Gateway Potato Sales v. G.B. Investment Co.

Brief Fact Summary.

Gateway Potato Sales (Plaintiff), a creditor of Sunworth Packing Limited Partnership (Sunworth) (Defendant), brought suit against limited partner G.B. Investment Co. (Defendant) in an effort to recover funds for goods it had provided to Sunworth (Defendant).

Synopsis of Rule of Law.

When a limited partner has participated in the control of the limited partnership, under certain circumstances, a limited partner may become liable for the obligations of the business.

Facts.

Gateway Potato Sales (Gateway) (Plaintiff), a creditor of Sunworth Packing Limited Partnership (Sunworth) (Defendant), brought suit to recover funds for goods it had provided to Sunworth (Defendant). Arizona Revised Statutes Annotated § 29-319 imposes liability on limited partners who control the business; therefore, Plaintiff also sought recovery from Sunworth (Defendant) as a general partner and from G.B. Investment Co. (Defendant), a limited partner.  At trial, G.B. Investment’s (Defendant) vice-president, Anderson, testified in his affidavit that G.B. Investment (Defendant) had exercised no control over the daily operation and management of the limited partnership, Sunworth (Defendant).  This testimony, however, was contradicted by the affidavit testimony of the president of Sunworth (Defendant), Ellsworth.  According to him, G.B. Investment’s (Defendant) employees Anderson and McHolm controlled the day-to-day management of the limited partnership (Defendant) and they made Ellsworth account to them for almost everything he did.  G.B. Investment (Defendant) moved for summary judgment, insisting that there was no evidence that the circumstances described in A.R.S. § 29-319 had occurred in this case.  It argued that, as a limited partner, it was not liable to the creditors of Sunworth (Defendant) except to the extent of its investment.  The trial court agreed and granted G.B. Investment’s (Defendant) motion for summary judgment.  Gateway (Plaintiff) appealed from the judgment and the denial of its motion for reconsideration, arguing that conflicting evidence of material facts existed.

Issue.

When a limited partner has participated in the control of the limited partnership, under certain circumstances, may a limited partner may become liable for the obligations of the business?

Held.

(Taylor, J.)  Yes.  When a limited partner has participated in the control of the limited partnership, under certain circumstances, a limited partner may become liable for the obligations of the business.  The legislature enacted A.R.S. § 29-319(a), which stopped just short of expressly stating that if the limited partner’s participation in the control of the business is largely the same as the powers a general partner exercises, he is liable only to persons who transact business with the limited partnership with actual knowledge of his participation in control.  It has made this statement by implication, though, by stating to the opposite effect that if the limited partner’s participation in the control of the business is not largely the same as the powers a general partner exercises, he is liable only to persons who transact business with the limited partnership with actual knowledge of his participation in control.  Additionally, without actual knowledge of the limited partner’s participation in the control of the partnership business, there must be evidence from which a trier-of-fact might find not only control, but control that is largely the same as the powers a general partner exercises.  The evidence presented by Gateway (Plaintiff) in this case should have allowed it to withstand summary judgment.  The affidavit testimony of Ellsworth raises the issue of whether he was just a puppet for the limited partner, G.B. Investment (Defendant).  Ellsworth’s detailed statement raises substantial issues of material facts.  It cannot be said, as a matter of law, that G.B. Investment (Defendant) was entitled to summary judgment.  Reversed and remanded.

Discussion.

The decision in Gateway represents the general rule under the amended version of the Uniform Limited Partnership Act regarding the liability of limited partners who participate in the control of the business.  Under this rule, limited partners may be found liable only to individuals involved in business with the limited partnership reasonably believing, based on the conduct of the limited partner, that the limited partner is in actuality a general partner.  This provision is widely considered to be the Act’s most significant method of liability defense.