Opinion
FROEHLICH, J.— Background
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 contacted Herbert Hops of the Hops Development Corporation (Hops) for assistance in resolving his problem.
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.
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 [1624]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 percent to Hops, 30 percent to Haber and 30 percent 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 [1625]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, much less pay anything by way of profit to the partners.
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.”
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 [1626]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 copartner). 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.) Literally, therefore, except as particularly provided otherwise either by the agreement or the act, the liability of a general partner to a limited partner is identical to his liability to another general partner.
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 copartners. 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 ere[1627]ated, the parties acquire rights and duties based on a fiduciary relationship.”) Civil Code section 2239 (at the time applicable to this case) provided that “[a] trustee is responsible for the wrongful acts of a co-trustee to which he consented, or which, by his negligence, he enabled the latter to commit, but for no others.”1 Thus, cotrustees, and hence also copartners, are not liable for loss caused by misdeeds of their cofiduciaries unless they are personally in some way at fault—either by participating in the tort through consent or otherwise, or by negligence in permitting it to occur. (Gbur v. Cohen (1979) 93 Cal.App.3d 296, 302 [155 Cal.Rptr. 507]; Cagnolatti v. Guinn (1983) 140 Cal.App.3d 42, 49 [189 Cal.Rptr. 151].)
The referee and the trial court found that Haber was ignorant of Hops’s misappropriation. It also inferentially found Haber not to have been negligent in permitting Hops’s misdeed. In view of the special nature of Haber’s participation, as a person providing credit but not expected to participate in the partnership’s business activities, the finding of nonnegligence is logical and surely supported by the evidence. We therefore conclude that the court was correct in denying Kazanjian’s claim against Haber, in terms of rejecting the concept that Haber as general partner should be answerable directly to the limited partner, as he would have been to a creditor.
This conclusion does not, however, provide a complete answer to the limited partner’s claim. The rights and obligations of partners inter se are regulated by Uniform Partnership Act sections 18, subdivision (b), and 40, subdivision (d) (Corp. Code, §§ 15018, subd. (b) and 15040, subd. (d)). A partner who has paid more than his share of partnership obligations is entitled to indemnification from the partnership. If the partnership is unable to provide such indemnification, the partners must contribute the sums necessary to satisfy its liabilities. Most important, as provided by Corporations Code section 15040, subdivision (d), “if any, but not all, of the partners are insolvent, or . . . refuse to contribute, the other partners shall contribute their share of the liabilities, and, in the relative proportions in which they share the profits, the additional amount necessary to pay the liabilities.”
These provisions are analyzed and explained in Bromberg and Ribstein on Partnership, volume II (1988) section 6.02, subdivision (c), pages 6:14 [1628]through 6:18. The obligation to share losses according to the division of profits applies where the losses result in consumption of capital of the business. The partnership loss in this case resulted from the misappropriation of funds by a general partner, and that general partner, Hops, is obligated to return the funds to the partnership. When, however, this entitlement is uncollectible, its effect is the same as any other loss through imprudent or unsuccessful partnership operation. It is a loss which, being uncollectible, has impaired partnership capital. From the calculations of the referee in this case, we can see that capital has been impaired to the extent of some $45,000. Since Hops is insolvent, the contribution to partnership capital to remedy the loss falls upon the remaining two partners: Kazanjian and Haber. Under Corporations Code section 15040, subdivision (d), this loss should be allocated to them in accordance with their partnership profit ratios, which being 30 percent and 30 percent means the loss should fall equally upon them.
It must be acknowledged that this analysis is made without reference to the special status of a limited partner. The mechanics of Corporations Code section 15040, subdivision (d) (Uniform Partnership Act, § 40, subd. (d)) appear to contemplate actual replacement of funds by partners to the partnership account, to be followed by disbursement of the funds. Since a limited partner cannot be required to contribute funds beyond his stated investment (and here we overlook the possibility of assessment contained in this agreement) he cannot be dunned for an additional assessment. This does not, we apprehend, preclude an accounting for distributions on dissolution which takes into account the concepts of contribution.
In this case, for instance, absent the application of contribution the entire loss from partnership misfortune falls upon Kazanjian because of the happenstance that he provided the entire initial capital for the partnership. Had a profit been made in the business, Haber would have shared it to the extent of 30 percent. It is entirely reasonable that he participate in the losses to the same 30 percent (or, excluding Hops because of his insolvency, to the extent of 50 percent of the remaining solvent partners). We emphasize, however, that this assignment of loss to Haber is based entirely upon concepts of partnership contribution, and not upon any special obligation of a general partner to protect a limited partner from loss in terms of joint liability with another malfeasant general partner.
Conclusion
We have analyzed the responsibilities of partners in a limited partnership in terms of contribution to repair impaired capital. While interesting, we believe this conclusion merely reflects clearly stated statutory provisions and [1629]represents no innovative thinking in terms of partnership law. We reverse on this ground, but only to require a more complete and accurate accounting on dissolution of this partnership.
The decision reached herein which we believe is somewhat original, and which has given us the most difficulty in terms of resolution, is the decision limiting liability of general partners for the misdeeds of their cogeneral partners. There is no need to cite precedent for the premise that when a general partner commits torts in connection with the partnership business which cause loss to creditors, all general partners are jointly and severally liable. We have thought, in working through this opinion, that the same obligations might well pertain to limited partners. The limited partner is, in some respects, like a creditor of the partnership. Like the creditor, the limited partner has no control of the partnership business. He is entirely dependent upon the general partners for the care and protection of his investment. One could posit the proposition that the nature of a limited partnership is that of a general partnership (composed of the several general partners) who together are in business for the objective of returning a profit to the limited partner. Such concept would impose on all general partners the obligation of protection of the limited partner and joint and several liability for the misappropriation by any general partner.
We have concluded, however, that the statutory framework created by the uniform partnership acts does not provide such broad scope of liability. Further reflection and research respecting the objectives of limited partnership status seem to justify this conclusion. The Uniform Limited Partnership Act, first adopted in 1916, was based upon two fundamental assumptions. The first assumption was that public policy did not require limited partners to become bound for partnership obligations. The second was: “That persons in business should be able, while remaining themselves liable without limit for the obligations contracted in its conduct, to associate with themselves others who contribute to the capital and acquire rights of ownership, provided that such contributors do not compete with creditors for the assets of the partnership.” (6 West’s U. Laws Ann. (1969) U. Limited Partnership Act, § 1, comrs. note, p. 564, italics added; see also 2 Barrett & Seago, Partners and Partnerships, Law and Taxation (1956) Limited Partnerships, § 1.2, p. 490; 2 Rowley on Partnership (2d ed. 1960) Limited Partnerships, § 53.0, p. 551.)
Thus, it appears that the key differences between the limited and general partners are (1) limitation of liability of the limited partner to his investment, in return for which (2) the limited partner relinquishes all right of business management. The limited partner remains a “partner" in the sense that he participates in profits and losses of the business. It does not [1630]seem violative of this status to deny the limited partner the guarantee of all general partners of the propriety of the acts of each of them. Innocent general partners, inter se, are obviously not responsible for the misdeeds of one of their number—the contribution provisions of Corporations Code section 15040, subdivision (f) provide for payment by a partner only “to the extent of the amount which he has paid in excess of his share of the liability.” Nothing to the contrary appearing in the uniform acts, there would appear no good reason for modifying this rule of nonliability for the claims of loss of a limited partner.
Disposition
The trial court’s accounting for partnership transactions and its determinations of the liability of Hops to the partnership and to the other partners are affirmed. The judgment denying Kazanjian’s claims against Haber is reversed, and the case is remanded for further consideration by the trial court, to determine the amount which should be paid by Haber to Kazanjian in accordance with the contribution provisions of the Uniform Partnership Act (Corp. Code, § 15040, subd. (d)). Kazanjian is entitled to costs on appeal.
Huffman, Acting P. J., concurred.
The case of Reynolds v. Mitchell (Ala. 1988) 529 So.2d 227 relied upon by Kazanjian is inapposite. While that opinion did hold two general partners liable to their limited partners for the misdeeds of a third general partner, those misdeeds were “in the ordinary course of the partnership’s business.” (Id. at p. 230.) It is undisputed that Hops encumbered partnership property for a personal debt, an action clearly outside the ordinary scope of the partnership business. Thus the Reynolds predicate for liability of both general partners is absent.