Luddington v. Bodenvest Ltd.
| Decision Date | 26 February 1993 |
| Docket Number | No. 900179,900179 |
| Parties | Dean F. LUDDINGTON, trustee of the Dean F. Luddington Retirement Trust, Plaintiff, v. BODENVEST LTD., a Utah limited partnership; C. Dean Larsen, an individual; EFF Fund, a Utah limited partnership; Menacor, Inc., a Utah corporation; Petersen Investors, a Utah general partnership; Foothill Thrift, a Utah corporation; and John Does 1 through 12, Defendants. FOOTHILL THRIFT, now known as Foothill Financial, a Utah corporation, Counterclaimant, Cross-Complainant, and Appellee, v. BODENVEST LTD., a Utah limited partnership; Dean F. Luddington, trustee of the Dean F. Luddington Retirement Trust; EFF Fund, a Utah limited partnership; Menacor, Inc., a Utah corporation; Petersen Investors, a Utah general partnership; and John Does 1 through 12, Counterdefendants, Cross-Defendants, and Appellant. |
| Court | Utah Supreme Court |
Richard A. Rappaport, Jeffrey L. Silvestrini, Martha S. Stonebrook, Salt Lake City, for Foothill Thrift.
Dennis K. Poole, Salt Lake City, for Foothill Financial.
Stephen R. Randle, Salt Lake City, for Bodenvest.
Bodenvest Ltd., a Utah limited partnership, appeals from a decree of foreclosure entered on a cross-claim filed against it by Foothill Thrift.
Until it filed bankruptcy in February 1987, Granada, Inc., was Bodenvest's general partner. Granada's common stock was owned by C. Dean Larsen, who was its president and one of its directors. Bodenvest's limited partners were retirement trusts established by various Utah medical practitioners. The primary purpose of the partnership, as stated in paragraph 2.1 of its certificate and agreement, was
to acquire a parcel of undeveloped real property containing approximately seventy-two (72) acres located in West Jordan, Salt Lake County, Utah ... and the Partnership shall hold the subject for investment, and may from time to time sell parcels of said property to investors or may retain and sell the total parcel of property to one Buyer.
In paragraph 15.2B, the general partner is given the power
to borrow money and, if security is required therefor, to mortgage or lien any portion of the property of the Partnership ... as [the general partner] deems, in his absolute discretion, to be in the best interests of the Partnership.
The 72 acres were purchased by Bodenvest for approximately $385,000, including interest. The land was purchased on an installment contract and, by 1983, was paid for in full. In 1985, part of the land was sold for a hospital, netting Bodenvest $203,000. Following this sale, the assets of Bodenvest were comprised of the remaining 50.3 acres and the $203,000 cash. The only expenses of the partnership were annual property taxes (less than $150), the cost of preparing annual tax returns, and a small management fee.
In late 1984, Granada, by and through Larsen, began a series of three transactions in which the remaining 50.3 acres were encumbered to secure loans for the sole benefit of Granada or for Granada and Bodenvest. The first of these transactions was a $455,300 loan from Petersen Investors to Granada. The loan was secured by a trust deed on the 50.3 acres. Subsequently, a second trust deed on the property was recorded to secure a $150,000 loan to Bodenvest and Granada from the Dean F. Luddington Retirement Trust. A third trust deed (the one at issue in this case) was executed in April 1986 to Foothill Thrift by Granada to secure a ninety-day loan for $252,083 to meet Granada's business obligations. The trust deed became a first lien after Larsen arranged to have the Petersen Investors and the Luddington trust deeds reconveyed or subordinated. There is no evidence that the Bodenvest limited partners knew there were any encumbrances on the property until after Granada filed for bankruptcy many months later. Also, apparently without the knowledge of the limited partners, Granada borrowed $192,925 of Bodenvest's $203,000 cash proceeds. The loan, which was not evidenced by a promissory note, was entirely unsecured and has never been repaid.
When Foothill prepared the documentation for the $252,083 business loan, it had the property appraised at approximately $762,000. Foothill did not obtain a loan application or any financial information from Bodenvest. It did, however, obtain a recent personal financial statement from Larsen and a one-year unaudited financial statement from Granada. The loan documents were all signed by Larsen in various capacities. The promissory note was signed by Larsen individually and for Granada as its president. The trust deed on the Bodenvest property was signed by Larsen as president of Granada, the general partner. A hypothecation statement was signed by Larsen for Granada as general partner of Bodenvest. In neither the trust deed nor the hypothecation statement is there any express reference to the promissory note. Foothill issued its check dated April 23, 1986, for $252,083, payable only to Granada. The evidence is undisputed that there was no benefit to Bodenvest from the loan, nor did Bodenvest guarantee the Granada-Larsen promissory note. Furthermore, Foothill makes no claim that Bodenvest subsequently ratified the transaction.
The principal and accrued interest were due in ninety days. Granada made no payment when the note fell due on July 22, 1986. On September 2, Granada made a $55,795.34 partial payment, and Foothill agreed to renew the note. Sometime after September 11, a renewal note to Foothill in the amount of $201,851 was executed for the balance owing. This renewal note was back-dated to July 22 and made payable on November 19, 1986. When the renewal note fell due, nothing was paid. A second renewal note, dated December 10, 1986, was executed for a six-month term, even though no payment had been made on the first renewal note. No further payments of either principal or interest were made by the maturity date, June 8, 1987.
Granada filed bankruptcy on February 13, 1987, and Larsen filed personal bankruptcy the following month. Both listed Foothill as a creditor. In May of 1987, the Dean F. Luddington Trust commenced this action against Larsen for fraud and legal malpractice, and against the other defendants, including Foothill Thrift and Bodenvest, seeking foreclosure of its trust deed. Foothill cross-claimed against Bodenvest for foreclosure.
A decree of foreclosure in favor of Pacific America Construction, Inc., successor to Foothill Thrift, was entered on Foothill's cross-claim. The decree rests primarily on three findings of fact as to Granada's authority to execute the trust deed to Foothill. In those findings, the trial court found authority in the hypothecation statement given in connection with the transaction which in turn was authorized by the certificate and agreement of the partnership. Additionally, the court based its finding of apparent authority for Granada's act on the fact that the limited partners had allowed Larsen to sign the certificate and agreement for them. The certificate and agreement was a public document. The court also noted that the Foothill officer who made the loan was unaware that Larsen and Granada had no authority to execute and deliver the trust deed on behalf of Bodenvest.
Bodenvest appeals, pursuant to rule 54(b) of the Utah Rules of Civil Procedure, assailing the findings of fact as insufficient to support the legal conclusion that Granada's act of encumbering the property was binding on Bodenvest. We begin our analysis by examining the Code provisions related to limited partnerships. Utah Code Ann. § 48-2-9, which was in effect at the time of the events in this case, 1 defines the rights, powers, and liabilities of a general partner. It provides:
A general partner shall have all the rights and powers, and be subject to all the restrictions and liabilities, of a partner in a partnership without limited partners, except that without the written consent or ratification of the specific act by all the limited partners, a general partner or all of the general partners have no authority to:
(1) Do any act in contravention of the certificate.
(2) Do any act which would make it impossible to carry on the ordinary business of the partnership.
(3) Confess a judgment against the partnership.
(4) Possess partnership property, or assign their rights in specific partnership property, for other than a partnership purpose.
Thus, a general partner has the same rights and powers in both a partnership and a limited partnership. Those rights and powers are set out in section 48-1-6:
(1) Every partner is an agent of the partnership for the purpose of its business, and the act of every partner, including the execution in the partnership name of any instrument for apparently carrying on in the usual way the business of the partnership of which he is a member, binds the partnership, unless the partner so acting has in fact no authority to act for the partnership in the particular matter and the person with whom he is dealing has knowledge of the fact that he has no such authority.
(2) An act of a partner which is not apparently for the carrying on of the business of the partnership in the usual way does not bind the partnership, unless authorized by the other partners.
We have held that a partner who is without actual authority has no power to bind the partnership in a transaction that is not within the ordinary and apparent scope of the partnership business. Any person dealing with a partner can only rely on the partner's acts if they are within the ordinary and apparent scope of the partnership business. Peterson v. Armstrong, 24 Utah 96, 102, 66 P. 767, 768 (1901). The burden of proof as to the partner's authority is on the party seeking to enforce the transaction. Id. at 102-03, 66 P. at 768.
The trial court stated in finding of fact 10 that Granada had actual authority to execute the trust deed to Foothill because "Bodenvest (by its...
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