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GREGG v. SR INVESTORS

June 17, 1997

JERRY E. GREGG, Plaintiff,
v.
SR INVESTORS, LTD., et al., Defendants.



The opinion of the court was delivered by: GETTLEMAN

 Plaintiff Jerry Gregg has filed a five count complaint against: SR Investors, Ltd., d/b/a Sierra Railroad, a/k/a SR Investors, L.P. ("SRI"); twenty-four individuals or entities who are limited partners of SRI, including MFC Properties ("MFC") and Richard Cohn ("Cohn"); Silver Foot, Inc. ("Silver"); James Foster; Sierra Pacific Coast Railway, Inc. ("Sierra Pacific"); and Chicago Medical Equipment Company ("CMEC"). Count I alleges a breach of a consulting agreement against SRI, Silver, and the SRI partners. Count II is a claim for quantum meruit against the same defendants. Count III alleges a violation of the Illinois Uniform Fraudulent Transfer Act against Silver, Foster and Sierra Pacific. Count IV is brought against Sierra Pacific alleging liability based on a "De Facto" merger. Count V seeks to pierce the corporate veil against Foster and CMEC.

 MFC and Cohn have moved to dismiss Counts I and II as to them for failure to state a claim pursuant to Fed. R. Civ. P. 12(b)(6). SRI and Silver have moved to dismiss Count II. Foster has moved to dismiss Count III. For the reasons set forth below, MFC and Cohn's motions are denied, SRI and Silver's motion is granted in part, and Foster's motion is granted.

 FACTS

 Plaintiff is an individual residing in Kansas engaged in business as a railroad consultant. SRI was formed in 1983 as an Illinois limited partnership under the Illinois Uniform Limited Partnership Act to own and operate the Sierra Railroad ("Sierra"). Silver is a Delaware corporation and a general partner of SRI. Foster is president of Silver and CMEC, which is the sole shareholder of Silver.

 Plaintiff alleges that in July through August 1986 he negotiated with Foster as president of Silver on behalf of SRI, and then entered into a consulting agreement (the Consulting Agreement") with SRI pursuant to which plaintiff was to provide certain consulting services to Sierra. According to the complaint, the terms of the Consulting Agreement are expressed in a series of letters between plaintiff and SRI's attorneys and accountants. Pursuant to that agreement, plaintiff alleges that he was appointed Sierra's executive vice president and chief operating officer with full authority to hire and fire and to make all executive decisions concerning Sierra's day-to-day operations. The Consulting Agreement contained a detailed plan pursuant to which plaintiff was to be compensated for his services. According to plaintiff, the Consulting Agreement terminated only upon his death, or upon SRI's exercising a buy-out option. Plaintiff alleges that he performed under the contract from August 6, 1986, until January 1, 1995, at which time SRI transferred all of its interest in Sierra to Silver, which then transferred it to Sierra Pacific, a California corporation. Plaintiff alleges that he was not paid for his services from January 1, 1987, until January 1, 1995.

 DISCUSSION

 I. MFC's and Cohn's Motion to Dismiss

 MFC and Cohn both invested in SRI as limited partners. Plaintiff has alleged that neither the Illinois Uniform Limited Partnership Act ("ULPA") nor the later Revised Uniform Limited Partnership Act ("RULPA") allows Illinois limited partnerships to operate a railroad. Specifically, the RULPA (805 ILCS 210/105) provides:

 
Nature of Business -- a limited partnership may carry on any business that a partnership without limited partners may carry on except . . ., the operation of railroads . . . .

 Plaintiff further alleges that SRI, which was formed under the ULPA (which also did not allow a limited partnership to operate a railroad) failed to file a certificate to be governed by the RULPA as required by Section 1205(d) of that Act. Plaintiff argues that because SRI could not properly be formed as a limited partnership, all the "limited partners," including MFC and Cohn, must be construed to be general partners. As general partners, plaintiff alleges they are liable for all debts of the partnership.

 MFC's and Cohn's responses are twofold. First, they argue that they cannot be deemed general partners simply because SRI operated a railroad. In particular, they argue that the restriction contained in § 105 does not apply to SRI because the railroad SRI operated was located in California, and California's Uniform Limited Partnership Act contains no such restriction. Cal. Corp. Code Section 15616. The court does not agree.

 The Illinois Act unambiguously provides that no Illinois limited partnership may carry on the operation of a railroad. It is not restricted to railroads located in Illinois, and the court will not read such a restriction into the Act. Therefore, SRI, which had a stated purpose to operate the railroad, was not a validly formed Illinois limited partnership. As Judge Aspen has noted, a corollary to the failure to valid formation as a limited partnership is that all partners will be treated as general partners. Continental Waste System, Inc. v. Zoso Partners, 727 F. Supp. 1143 (N.D. Ill. 1989). Although Continental Waste involved technical failures to timely comply with the Act's filing requirements, the result was an invalidly formed limited partnership. The same principle should apply in the instant case.

 Next, MFC and Cohn argue that they cannot be held accountable as general partners because they timely withdrew from the partnership pursuant to ...


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