In Canter v. Lakewood of Voorhees, the Appellate Division held that limited partners may be liable for their partnership’s obligations under traditional common-law veil-piercing standards, as well as under the circumstances set forth in the limited partnership statute.
In a negligence suit against a nursing home and one of its limited partners, the limited partner sought to avoid liability by arguing that limited partners may be liable to third parties for the partnership’s obligations only under the narrow circumstances set forth in the New Jersey Uniform Limited Partnership Law, specifically N.J.S.A 42:2A-27(a) .
The Appellate Division disagreed, finding that a limited partnership’s veil of liability protection may be pierced to impose liability on a limited partner who: 1) “dominated the limited partnership” and 2) “used the limited partnership to perpetrate a fraud or injustice, or otherwise circumvent the law.” Quoting liberally from its opinion in OTR Assocs. v. IBC Servs., which involved the piercing of a corporation’s veil, the Appellate Division went on to describe the “hallmarks” of improper domination of a limited partnership:
The hallmarks of domination for an illegitimate purpose “are typically the engagement of the subsidiary [here, the limited partnership] in no independent business of its own but exclusively the performance of a service for the parent [or here, the majority limited partner] and, even more importantly, the under capitalization of the subsidiary [limited partnership], rendering it judgment proof.” [Alterations in original]
The Appellate Division ultimately concluded, relying principally on the fact that the nursing home was adequately capitalized, that there was no basis for finding that the limited partner dominated the nursing home or used it to perpetrate a fraud. Thus, the Appellate Division ruled that summary judgment should have been granted in favor of the limited partner.
The lesson from Canter is that limited partners who own a majority interest in the partnership should take steps to ensure that they will be insulated from liability under traditional veil-piercing standards. Capitalizing the partnership with sufficient funds to conduct its business should provide a large measure of assurance that the partnership’s veil of liability protection will not be pierced.