Submitted: January 20, 1993
Filed: February 25, 1993
Jerald E. Jones
West & Jones
Clarksburg, West Virginia
Attorney for the Appellees
Fred L. Riggleman and
Louis E. Enderle, Jr.
Steptoe & Johnson
Clarksburg, West Virginia
R. Mike Mullens
Elkins, West Virginia
Attorneys for the Appellant
JUSTICE MILLER delivered the Opinion of the Court.
1. Under W. Va. Code, 47-8A-40, the liability of a
partnership to creditors other than partners must be given greater
priority in the order of payment than the liability owed by a
partnership to its partners when the partnership is dissolved.
2. The common law was that a partner in a partnership
dissolution could not assert a lien on partnership assets that
would create a preferential claim over its general creditors. This
same result has been reached interpreting the Uniform Partnership
Act, W. Va. Code, 47-8A-1, et seq.
3. The doctrine of plain error will be recognized in a civil case where the case was tried before a judge without a jury and both parties without objection have allowed the court to try the case on a totally erroneous legal theory that was dispositive of the outcome of the case to the substantial prejudice of the appealing party.
Donald H. Lowther appeals from an adverse ruling entered
by the Circuit Court of Randolph County on June 25, 1991. The
trial court ruled that excess money remaining from the sale of
property owned by the Four Square Partnership should be distributed
to the appellees, Fred L. Riggleman and Granville J. Zopp. The
appellant contends that the trial court erred in ordering the
excess money distributed to the appellees and that the money should
have been ordered to be distributed to him because he is a non-partner creditor of the partnership, unlike the appellees, who are
partner creditors.See footnote 1 For the reasons that follow, we find for the
The appellees and Robert L. Lowther, brother of the
appellant, formed Four Square Partnership in 1985. The three were
equal partners. Their object in creating the partnership was to
acquire real estate upon which to construct buildings to be used in
a commercial retail venture. In the course of the partnership,
both of the appellees loaned money to the partnership. Mr.
Riggleman loaned the partnership $30,000 and Mr. Zopp loaned the
partnership a total of $50,000. Apparently, Robert L. Lowther
convinced the appellant to loan the partnership at least $80,000.See footnote 2
Although the record does not disclose the nature of the
partnership's financial problems, it appears that the partnership
did not fare well after the retail commercial venture began. The
appellees offered Robert Lowther an option to purchase both their
interests in the partnership and in a corporation formed to operate
the commercial venture. Robert Lowther conditionally agreed to the
option arrangement based upon his ability to find new investors in
the partnership. The search for new investors was ultimately
Upon learning of this failure, the appellees recorded
deeds of trust securing their loans to the partnership. The
appellant, Robert Lowther, also partially recorded documents
purporting to be deeds of trust securing the loans of the
appellant. The bank which had loaned money to the partnership for
the construction of the retail building ultimately foreclosed under
its deed of trust. The property was sold and, after paying off the
bank, there was left $87,783, which became available for
distribution because the partnership was in the process of
The trial court found the deeds of trust recorded by the
appellees to be valid and found that the documents recorded in
favor of the appellant were invalid. It determined that the
appellant had loaned the partnership $80,000 and received a
promissory note signed by the three partners. Despite this
finding, the trial court determined that the appellees "had no
actual notice of any valid lien in [the appellant's] favor upon the
partnership real estate at the time they recorded their respective
deeds of trust." Consequently, because their liens were filed
ahead of the appellant's, the trial court ordered that the
appellees should receive the excess proceeds realized from the sale
by the bank of the partnership's retail building.
Counsel for the appellant argue that basic tenets of
partnership law dictate that upon the dissolution of a partnership
and the sale of a partnership's assets, any excess monies recovered
from such a sale must first be applied to debts owed to general
creditors before any monies may be used to repay debts owed to
partners in a partnership. Both the relevant statute under our
Uniform Partnership Act, W. Va. Code, 47-8A-1, et seq., and case
law based on the common law of partnership are clear and support
Under the Uniform Partnership Act, the order of
priorities in settling accounts of a partnership upon its
dissolution is found in W. Va. Code, 47-8A-40, which provides, in
"In settling accounts between the partners after dissolution, the following rules shall be observed, subject to any agreement to the contrary:
"(a) The assets of the partnership are:
"(I) The partnership property,
"(II) The contributions of the partners necessary for the payment of all the liabilities specified in clause [subsection] (b) of this paragraph [section].
"(b) The liabilities of the partnership shall rank in order of payment as follows:
"(I) Those owing to creditors other than partners,
"(II) Those owing to partners other than for capital and profits,
"(III) Those owing to partners in respect of capital,
"(IV) Those owing to partners in respect of profits."
Thus, under the foregoing statute, the liability of a
partnership to creditors other than partners, such as the
appellant, must be given greater priority in the order of payment
than the liability owed by a partnership to its partners, such as
the appellees, when the partnership is dissolved. The common law
partnership rules regarding distribution of the assets of a
partnership upon dissolution are much the same, as illustrated by
Syllabus Point 4 of Hyre v. Lambert, 37 W. Va. 26, 16 S.E. 446
"The assets of a firm are to be applied in the following order: First, in payment of the debts and liabilities of the firm to persons who are not partners; second, in payment to each partner ratably of what is due from the firm to him for advances, as distinguished from capital; third, in payment to each partner ratably of what is due from the firm to him in respect of capital; fourth, the ultimate residue, if any, is divisible among the partners in the proportion in which profits are divisible under the partnership contract."
See also Jones v. Rose, 81 W. Va. 177, 94 S.E. 41 (1917); Floyd v.
Duffy, 68 W. Va. 339, 69 S.E. 993 (1910); Koelz v. Brinkman, 50
W. Va. 270, 40 S.E. 578 (1901).
Although not directly at issue in this case, we set out
in Syllabus Points 1 and 2 of Stump v. Wilson, 100 W. Va. 227, 130
S.E. 463 (1925), the rule applicable to partners who leave or
retire from a partnership before it is dissolved:
"1. The claim of a retiring partner against the firm is inferior to the claims of the partnership creditors. His demand cannot be paid until the debts of such creditors are discharged.
"2. A retiring partner may be
restrained from securing a preference of his
claim over those of the partnership
Thus, it is clear that even where a partner has left or retired
from the partnership, his claim against the partnership is
ordinarily considered to be inferior to those of "partnership
creditors," i.e., non-partner creditors of the partnership.See footnote 3 These
rules are codified in more detail in W. Va. Code, 47-8A-41 and -42.
There is no express language in the Uniform Partnership
Act that states that a partner may not have a lien on partnership
assets superior to that of a general creditor of the partnership
upon its dissolution. As Stump v. Wilson, supra, points out, a
retiring partner cannot secure a lien on partnership assets over
its general creditors upon dissolution. Obviously, the same rule
should apply to an existing partner. Thus, the common law was that
a partner in a partnership dissolution could not assert a lien on
partnership assets that would create a preferential claim over its
general creditors. This same result has been reached interpreting
the Uniform Partnership Act. See, e.g., In Re Johnson, 51 B.R. 220
(D.C. Colo. 1985); In Re Fulton, 43 B.R. 273 (M.D. Tenn. 1984);
Carter v. Carter, 247 Ala. 409, 24 So. 2d 759 (1945); Retzke v.
Larson, 166 Ariz. 446, 803 P.2d 439 (1990); Stroebel-Polasky Co. v.
Slachta, 106 Mich. App. 538, 308 N.W.2d 273 (1981). We agree with
this rule, and, therefore, conclude that the appellees are not
general creditors of the partnership on a par with the appellant.
In closing, we note that these rules regarding the
priority of claims upon the dissolution of a partnership were not
raised before the trial court. Both sides proceeded on the theory
of who had the better recorded lien. The appellant's counsel on
appeal raises for the first time the correct law with regard to a
creditor of the partnership's enhanced status over a partner upon
dissolution of the partnership.
Here, the case was tried without a jury and the law given
to the trial court was clearly erroneous, even though no objection
was made. The situation is analogous to one in which erroneous
instructions have been given to a jury and no objection has been
made. This is covered by Rule 51 of the West Virginia Rules of
Civil Procedure, which states, in part: "but the court or any
appellate court, may, in the interest of justice, notice plain
error in the giving or refusal to give an instruction, whether or
not it has been made the subject of objection."See footnote 4
In Mollohan v. Black Rock Contracting, Inc., 160 W. Va. 446, 449, 235 S.E.2d 813, 815 (1977), we said this about Rule 51: "Rule 51, as noted in Casto v. Martin, [159 W. Va. 761, 230 S.E.2d 722 (1976)], and Earp v. Vanderpool, [160 W. Va. 113], 232 S.E.2d 513 (1976), . . . allows us, in the interest of justice, to notice a plainly erroneous instruction even if it was not objected to before jury argument." Earlier, in Earp v. Vanderpool, 160 W. Va. 113, 232 S.E.2d 513 (1976), we held in Syllabus Point 6:
"Where an error respecting an instruction is not preserved by compliance with Rule 51 of the West Virginia Rules of Civil Procedure but is obvious and substantially affects the fairness and integrity of the trial proceeding, the interests of justice may mandate the exercise of this Court's discretionary authority to note plain error."
Moreover, in Earp, we recognized that "[s]uch discretion
must be exercised sparingly and only in exceptional cases." 160 W.
Va. at 121, 232 S.E.2d at 518. The polestar of any inquiry is
whether the legal error committed is so substantial that it can be
said from the record that a grave injustice was done to the
complaining party. The rule is not designed to enable a party to
seek an advantage by deliberately refusing to object to clear legal
error. Other jurisdictions exercise much the same test with regard
to their counterpart to Rule 51. See, e.g., Morris v. Travisono,
528 F.2d 856 (1st Cir. 1976); Williams v. City of New York, 508
F.2d 356 (2d Cir. 1974); Brown v. Avemco Inv. Corp., 603 F.2d 1367
(9th Cir. 1979); Jackson Printing Co., Inc. v. Mitan, 169 Mich.
App. 334, 425 N.W.2d 791 (1988); Johnson v. Jensen, 433 N.W.2d 472
(Minn. App.), rev'd on other grounds 446 N.W.2d 664 (Minn. 1989);
Keller v. Noble, 229 Neb. 542, 428 N.W.2d 170 (1988); Falk v. Keene
Corp., 113 Wash. 2d 645, 782 P.2d 974 (1989); Triton Coal Co. v.
Mobil Coal Producing, Inc., 800 P.2d 505 (Wyo. 1990).
Furthermore, it appears that a number of jurisdictions
without the benefit of any particular procedural rule have adopted
a general plain error rule in civil cases which allows an appellate
court to consider an error not raised below when such an error
results in a manifest injustice. See, e.g., Sea Lion Corp. v. Air
Logistics of Alaska, Inc., 787 P.2d 109 (Alaska 1990); City Bank v.
Saje Ventures II, 7 Haw. App. 130, 748 P.2d 812 (1988); Ramirez v.
Bureau of State Lottery, 186 Mich. App. 275, 463 N.W.2d 245 (1990),
app. denied, 475 N.W.2d 819 (1991); Murin v. Frapaul Constr. Co.,
240 N.J. Super. 600, 573 A.2d 989 (1990); Falk v. Keene Corp.,
supra; Jacobs v. Jacobs, 138 Wis. 2d 19, 405 N.W.2d 668, rev.
denied 139 Wis. 2d 860, 415 N.W.2d 162 (1987).
We have not adopted a general rule of harmless error in
civil casesSee footnote 5 and have traditionally stated the principle found in
Syllabus Point 3 of O'Neal v. Peake Operating Co., 185 W. Va. 28,
404 S.E.2d 420 (1991):
"'Where objections were not shown to have been made in the trial court, and the matters concerned were not jurisdictional in character, such objections will not be considered on appeal.' Syllabus Point 1, State Road Commission v. Ferguson, 148 W. Va. 742, 137 S.E.2d 206 (1964)."
It is sufficient for purposes of this case to hold that
the doctrine of plain error will be recognized in a civil case
where the case was tried before a judge without a jury and both
parties without objection have allowed the court to try the case on
a totally erroneous legal theory that was dispositive of the
outcome of the case to the substantial prejudice of the appealing
The record amply demonstrates that both parties tried the
case on the sole and erroneous issue that the priority of the
various parties' notes and deeds of trust would determine who was
entitled to the excess amount held by the bank. This was clearly
not the correct law. Our result would be different if it were
shown that the disputed legal issue was not clear cut.
For the foregoing reasons, we find that the trial court
committed reversible error when it held that the partnership debts
owed to the appellees took precedence over those owed to the
appellant. We, therefore, reverse the judgment of the Circuit
Court of Randolph County and remand this case for further
proceedings consistent with this opinion.
Reversed and remanded.
Footnote: 1The style of the case is a bit confusing as the original complaint was filed by Robert L. Lowther who was a member of the partnership. He asked the circuit court to prevent any of the partners from disposing or receiving any of the assets of the partnership until the court made a determination as to who was legally entitled to receive them. Subsequently, the appellant, Donald Lowther, was granted the right to intervene in order to establish the priority of his loan to the partnership.
Footnote: 2It is undisputed that the appellant loaned the partnership $80,000. The appellant also claims he later loaned the partnership $20,000, but the appellees deny that claim and contend that the $20,000 originated with Robert L. Lowther. The trial court did not make any conclusive finding on this issue nor do we.
Footnote: 3In Syllabus Point 3 of Lutz v. Miller, 102 W. Va. 23, 135 S.E. 168 (1926), we stated this principle with an added limitation: "A partner cannot repay himself out of the firm's assets for advances made the partnership, except with the assent of his co-partners, express or implied, and not then until the general creditors are paid." (Emphasis added). See also Burdett v. Greer, 63 W. Va. 515, 60 S.E. 497 (1908), where we stated in Syllabus Point 1 that contracts formed by a partner, while part of the partnership, are binding on that partner even after the dissolution of the partnership: "All the partners are still bound, after dissolution, by a contract made during the partnership."
Footnote: 4The relevant text of Rule 51 of the Rules of Civil Procedure provides:
"No party may assign as error the giving or the refusal to give an instruction unless he objects thereto before the arguments to the jury are begun, stating distinctly, as to any given instruction, the matter to which he objects and the grounds of his objection; but the court or any appellate court, may, in the
interest of justice, notice plain error in
the giving or refusal to give an instruction,
whether or not it has been made the subject
of objection. Opportunity shall be given to
make objection to the giving or refusal to
give an instruction out of the hearing of the
Footnote: 5In criminal cases, we have adopted Rule 52 of the West Virginia Rules of Criminal Procedure, which states:
"(a) Harmless Error. Any error,
defect, irregularity or variance which does
not affect substantial rights shall be
"(b) Plain Error. Plain errors or
defects affecting substantial rights may be
noticed although they were not brought to the
attention of the court."