NJ Limited Partner Liability: Can a Limited Partner be Held Liable for a Limited Partnership’s Debts?
In limited circumstances the answer is “yes”. Under New Jersey’s Uniform Partnership Law a limited partner is protected from liability from the limited partnership’s obligations except in two instances:
(1) Where the limited partner is “also a general partner,” or
(2) Where a limited partner “takes part in the control of the business”.
N.J.S.A. 42:2A-27a.
However, where “the limited partner’s participation in the control of the business is not substantially the same as the exercise of the powers of a general partner, he is liable only to persons who transact business with the limited partnership with actual knowledge of, and reliance on, his participation in control.” N.J.S.A. 42:2A-27a.
N.J.S.A. 42:2A-27a “sharply limits the circumstances under which the exercise of ‘control’ could lead to imposition of general partner liability on a limited partner.” Zeiger v. Wilf, 333 N.J. Super. 258, 276 (App. Div. 2000), certif. denied, 165 N.J. 676 (2000).
Indeed, N.J.S.A. 42:2A-27b provides a “safe harbor” provision establishing certain activities in which a limited partner may engage in without constituting participation in the control of the limited partnership’s business within the meaning of N.J.S.A. 42:2A-27a. Included within the safe harbor activities are: (1) being or serving as a shareholder of a general partner; (2) “[c]onsulting with or advising a general partner with respect to any matter, including the business of the limited partnership;” or (3) being a contractor, an agent or employee of the limited partnership. N.J.S.A. 42:2A-27b (1)-(2), (6).
So does this mean that a limited partner has no worries about being held liable for the partnership’s debts?
Not necessarily. Like many states, New Jersey recognizes that the corporate veil of liability protection is not absolute. Indeed, the New Jersey Appellate Division held that corporate veil-piercing principles can be applied to a New Jersey limited partnership under appropriate circumstances where there is evidence that the limited partner:
(1) Participated in the control of the limited partnership’s business by taking or attempting action not within the safe harbor of N.J.S.A. 42:2A-27b; or
(2) Dominated the limited partnership and used the limited partnership to perpetrate a fraud or injustice, or otherwise circumvent the law.[1] [1]
Canter v. Lakewood of Voorhees, 420 N.J. Super. 508 (App. Div. 2011) [2](internal citations omitted). Both prongs of the domination test must be established by clear and convincing evidence. See Trs. of Nat’l Elevator Indus. Pension, Health Benefit & Educ. Funds v. Lutyk, 332 F.3d 188, 194 (3d Cir. 2003).
[1] [3] Indeed, principles of equity and law supplement New Jersey’s Uniform Partnership Law. See N.J.S.A. 42:1A-5.
Disclaimer: This article discussing NJ Limited Partner Liability is for informational purposes only, and is not intended by the author to provide legal advice to any particular set of circumstances. Nor is the subject matter of this article intended to be an exhaustive summary of the relevant case law and statutes.
For more information contact partner Glenn R. Reiser [4].