Academic journal article Washington and Lee Law Review

IMWA Equities IX Co. V. WBC Associates

Academic journal article Washington and Lee Law Review

IMWA Equities IX Co. V. WBC Associates

Article excerpt

961 F.2d 480 (4th Cir. 1992)

The longstanding general rule developed at common law is that until the business of a partnership is wound up and the accounts are finally settled, an action on a claim arising out of the partnership transactions will not lie.(516) This rule applies even after dissolution of the partnership.(517) Subject to well-recognized exceptions, the general rule is, however, far from absolute.(518) A partnership agreement may, for example, form the basis of an action at law where the transaction demonstrates that the partners have agreed upon the specific sum each owes the other.(519) In Wright v. Armwood,(520) the Municipal Court of Appeals for the District of Columbia held that hearing a partner's claim without a formal prior accounting was proper because the claim was for a definite amount of money and was evidenced by a single promissory note of the partnership.(521) Therefore, the court reasoned that determining the respective rights and obligations of the parties with regard to the agreement would be relatively easy.(522) In Gilbert v. Fontaine,(523) the United States Court of Appeals for the Eighth Circuit delineated another exception, stating that where the partnership articles contain an express stipulation which one partner has violated, an action at law will lie against that partner.(524) In IMWA Equities IX Co. v. WBC Associates,(525) the United States Court of Appeals for the Fourth Circuit considered whether Virginia law forbids a partner's suit to enforce an indemnity provision in a partnership agreement against another partner prior to dissolution, winding up, and settlement of the accounts.

IMWA Equities involved a provision in a partnership agreement requiring one partner to indemnify another upon the occurrence of certain events. The question before the Fourth Circuit was whether the partner seeking enforcement of the indemnification clause could sue once the specified circumstances were present, even though the partners had not yet dissolved the partnership, wound up its business, or settled its accounts. Specifically, the Fourth Circuit considered whether the indemnity provision of the partnership agreement constituted an express stipulation, enforceable despite the failure of the partners to dissolve, wind up, and settle the accounts of the partnership.(526)

In IMWA Equities, WBC Associates Limited Partnership (WBC) and Porter Sullivan Corporation (PSC) co-owned Beacon Hill Farm Associates II Limited Partnership (Beacon Hill). WBC was a Beacon Hill limited partner, and PSC was both a general partner and a limited partner of Beacon Hill. The general partners of WBC were James M. Wordsworth and Harvey Borkin. After purchasing a piece of property, Beacon Hill needed additional financing to develop the land. Consequently, it recruited IMWA Equities IX Company, Limited Partnership (IMWA) to become its third partner and to provide further security to Beacon Hill's lender, United Savings Bank (USB). IMWA provided USB with a six million dollar irrevocable letter of credit that Beacon Hill used as collateral to obtain five and one-half million dollars in loans from USB. A provision in the amended partnership agreement stated that any draws by Beacon Hill against the letter of credit would become loans from IMWA to Beacon Hill. Wordsworth and Borkin agreed to indemnify IMWA in the partnership agreement, as protection for IMWA, PSC, and WBC.

Three years later, Beacon Hill and PSC both filed voluntary bankruptcy petitions under Chapter 11 of the United States Bankruptcy Code. USB then demanded immediate payment from IMWA on the six million dollar letter of credit. IMWA honored USB's demand, converting the letter of credit to a loan that then became due and payable to IMWA according to the partnership agreement. However, as Beacon Hill was in bankruptcy, it did not repay IMWA. Moreover, WBC, Wordsworth, and Borkin subsequently refused to indemnify IMWA for any portion of the loan. …

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