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HENKELS & MCCOY, INC. v. ADOCHIO

October 24, 1995

HENKELS & MCCOY, INC., Plaintiff,
v.
ROBERT ADOCHIO, et al., Defendants.



The opinion of the court was delivered by: REED

 Reed, J.

 October 24, 1995

 Plaintiff Henkels & McCoy, Inc. brings this action under N.J. Stat. Ann. § 42:2A-46(b) against nineteen limited partners of Red Hawk North Associates, L.P. ("Red Hawk"), a New Jersey limited partnership. Plaintiff alleges that these defendants have received cash distributions from Red Hawk in violation of the Red Hawk Agreement of Limited Partnership and the Red Hawk Limited Partnership Certificate. Plaintiff seeks to have these funds returned to Red Hawk in order that a judgment plaintiff has obtained against Red Hawk may be satisfied. This Court has jurisdiction over this case pursuant to 28 U.S.C. § 1332 as the parties are of diverse citizenship and the amount in controversy is in excess of $ 50,000, exclusive of interest and costs.

 Currently before the Court are the motion by defendants for summary judgment and the cross-motion by plaintiffs for summary judgment. (Document Nos. 27, 30) For the following reasons, both motions will be denied.

 I. FACTUAL BACKGROUND

 The following facts are undisputed.

 In 1987 or 1988, Red Hawk and Cedar Ridge Development Corporation ("Cedar Ridge"), a New Jersey corporation, entered into a "Joint Venture Agreement" in order to form a partnership which was given the name Chestnut Woods Partnership ("Chestnut Woods"). Red Hawk and Cedar Ridge were both general partners of Chestnut Woods. Chestnut Woods was formed for the purpose of developing and then selling certain real property located in Bucks County, Pennsylvania (the "Property") which Cedar Ridge had previously arranged to purchase. Under the terms of the Joint Venture Agreement, Red Hawk agreed to provide $ 650,000 of capital for this development, and Cedar Ridge agreed to act as the Managing Partner and the General Contractor for the partnership and to assign the purchase agreement for the Property to the partnership.

 On December 29, 1988, Cedar Ridge entered into a "Subcontract Agreement" with plaintiff; in that agreement, Cedar Ridge agreed to pay plaintiff a fixed price of $ 300,270 for the installation of storm and sanitary sewer systems on the Property. The Subcontract Agreement identified Cedar Ridge solely as the General Contractor for the development project. No mention of the partnership connection between Cedar Ridge and Chestnut Woods was made in the agreement, and plaintiff was unaware that Cedar Ridge was a partner in Chestnut Woods when plaintiff entered into the agreement.

 Plaintiff began work on the sewer systems project on January 16, 1989. Plaintiff's first two invoices to Cedar Ridge, sent in February and May of 1989, were paid in full by Cedar Ridge, with plaintiff receiving payment on April 6, 1989 and July 12, 1989 respectively. Plaintiff's August, September and November invoices were not paid in full, however; Cedar Ridge only paid $ 25,000 on the $ 215,174.50 August invoice and made no payments on the other two invoices, leaving a total unpaid balance of $ 237,943.50.

 Also during 1989, Cedar Ridge made various cash payments to Red Hawk, and Red Hawk then distributed the bulk of those payments to its limited partners. On January 6, 1989, Cedar Ridge made a payment to Red Hawk in the amount of $ 78,750, and on January 11, 1989, Red Hawk in turn made a distribution to its limited partners in the amount of $ 76,923, leaving a balance of $ 1,904 in Red Hawk's checking account. On April 4, 1989, Cedar Ridge made payment to Red Hawk in the amount of $ 215,000 and on the same day Red Hawk made distributions to its limited partners of $ 210,000, leaving a balance of $ 5,782 in Red Hawk's checking account. And finally, on July 6, 1989, Cedar Ridge made a payment to Red Hawk in the amount of $ 215,000, and on either July 7, 1989 or July 10, 1989, Red Hawk made distributions to its limited partners of $ 210,000, leaving a balance of $ 8,779 in Red Hawk's checking account. Despite these low cash balances, it is undisputed that Red Hawk was solvent throughout 1989.

 On December 19, 1990, plaintiff brought suit in the United States District Court for the Eastern District of Pennsylvania against Cedar Ridge and Red Hawk, trading as Chestnut Woods. In its complaint, plaintiff made claims of breach of the Subcontract Agreement, breach of the April 1990 agreement, unjust enrichment, quantum meruit, and conspiracy to defraud. On October 15, 1991, judgement was entered for plaintiff and against Cedar Ridge and Red Hawk in the amount of $ 282,421.55, including interest. Plaintiff then discovered, however, that Cedar Ridge and Red Hawk were unable to satisfy this judgment, and to date the judgment has not been satisfied in whole or in part.

 Plaintiff then brought suit in June 1992 against G&A in its capacity as general partner of Red Hawk for the amount of the previously obtained judgment. On August 12, 1992, default judgment was entered against G&A in the amount of $ 282,424.55 *fn1" plus interest at 6% per annum from October 15, 1991. After obtaining this default judgment, plaintiff learned that G&A was also unable to satisfy the judgment against it, and to date this second judgment has also not been satisfied in whole or in part. Plaintiff then filed the instant suit on June 27, 1994 seeking to have defendants return to Red Hawk the cash distributions they received in 1989 as limited partners so that Red Hawk could satisfy the judgment obtained by plaintiff against it.

 II. DISCUSSION

 Under Fed. R. Civ. P. 56(c), summary judgment may be granted when, "after considering the record evidence in the light most favorable to the nonmoving party, no genuine issue of material fact exists and the moving party is entitled to judgment as a matter of law." Turner v. Schering-Plough Corp., 901 F.2d 335, 340 (3d Cir. 1990). For a dispute to be "genuine," the evidence must be such that a reasonable jury could return a verdict for the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986).

 Defendants argue that they are entitled to summary judgment because (1) plaintiff's claim against them is barred by New Jersey's entire controversy doctrine, (2) creditors of limited partnerships lack standing to bring an action under N.J. Stat. Ann. § 42:2A-46(b), and (3) even if creditors do have such standing, plaintiff was not a creditor of Red Hawk when the distributions were made in 1989. Plaintiff responds by countering each of defendants' arguments and by asserting that it is entitled to summary judgment because there is uncontradicted evidence demonstrating that the distributions at issue here violated the Red Hawk Agreement of Limited Partnership and the Red Hawk Limited Partnership Certificate. The arguments of defendants in support of their motion for summary judgment will be addressed first, followed by consideration of the arguments of plaintiff in support of its cross-motion for summary judgment.

 A. Entire Controversy Doctrine

 The Supreme Court of New Jersey has adopted an "entire controversy doctrine":

 
Accordingly, we now hold that to the extent possible courts must determine an entire controversy in a single judicial proceeding and that such a determination necessarily embraces not only joinder of related claims between the parties but also joinder of all persons who have a material interest in the controversy.

 Cogdell v. Hospital Ctr. at Orange, 116 N.J. 7, 560 A.2d 1169, 1178 (N.J. 1989). Following the Cogdell decision, the effect of this doctrine was codified by the Supreme Court:

 New Jersey Rule of Court 4:30A. Defendants argue that since the instant action is being brought pursuant to New Jersey substantive law plaintiff should have joined defendants in its initial suit against Cedar Ridge and Red Hawk or, at a minimum, in its suit against G&A. As plaintiff failed to so join defendants, defendants argue that plaintiff's instant claim against them is barred by the entire controversy doctrine.

 After defendants filed their briefs relating to the instant motions, the Supreme Court of New Jersey issued an opinion clarifying the application of the entire controversy doctrine to cases brought outside of New Jersey. While holding that the doctrine applied even if the first judicial proceeding was brought outside of New Jersey as long as the second judicial proceeding was brought within New Jersey, the Supreme Court went on to hold that the doctrine did not apply when the second judicial proceeding was also brought outside of New Jersey:

 
This ruling presupposes that when the procedural rules of foreign jurisdictions permit the omitted claims to be brought later, the foreign jurisdiction is free to entertain such claims. Just as we do not seek to export our procedural requirements of party joinder, we do ...

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