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Casey v. Chapman | 98 P.3d 1246 (2004)

Equity interests, including partnership interests, may be given as collateral for a loan. However, like an onion, a partnership interest has many layers, including management rights, voting rights, economic rights, and equity interests. If the lender exercises its power of sale with respect to the partnership interest, what rights and interests will a purchaser receive? A Washington state court considered this question in the two thousand four case of Casey versus Chapman.

In nineteen eighty-five, James Chapman, Daniel Casey, and others formed a general partnership known as South Three-Twentieth Federal Way Partnership.

In nineteen ninety-three, Casey agreed to purchase Chapman’s entire partnership interest for two hundred thousand dollars. All of the partners of South Three-Twentieth signed the purchase agreement. Casey and Chapman concurrently signed a promissory note and security agreement under which Casey pledged the partnership interest as collateral for the debt. The agreement gave Chapman the right to foreclose and sell the interest in case of default.

By nineteen ninety-five, Casey had defaulted. Chapman began foreclosure proceedings. Casey filed suit and was granted a temporary restraining order and preliminary injunction to prevent the sale. While the litigation was pending, Casey and Chapman settled. Under the settlement agreement, if Casey failed to make an additional payment, the partnership interest would be foreclosed pursuant to the Uniform Commercial Code, or U C C. Casey didn’t make the payment. Bruno Investments was the successful bidder at the foreclosure sale and purchased the partnership interest.

Chapman sought entry of a declaratory judgment determining that Bruno Investments had acquired all voting rights, equity interests, and economic interests of the partnership interest. Casey argued that Bruno Investments had only received the right to profits, not voting and management rights. The trial court disagreed and entered the declaratory judgment. Casey appealed to the Washington Court of Appeals.

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