised a plan to commercially develop a tract of bayfront land located in Ocean City, which was then owned by the Seventy-Sixth Street Joint Venture (the Joint Venture). On October 10, 1972, Fulton and Rinaldi contracted to purchase the property from the Joint Venture for $450,000. The contract was signed by Fulton and Rinaldi as general partners of the Seventy-Sixth Street Limited Partnership, although no such partnership was then in existence. Under the terms of the contract, $10,000 was paid at the time the contract was signed; settlement was to take place on March 15, 1973, at which time $175,000 was to be paid in cash, and the Limited Partnership was to assume an existing mortgage not to exceed $124,000, and execute a purchase money mortgage to the Joint Venture in the amount of $141,000.

To raise the money needed to purchase the property, Fulton and Rinaldi decided to create a limited partnership pursuant to which they would act as general partners, and sell 25 limited partnership units for $9,000 each, thereby generating $225,000. Of this amount, $185,000 would be used to pay the cash obligation under the contract. The balance would service the mortgages during the first year and pay settlement and other costs.

Lloyd Whitehead, of the law firm of Perdue, Owrutsky & Whitehead, was employed by Fulton to prepare the legal papers and documents necessary to effectuate the plan. In late January or early February of 1973, Whitehead drafted an instruction letter, a subscription agreement, a limited partnership agreement and a certificate of limited partnership, all to be used in the solicitation of prospective limited partners.

As originally drafted by Whitehead, the partnership agreement and the partnership certificate required that each limited partner make an initial capital contribution of $9,000 for each partnership unit purchased; it also called for a future contribution of $15,298 per unit, representing the per unit share of the mortgage debt to be created on the property to be acquired from the Joint Venture. This future contribution was to be paid in accordance with a mortgage payment schedule which was attached to the partnership agreement and listed the annual per unit payment, based on 25 contributing shares, for the years 1973 through 1981. The agreement specified that the dates on which these payments were due would be provided to the limited partners by the general partners or the escrow agent, Perdue, Owrutsky & Whitehead, not later than 90 days before the first such payment was required.

The proposed partnership agreement acknowledged that there was a pre-existing business arrangement between the limited and general partners. It stated that the limited partners ratified the contract made by Fulton and Rinaldi in October of 1972 to purchase the Joint Venture property. It provided that a maximum of 25 limited partnership units would be sold and that no limited partner had the right to withdraw his capital contributions unless there was sufficient cash or other property to operate the partnership or upon dissolution.

Under the proposed partnership agreement, the general partners were authorized to take title to the Joint Venture property and to execute any documents on behalf of the partnership which related thereto, whether before or after the filing of the partnership certificate, as to which the limited partners "hereby ratify and confirm any such action by the General Partners." The agreement also provided that the limited partners consented to any mortgage by the general partners of the partnership's assets "on such terms and conditions as may be determined by the General Partners, and to any contract, agreement . . . or arrangement with . . . (others) as the General Partners may deem necessary to accomplish the purposes of this Partnership . . . ." The general partners were empowered, in their absolute discretion, "to borrow money and as security therefor to mortgage or subject to other security device any part of the property of the Partnership; to . . . refinance, recast, increase, modify . . . or extend any such property . . . upon such terms as they deem proper . . . (and) to execute, acknowledge and deliver any and all instruments to effectuate the foregoing." The agreement designated the general partners as attorney and agent for the limited partners to execute and record on their behalf "all certificates or other instruments . . . which the General Partner deems appropriate to qualify or continue the Partnership as a Limited Partnership . . . (and) all instruments which the General Partner deems appropriate to effect a change or modification of the Partnership in accordance with the terms of this Agreement . . . ."

The proposed partnership agreement and certificate set forth the names and addresses of Fulton and Rinaldi as general partners. With respect to the identity of the limited partners, the partnership documents stated: "See attached Instruments of Execution." The certificate made no mention of the number of limited partnership units to be sold.

The instruction letter which Whitehead had prepared for the information of prospective limited partners set forth the steps to be taken by persons interested in investing in the venture. The letter directed prospective subscribers to execute the subscription agreement; that agreement specified that the subscriber had received and read the limited partnership agreement and the limited partnership certificate prior to executing the subscription agreement. The instruction letter directed prospective limited partners to sign "instruments of execution," which were therewith provided, these being separate documents to be separately appended to the partnership agreement and certificate; they disclosed the identity of the limited partners, and recited their acceptance and adoption of all the provisions contained in the partnership agreement and certificate. Finally, the instruction letter directed subscribers to send all the subscription documents to the Limited Partnership, together with a check in the amount of the initial capital contribution.

It was provided in the subscription agreement that at the time the Limited Partnership settled on the Joint Venture property, Fulton and Rinaldi, individually, would enter into a contract with the Limited Partnership to repurchase the property within one year thereafter, paying an amount therefor which would yield to the limited partners net proceeds of $100,000 in excess of their initial capital contribution. Thus, the subscription agreement led each subscriber to expect within a year a substantial return on his original $9,000 investment without ever being called upon to make any part of the additional $15,298 contribution specified in the partnership agreement and certificate.

Of the maximum 25 limited partnership units for sale, only 7 units were sold, including the 31/2 units purchased by the appellees in this case. The initial capital contribution of $9,000 for each subscribed partnership unit was duly paid to the Limited Partnership.

The appellee Hammond had been solicited by Whitehead in February of 1973 and purchased a unit as a tenant in common with another individual. Hammond signed the "instruments of execution" on March 1, 1973 and paid $4,500, representing his one-half share of the initial capital contribution. He claimed that he never read the agreement...