Arizona Court of Appeals Division One Holds That Arizona’s Limited Partnership Act Does Not Require Automatic Removal of a General Partner from a Limited Partnership When a Legally Defective Proceeding for Dissolution Remains Pending Against the General Partner for More Than 120 Days.

This case involves a dispute between two brothers, Jerry Simms and Ron Simms, over the control of TP Racing, L.L.L.P., a limited partnership which owns and operates a horse-racing facility.  J&R Racing, L.L.C., is TP Racing’s sole general partner.  Jerry Sims and RASCD, Inc., a company owned and controlled by Ron Simms, each own 50% of J&R Racing.  Jerry is the manager of J&R Racing and has the authority to conduct its day-to-day affairs.  RASCD’s consent is required for all other decisions.  Jerry owns about 55% of the interests in TP Racing.  TP Racing’s other limited partners include Ron Simms and two trusts for which Ron is the trustee.

In July 2010, TP Racing filed suit against Ron and a company owned by Ron alleging defaults on a promissory note and other obligations.  In response, in February 2011, Ron, RASCD, and the trusts filed suit against Jerry and J&R Racing asserting claims related to Jerry’s management of TP Racing, through J&R Racing.  One claim, brought by Ron and the trusts sought judicial dissolution of TP Racing and J&R Racing.  The complaint invoked the Limited Partnership Act as the authority for judicial dissolution.

In February 2012, Jerry sent a notice to Ron of a partnership meeting for TP Racing.  The notice stated that the pending dissolution action had, by operation of law, removed J&R Racing as the general partner for TP Racing, pursuant to its operating agreement and A.R.S. § 29-323(5).  The notice further stated that a majority of the limited partners had elected Jerry as the interim general partner and that an election for a new permanent general partner would be conducted at the meeting.

Ron and RASCD moved for a temporary restraining order and preliminary injunction to prevent the removal of J&R Racing as TP Racing’s general partner and the election of a new general partner.  The superior court granted the injunction, concluding that J&R Racing had not been withdrawn as TP Racing’s general partner by operation of law.

The Court of Appeals affirmed.  A provision of the Limited Partnership Act, A.R.S. § 29-323(5) provides that a general partner is withdrawn if “one hundred twenty days after the commencement of any proceeding against the general partner seeking . . . dissolution . . . under any statute, law or regulation, the proceeding has not been dismissed . . . .”  The Court rejected Jerry and TP Racing’s proposed interpretation of the statute because it would lead to absurd results – a literal reading of the statute would allow a frivolous claim to force the removal of a general partner.  Instead, the statute must be read to refer only to “those cases that could legally cause dissolution” of the general partner (not the limited partnership).

In this case, the Court concluded that the pleading had failed to state a claim for dissolution of J&R Racing.  The claim’s allegations were completely unrelated to J&R Racing; they related only to TP Racing’s business. In addition, the claim was brought under the Limited Partnership Act, which applied to TP Racing, but not J&R Racing.  Moreover, only members of a limited liability company may bring a claim for dissolution of the company, and the applicable claim in this case was brought by Ron and the trusts, who are not members of J&R Racing.  Finally, the court noted that the parties opposing removal are the ones who brought suit seeking dissolution.  Thus, “it is hardly surprising that the action purportedly giving rise to removal was not dismissed within 120 days.”

The Court of Appeals also concluded that the superior court had not abused its discretion by enjoining any meetings or actions for the purpose of removing J&R Racing as the general partner of TP Racing or electing a new general partner, without further order of the court.  Ron and RASCD would be irreparably harmed by the removal of J&R Racing as the general partner because it would deprive them of managerial participation in TP Racing.  The Court also concluded that the scope of the injunction was appropriate because it was crafted to prevent Jerry and TP Racing from unilaterally effecting J&R Racing’s withdrawal as general partner.  The injunction would allow Jerry and TP Racing to apply to the court if a change in circumstances warranted J&R Racing’s removal.

Judge Swann authored the opinion; Judges Orozco and Cruz concurred.