Zions First National Bank, N.a., As Indenture Trustee Fornoteholders of Cfs Fox River, Ltd., Plaintiff-appellee, v. Carl M. Fisher, D.o.; Rachel C. Fisher; Geoffrey O.hartzler; Robert W. Miley; W. Michael Pryor;elvin L. Shelton, Defendants-appellants,andrichard L. Kolp, James A. Murray, Defendants, 947 F.2d 955 (10th Cir. 1991)

This is an appeal by certain investors in a bankrupt limited partnership from a judgment of the district court which held the investors liable for the payment of a note pledged by the partnership as security for loans to the partnership. As a group, the investors raised several defenses which the district court held unavailing. In Zions First Nat'l Bank v. Bailey, No. 90-4087, (Keegan's Glen), we held the district court did not err in rejecting the claims of the Keegan's Glen defendants based on alleged security violations, failure of consideration, frustration of partnership purpose, and breach of fiduciary duty, among others. Because the common defenses claimed by the defendants in this case raise the same questions of law presented in Keegan's Glen, we affirm the district court's decision relating to these defenses in this case.

However, in addition to the defenses common to all the investors, Dr. W. Michael Pryor claimed he was no longer liable on the note because he had sold his interest to a third party. To allow the case to be joined on appeal with Keegan's Glen, the district court granted plaintiff's motion for summary judgment on this claim as well. Although the district court recognized Dr. Pryor's "novation" defense was not addressed in Keegan's Glen, it found Dr. Pryor's arguments without merit.

In 1984, Dr. Pryor became a limited partner in CFS Fox River, Ltd., a Utah limited partnership formed to acquire and operate an existing apartment complex located in Marietta, Georgia. Under the terms of the CFS Fox River Subscription Agreement and the Amended and Restated Limited Partnership Agreement of CFS Fox River, Ltd., Dr. Pryor purchased his limited partnership interest in Fox River by paying partially in cash and partially in a promissory note payable to Fox River.

His promissory note (Investor's Note and Security Agreement) obligated him to pay the balance of his capital contribution in installments due on February 15, 1985, and February 15, 1986. Dr. Pryor made his February 1985 payment, and in 1986 he sold his partnership interest to Mr. Dean Price, a CFS sales representative. By the terms of the sale, Dr. Pryor conveyed to Mr. Price all his "right, title and interest."

Meanwhile, Fox River borrowed money from twenty-two investors (Noteholders) in exchange for which Fox River executed indenture notes secured, in part, by Dr. Pryor's Investor's Note. Fox River and appellee, Zions First National Bank, then executed an indenture agreement by which Zions agreed to serve as indenture trustee for the Noteholders.

Subsequent to the sale of Dr. Pryor's interest to Mr. Price, Fox River defaulted on its payments to its Noteholders, and the apartment complex was lost through foreclosure. Zions, in its representative capacity as Indenture Trustee for the Noteholders, commenced efforts to collect the limited partners' unpaid capital contributions due under their Investor's Notes which had been pledged to the Noteholders as collateral.

Believing his obligation to pay the 1986 installment was terminated by the sale to Mr. Price, Dr. Pryor declined to pay. The district court held on cross-motions for summary judgment that Dr. Pryor was liable for the 1986 installment.

Both the Investor's Note and the investor-partnership Security Agreement which Dr. Pryor signed are silent regarding transferability. The Subscription Agreement mandates that any transfer of partnership units can be made only in accordance with the Partnership Agreement.¹ The Partnership Agreement contains elaborate requirements for both the transfer of partnership interests² as well as for substitution of a limited partner.³

Under the terms of the Partnership Agreement, for Dr. Pryor to substitute Mr. Price as a limited partner, Dr. Pryor would have had to comply with the five conditions specified in section 13(c) of the Partnership Agreement. Dr. Pryor presented no evidence whatsoever that he had made any attempt to comply with those requirements. The only evidence offered on behalf of Dr. Pryor was that subsequent lists and minutes of partnership meetings contained Mr. Price's name instead of Dr. Pryor's. This evidence is at best ambiguous because of Dr. Pryor's failure to prove compliance with section 13(c). Moreover, it proves no more than Fox River's recognition that Dr. Pryor had transferred his partnership interest. It is not, as Dr. Pryor would have us conclude, evidence that Fox River recognized Mr. Price as a substituted Partner. This is a fatal deficiency in proof. Having failed to establish his satisfaction of the contractual conditions for an effective substitution of his partnership interests and responsibilities, Dr. Pryor remains obligated by the terms of the agreements and note he executed.

AFFIRMED.