Defendant's Motion for Summary Judgment Counts I through V
In Counts I through V, plaintiffs seek to hold Ivo Zoso liable as a general partner for debts of I. Jones partnership owed to the Hanchars. Ivo was nominally a limited partner of I. Jones. However, the Hanchars contend that there are two grounds on which to assess personal liability against Ivo. First, plaintiffs argue that filing defects precluded the lawful creation of a limited partnership. Second, plaintiffs allege that Ivo participated in the control of I. Jones, thus rendering him personally liable as a general partner. Ivo moves for summary judgment, claiming that these allegations present no genuine issues of material fact.
The Hanchars maintain that several violations of the recording and registration requirements of the Uniform Limited Partnership Act ("ULPA"), Ill.Rev.Stat. ch. 106 1/2, § 44, et seq. (1987), preclude Ivo from claiming limited partner status in I. Jones. First, the I. Jones certificate of limited partnership was not filed until September 12, 1985; this was six weeks after the closing of the purchase agreement. Second, the Hanchars maintain that the certificate was filed in the wrong county. Section 2 of the ULPA provides that the certificate should be filed "in the office of the recorder of the county where the principal office of such limited partnership is located." The Hanchars claim that the certificate should have been filed in Allen County, Indiana, rather than in Cook County, Illinois. Third, I. Jones failed to file an amendment to the certificate when Cook became the new general partner. Finally, I. Jones failed to amend the certificate when Ivo became aware that the $ 100,000 capital contribution for IJP Partners would not be made.
Under Illinois law, these filing defects precluded the formation of a limited partnership. "Limited partnerships are creatures of statute. . . . Unlike a general partnership, a limited partnership cannot be created by informal agreement; its existence depends on compliance with the Uniform Limited Partnership Act. A certificate of incorporation must be signed by all the partners and filed in the county of the partnership's principal place of business." Inland Real Estate Corporation v. Christoph, 107 Ill.App.3d 183, 437 N.E.2d 658, 662, 63 Ill. Dec. 9 (1st Dist. 1982) (citations omitted). See also Allen v. Amber Manor Apartments Partnership, 95 Ill.App.3d 541, 420 N.E.2d 440, 446, 51 Ill. Dec. 26 (1st Dist 1981) ("The certificate is a statutory prerequisite to the creation of a limited partnership and until it is filed, the partnership is not formed as a limited partnership.").
A corollary to the principle that filing defects preclude the formation of a limited partnership is that such filing defects affect the liability of the ostensible limited partners. Until a proper certificate of limited partnership is filed, "the partnership is not formed as a limited partnership and all partners will be treated as general partners." Deporter-Butterworth Tours Inc. v. Tyrrell, 151 Ill.App.3d 949, 503 N.E.2d 378, 384, 104 Ill. Dec. 821 (3d Dist. 1982). "Any contracts entered into prior to . . . the date on which the limited partnership certificate was filed and made of record, would be contracts entered into by a general partnership and all partners involved would be liable as general partners." Id. at 384.
Applied to the present case, these principles would suggest that Ivo may be subject to personal liability beyond his capital contribution to I. Jones. I. Jones did not even attempt to comply with the filing requirements of the ULPA until September 12, 1985. Even assuming, for present purposes, that this filing constituted "substantial compliance in good faith" for purposes of ULPA § 2(2), I. Jones entered into a contract with the Hanchars six weeks prior to this filing. Ivo would be liable as a general partner for this pre-filing contract under Illinois law.
Ivo seeks to avoid the effect of these filing defects and obtain summary judgment in his favor through § 11 of the ULPA. This section provides:
A person who has contributed to the capital of a business conducted by a person or partnership erroneously believing that he has become a limited partner in a limited partnership, is not, by reason of his exercise of the rights of a limited partner, a general partner with the person or in the partnership carrying on the business, or bound by the obligations of such person or partnership; provided that on ascertaining the mistake he promptly renounces his interest in the profits of the business, or other compensation by way of income.
Ill.Rev.Stat. ch. 106 1/2, § 54. Ivo states that the Hanchars first raised the defective filing issues on January 21, 1987, during related litigation in another court. On January 29, 1987, Ivo sent Cook a letter renouncing any interest in the profits of I. Jones. (Joseph Aff't). Ivo contends that this renunciation is sufficient to bring him within ULPA § 11 as a matter of law.
However, Ivo's attempted application of § 11 raises substantial issues of material fact. First, § 11 is available only to those individuals who limit their participation in the partnership to the exercise of rights held by limited partners. See Giles v. Vette, 263 U.S. 553, 44 S. Ct. 157, 161, 68 L. Ed. 441; ULPA § 7. There is a substantial question of fact as to whether Ivo participated in the control of I. Jones, thereby exercising the rights of a general partner.
Second, there is a question of fact as to whether Ivo could have believed in good faith that he was a limited partner until January of 1987. The Hanchars suggest at least two dates, far in advance of the January 29, 1987 renunciation, when Ivo should have had notice of the filing defects. Ivo learned in 1985 that IJP Partners would not contribute the funds stated in the I. Jones partnership certificate. On August 27, 1986, Ivo was sued individually for partnership debts. At a minimum, there is an issue of fact as to whether Ivo was or should have been aware of the filing defects on one or both of these dates. Furthermore, the possibility that Ivo had notice of filing defects far in advance of the renunciation creates a material issue of fact as to whether this renunciation was prompt. See Vidricksen v. Grover, 363 F.2d 372 (9th Cir. 1966) (holding that a six-month delay in renunciation was not "prompt" for purposes of ULPA § 11). Together, these issues of fact render summary judgment inappropriate.
Ivo also contends that he is entitled to summary judgment on the issue of whether he exercised control over I. Jones, rendering him liable under § 7 of the ULPA. This section provides that, "A limited partner shall not become liable as a general partner unless, in addition to the exercise of his rights and powers as a limited partner, he takes part in the control of the business." Ill.Rev.Stat. ch. 106 1/2, § 50. Ivo makes two arguments in favor of his motion for summary judgment. First, Ivo argues that he is entitled to summary judgment because in order to make a limited partner liable under § 7, a creditor must show that in extending credit to the partnership, he relied upon the fact that the limited partner acted as a general partner. Ivo claims that there is no issue of fact as to whether the Hanchars relied on Ivo's status as a general partner. Second, Ivo contends that no reasonable juror could conclude that he participated in the control of I. Jones.
Courts are split as to whether creditor reliance is a requirement under § 7. Illinois, however, has not considered this question. A federal court recently discussed the underlying rationales that have driven courts to reach divergent views on the issue.
Although undoubtedly in conflict with one another, these dichotomous lines of authority can be explained by recognizing that the different courts had different focuses. Those which required reliance as an element of control were concentrating upon the external relationship between the plaintiff and the limited partner, and were concerned with the equities arising from that relationship. The Delaney Court, in contrast, appears to have been concerned with the broader public policy of requiring those who choose to accept the benefits of the limited partnership form to preserve the integrity of the partnership's internal relationships.