Frigidaire Sales Corp. v. Union Properties, Inc.

Supreme Court of Washington · Corporations

CorporationsLimited partnershipsLimited partner liabilityCorporate general partnerlimited partnergeneral liabilitycontrol of the businesscorporate general partner

Facts

Frigidaire entered into a contract with Commercial Investors, a limited partnership. Leonard Mannon and Raleigh Baxter were limited partners of Commercial and were also officers, directors, and shareholders of Union Properties, Inc., the only general partner of Commercial. Through their control of Union Properties, they exercised the day-to-day control and management of Commercial. After Commercial breached the contract, Frigidaire sued Union Properties and the individual respondents, claiming they were personally liable as general partners.

Issue

Whether limited partners become liable as general partners under RCW 25.08.070 merely because, as officers, directors, and shareholders of the corporate general partner, they exercise day-to-day control over the limited partnership's business.

Rule

Where a limited partnership is lawfully formed with a corporation as its sole general partner, limited partners do not incur general liability under RCW 25.08.070 solely because they control and manage the partnership through their roles as officers, directors, or shareholders of that corporate general partner. If the corporation is treated as a separate legal entity, the individuals act only in corporate capacities, the creditor knows it is dealing with the corporation, and there is no basis to disregard the corporate form, control is attributed to the corporation rather than to the limited partners personally.

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In Seattle, Cascade Harbor Ventures, LP was formed with North Sound Management, Inc. as its sole general partner. Two limited partners, Elena Park and Victor Sloan, owned all the stock of North Sound, served as its officers, and made all daily operating decisions for the partnership, but signed contracts only in their corporate titles; the supplier knew North Sound was the sole general partner.

If the partnership defaults on a supply contract, are Elena and Victor most likely personally liable as general partners merely because they managed the business day to day?

Explanation. The majority held that where a limited partnership lawfully uses a corporation as the sole general partner, limited partners do not incur general liability merely because they control the business through their roles as officers, directors, or shareholders of that corporation. Because Elena and Victor acted only as agents of the corporate general partner, and the creditor knew the corporation was the sole general partner, the law treats the corporation—not the individuals—as controlling the business. (Derived from Frigidaire Sales Corp. v. Union Properties, Inc. (n.d.).)