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CONTINENTAL WASTE SYS. v. ZOSO PTNRS.

September 22, 1989

CONTINENTAL WASTE SYSTEM, INC., THOMAS J. HANCHAR, ANTHONY A. HANCHAR and BRENDA HANCHAR, Plaintiffs,
v.
ZOSO PARTNERS, IJP PARTNERS and IVO ZOSO, Defendants; IVO ZOSO, Counterplaintiff, v. CONTINENTAL WASTE SYSTEM, INC., THOMAS J. HANCHAR, ANTHONY A. HANCHAR and BRENDA HANCHAR, Counterdefendants


Marvin E. Aspen, United States District Judge.


The opinion of the court was delivered by: ASPEN

MARVIN E. ASPEN, UNITED STATES DISTRICT JUDGE

 Plaintiffs Continental Waste Systems, Inc., Thomas J. Hanchar, Anthony A. Hanchar and Brenda Hanchar filed this diversity action against Zoso Partners, IJP Partners and Ivo Zoso. Subsequently, defendant Ivo Zoso filed two counterclaims. Presently before the Court are the defendant's motion for summary judgment on Counts I through VIII of the complaint and the plaintiffs' motion for summary judgment on defendant Ivo Zoso's counterclaims. For the reasons set forth herein, defendants' motions are denied and plaintiffs' granted.

 I.

 Background

 This is an action for breach of contract, failure to pay promissory notes, misappropriation and improper transfer of funds and damage to personal property, for which plaintiffs seek to recover against defendants Zoso Partnership and Ivo Zoso. Plaintiffs claim that the defendants should each be treated as a general partner and be held liable for the debts of I. Jones partnership. Plaintiffs claim this liability exists because of several violations of the Uniform Limited Partnership Act ("ULPA"), and because the defendants engaged in active participations and control of the partnership business. Defendant Ivo Zoso counterclaims, alleging that, if he is personally liable to the plaintiffs, he is entitled to recovery for misrepresentations made with respect to the purchase contract described below.

 Defendant Ivo Zoso ("Ivo") is an individual who has invested in hazardous waste treatment facilities. Prior to investing in Continental Waste (the facility involved in the current dispute), Ivo was the sole investor and limited partner in Chem Partners. Ivo became aware of this investment opportunity after Charles McKiel, a general partner in Chem Partners, had pitched the investment to Ivo's accountant Frederick Cook. Ivo's investment enabled the partnership to acquire a waste treatment plant in Des Plaines, Illinois. The plaintiffs allege that Ivo became actively involved in the management and control of Chem Partners.

 Sometime after Ivo had invested in Chem Partners, McKiel became interested in purchasing an additional waste treatment facility in Fort Wayne, Indiana. This facility was the Continental Waste facility owned by the plaintiffs. McKiel proposed to Ivo and Cook that they form I. Jones Partners ("I. Jones") in order to acquire and manage this second facility. Eventually, Cook and Ivo formed Zoso Partners for the purpose of holding a partnership interest in I. Jones. Cook held a 10% interest and Ivo held a 90% interest in the partnership. Pursuant to the terms of the I. Jones partnership agreement, Zoso Partners contributed $ 900,000 to I. Jones. McKiel was to form a partnership, IJP Partners, to invest an additional $ 100,000 in I. Jones. IJP Partners never contributed this amount. The plaintiffs charge that Ivo actively participated in the management and control of I. Jones, despite the fact that the Zoso Partners were nominally limited partners in I. Jones.

 On August 1, 1985, I. Jones partnership purchased substantially all of the assets of Continental Waste. As part of the purchase agreement, I. Jones agreed to assume and pay certain debts and liabilities of Continental, Thomas Hanchar and Anthony Hanchar. I. Jones also agreed to provide other fees and benefits to the Hanchars. I. Jones executed promissory notes in favor of the Hanchars and the Hanchars' law firm. However, I. Jones failed to pay all of these debts and liabilities assumed under this purchase agreement.

 Both Chem Partners and I. Jones partners began to experience severe financial difficulties. Various environmental hazards were discovered on the Indiana site; these hazards represented enormous cleanup costs. During this time, Ivo invested additional capital in I. Jones. McKiel was eventually removed as general partner of I. Jones and replaced by Cook, who attempted to continue operations at the Indiana facility. Plaintiffs allege that Ivo, through Cook, controlled the business of I. Jones both before and after this change in management.

 During its operation of the Continental Facility, I. Jones made various payments to Chem Partners. I. Jones also paid the interest on a note taken by Ivo. The plaintiffs charge that these payments were improper and violate the ULPA.

 In addition, plaintiffs allege that the defendants failed to comply with the statutory requirements of the ULPA. The I. Jones partnership certificate was not filed until September 12, 1985; this was six weeks after the partnership contracted to purchase Continental Waste. Plaintiffs also allege other filing defects. These defects include a failure to amend the certificate as required by the ULPA, and the failure to file the certificate in the proper county.

 In February 1987, in an earlier law suit, the plaintiffs sued I. Jones, Cook, Ivo and Zoso Partners in the United States District Court for the Northern District of Indiana for breach of the Continental Waste purchase agreement. Ivo and Zoso Partners were dismissed by stipulation. The plaintiffs were awarded a default judgment against Cook and I. Jones. Two counterclaims alleging fraud and misrepresentation were dismissed with prejudice.

 II.

 Standard of Review

 "A motion for summary judgment should be granted only when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law." Checkers, Simon & Rosner v. Lurie Corp., 864 F.2d 1338 (7th Cir. 1988) (citation omitted). The moving party bears the burden of establishing the absence of any disputed facts. Celotex Corp. v. Catrett, 477 U.S. 317, 106 S. Ct. 2548, 2553, 91 L. Ed. 2d 265 (1986). If, however, the non-moving party bears the burden of proving an issue at trial, it also bears the burden of presenting sufficient facts on summary judgment from which a trier of fact could find in its favor, and the moving party need only "[point] out to the District Court . . . that there is an absence of evidence to support the nonmoving party's case." Id. at 2554; Beard v. Whitley County REMC, 840 F.2d 405, 410 (7th Cir. 1988). In deciding a motion for summary judgment, the court must read all facts in the light most favorable to the nonmoving party. Anderson v. Liberty Lobby, Inc. 477 U.S. 242, 106 S. Ct. 2505, 2513, 91 L. Ed. 2d 202 (1986); Richardson v. Penfold, 839 F.2d 392, 394 (7th Cir. 1988).

 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 ...


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