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Shimko v. Guenther - 505 F.3d 987 (9th Cir. 2007)

Rule:

A limited partner can only be held liable as a general partner to persons who transact business with the limited partnership reasonably believing, based on the limited partner's conduct, that the limited partner "is" a general partner. Ariz. Rev. Stat. § 29-319(A), derived from § 303 of the Revised Uniform Limited Partnership Act (RULPA), is related to the same legal principle as the agency concept of apparent authority. Someone who actually knows (or should know, by virtue of the nature of his relationship with the person) that a person is not a general partner cannot transmute that person into a general partner of the limited partnership based upon that person's conduct. Both the evolution of Ariz. Rev. Stat. § 29-319 and § 303 of the RULPA (amended 1985) on which it is based support this reading of the statute.

Facts:

Appellees were hired to advise the limited partners on the extent of their individual and personal exposure to liability after several of the partnership entities' clients threatened to file fraud complaints against the partnership entities and the limited partners. Appellees filed the instant suit alleging action on account, breach of contract, and unjust enrichment seeking payment of legal fees when neither the partnership entities nor the limited partners paid appellees for their services. The district court held one of the limited partners liable, finding that the limited partner - despite him being listed in the organic documents of the partnership as a “limited partner” - participated in the control of the partnership, and that due to the substantial involvement in the operations of the partnership, it was reasonable for appellees to believe that they were dealing with a general partner.

Issue:

Under the circumstances, was it reasonable for the appellees to believe that they were dealing with a general partner, hence, justifying the decision of making the limited partner liable for the appellees’ legal services?

Answer:

No.

Conclusion:

The court held that the district court erred in finding that it was reasonable for appellees to believe that the limited partner was a general partner. Because appellees owed a duty of fiduciary care to their clients, the court held that appellees were chargeable with knowledge of the contents of the partnership entities' organic documents, whether or not appellees actually examined them, and consequently that it was not reasonable for appellees to believe that the limited partner was a general partner. Thus, the district court erred in holding appellants liable for the legal fees of the partnership entities under Ariz. Rev. Stat. § 29-319.

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