10.2 Management Rights; Fiduciary Obligations
In Green v. Bellerive Condominiums Limited Partnership, 135 Md. App. 563, 763 A.2d 252 (2000), the debtor partner defaulted on his personal obligation resulting in a judgment against him. The judgment creditor received a charging order against the partner’s interest. The partnership incurred bank debt to finance the project. The partnership defaulted on that debt and the FDIC (the bank having dissolved) began collection remedies against the partnership. The other partners negotiated with the FDIC to purchase the note at a discount. Those partners then sold the property paying themselves the full value of the note with none of the discount passing through to the partnership. The result was that the remaining partners cashed out but no proceeds were left as partnership distributions. The judgment creditor was never paid. The receiver for the judgment creditor asserted the partnership rights of the debtor partner, claiming that he was entitled to notice of the opportunity to purchase the note because he stands in the debtor’s partner’s shoes. The Court held that the receiver has the rights of a mere assignee, not those of a partner:
“By limiting a creditor’s right to exercise the debtor partner’s management rights, we ensure that creditors of a limited partner cannot disrupt partnership business or interfere with the management rights of other partners. In particular, this limitation prevents third party creditors from using a charging order as a license to ‘squeeze’ other limited partners into paying off obligations of the debtor, as the necessary costs of eliminating the risk of such interference.
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These reasons for excluding third party creditors from a seat at the partnership’s management table are no less applicable – and perhaps are even more applicable – when the issue under consideration is what to do about partnership debt or about a partnership opportunity. If a charging creditor is permitted to exercise management rights of the debtor partners in matters pertaining to partnership debt or partnership opportunities, that third party creditor is in an enhanced position to wield any of the debtor partner’s management rights as a tool to obtain payment of the judgment debt. Undoubtedly, investors contemplating a limited partnership opportunity would be discouraged by the possibility of having to satisfy or deal with creditors of each partner.”
Green v. Bellerive Condominiums Limited Partnership, 135 Md. App. 563, 582-3, 763 A.2d 252, 263 (2000).
It is precisely this inability of a creditor to interfere with the operations of a partnership or to reach partnership property that insulates a partnership from the creditors of its partners. Even the foreclosure of a debtor partner’s interest confers limited rights to the transferee:
“We do not think that the receiver or judgment creditors are burdened unfairly by the denial of these management rights. Like other well-informed creditors, they presumably knew that partnership interests are notoriously poor security for the repayment of a debt. ‘Credit extenders who look to a partner’s interest in a partnership as a possible source of satisfaction are well advised to take and perfect a security interest rather than rely on a charging order … [because a] partnership interest is not very good collateral…” IV Bromberg and Ribstein, supra, at § 13.07(a), at 13:43.”
Id. at 584-5.
It is important to note, however, that by statute a transferee may seek judicial dissolution and winding up of a partnership in one circumstance. This can occur upon a judicial determination that “it is equitable to wind up the partnership business” and either (1) the partnership term expires or (2) the partnership has an “at will” term. Corps & Ass’ns § § 9A-503(b)(3) and 9A-801(a). The partnership term may be, of course, perpetual. Corps & Ass’ns § 10-201(a)(4).