Opinion
A100627.
11-25-2003
JIM L. WOODSON, Plaintiff and Appellant, v. LEGACY PARTNERS 2323 L.P., et al., Defendants and Respondents.
Plaintiff Jim L. Woodson appeals from a judgment dismissing his lawsuit against respondents Legacy Partners 387 L.P. (LP 387) and Legacy Partners 2323 L.P. (LP 2323), two limited partnerships, and some of the general and limited partners of those partnerships, respondents Preston Butcher, Stuart L. Leeder, Denny McLarry, Jeffrey Byrd, Gary Rossi, Guy K. Hays, and W. Dean Henry. We agree with Woodson that the trial court erred by ruling that his claims were barred as a matter of law because respondents were protected from liability based upon the business judgment rule. Additionally, we reject respondents contention that dismissal of the action was warranted because Woodson lacked standing to pursue his claims. The judgment is reversed and the matter is remanded for further proceedings.
The judgment under review does not resolve Woodsons claims against additional general partners of LP 387 and LP 2323 (defendants Mack Pogue, Inc., Mack Pogue, Pogue Childrens 1988 Lincoln Trust and its trustee B. Jack Pogue), or the cross-complaint for equitable indemnity by defendants Mack Pogue and B. Jack Pogue against respondents Butcher, Leeder, Byrd, Rossi, Hays, and Henry. However, Woodson may properly appeal from the judgment that is final as to his claims against respondents. (Desaigoudar v. Meyercord (2003) 108 Cal.App.4th 173, 182, fn. 2; Wells Fargo Bank v. California Ins. Guarantee Assn. (1995) 38 Cal.App.4th 936, 941-942, fn. 5; Eisenberg, Cal. Practice Guide: Civil Appeals and Writs (The Rutter Group 2002) ¶ 2:91, pp. 2-49 -2-50.)
FACTUAL AND PROCEDURAL BACKGROUND
In the 1980s, Legacy Partners 387 (LP 387), a limited partnership, and Taylor Woodrow of San Francisco, Inc. (Taysan), were general partners in Taysan-Lincoln Associates (T-L Partnership), with each general partner holding a 50% interest. The T-L Partnership was formed to acquire and develop real property in San Francisco (the Project). T-L Partnership later became a general partner of St. Francis Place Limited Partnership (St. Francis Place LP), which entity currently owns the Project, consisting of residential units, commercial units, and parking facilities.
The T-L partnership changed its name to Legacy Partners St. Francis Place G.P., and later converted into a limited liability company named Legacy Partners St. Francis Place LLC. For convenience, we refer to the partnership by its original name.
In 1998, to prevent foreclosure, the managing general partners of LP 387 refinanced the underlying debt of the Project. As part of the refinancing, the managing general partners of LP 387 bought out Taysans interest in the T-L Partnership, and formed a new limited partnership, Legacy Partners 2323 (LP 2323). According to respondents, the refinancing was structured to be "neutral" to the general and limited partners in LP 387, some of whom were not partners in LP 2323. In other words, the equity positions and entitlements of the general and limited partners of LP 387 would remain unchanged after the refinancing, and the refinancing would not diminish the value of LP 387 or its proportionate interest in the Project.
In his third amended complaint, the operative pleading, Woodson, a limited partner of LP 387, alleges individual and derivative claims based upon causes of action for breach of fiduciary duty, breach of implied covenant, fraud, conversion, interference with contract, and conspiracy. The gravamen of his complaint is that as a consequence of the refinancing, the managing general partners of LP 387 were able to gain substantial benefits from the refinancing. He also alleges that the refinancing had a negative impact upon the distributions to Woodson and other partners of LP 387 who were excluded as partners in LP 2323.
Respondents moved for summary judgment on the ground that the refinancing was a legitimate exercise of the business judgment of the managing general partners of LP 387, authorized by the governing partnership agreement for LP 387. Additionally, respondents contended Woodson had no standing to pursue either individual claims or derivative claims on behalf of LP 387.
In opposing the motion, Woodson argued that the business judgment rule did not protect a partner against a claim of breach of fiduciary duty by his co-partner and by misappropriating the assets of LP 387, the individual respondents not only diminished the value of his investment but also increased their share in the ownership of the Project to his detriment. Additionally, Woodson claimed he had standing to pursue his claims.
The superior court granted respondents motion for summary judgment and entered a judgment of dismissal in their favor, ruling that "all Woodsons causes of action are barred because all the actions of which Woodson complains were legitimate exercises of the business judgment of the managing partners of Legal Partners 387 L.P., and not business opportunities in which Woodson was entitled to participate. " This appeal ensued.
DISCUSSION
Because respondents " `obtained summary judgment in their favor, "we review the record de novo to determine whether they have conclusively negated a necessary element of [Woodsons] case or demonstrated that under no hypothesis is there a material issue of fact that requires the process of trial." ([Ann M. v. Pacific Plaza Shopping Center (1993) 6 Cal.4th 666,] 673-674.) [Citation.]" (Saelzler v. Advanced Group 400 (2001) 25 Cal.4th 763, 767.) "[W]e must determine whether [respondents] in the present case [have] shown, through the evidence adduced in this case, . . . that [Woodson] . . . has not established, and cannot reasonably expect to establish, a prima facie case of causation, a showing that would forecast the inevitability of a nonsuit in [respondents] favor." (Id. at p. 768.) "In performing our de novo review, we must view the evidence in a light favorable to [Woodson] as the losing party . . ., liberally construing h[is] evidentiary submission while strictly scrutinizing [respondents] own showing, and resolving any evidentiary doubts or ambiguities in [Woodsons] favor. [Citations.]" (Id. at pp. 768-769; see Aguilar v. Atlantic Richfield Co. (2001) 25 Cal.4th 826, 854.)
Although the parties have spent much effort in their briefs discussing whether the business judgment rule applies to general partners of a limited partnership, we need not resolve that issue. Assuming for the sake of argument the business judgment rule applies to the parties dispute, we conclude the evidence presents factual issues that preclude the granting of summary judgment. " `[T]he common law business judgment rule has two components — one which immunizes [corporate] directors from personal liability if they act in accordance with its requirements, and another which insulates from court intervention those management decisions which are made by directors in good faith in what the directors believe is the organizations best interest. [Citations.] A hallmark of the business judgment rule is that, when the rules requirements are met, a court will not substitute its judgment for that of the corporations board of directors. [Citation.]." (Lamden v. La Jolla Shores Clubdominium Homeowners Assn . (1999) 21 Cal.4th 249, 257.) However, the common law business judgment rule, "strictly speaking," does not protect "noncorporate entities . . . ." (Id. at p 259.) "Traditionally, our courts have applied the common law `business judgment rule to shield from scrutiny qualifying decisions made by a corporations board of directors. [Citations.] The policies underlying judicial creation of the common law rule derive from the realities of business in the corporate context." (Ibid.) Thus, "the `business judgment rule of deference to corporate decisionmaking . . . has no direct application to the instant controversy." (Id . at p. 260.)
However, by analogy to the corporate business judgment rule, the courts have adopted a rule of deference with regard to decisions made by general managing partners of limited partnerships. Under the Uniform Limited Partnership Act (ULPA), "[a] limited partnership affords a vehicle for capital investment whereby the limited partner restricts his [or her] liability to the amount of his [or her] investment in return for surrender of any right to manage and control the partnership business. (Corp. Code, § 15507.) In a limited partnership the general partner manages and controls the partnership business. (Corp. Code, § 15509, subd. (1).) In exercising his [or her] management functions the general partner comes under a fiduciary duty of good faith and fair dealing toward other members of the partnership. (Corp. Code, § 15021; Laux v. Freed (1960) 53 Cal.2d 512, 522 [ ]; Dennis v. Gordon (1912) 163 Cal. 427, 433.)" (Wyler v. Feuer (1978) 85 Cal.App.3d 392, 402.) Because "[t]hese characteristics - limited investor liability, delegation of authority to management, and fiduciary duty owed by management to investors - are similar to those existing in corporate investment, where it has long been the rule that directors are not liable to stockholders for mistakes made in the exercise of honest business judgment [citations], or for losses incurred in the good faith performance of their duties when they have used such care as an ordinarily prudent person would use . . . , a general partner may not be held liable for mistakes made or losses incurred in the good faith exercise of reasonable business judgment." (Ibid; see Lee v. Interinsurance Exchange (1996) 50 Cal.App.4th 694, 711-712.) Nevertheless "the presumption created by the business judgment rule can be rebutted . . . by affirmative allegations of fact which, if proven, would establish fraud, bad faith, overreaching or an unreasonable failure to investigate material facts. [Citation.]" (Lee v. Interinsurance Exchange, supra, 50 Cal.App.4th at p. 715.)
We recognize that the Revised Limited Partnership Act (RLPA) replaced the ULPA in 1984. (Stats. 1983, ch 1223, § 10, operative July 1, 1984.) However, because LP 387 was formed before 1984, and the parties agree that its partners have not elected to be governed by the RLPA, the partnership is governed by the ULPA, codified in Corporation Code sections 15501-15533. (Corp. Code, §§ 15533, 15710-15712.)
Here, in seeking summary judgment, respondents argued that the managing general partners of LP 387 acted in good faith because they "saved" the partnerships sole asset (the Project) from foreclosure by refinancing its debt, leaving LP 387 and its partners in the same position as before the refinancing. However, respondents did not present any financial data in the record in support of their argument. Rather, they argue that "Woodson presented no evidence to the [superior] court that the refinancing had any `upside at all, and quantified no `rewards of the refinancing . . . ." We disagree.
In opposing the summary judgment motion, Woodson did present evidence to the superior court "quantifying the adverse effect" to himself and other partners of LP 387 who had been excluded from LP 2323, and from which a trier of fact could reasonably infer that the refinancing had an "upside" to those partners of LP 387 that were also partners in LP 2323. Woodsons evidence, including financial evaluations of the Projects finances and the deposition testimony of some of the respondents, showed that the partners in LP 2323 received a priority on distribution of net cash flow and sales proceeds from the Project ahead of the partners in LP 387, so that a partner of LP 387 who is also a partner of LP 2323 would receive shares of distributions to both of those partnerships, unlike a partner such as Woodson who participated only in LP 387. Additionally, the managing general partners of LP 387 pledged the partnerships entire interest in T-L Partnership to secure a note for $5.75 million payable to LP 2323 by St. Francis Place LP, which pledge put LP 387 at risk to lose its only asset (the Project) in the event LP 2323 sought to foreclose on its note. Contrary to respondents contentions, the evidence is sufficient to raise triable issues as to whether the general partners of LP 387 were guided by private self-interest rather than by their business judgment for the benefit of LP 387.
Concededly, as argued by respondents, the general managing partners of LP 387 may have chosen to allow the Projects debt to go into foreclosure rather than refinancing. However, having determined that it was in the best interest of LP 387 to refinance the Projects debt, the managing general partners of LP 387 had an obligation to their partners to assure that such refinancing did not adversely impact the interests of the other partners of LP 387 or the partnership itself. Whether the managing general partners of LP 387 met their fiduciary obligations will depend upon the factual determinations to be made after trial.
There is no merit to respondents further contention that the superior court properly dismissed the action because the provisions of the partnership agreement for LP 387 permitted the managing general partners to refinance the Projects debt. Regardless of the broad powers granted to the managing general partners of LP 387 under the partnership agreement, they have a fiduciary responsibility to their partners, including Woodson, to manage the partnership in a fair, just and equitable manner. " ` "`Partners are trustees for each other, and in all proceedings connected with the conduct of the partnership every partner is bound to act in the highest good faith to his copartner and may not obtain any advantage over him in the partnership affairs by the slightest misrepresentation, concealment, threat or adverse pressure of any kind. [Citations.]" (Leff v. Gunter (1983) 33 Cal.3d 508, 514 [ ].) Moreover, this duty extends to all aspects of the relationship and all transactions between the partners. ` "Each [partner] occupie[s] the position of a trustee to the other with regard to all the partnership transactions, including the transactions contemplated by the firm and constituting the object or purpose for which the partnership was formed." (Ibid ., italics omitted.)" (BT-I v. Equitable Life Assurance Society (1999) 75 Cal.App.4th 1406, 1410-1411.) Thus, "[a] limited partnership agreement cannot relieve the general partner of [his or her] fiduciary duties in matters fundamentally related to the partnership business." (Id . at p. 1412) " `Language in the agreement such as `sole discretion does not metamorphose the document into an unrestricted license to engage in self-dealing at the expense of those to whom the managing partner owes such a duty. " (Id. at p. 1413.) As argued by Woodson, "[e]ven if the [managing general partners of LP 387] had the right to make reasonable business decisions regarding refinancing the Project[`s debt], it does not follow that they [had] the right to exclude their partner(s) from whatever benefits the refinancing might bring, while placing [the excluded partners] entire interest in LP 387 at risk." Respondents reliance on AB Group v. Wertin (1997) 59 Cal.App.4th 1022 (Wertin) is misplaced because in that case, the partners of AB Group by their agreements had each acquired the right to buy the partnerships debt at full face value and to make whatever deals they could with regard to their other loans with the bank that held the partnerships debt. (Id. at p. 1035, italics added.) Unlike the circumstances in Wertin, the challenged aspects of the refinancing at issue here directly involved the debt of the Project, which was LP 387s sole asset. To accept respondents "argument would strip away [their] fiduciary obligation in what was the partnership business." (BT-I v. Equitable Life Assurance Society, supra, 75 Cal.App.4th at p. 1412.)
The LP 387 partnership agreement gave any one of the managing general partners the powers "to make all decisions with respect to the business and affairs of the Partnership and to take such action for and on behalf of the Partnership as he may deem necessary or appropriate to enable the Partnership to carry out its purpose," including: "(a) to borrow money for and on behalf of the Partnership upon such terms and conditions as he, in his sole discretion, deems necessary or appropriate; [and][¶] (b) (in order to secure any loans to the Partnership . . . or for Partnership purposes) to convey, mortgage, pledge, hypothecate, for and on behalf of the Partnership and upon such terms and conditions as he, in his sole discretion, deems necessary or appropriate, all or any part of the Partnerships assets . . . ." Additionally, "[e]ach partner, in his individual capacity or otherwise, [was]. . . free to engage in, to conduct or to participate in any business or activity whatsoever, including, without limitation, the acquisition, development, management and exploitation of real property, without any accountability, liability or obligation whatsoever to the Partnership or to any other Partner, even if such business or activity competes with or is enhanced by the business of the partnership. Further, the General Partners, in the exercise of their power and authority under this Agreement, may contract and otherwise deal with or otherwise obligate the Partnership to entities in which any one or more of the Partners may have an ownership or other financial interest." Under the agreement, the general partners had no liability to either the Partnership or any other partner "for any error of judgment or for any mistakes of fact or law or for anything which they may do or refrain from doing hereafter in connection with the business and affairs of the Partnership except in the case of willful misconduct or gross negligence."
Finally, we reject respondents contention that Woodson lacks standing to pursue his claims. A limited partner has the right to pursue both individual and derivative causes of action on behalf of the limited partnership on both equitable and statutory grounds. (Wallner v. Parry Professional Bldg. Ltd. (1994) 22 Cal.App.4th 1446, 1450 fn. 4, 1451, 1453 fn. 8, 1454 (Wallner); Linder v. Vogue Investments, Inc. (1966) 239 Cal.App.2d 338, 341 ["If it were the law that a limited partner who may have a substantial investment in the partnership, must sit idly by and watch it disappear because the general partner refuses to defend an unmeritorious or collusive action against the partnership, something would have to be done about it"]; see, Corp. Code, §§ 15526 [a limited partner is a proper party to a proceeding "where the object is to enforce a limited partners right against . . . the partnership"], 15529 ["In any case not provided for in this act the rules of law and equity . . . shall govern"].) We are not persuaded by respondents argument that dismissal of the derivative claims is warranted because Woodson did not make a demand on the general partners to act on his claims in favor of the partnership. Nothing in Wallner or the ULPA requires dismissal of a limited partners derivative-type action on the basis that the limited partner failed to either make a prelitigation demand on the general partners or demonstrate the futility of making such a demand. Respondents citation to cases and statutes involving entities other than limited partnerships governed by the ULPA do not warrant a different result. In any event, even if we assume for the sake of argument a demand was necessary, the evidence that all the managing general partners of LP 387 either participated or acquiesced in all the transactions regarding the refinancing of the Projects debt raises a triable issue as to whether a demand would have been futile under the circumstances. (See, e.g., Shields v. Singleton (1993) 15 Cal.App.4th 1611, 1621 ["no demand is necessary when conspiracy [or] fraud . . . of the defendants is charged"]; Gottesfeld v. Richmaid Ice Cream Co. (1953) 115 Cal.App.2d 854, 860 [no demand is necessary where complaint alleges the challenged conduct was the result of a conspiracy among a majority of the corporations directors with others].)
We therefore conclude that the trial court erred in resolving Woodsons claims as a matter of law. Our determination should not be read as expressing an opinion about the ultimate merits of the matter.
DISPOSITION
The judgment is reversed and the matter is remanded for further proceedings. Plaintiff is awarded costs on this appeal.
We concur: McGuiness, P. J., Pollak, J.