The Investor Associates v. Copeland ( 2001 )

PRESENT: Carrico, C.J., Lacy, Hassell, Koontz, Kinser, and
Lemons, JJ., and Compton, S.J.
THE INVESTOR ASSOCIATES,
ET AL. OPINION BY
SENIOR JUSTICE A. CHRISTIAN COMPTON
v. Record No. 001919 June 8, 2001
ROBERT O. COPELAND, ET AL.
FROM THE CIRCUIT COURT OF THE CITY OF VIRGINIA BEACH
A. Bonwill Shockley, Judge
In this chancery suit involving controversy among partners
of a Virginia general partnership, the central issues, driven by
application of the proper statute of limitations, deal with who
is indebted to whom and which of the partners have the right to
wind up the partnership affairs under former Code § 50-37.
The former Uniform Partnership Act, Code §§ 50-1 through -
43.12, which was repealed effective January 1, 2000 (Acts 1996,
ch. 292), applies in this suit. Thus, we shall refer only to
the former statutes.
In August 1994, the following plaintiffs filed this suit:
The Investor Associates (hereinafter Investors); Herbert L.
Kramer, individually and as assignee of all rights, title and
interest of Benjamin J. Levy in Investors; Jeffrey L. Kramer;
Richard G. Kramer; and Edward A. Kramer. Named as defendants in
the bill of complaint were Robert O. Copeland, Herbert J.
Zukerman, and Property Investments Associates, also known as
Property Investments of America, Inc. (hereinafter PIA).
The plaintiffs alleged that by an October 1983 agreement
among the individual plaintiffs and defendants and PIA,
Investors, a Virginia general partnership, was formed. The
plaintiffs asserted that the partnership had been dissolved by
operation of law, citing various Code sections.
In the bill of complaint, the plaintiffs sought the
following relief: An accounting of partnership affairs under
Code § 50-22; dissolution of the partnership by the court under
Code § 50-32, if it had not already been dissolved by operation
of law; contribution from the defendant copartners under Code
§ 50-34; an order granting plaintiffs the right to wind up the
partnership affairs under Code § 50-37; an order under Code
§ 50-38 for application of the partnership's property to
discharge its liabilities and for appropriate distribution of
the surplus, if any; and, an order under Code § 50-40 settling
the accounts among copartners after dissolution.
The plaintiffs further requested, relying on the terms of
the October 1983 agreement, that if it were determined "there is
a cash loss of over the initial capitalization of The Investor
Associates," the loss be assessed against the copartners in the
same proportions as their percentages of ownership in the
partnership, and that a judgment be entered against each of the
copartners as their liability may appear.
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In an answer, Copeland and Zukerman (hereinafter
defendants) joined in the bill of complaint and asked for a
formal accounting. They asserted "it is not clear" that the
partnership had been dissolved by operation of law, but "in any
event" joined plaintiffs' motion to dissolve and to wind up the
partnership affairs.
Further, defendants asserted that plaintiffs have spent
funds in violation of the partnership agreement and, thus,
defendants owed no funds. Additionally, defendants asserted
that they are the proper partners to wind up the partnership
affairs and that the plaintiffs should not be allowed to wind
up. However, defendants joined in the plaintiffs' request for
settlement of the accounts, distribution of the proceeds, and
liquidation of the partnership assets.
Defendants affirmatively asserted "that laches and the
statute of limitations bar any claim against them from any of
their partners." Additionally, defendants alleged that
plaintiffs "do not come into equity with clean hands and as a
consequence are barred from any contribution from their partners
. . . and are further barred from the right to wind up the
partnership or otherwise deal on behalf of the partners or the
partnership."
In a counterclaim, defendants sought judgment against
plaintiffs, alleging that plaintiffs created unnecessary losses
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by violating the terms of the partnership agreement and that
"the Plaintiffs breached their fiduciary duties against the
Defendants."
In a May 1996 order, the chancellor referred the matter to
a commissioner in chancery. In a December 1996 order, the court
amended the style of the suit because plaintiff Herbert L.
Kramer had died while the suit was pending. The other Kramer
plaintiffs as "co-personal representatives of the Estate of
Herbert L. Kramer" were substituted for the deceased, their
father, as parties plaintiff.
The commissioner held hearings during six days from May to
October 1997, during which he heard testimony ore tenus and
received voluminous documentary evidence. Following receipt of
arguments and briefs of counsel, as well as proposed findings of
fact and conclusions of law, the commissioner submitted a report
in September 1999. The commissioner recommended that the court
rule against the plaintiffs and grant the defendants' request
for relief contained in the answer.
The chancellor considered the record, the commissioner's
report, exceptions to the report, and argument and briefing by
counsel. In a May 2000 decree, incorporating a letter opinion
and rulings from the bench that adjudicated the principles of
the cause, the chancellor confirmed the commissioner's report,
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the counterclaim having been nonsuited in March 2000. The
plaintiffs appeal.
The plaintiffs agree on appeal that the factual findings of
the commissioner, approved by the chancellor, are correct.
Therefore, we will summarize those findings that are pertinent
to the issues we shall address.
In the October 1983 agreement, the Kramers, Benjamin J.
Levy, PIA, and the defendants formed Investors, capitalized for
the total sum of $200,000. Levy, as well as Herbert L. Kramer,
was deceased at the time of the commissioner's report. The
deceased individuals comprising Investors, and the surviving
partners, were intelligent and sophisticated businessmen,
knowledgeable about construction, law, finance, and tax matters.
The apparent purpose of the partnership was to place
various real estate investment entities owned by the various
partners under one management, and to share in the overall
profits and losses.
On January 1, 1984, Herbert L. Kramer, Benjamin Levy, and
the Kramer brothers (Jeffrey L., Richard G., and Edward A.)
formed another general partnership known as Kramer/Levy
Associates (KLA), not a party to this suit. The Kramers and
Levy used KLA to loan money to various other partnerships in
which they had interests.
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Numerous loans, advances, and other payments were made by
the plaintiffs through KLA to Investors over the years that this
arrangement continued. None of the loans was evidenced by any
promissory note. Checks written to and by KLA are the only
evidence of the loans.
At the commencement of the commissioner's hearings in May
1997, the parties stipulated that Investors had no assets, and
that Levy and all the Kramers had filed for bankruptcy
protection. The parties further stipulated that Investors was
dissolved by operation of Code § 50-31(5) (the bankruptcy of any
partner).
Code § 50-30 provided that a partnership is not terminated
upon dissolution "but continues until the winding up of
partnership affairs is completed." Code § 50-37 provided that
partners, "not bankrupt, have the right to wind up the
partnership affairs;" but that any partner "upon cause shown,
may obtain winding up by the court."
The commissioner noted that all the surviving plaintiff
partners of Investors were bankrupt. He then found that
"[a]lthough there is substantial evidence of an acrimonious
relationship between parties Plaintiff and Defendant, no
evidence has been introduced to indicate that the Defendants are
not proper persons to wind up any remaining business of the
partnership." Thus, the commissioner recommended that the court
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adjudicate Investors had been dissolved, but not terminated;
and, that the defendants be entrusted to wind up the partnership
affairs.
Crucial to the winding up and settlement of the accounts
will be the determination of who is indebted to whom. On
appeal, as below, the plaintiffs take the position that the KLA
partnership was a mere "conduit" for the plaintiffs to make
loans or other advances to Investors. Under this theory, the
plaintiffs say that Investors is liable to them for the funds
loaned or advanced. The defendants take the position that the
Kramers and Levy loaned money to KLA, which, in turn, loaned the
money to Investors and others. The commissioner stated: "The
issue here boils down to determining the identity of the lender
who made the loans and/or advances to Investors, the real party
in interest. Is the real lender to Investors the Kramer family
and/or Levy; or, is KLA the real lender to Investors?"
The significance of this issue relates to the statute of
limitations. According to defendants, the plaintiffs developed
the "conduit theory" in an attempt to avoid the statute of
limitations of either Code § 8.01-246(4) (three years-unwritten
contract) or Code § 8.01-246(2) (five years-written contract).
The plaintiffs, defendants point out, seek to bring their claim
within the limitations set forth in Code § 8.01-246(3), which
provides: "In actions by a partner against another for
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settlement of the partnership account . . . within five years
from the cessation of the dealings in which they are interested
together." The plaintiffs realize, the defendants say, that in
order to advance their argument that § 8.01-246(3) governs, they
must convert the loans from KLA, which clearly was not a
partner, to loans from a partner. Hence, the Kramers created
their conduit theory.
In order to determine the identity of Investors' lender,
the commissioner reviewed the evidence. He focused upon
bankruptcy schedules filed by the Kramers under penalties of
perjury. The commissioner reported that the schedules "do
reflect adversely on their credibility in this proceeding as do
the Plaintiffs' (including the deceased Mr. Kramer's) income tax
returns, financial statements, the estate tax return for the
deceased Mr. Kramer, the books of Investors, the books of KLA,
and their attempts to explain them away."
The commissioner said: "In short, all of the records of
Investors and KLA, including KLA's tax returns, show that the
money went from the Kramers to KLA . . . to Investors. In all
of these documents, the Kramers treated the money as a loan from
them to KLA and not as a loan to Investors. Further, the
Kramers treated the money as a loan from KLA to Investors, as
did KLA."
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The commissioner further found that the Kramers, KLA, and
Investors "are or were (at all pertinent times) distinct legal
entities." He said that assertions on financial statements,
estate tax returns, income tax returns, books of account, and
other business records "all mean something." The commissioner
observed: "We cannot simply disregard the Plaintiffs' course of
conduct over the many years that Investors and KLA operated, nor
can we disregard same based on the Plaintiffs' testimony that
the use of KLA was a convenience."
In concluding that the debt of Investors was in favor of
KLA, not the plaintiffs, the commissioner stated that "the over-
riding factor appears to me to be the way in which the
Plaintiffs have changed their perception of what has occurred in
the past, a past fully documented by the Plaintiffs' records and
other records not technically theirs but records of business
entities under their control."
Among other issues reported upon, the commissioner made no
finding or recommendation relative to the statute of limitations
question, but observed that the three-year limitation found in
Code § 8.01-246(4) controls both the KLA and Copeland loans to
Investors.
In her February 2000 letter opinion confirming the
commissioner's report, the chancellor ruled that the partnership
was dissolved upon the Kramers filing bankruptcy, that
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defendants are entitled to wind up the partnership affairs, and
that the Investors' debt is owed to KLA, not the Kramers. While
the commissioner found that the clean hands doctrine had been
violated by the plaintiffs, the chancellor saw no "need to
reach" that question, or others raised by the parties.
During a March 2000 hearing, the trial court considered the
statute of limitations issue. Following argument of counsel,
the court ruled from the bench that the three-year limitation
period governing oral contracts controlled, and that the
partners responsible for winding up the affairs of the
partnership are entitled to invoke that defense on behalf of
Investors.
All the foregoing rulings were incorporated in the May 2000
order appealed from, including the decision that, in winding up
the affairs of Investors, the defendants "do not have to pay the
debts due Kramer/Levy Associates or Robert Copeland, because the
debts are barred by the three year statute of limitations."
On appeal, the plaintiffs first contend the trial court
erred when it ruled that Investors' debt is owed to KLA, and not
to the Kramers individually. There is no error in this ruling.
"When a report of a commissioner in chancery who heard
evidence ore tenus has been fully approved by the trial court,
the decree of the court confirming the report is presumed to be
correct and will not be reversed on appeal unless plainly
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wrong." Ward v. Harper, 234 Va. 68, 70, 360 S.E.2d 179, 181
(1987). Upon review of such a decree, the appellate court's
duty is to determine whether the conclusions of the
commissioner, approved by the chancellor, are supported by
credible evidence. Id.A further discussion of the evidence is unnecessary to
demonstrate the obvious, that is, the factual findings upon the
foregoing issue are fully supported by the evidence. Agreeing
that the commissioner "made the factual finding, consistent with
the undisputed evidence, that all loans and advances to
[Investors] were made by the Kramers funneling money through
[KLA]," the plaintiffs nevertheless persist to advance the
theory that KLA performed mere "conduit" functions. Without
citing any law directly supporting their idea, the plaintiffs
argue that KLA "was the Kramers' agent, created for the purpose
of administering the Kramers' contractually required loans made
to or for the benefit of [Investors] and any other investments
in which the Kramers and Levy were jointly interested." This
argument is no more than an attack upon the factual findings
below, which are supported by credible evidence.
Second, plaintiffs contend the trial court erred in ruling
that defendants should wind up Investors' affairs. They argue
that they have shown "cause" under Code § 50-37 to be entitled
to wind up because defendants will plead the statute of
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limitations eliminating their individual liability for their
debt to Investors, and the plaintiffs will not. There is no
merit in this contention.
As we have said, Code § 50-37 provided that partners who
are not bankrupt have the right to wind up the partnership
affairs, but the court may allow any partner, "upon cause
shown," to wind up. The phrase, "upon cause shown," does not
mean just any cause. The statute vests the court with the
discretion to select which partners will wind up, giving
preference to partners who are not bankrupt.
Here, the defendants are the only nonbankrupt partners.
The fact that they will perform their fiduciary duty to plead
available defenses eliminating liability to Investors, including
their own, does not disqualify them from serving, nor does it
justify a finding that the trial court abused its discretion.
Finally, plaintiffs contend the trial court erred in ruling
that defendants are entitled to raise on behalf of Investors "a
defense that a three year oral contract statute of limitation
bars [KLA's] claim against [Investors] on the debt." In the
same vein, plaintiffs contend the trial court erred by ruling
that defendants, in winding up, do not have to pay their share
of Investors' debt because the debt is barred by the three-year
statute of limitations. We disagree with these contentions.
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As we already have indicated, partners owe each other a
fiduciary duty in winding up the partnership affairs. Code
§ 50-21(1) expressly provided that one partner is accountable to
the others as a fiduciary for "any transaction connected with
the . . . liquidation of the partnership." Thus, the trial
court correctly ruled defendants may raise the statute of
limitations defense on behalf of Investors.
Moreover, the trial court correctly decided that the three-
year statute of limitations for oral contracts set forth in Code
§ 8.01-246(4) governs, and bars KLA's claims. At issue is the
recovery of debts to be included in the accounting and the
statute of limitations against a creditor, of which KLA is one.
The sums paid by KLA were demand loans made by checks premised
on an oral contract, the right of action accruing and the
statute of limitations commencing to run on the date of the
checks without any formal demand. See Guth v. Hamlet Assoc.,
230 Va. 64, 72, 334 S.E.2d 558, 563-64 (1985) (demand note
matures and is payable at once, and interest and statute of
limitations commence to run on that date); former Code § 8.3-
104(2)(b). Accord Bell v. Alexander, 62 Va. (21 Gratt.) 1, 6
(1871) (check is obligation payable on demand).
In summary, we hold that the trial court committed no error
in deciding the foregoing issues. And, we have considered the
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remaining arguments made by plaintiffs, and have determined they
are without merit.
Consequently, we will affirm the order appealed from and
will remand the cause to the trial court for such further
proceedings as may be necessary to wind up the partnership
affairs.
Affirmed and remanded.
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