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When Can a Plaintiff Pierce the Corporate Veil of a Limited Partnership?

New Jersey might be joining a group of states that have decided to allow plaintiffs to pierce the corporate veil of limited partnerships, but the state’s courts would only allow it in limited circumstances.

A limited partner is one who does not insinuate himself in the running of the partnership, and is therefore, not jointly and severally liable for the acts and omissions of the other partners. However, in a matter of first impression, the Appellate Division of the Superior Court of New Jersey recently held that a plaintiff would be able to pierce the corporate veil of a limited partner in certain situations, including when that partner dominated the partnership or used it to perpetuate a fraud or injustice. Canter v. Lakewood, 420 N.J.Super. 508, 22 A.3d 68.

The suit arose when the plaintiff, Sanford Canter, broke his leg during a slip-and-fall at Lakewood at Vorhees (“Lakewood”) nursing home, where he was a resident. The defendants named in the negligence suit included Seniors Healthcare, Inc. (“SHI”) and Ozal of Lakewood (“Ozal”), each a limited partner of Lakewood. Carter asserted that, in addition to Lakewood, the limited partners of the nursing home should also be liable.

While generally a limited partner is shielded from liability for the partnership’s obligations, the New Jersey Statutes set forth that the two exceptions to this rule:

a) a limited partner is also a general partner, or
b) a limited partner participates in the control of the business.

N.J.S.A. 42:2A-27a.

Nevertheless, N.J.S.A. 42:2A-27b’s “safe harbor” provision allows a limited partner to engage in certain activities of the partnership without being considered in control of the business. Those safe harbor activities include being a shareholder of a general partner; consulting or advising with a general partner; or being the partnership’s contractor, agent or employee.

However, the Canter Court held that a limited partner may also be found liable when the partner “dominates” the partnership or uses it to commit a fraud or injustice. Factors that are considered during this determination of “domination” include:

a) the limited partner’s role in day-to-day operations of a business
b) the limited partner’s decision-making authority compared to that of a general partner
c) Capitalization of the entity relative to the nature of the company’s business

SHI argued that veil piercing did not apply to a limited partnership and, even if it did, that SHI did not dominate Lakewood or use it to perpetuate a fraud or injustice. The Court agreed with SHI’s second argument, stating that “corporate veil-piercing principles can apply to a limited partnership; however, the record does not support veil piercing in this case.”

The Court reversed the lower court’s decision and granted SHI’s motion for summary judgment, finding no evidence that it had dominated Lakewood or used its control in the company to perpetuate any fraud. The Court’s decision aligns New Jersey law with that of other states who have adopted the Revised Uniform Limited Partnership Act. It is significant  because it provides a framework for courts to use when determining whether to pierce the shield of a limited partner.  

Comments/Questions: gdn@gdnlaw.com

© 2011 Nissenbaum Law Group, LLC