Court of Appeal, State of California, First Appellate District, Fourth Division
(Sonoma County Super. Ct. No. SCV160147)
Appellants Carroll Anglin, et al., the limited partners in two California limited partnerships, Commerce Investments (Commerce I) and Commerce Investments II
(Commerce II), appeal from the judgment and supplemental judgment in favor of respondent Lori Barber, former general partner of Commerce II, in this action for dissolution and accounting of the partnerships, and for
damages against respondent and others. We affirm.
I. BACKGROUND
Commerce I and Commerce II were organized in 1978 and 1979. Respondent's mother, Wanda McCulloh, was general partner of Commerce I,
and Howard Boggs was the original general partner of Commerce II. In May of 1979, Commerce I and Commerce II entered into a joint venture to develop two adjacent parcels of land they separately owned in Rohnert Park.
The joint venture agreement indicated that Commerce I and Commerce II were capitalized respectively at $360,000 and $200,000, and would share 64.29% and 35.71% of the development costs, expenses, profits and losses. The
agreement stated that McCulloh was the manager of both properties and would maintain all of the books and records.
In September of 1981, respondent and Charles Moore executed an amendment to the certificate
of limited partnership for Commerce II substituting them as cogeneral partners in place of Boggs. At the time, respondent was a 21-year-old college student with no experience in real estate. Respondent testified that
she signed the document at her mother's request, without an understanding of what it meant. A majority of Commerce II's limited partners ratified the substitution of respondent and Moore as general partners.
McCulloh continued to manage Commerce II, and respondent did not participate in the partnership's affairs. Respondent said that she did some work in her mother's office during her tenure as general partner of Commerce
II, but that she did no work for Commerce II other than depositing money into a bank account, and never received any compensation from the partnership. In March of 1982, McCulloh as general partner of Commerce I and
respondent as general partner of Commerce II signed an amendment to the partnerships' joint venture agreement which adjusted the allocation of assets, liabilities, gains and losses between the partners.1
Respondent said she did not understand this document, and did not even know at the time that there were two partnerships.
McCulloh, respondent and Moore executed a document dated December 31, 1983,
which stated that the parcel owned by Commerce II was transferred to Commerce I, and that Commerce II was dissolved. This document provided that the limited partners of Commerce II would continue to receive the same
percentage interests in the combined partnership which were specified in the amended joint venture agreement, and that respondent and Moore would "participate on the same percentage basis as in the joint venture
agreement." The limited partnership agreements allocated a percentage of profits to the general partners if the limited partners received a certain return on their investments, and McCulloh testified that the
December 1983 provision for respondent's continued "participat[ion]" referred to this "residual" general partner's interest. Respondent testified that she did not understand the December 1983
document, that McCulloh never told her about the residual interest, and that she never expected to receive any partnership profits. Unlike McCulloh and Moore, respondent never invested in either of the partnerships, and
never held any investment units in the merged partnership.
The limited partners of Commerce II were advised in 1984 of the partnerships' "merger" and did not object to it. However, they were not
asked to vote on the merger as required by the limited partnership agreement, and were not fully advised of the terms of the merger or the residual interest of Commerce II's general partners in the merged entity.2
The trial court found that Commerce II was dissolved and merged into Commerce I as of December 31, 1983, that Commerce II's limited partners became limited partners in Commerce I as a result of the merger,
and that McCulloh was the sole general partner of Commerce I after the merger.
In 1985 and 1986, McCulloh arranged sales of condominium units by Commerce I to herself, Moore and other partners in which the
buyer's equity in the partnership was used as a credit against the purchase price. Use of these "equity credits" in lieu of cash downpayments on the units resulted in taxable gains to the partners without any
income to the partnership. McCulloh took a total of $207,104 in equity credits and never executed promissory notes to the partnership for the credits. McCulloh received commissions on sales of the units she bought with
equity credits, profited from resales of the units, and failed to fully disclose these dealings to the limited partners.
Respondent received title to one of the condominiums McCulloh bought with an equity
credit. Respondent and McCulloh testified that this equity credit was a gift from McCulloh to respondent. The $17,135 equity credit respondent received was shown on the partnership's financial statements, along with
McCulloh's other equity credits, as a $207,104 receivable owed by McCulloh. Appellants recovered the value of respondent's equity credit, along with the other equity credits McCulloh took, in a bankruptcy court judgment
against McCulloh.
Respondent exchanged her condominium for other property in 1988. Respondent testified that she incurred a capital gain of $30,000 from this exchange, and that McCulloh received all of the
proceeds from the exchange. However, this testimony about respondent's disposition of the property was stricken as irrelevant on appellants' objection. Respondent said she received net income of either $100 or $100 per
month, she could not remember which, from the property before she disposed of it.
McCulloh paid herself various fees for her partnership activities, including amounts listed on the financial statements as
accounting fees, management fees, sales commissions, leasing commissions, administrative costs, loan fees, and construction development fees. McCulloh's fees in 1983, 1984, 1985 and 1986 totaled $20,569, $126,581,
$195,392 and $137,243, respectively. In McCulloh's bankruptcy case, the court determined that the "administrative fees," the construction development fees, and certain of the sales commissions were improper,
and held McCulloh liable to appellants for those fees and commissions, less a credit for sums McCulloh had advanced to the partnerships.
An independent accountant, David Von Bima, was hired in 1987 to
prepare tax returns and financial statements for the merged partnership. No general ledger had been maintained, and thus Von Bima had to go back and construct books of account for 1983-1986 from bank statements, check
registers, sales documents and the like. He discovered in the process that amended partnership tax returns were required for 1982-1985.
Appellants filed their original complaint herein against McCulloh,
respondent, Moore, and others on August 21, 1987. Appellants maintained that respondent breached her fiduciary duties as general partner of Commerce II, and thus that she was vicariously liable for McCulloh's
malfeasance. Appellants eventually obtained a bankruptcy court judgment against McCulloh for $812,571.02, and they stipulated that damages on their breach of fiduciary claim herein were limited to the attorney's fees
they incurred in recovering losses from the partnership, including fees in connection with McCulloh's bankruptcy. In May of 1989, appellants amended their complaint to seek a constructive trust on the real property
respondent acquired with McCulloh's equity credit.
In its statement of decision, the trial court concluded that respondent undertook fiduciary duties to Commerce II when she agreed to act as its general
partner. The court determined that respondent breached those duties by giving McCulloh unsupervised control over the partnership's affairs, by permitting and participating in a breach of the partnership agreement, and
by conveying all of the assets of Commerce II to Commerce I against the limited partners' vote to develop the property and without their knowledge or consent. However, the court found that "[t]he evidentiary record
herein fails to establish that the conduct of [respondent and Moore] was the proximate cause of any damage or loss to the Partnership."3
The court also concluded, in its notice
of tentative decision, that respondent was not liable for the value of the equity credit she received from McCulloh. The court found that respondent received the equity credit "as a gift, and in good faith on her
part." The court noted that appellants had abandoned their constructive trust claim against respondent, and indicated that "no authority has been presented...that would impose upon the recipient of a
gift personal liability in damages as distinguished from the obligation to return the improperly transferred property or its identifiable proceeds."
Appellants have appealed from the judgment denying
their claims for damages against respondent (A072797), and from the subsequent order and judgment against them for respondent's costs and attorney's fees (A073725). The two appeals have been consolidated for briefing
and decision.
II. DISCUSSION
A. Breach of Fiduciary Duty
Appellants contend that respondent must be held liable as a matter of law for all damages stemming from McCulloh's
malfeasance in light of the finding that she gave McCulloh free reign over all partnership affairs in breach of her fiduciary duty as general partner. They rely upon the principle that "if a trustee enters into any
arrangement in relation to trust funds which surrenders or limits his control over them, he becomes a guarantor of the fund, irrespective of his motive, or whether his surrender of control was the cause of the loss of
the fund. In such case, in the event of loss, the court will not enter upon an inquiry whether the loss is due to such abdication of control... If a trustee confides the application of a trust fund to the care of
another, whether a stranger or his own attorney or solicitor, or even cotrustee, he will be held personally liable for any loss that may result....[A] trustee may employ attorneys or agents, according to the usual
course of business...but when once in his hand his personal duty to dispose and manage [the estate] begins ... this duty is not to be delegated." (Gaver v. Early
(1923) 191 Cal. 123, 126-127.) Appellants submit that, since a fiduciary who abdicates control is a "guarantor...irrespective of...whether [the] surrender of control was the cause of the loss," respondent could not be exonerated by the finding that her breach caused no damage.
We agree with appellants that trust principles are properly applied in assessing a general partner's liability to limited partners. Liability in this context was addressed in
Kazanjian v. Rancho Estates, Ltd.
(1991) 235 Cal. App. 3d 1621, where the issue was: "When a limited partner suffers loss because of the misappropriation of partnership funds by one general partner, is the other general partner liable jointly to the limited partner for such loss?" (
Id. at p. 1625.) This is essentially the same issue presented here. Although McCulloh was not a general partner of Commerce II, she assumed the fiduciary duties of a general partner in her capacity as
"managing" partner. (See Gaver v. Early, supra, 191 Cal. at p. 126 [lawyer entrusted by guardian with funds from estate became beneficiary's trustee for purposes of accounting])
Kazanjian
concluded that "an innocent general partner is not jointly and severally liable with a malfeasant general partner for misappropriations which cause loss to a limited partner." (
Kazanjian v. Rancho Estates, Ltd., supra, 235 Cal. App. 3d at p. 1625.) The court reasoned that a general partner's liability to limited partners is the same as that of a trustee to the beneficiaries of a trust,
because a partner is deemed by statute to be a "trustee" of profits she derives without the consent of the other partners. (Id. at pp. 1627-1628 [citing Corp. Code section 15201, subd, (1)].)
"Civil Code section 2239 (at the time applicable to this case) provided that '[a] trustee is responsible for the wrongful acts of a cotrustee to which he consented, or which, by his negligence, he enabled the
latter to commit, but for no others.' Thus, cotrustees, and hence also copartners, are not liable for loss caused by misdeeds of their cofiduciaries unless they are personally in some way at fault either by
participating in the tort through consent or otherwise, or by negligence in permitting it to occur."4 (Id. at p. 1627.)
Since respondent did not participate in McCulloh's wrongs,
negligence is her only potential ground of liability. Causation is, of course, an element of negligence (6 Witkin, Summary of Cal. Law (9th ed. 1988) Torts, 732, p. 60), and Gaver v. Early, supra, does not depart
from that basic tenet. It could be said, as it was in Gaver, that a trustee who delegates control is liable even if the delegation is not the "cause" of the loss, because the delegation itself may be
prudent. In this case, for example, it was sensible for respondent, with no background in real estate, to entrust management of the partnership to someone like her mother with experience in the area. According to the
evidence, respondent had no business being made general partner and would have been negligent if she had tried to manage the partnership herself. In that sense, the act of employing McCulloh was not the
"cause" of any loss.
Respondent may nonetheless be liable for her abdication of control because she undertook a duty of oversight when she became general partner which the law does not permit her
to abandon. This is not a form of vicarious liability imposed irrespective of causation. It is a species of negligence because the law presumes that a general partner is competent to perform her duties, and capable of
preventing losses that could have been avoided by reasonable oversight. The abdication of control is thus viewed as the legal cause of the loss.
These points are illustrated in Estate of Guiol
(1972) 28 Cal.App.3d 818, where the court held the adminstrator of an estate liable for funds lost by her attorney. "Even though [she] may not have been negligent in the selection of [the] attorney, it cannot be said that she was not negligent when she in effect abdicated all of her duties to the estate by turning the money over to [the attorney and failing to protect it by her own control and accounting." (
Id. at p. 826 [italics added].) The administrator was responsible for the loss despite her lack of business experience and her testimony that she was too ill to perform her fiduciary duty. (Id. at p. 822,
826, fn. 8.) The court reached that conclusion by applying Graver, and another case where the loss was "'directly traceable"' to the defendant fiduciary. (Id. at p. 826.)
Accordingly, we
conclude that causation was a necessary element of appellants' breach of fiduciary duty claim. Causation is generally a question of fact (Fagerquist v. Western Sun Aviation, Inc. (1987) 191 Cal.App.3d 709, 719),
and the only issue is whether substantial evidence supported the trial court's finding that respondent's breaches of duty caused no loss.
The record shows that respondent did nothing as general partner of
Commerce II other than sign three documents: the amendment to the limited partnership certificate making her and Moore general partners; the amendment to the joint venture agreement adjusting the partners' investment
interests; and the December 31, 1983, document transferring Commerce II's assets to Commerce I and dissolving Commerce II. There is no claim of loss resulting from the adjustment of the partners' interests or the
transfer of Commerce II's property. Respondent's service as general partner appears to have had no effect on the operations or prospects of the partnerships. The business went on as it had before respondent's
appointment, with McCulloh running the show. Therefore, the only breach of duty that might have damaged appellants was respondent's failure to supervise McCulloh.
A partner who withdraws from a partnership
has no liability for the acts of other partners after the withdrawal. (Blackmon v. Hale (1970) 1 Cal.3d 548, 560; Mission Fixture Co. v. Potter
(1915) 26 Cal.App. 691, 695.) This rule is properly applied to the former general partner of a limited partnership who no longer has any power or duty to control the partnership's affairs. Whether respondent ever effectively withdrew as general partner thus became a key contested issue at trial. If Commerce I and Commerce II were effectively merged, pursuant to the document respondent signed at the end of 1983, into one partnership with McCulloh as sole general partner, then respondent was thereby relieved of liability for McCulloh's subsequent misconduct. The issue was treated as one of fact at trial, with the parties examining accountant Von Bima on such matters as how many partnership tax returns were filed after 1983, and who was listed as general partner on the returns and on what basis.
The trial court found that Commerce I and Commerce II were effectively merged at the end of 1983 into one partnership with McCulloh as sole general partner, even though Commerce II was not dissolved in
accordance with its partnership agreement.5
Appellants do not challenge this finding on appeal, and it is fatal to their breach of fiduciary duty claim against respondent because virtually all of McCulloh's misdeeds occurred while McCulloh was sole general partner of the combined partnership. Fortunately for respondent, the great bulk of McCulloh's fees were paid after 1983, and McCulloh did not begin arranging equity credits until 1985.
Note 7 to the financial statements Von Bima prepared for 1983-1986 6
indicates that McCulloh received $20,569.31 in fees during 1983 as follows: accounting fees of $6,000; management fees of $1,861.31, leasing commissions of $3,775; administrative costs of $5,000; and loan fees of $3,933. It is not apparent which of these various fees were illegal. The bankruptcy court determined that McCulloh's loan fees were proper, but that a portion of her sales commissions, all of her development fees, and $44,800 in "administrative fees" were improper. McCulloh evidently received no sales commissions or development fees in 1983, and it is unclear whether any or all of her 1983 "accounting fees," "management fees" and "administrative costs" were "administrative fees" within the meaning of the bankruptcy court's decision. The totals for these three categories of fees in note 7 do not add up to $44,800, either alone or in combination.
It is also unclear whether Commerce I or Commerce II paid McCulloh's 1983 fees. Respondent speculates that the fees were probably paid by Commerce I because it was "the more active of the two
partnerships at the time." Appellants speculate that Commerce II probably paid some of the fees because the joint venture agreement between the partnerships provided that they would share expenses. There does not
appear to be any evidence on the point. Since appellant's bore the burden of proof (Evid. Code section 500), they did not prevail on the issue.
The evidence did not compel a finding as a matter of law that
McCulloh's actions harmed Commerce II while respondent was its general partner. Thus, the trial court's finding that respondent's breaches of duty caused no harm was supported by substantial evidence, and there is no
basis to reverse the judgment on the fiduciary duty claim.
B. Equity Credit
Appellants contend that respondent, like the partners who received "equity credits" toward purchases
of partnership property, should be held to account for the value of the credit she received. However, unlike the partners who obtained equity credits, respondent was found to have received her credit as a gift.
Respondent's $17,000 equity credit came from McCulloh, it was reflected on the partnership's 1983-1986 financial statements as a receivable from McCulloh, and it was accounted for in the judgment appellants obtained in
McCulloh's bankruptcy.
Notwithstanding this bankruptcy court recovery and appellants' abandonment of their constructive trust claim against respondent herein, appellants seek restitution from respondent of
the value her equity credit. This restitution is sought on the grounds that respondent was unjustly enriched by the equity credit, or knew of appellants' claim to the credit when she disposed of the condominium she
acquired with the credit. Even if these are viable theories of recovery under the circumstances, the record does not support them.
Appellants note that respondent received rental income from the
condominium, acknowledged by respondent to have been $100 or $100 per month, while she owned it. However, respondent offered to prove that she received no benefit from her ownership of the unit in light of the capital
gain she incurred when the unit was sold and McCulloh's receipt of all of the sale proceeds. This evidence was excluded as irrelevant on appellants' objection. Having thus denied respondent an opportunity to prove that
she did not benefit from the credit, appellants cannot now be heard to claim that she was unjustly enriched. (See Travelers Ins. Co. v. Lesher (1986) 187 Cal.App.3d 169, 197198.)
The record
also does not establish that respondent must have known of appellants' claim to her equity credit when she disposed of the condominium in 1988. Appellants did not ask respondent when she first learned that there might
have been a problem with the downpayment on the unit. Respondent admitted attending partnership meetings in 1986 and 1987 to provide "moral support" to her mother because she knew there was "trouble
brewing." However, there is no evidence of what was discussed at those meetings other than "accounting" for the partnership and a potential lawsuit. Allegations about equity credits were not included in the
original complaint, and respondent was not served with the amended complaint setting forth those allegations until 1989, after she had sold the unit.
Accordingly, we find no basis for charging respondent
with the value of the equity credit she received from McCulloh.
III. CONCLUSION
The judgment and supplemental judgment for respondent are affirmed with costs and attorney's fees to
respondent. The amount of respondent's reasonable attorney's fees on appeal is left to the determination of the trial court.
Footnotes
1 This document stated that "the prorations of assets,
liabilities, capital and gains/losses to each Partnership will not be made according to the capital contributed but will be allocated based on the percentage that one investment unit bears to the total investment units
sold in both Limited Partnerships combined." Appellants do not claim harm from this adjustment.
2 These facts are taken from the trial court's statement of decision filed on October 3, 1995. The
evidentiary basis for these findings in not apparent in the record. However, the joint appendix and reporter's transcript do not include all of the evidence presented in the case, and the briefs do not dispute that
Commerce II's limited partners were apprised of the merger.
3 In its notice of intended decision, the court had concluded that respondent and Moore were jointly and severally liable to appellants "for
damages sustained as a result of their failure to properly carry out their fiduciary duties.' However, the court changed its mind and filed an addendum to the notice of intended decision stating that "the argument
of [Moore and respondent] regarding causation is meritorious. The court finds that the record herein does not support a determination that the acts of said defendants were the cause of the damages sustained by the
partnership arising out of the malfeasance of [McCulloh]."
4 A majority in Kazanjian
went on to hold that, even if a general partner is not liable to the limited partners for another general partner's breach of fiduciarv duty, she may, like other partners, be required to contribute money to the partnership to insure that her share of partnership losses is the same as her interest in partnership's profits. (
Kazanjian v. Rancho Estates, Ltd., supra, 235 Cal.App.3d at pp, 1627-1628.) An innocent general partner in Kazanjian
was thus assigned a percentage of the partnership's losses "based entirely upon concepts of partnership contribution, and not upon any special obligation of a general partner to protect a limited partner from loss in terms of joint liability with another malfeasant general partner." (Id. at P. 1628.) It does not appear that respondent ever had any entitlement to profits by virtue of her "residual" general partner's interest, and appellants have not sought a "partnership contribution" from her within the meaning of
Kazanjian.
5 The trial court's finding was consistent with that of the bankruptcy court in appellants' adversary proceeding in the McCulloh bankruptcy. In its memorandum of decision, the bankruptcy
court stated that "[t]he two partnerships were in effect merged into a single limited partnership, with McCulloh the managing general partner."
6 The record does not disclose whether McCulloh
received any fees prior to 1983. Appellants refer to the 1983-86 financial statements as the only evidence of the fees McCulloh received during respondent's tenure as general partner.
