Pappas v. Arfaras, B-90-326 (GLG).

• Decision Date: 30 September 1998
• Docket Number: No. B-90-326 (GLG).,B-90-326 (GLG).
• Citation: 20 F.Supp.2d 372
• Parties: Anthony PAPPAS, Pro Se, Plaintiff, v. George ARFARAS, et al., Defendants.
• Court: U.S. District Court — District of Connecticut

20 F.Supp.2d 372

Anthony PAPPAS, Pro Se, Plaintiff, v. George ARFARAS, et al., Defendants.

No. B-90-326 (GLG).

United States District Court, D. Connecticut.

September 30, 1998.

Anthony Pappas, Riverside, CT, pro se.

Jeffrey R. Hellman, Zeisler & Zeisler, P.C., Bridgeport, CT, for George Arfaras, Irene Arfaras, A-C Associates, Inc., Cedar Mill Farms Ltd., Newtown Sports Properties Ltd. Partnership, Newtown Sports Center, Inc., Maria Arfaras, Nicholas Arfaras, Patricia Denlinger, Holly Larson, Scott Larson, Tracy Larson, Eileen Migiano, Kathy Pappas.

T. Stevens Bliss, Resha, Smith & Goldberg, Danbury, CT, for Newton Sports Center Ltd. Partnership.

Jeffrey R. Hellman, Zeisler & Zeisler, P.C., Bridgeport, CT, T. Stevens Bliss, Resha, Smith & Goldberg, Danbury, CT, for Arthur Polstein, Maryann Polstein, Maria Vovou.

Jeffrey R. Hellman, Zeisler & Zeisler, P.C., Bridgeport, CT, Carl R. Ajello, Ansonia, CT, for Edward Bednar.

Jeffrey R. Hellman, Zeisler & Zeisler, P.C., Bridgeport, CT, Daniel Shepro, Willinger, Shepro, Tower & Bucci, Bridgeport, CT, for Irene Boubaris, Nick Boubaris, Grillos, George Michael, Pauline Grillos.

MEMORANDUM DECISION

GOETTEL, District Judge.

INTRODUCTION

This case arises from the dissolution of a limited partnership which had been formed for the purpose of acquiring approximately ninety acres of raw land in Newtown, Connecticut and developing this land into two-acre plot, single-family home subdivisions. Several of the defendants moved for summary judgment and Magistrate Judge William I. Garfinkel issued a recommended ruling on June 12, 1998. The Magistrate recommended granting the summary judgment motion of defendant Irene Arfaras on all counts, except counts four and five; denying the partial summary judgment motion of defendant George Arfaras on counts four, five, and seven; granting in part and denying in part defendant George Arfaras' partial summary judgment motion on count 13; and denying the cross-motions for summary judgment of defendants Michael Grillos, Pauline Grillos, Nick Boubaris, and Irene Boubaris, in which defendant Edward J. Bednar joined, on count thirteen.

The parties now raise several objections to the recommended ruling. Plaintiff Anthony Pappas objects to the recommended ruling on the distribution of partnership assets after dissolution (count thirteen) and on the acts of fraud (count seven). Defendants/cross-claimants Grillos and Boubaris also object to the recommended ruling on count thirteen. At the outset, we note that the parties object only to portions of the recommended ruling. Thus, this Court is not required to make a de novo determination on the entire proposed decision. Fed.R.Civ.P. 72(b); Local R. Mag. JJ. 2(b). Familiarity with the recommended ruling is presumed, and we rely on that decision for pertinent background facts and legal principles.

This Court adopts, approves, and ratifies the recommended ruling as modified herein. We also DENY plaintiff's objections (document # 258) and the objections of the defendants/cross-claimants (document # 259). We write separately, however, to clarify some points of law on how the limited partnership's assets should have been distributed and to specifically address the limited partners' objections.

I. SUBSTANTIVE MODIFICATIONS TO THE RECOMMENDED RULING

As discussed by the Magistrate, upon dissolution a limited partnership undergoes "a three-step dismantling process: dissolution, winding up, and termination." Recommended Ruling at 43. The winding up period allows the partners to complete all transactions begun before dissolution but not completed by the dissolution date. Michael L. Closen et al., Dissolution and Liquidation of Partnerships, § 6.30 (Nov.1994). Also during this period, all of the assets are typically sold to accumulate a fund of cash. This fund of cash is then used to pay any debts to outside creditors, to return capital contributions made by partners, and to distribute to the limited and general partners the value of their respective interests in the partnership. Id.; see also id. § 6.35. The last step in the winding up process is to render an accounting of the partnership affairs.

The Magistrate concluded, and the parties agree, that the 1975 version of the Connecticut Uniform Limited Partnership Act ("ULPA") applies to the Cider Mill Farms Limited Partnership. Additionally, to the extent an issue is not covered by the limited partnership agreement or the ULPA, the Connecticut Uniform Partnership Act ("UPA") applies, to the extent that it is consistent with the ULPA. C.G.S.A. § 34-44(2) (rev. to 1975).

Because the Articles of Limited Partnership ("Articles") were silent on the issue of dissolution, the Magistrate applied C.G.S.A. § 34-31 (rev. to 1975) to determine the order of payments which should have been made after dissolution. The only substantive modification we make to the Recommended Ruling pertains to the interplay between subsections (1) and (2) of section 34-31 (rev. to 1975).

In its entirety, section 34-31 (rev. to 1975) provides:

Priorities on dissolution. (1) In settling accounts after dissolution, the liabilities of the partnership shall be entitled to payment in the following order: (a) Those to creditors, in the order of priority as provided by law, except those to limited partners on account of their contributions, and to general partners, (b) Those to limited partners in respect to their share of the profits and other compensation by way of income on their contributions, (c) Those to limited partners in respect to the capital of their contributions, (d) Those to general partners other than for capital and profits, (e) Those to general partners in respect to profits, (f) Those to general partners in respect to capital. (2) Subject to any statement in the certificate or subsequent agreement, limited partners share in the partnership assets in respect to their claims for capital, and in respect to their claims for profits or for compensation by way of income on their contributions respectively, in proportion to the respective amounts of such claims.

Section 34-31 (rev. to 1975) creates confusion due to the use of the term "liabilities" in subsection (1), and the term "assets" in subsection (2). As one commentator observed, "the scheme of § 23 in the 1916 ULPA [C.G.S.A. § 34-31 (rev. to 1975)] ... was a complicated and practically unworkable arrangement. That old law appeared to give preference to limited partners over general partners, but no one seems to know what was meant by it. No one ever accepted the challenge of explaining how § 23 of the 1916 ULPA should work." Closen, supra, § 6.43. After reviewing relevant caselaw, law review articles, and treatises, we agree that section 34-31 (rev. to 1975) is not a model of clear legislative drafting.

According to the Magistrate, "[s]ubsection (1) concerns the payment of liabilities; subsection (2) concerns the distribution of assets." Recommended Ruling at 51. We concur with the Magistrate's analysis on the order in which payments should be made after dissolution under subsection (1). See id. at 51-52. We disagree, however, on the purpose of subsection (2).

In this case, subsection (2) is relevant only as it provides a default rule on distributing assets and profits after dissolution in the event the parties have not addressed these issues in the limited partnership agreement. The Magistrate concluded that subsection (2) set forth an additional step in the schedule of payments made after dissolution. According to this approach, once liabilities were paid out under subsection (1), assets would then be paid out under subsection (2).

We find instead that subsection (2) provides a default rule on how to calculate a limited partners' share of the assets and profits which are paid out under subsection (1). Indeed, subsection (1) begins with the phrase "in settling accounts after dissolution" which is a phrase not used in subsection (2). We read subsection (2) in two parts. The first part applies to distributions of assets. To the extent that there may be an in-kind distribution of assets, the limited partners will share in those assets "in respect to their claims for capital." The second part provides that limited partners will also receive profits or compensation for income on their contributions "in proportion to the respective amounts of such claims."

As the Magistrate noted, after dissolution a partner's interest is that of a creditor rather than an owner. Recommended Ruling at 49-50; see Porter v. Barnhouse, 354 N.W.2d 227, 233 (Iowa 1984); 2 Zolman Cavitch, Business Organizations with Tax Planning § 30.08[3][f] (1997). Any payments which must be made after dissolution to limited partners, in order to return their capital contributions and to distribute profits, are properly characterized as liabilities of the partnership. These liabilities would be paid out according to the schedule in section 34-31(1) (rev. to 1975). In this case, if the partnership's single asset was liquidated to make payments to creditors and partners pursuant to section 34-31(1) (rev. to 1975), there should have been no assets left for which section 34-31(2) (rev. to 1975) would have had any practical application. Indeed, the Magistrate made a similar observation. Recommended Ruling at 52 ("At this point, there should be no remaining money or assets to be distributed."). To give meaning to section 34-31(2) (rev. to 1975), we conclude that subsection (2) gives instruction on how to make payments under subsection (1). However, for reasons discussed by the Magistrate and also for reasons discussed below we find that the parties did agree on how to share profits, even though they did not provide for the order in which distributions should be made after dissolution. Thus, it is not necessary to apply the provision on sharing profits set forth in section 34-31(2) (rev. to 1975).

II. THE LIMITED PARTNERS' OBJECTIONS

One objection raised by...