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First District Says Delaware Law Controls Dispute Over Returning Overpayments From Trust Fund

 

As Illinois limited partnership litigation attorneys, we were pleased to note a recent ruling clearing up a potential conflict between Illinois and Delaware limited partnership law. Delaware law time-bars claims in a limited partnership dispute even though Illinois law typically controls statute of limitation issues, the First District Court of Appeal ruled. Freeman v. Williamson, No. 1-07-2058 (Ill. 1st Dist. June 24, 2008). The case is a victory for members of the Freeman family, who are former investors in a fund set up as a Delaware limited partnership. The plaintiffs invested in the Lipper Fixed Income Fund in 1993 and withdrew in 1999.

In 2002, the fund’s general partner realized that a former manager had overstated its returns, leading to overpayments to partners. It liquidated the partnership and appointed Richard Williamson as the trustee of the fund. In 2006, Williamson demanded that the Freemans return those overpayments. In response, the Freemans filed a lawsuit in Illinois, asking for a declaratory judgment that they were not obligated to repay the overpayments because Delaware law time-barred any claim by Williamson. They also argued that the partnership agreement for the fund specifically said partners had no obligation to restore a negative balance in the fund’s capital account. Williamson countersued for unjust enrichment, conversion and money had and received.

The trial court granted the declaratory judgment and dismissed all of Williamson’s claims with prejudice, all on summary judgment. It agreed that the Delaware Revised Uniform Limited Partnership Act applied to both the partnership agreement and Williamson’s counterclaims, and that its three-year limit for bringing claims had already expired. Williamson appealed to the First District on all of the claims but conversion.

On appeal, the court started by noting that the sole issue at stake was whether the Delaware Act applies to the dispute. Williamson argued that it did not, but the First District found this unpersuasive. The partnership agreement expressly incorporates a relevant section of the Delaware Act, the court said, and also explicitly says the same law governs the partnership aspects of the agreement. Under the Delaware Act, partners are liable for knowingly accepting payments that make the partnership unable to meet its obligations to creditors — but if they innocently accept such payments, they are not liable. Furthermore, the law applies a three-year limit to any liability “under this chapter or other applicable law” for receiving such payments, regardless of whether it was received knowingly. Thus, the court said, the three-year period applies as long as the time limitation in the Delaware Act applies to the payments the plaintiffs received.

The court rejected Williamson’s argument that Illinois law, which would not time-bar his claims, applies because the relevant part of the Delaware Act is a statute of limitations. Using Belleville Toyota, Inc. v. Toyota Motor Sales, U.S.A., Inc., 199 Ill. 2d 325, 770 N.E.2d 177 (2002), the trustee argued that the Illinois law applies when a statute of limitations is at issue because a statute of limitations is procedural rather than substantive. The plaintiffs argued that the provision is actually a statute of repose, a substantive issue that places the matter under Delaware law through the limited partnership agreement. The court agreed, saying that the Delaware Act extinguishes liability regardless of whether plaintiffs know their cause of action, making it an issue of substantive rights.

Finally, the court rejected Williamson’s argument that the partnership agreement does not apply. It agreed that the plaintiffs are also wrong to argue that the sections on partners’ obligations apply to them, because they are former partners and the agreement clearly differs between former and current partners. However, the court said there was no question that the distributions the plaintiffs received were made pursuant to the terms of the agreement. And again, the agreement specifically says the Delaware Act applies. Thus, First District said the Delaware Act applies even though the plaintiffs are now former partners. It affirmed the summary judgment rulings by the trial court.


DiTommaso-Lubin has more than two decades of experience helping business clients unravel the complexities of Illinois and out-of-state business laws. Our Chicago partnership litigation lawyers represent enterprises of all sizes in a variety of legal disputes, including disputes among partners and shareholders as well as lawsuits between businesses. In every case, our goal is to resolve disputes as quickly and painlessly as possible, helping clients protect their work and get back to business as usual. From offices in Oak Brook, near Wheaton, and Chicago, we serve clients throughout Illinois and the Midwest.

If you’re facing a business lawsuit, or the possibility of one, and you’d like to discuss how the experienced Illinois business dispute attorneys at DiTommaso-Lubin can help, we would like to hear from you. To set up a consultation with one of our Chicago, Wheaton or Naperville business trial attorneys, please call us toll-free at 1-877-990-4990 or contact us through the Internet.