TO: The Honorable Locke Burt, State Senator, District 16 (Ormond Beach)
SUMMARY:
A State Senator was not required to disclose his proportionate share of indebtedness under a promissory note executed by him in his capacity as a general partner. While, under the Uniform Partnership Act, general partners are jointly liable for contractual debts and obligations of the partnership, such liability appears to be contingent upon a creditor first exhausting the assets of the partnership, and "contingent" liabilities are not required to be reported. CEO's 89-5 and 86-40
QUESTION:
By your letter of inquiry, materials accompanying your letter of inquiry, and by additional correspondence and materials sent to us by your counsel in your behalf, we are advised that you serve as a member of the Florida Senate, from District 16, and that as such you are required to file full and public disclosure of your financial interests pursuant to Article II, Section 8, Florida Constitution. In addition, you have enclosed a copy of a promissory note dated August 29, 1989, in the amount of $2,900,000.00, whereby a general partnership of which you are a general partner borrowed funds from a bank. You, along with two other persons, signed the note as general partners, your designation as a "general partner" being typewritten on the note. The printed language at the beginning of the note states that the liability under the note is "joint and several." You advise further that you did not report the note on your financial disclosure form because you believe that the liability evidenced by the note is a contingent liability because, as you represent, "[you] are not a co-maker of the note" and "[your} liability is contingent upon the bank exhausting the assets of the partnership."
Article II, Section 8, of the State Constitution requires all elected constitutional officers to file full and public disclosure of their financial interests by July 1st of each year. Among other information, the disclosure is to show net worth, identify each asset and liability in excess of $1,000, and list the value of each asset and liability in excess of $1,000.
Section 112.312(14) defines the term "liability"
[A]ny monetary debt or obligation owed by the reporting person to another person, except for credit card and retail installment accounts, taxes owed, indebtedness on a life insurance policy owed to the company of issuance, contingent liabilities, or accrued income taxes on net unrealized appreciation. Each liability which is required to be disclosed by s. 8, Art. II of the State Constitution shall identify the name and address of the creditor.
The current instructions accompanying CE Form 6 state that "[a] 'contingent liability' is one that will become an actual liability only when one or more future events occur or fail to occur, such as pending or threatened litigation or where you are liable only as a guarantor, surety, or endorser on a promissory note," and state that "if you are a 'co-maker' on a note payable and have signed as being jointly liable or jointly and severally liable, then this is not a contingent liability."
In CEO 86-40, we found that a county commissioner's guaranty of his corporation's loan from a bank was a contingent liability not requiring disclosure. In that opinion, we deferred to the general law governing negotiable instruments and adopted the reasoning that a guarantor, surety, or indorser is liable on a debt only upon a third person failing to carry out his obligation to make payment. In CEO 89-5
Your situation is distinguishable from both of these opinions. Since your signature on the note is accompanied by the designation "general partner" and since you did not sign the note in your individual capacity (did not sign without the designation "general partner"), we must look to the general law governing partners and partnerships to determine whether you are personally liable under the note and whether any such liability is "contingent"
Under the general law governing partnerships you (as an individual) are jointly liable for the debt.
(1)
(2)
Section 620.63, Florida Statutes, is part of the Uniform Partnership Act (UPA) which has been adopted by Florida and by most other states. While there is no case from a Florida court that discusses whether, under the UPA, the liability of a general partner on a contractual obligation (i.e., a note) is contingent or not, there is substantial UPA caselaw from other states that recognizes that such liability is contingent upon the creditor first proceeding without satisfaction against the partnership itself. See Head v. Henry Tyler Construction Corporation
The general common law rule is that partnership contracts create only a joint liability among the partners. The partners are not individually liable for partnership contracts, unless assets of the partnership are inadequate to pay the partnership debts or there is not effective remedy without resort to the property of individual partners. [citations omitted.] The Uniform Partnership Act, Section 15(b), provides that partners are jointly liable for all debts and obligations of a partnership, except those arising from a tort or breach of trust.
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The major impact of making partners not merely jointly liable but also severally liable is that if a creditor chooses to bring an action against one of the partners, that partner is liable for all of the partnership debts, regardless of whether the creditor first attempted to recover the debt from the partnership or prove that the partnership had no assets. Several liability is "[l]iability separate and distinct from liability of another to the extent that an independent action may be brought without joinder of others." [citations omitted.] The individual liability associated with partners that are jointly liable is not separate and distinct from the liability of all the partners jointly. Rather, the individual liability arises only after it has been shown that the partnership assets are inadequate. No direct cause of action may be maintained against the individual partners until the above condition is met. Several liability, on the other hand, imposes no such conditions precedent before one can be held individually liable. [Head
For this view, accompanied by its detailed reasoning and analysis, that partners are only jointly, and thus secondarily, liable for contractual obligations (i.e., loans/notes) under the UPA, see also Catalina Mortgage Company, Inc. v. Monier, 800 P. 2d 574 (Ariz. 1990), "[i]f a partnership's debt is contractual in nature, common law requires creditors to resort to and exhaust partnership assets before reaching the partners' individual assets" and "[a]s adopted in most states, the Uniform Partnership Act (UPA) preserves this common law rule"; Wayne Smith Construction Company, Inc. v. Wolman, Duberstein & Thompson, 604 N.E. 2d 157 (Ohio 1992), "partners are not primarily liable for the contractual obligations incurred by their firm" and "[a] partnership creditor in proceedings in execution of a judgment against the partnership must first exhaust partnership property before resorting to the personal assets of partners"; and Seventy-Three Land, Inc. v. Maxlar Partners, 637 A. 2d 202 (N.J.Super.A.D. 1994), "[t]ort creditors may proceed against partners, who are jointly and severally liable, without first proceeding against the partnership; contract creditors may not proceed against partners, who are jointly liable, until after exhausting partnership assets," "[t]he distinction may be explained, if not entirely justified, by the opportunity contract creditors have to require as part of the contract that partners waive their right to insist that the creditor exhaust partnership assets before resorting to partner assets, an opportunity not available to tort creditors," "[t]he Act [UPA] places partners in a position more vulnerable than stockholders but less vulnerable than guarantors of payment," "[p]artners are liable for partnership contract debts, but their assets are not at risk until it is shown that the partnership cannot discharge the debt," and "[p]artners are therefore like guarantors of collection as distinguished from guarantors of payment."
Since Section 620.62 refers to wrongful or tortious conduct and Section 620.625 addresses the misapplication of funds by a partner, neither of which encompass the borrowing of money via a promissory note, your liability on the note would appear to be joint rather than several. Joint liability applies, notwithstanding the printed language at the beginning of the note which states "jointly and severally," because Section 673.118(2), Florida Statutes (1989), which concerns commercial paper (negotiable instruments) such as notes, provides that "[h]andwritten terms control typewritten and printed terms, and typewritten control printed" and your liability under the note is based upon your liability due to your personal status as a general partner (a typewritten term or designation which controls over the printed term "severally"
Thus, we find that you were not required to disclose the loan as a liability. We note that valuing the amount of one's liability for disclosure purposes can be difficult.
You have asked for additional guidance on how to complete the asset and net worth sections of Form 6 in situations where one is involved in a partnership. In valuing as an asset one's general partnership interest, the instructions on Form 6 state that, for partnerships, "[y]ou are deemed to own an interest in a partnership which corresponds to your interest in the capital of that partnership." By "capital,"
In calculating one's net worth, we believe that it would be inappropriate to simply add the value of one's partnership interest as disclosed in the asset portion of the form and then subtract the reported value of liabilities related to the partnership. This would distort one's net worth, by making it appear unduly low, because the partnership's liabilities would be subtracted twice--when valuing the asset (share of equity in the partnership) and again when subtracting the liabilities.
NOTE: In order to avoid a net worth figure that unrealistically portrays your liabilities, these kinds of joint liabilities should be calculated somewhat differently than they were calculated for Part B [liabilities]. Joint liabilities with one or more other persons for which you are 'jointly and severally liable,' should be included in your calculations based upon your percentage of liability as if it were only joint liability (rather than the total amount, as reported in Part D [a typographical error that should read Part B]), with the following exception. . . .
Thus, the valuation of your interest in the partnership should be your share of the equity, or capital, of the partnership.
ORDERED by the State of Florida Commission on Ethics meeting in public session on January 26, 1995, and RENDERED
Chairman