Nicholas Kostanty formed a limited partnership with his father-in-law, Ray Sweeney, to open an upscale French restaurant in a midwestern town. Mr. Kostanty was the general partner and owned 75 percent of the business. Mr. Sweeney, with 25 percent ownership, was the limited partner and invested $100,000. After one year, difficulties in the restaurant’s operation caused business to drop off, and Mr. Kostanty called Mr. Sweeney for advice.
After hearing of the difficulties, and concerned with the security of his investment, Mr. Sweeney traveled from Arizona to Indiana to visit the operation. Upon observing the operation for two days, the two partners decided to launch a large and expensive television ad campaign to increase flagging sales. Mr. Sweeney designed the campaign with the help of Seelhoff Advertising and Video, a local advertising agency specializing in television commercials.
Despite an immediate increase in sales, volume continued to decline, and finally, three months after the ad campaign was launched, the restaurant closed its doors. Total debts at the time the restaurant closed equaled $400,000, with assets of the partnership only being $200,000. Included in the debt was $150,000 owed to the advertising agency. The agency sought payment directly from Mr. Sweeney.
Mr. Sweeney claimed that his liability was limited to the $100,000 he had previously invested in the business, and refused to pay any additional money. The Seelhoff Advertising Agency sued the limited partnership, as well as Nicholas Kostanty and Ray Sweeney individually
- By hiring the advertising agency, did Mr. Sweeney forfeit his limited partner status?
- Is Mr. Sweeney liable for the outstanding debts of the limited partnership?
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