Henkels & McCoy, Inc. v. Adochio

Nineteen people, including Robert Adochio (the limited partners) (defendants), were limited partners of Red Hawk North Associates, L.P. (Red Hawk). Red Hawk and Cedar Ridge Development Corporation (Cedar Ridge) were general partners in the Chestnut Woods Partnership (Chestnut Woods), which developed, built, and marketed homes in Bucks County, Pennsylvania. In December of 1988, Cedar Ridge subcontracted with Henkels & McCoy, Inc. (Henkels) (plaintiff) for a construction project related to the Chestnut Woods development. Henkels completed the construction work but was not fully paid. Henkels sued Cedar Ridge and Red Hawk, operating as Chestnut Woods, for the balance due. The court entered a default judgment, which went unsatisfied. Henkels then sued Red Hawk’s general partner, G&A Development Corporation (G&A), to recover the balance. That action also resulted in a default judgment that went unsatisfied, and Henkels subsequently learned that Red Hawk and G&A had no assets to pay the judgment. Henkels then sued Red Hawk’s limited partners, seeking to compel the return of $492,000 in capital distributions made to Red Hawk’s limited partners in 1989. The capital distributions came from capital that had been returned to Red Hawk from a separate, discontinued Red Hawk–Cedar Ridge joint venture known as Timber Knolls. Henkels asserted that the capital distributions had been made in violation of Red Hawk’s partnership agreement, which gave G&A the power to establish reserves and further provided that cash received by the partnership had to be used to establish reasonable reserves for paying creditors before the receipts could be distributed to the limited partners. Henkels showed that G&A did not set aside any of the money received from Timber Knolls for reserves before making distributions to the limited partners, even though G&A had notice at the time that Red Hawk and Chestnut Woods were in financial trouble. The trial court ultimately entered judgment in Henkels’s favor and held that each limited partner was liable for a proportionate share of the amount owed to Henkels. The limited partners appealed.