Lady Justice

Welcome to another edition of Winter Case Notes in which I clear out my backlog of recent court decisions of interest to business divorce aficionados by way of brief synopses with links to the decisions for those who wish to dig deeper.

And speaking of digging deeper, if you don’t already know, New York’s e-filing system has revolutionized public access to court filings in most parts of the state. The online e-filing portal (click here) allows searches by case index number or party name. Once you find the case you’re looking for, you’ll see a chronological listing with links allowing you to read and download each pleading, affidavit, exhibit, brief, decision, or other filing. No more trips to the courthouse basement to requisition paper files!

This year’s synopses feature matters that run the gamut, from a claimed de facto partnership, to several disputes pitting minority against majority shareholders, to an LLC case in which the court resolved competing interpretations of a somewhat murky operating agreement. Continue Reading Winter Case Notes: De Facto Partnership and Other Recent Decisions of Interest

NewYorkCourtofAppealsIn a controversial ruling last year in Congel v Malfitano, the Appellate Division, Second Department, affirmed and modified in part a post-trial judgment against a former 3.08% partner in a general partnership that owns an interest in a large shopping mall, and who unilaterally gave notice of dissolution, finding that

  • the partnership had a definite term and was not at-will for purposes of voluntary dissolution under Partnership Law § 62 (1) (b) based on the partnership agreement’s provisions authorizing dissolution by majority vote, notwithstanding a 2013 ruling by the Court of Appeals (New York’s highest court) in Gelman v Buehler holding that “definite term” as used in the statute is durational and “refers to an identifiable terminate date” requiring “a specific or even a reasonably certain termination date”;
  • the former partner’s unilateral notice of dissolution therefore was wrongful; and
  • having wrongfully dissolved the partnership and upon the continuation of its business by the other partners, under Partnership Law § 69 (2) (c) (II) the amount to be paid to the former partner for the value of his interest properly reflected a 15% reduction for the partnership’s goodwill value, a 35% marketability discount, a whopping 66% minority discount, and a further deduction for damages consisting of the other partners’ litigation expenses over $1.8 million including statutory interest.

The Appellate Division’s decision, which I wrote about here, and the former partner’s subsequent application for leave to appeal to the Court of Appeals, which you can read here, reveal, to say the least, a remarkable result: the former partner, whose partnership interest had a stipulated topline value over $4.8 million, ended up with a judgment against him and in favor of the other partners for over $900,000.

But the story’s not over. Last week, the Court of Appeals issued an order granting the former’s partner’s motion for leave to appeal. Sometime later this year, the Court of Appeals will hear argument in its magnificent courtroom pictured above and issue a decision in the Congel case which likely will have important ramifications for partnership law whatever the outcome. Continue Reading Court of Appeals to Decide Controversial Partnership Dissolution Case

limited partnershipNotwithstanding the ascendency of the limited liability company, the Delaware limited partnership continues to serve as an important, tax-advantaged vehicle for certain capital-intensive ventures — especially in the energy sector — featuring centralized management and limited liability for large numbers of passive investors.

Late last month, the Delaware Supreme Court handed down two noteworthy decisions springing from suits by limited partners challenging the fairness of conflicted transactions by general partners that were approved by conflicts committees. In one, the high court affirmed Chancery Court’s order rejecting a claim based on the implied duty of good faith and fair dealing where the transaction’s approval by the conflicts committee complied with the agreement’s safe harbor provision and thus contractually precluded judicial review. Employees Retirement System v TC Pipelines GP, Inc., No. 291, 2016 [Del. Sup. Ct. Dec. 19, 2016].

In the other, Supreme Court reversed Chancery Court’s post-trial decision holding the general partner liable in damages owed directly to limited partners for a conflicted, over-priced  “dropdown” transaction by the general partner. The high court disagreed with Chancery Court’s application of the Tooley standard, instead finding that the claims were exclusively derivative and that the post-trial, pre-judgment acquisition by merger of the partnership extinguished the plaintiff limited partner’s standing to seek relief. El Paso Pipeline GP Company, LLC v Brinckerhoff, No. 103, 2016 [Del. Sup. Ct. Dec. 20, 2016].

Together, the two decisions re-affirm the primacy of contract in the realm of alternative entities including limited liability companies, limited partnerships, and master limited partnerships. Continue Reading Limited Partners Take a Licking in Two Delaware Supreme Court Decisions

Goodwill

This is a story about a recent case involving a fight over the inclusion or exclusion of goodwill in valuing the interest of a retired partner in a medical practice organized as a limited liability partnership, and how it easily could have been avoided. But first, it helps to understand the legal framework for valuing such an interest and the type of goodwill at issue.

The limited liability partnership or LLP is a highly popular form of business association for professional practices including law firms and medical groups. As its name suggests, the LLP combines the attributes of a partnership with the limited liability traditionally associated with corporations, except that professionals in LLPs generally remain personally liable for their own misconduct or negligence.

In New York, the formation and registration of LLPs is governed by Article 8-B of the Partnership Law. In all other respects, as to both their internal and external affairs, the New York LLP is governed by the same provisions governing general partnerships codified in Sections 1 through 82 of the Partnership Law based on the ancient Uniform Partnership Act promulgated in 1914. Continue Reading How to Avoid Bad Blood Over Goodwill in Professional Partnership Valuations

66discountTalk about playing your cards wrong.

A partner with a 3.08% interest worth $4.85 million in a partnership that owns a major shopping mall likely will walk away with only a few hundred thousand dollars after a court decision finding that he wrongfully dissolved the partnership and deducting from the value of his interest the other partners’ damages including legal fees, a 15% discount for goodwill, a 35% marketability discount, and a whopping 66% minority discount.

Last week’s decision by the Brooklyn-based Appellate Division, Second Department, in Congel v Malfitano, 2016 NY Slip Op 03845 [2d Dept May 18, 2016], rejected the partner’s appeal from the trial court’s determination of wrongful dissolution and also upheld its valuation determination with one major exception: the appellate court held that the trial court erred by failing to apply a minority discount and that it should have applied a 66% minority discount based on the “credible” expert testimony “supported by the record.”

The defendant partner’s fateful decision took place in 2006, when he sent his fellow partners a written notice unilaterally electing to dissolve the partnership due to what he described as a “fundamental breakdown in the relationship between and among us as partners.” The other partners quickly responded with a damages lawsuit claiming that he had wrongfully dissolved in violation of the partnership agreement in an effort to force the partnership to buy out his interest at a steep premium. The defendant, arguing that the partnership was at-will and of indefinite duration, denied wrongful dissolution and counterclaimed for his full, pro rata share of the partnership’s value upon dissolution. Continue Reading Partner Who Wrongfully Dissolved Partnership Hit With Whopping 66% Minority Discount

BreakupIt seems that every time I comment on the dearth of business divorce cases involving partnerships in an era increasingly dominated by limited liability companies, up pops a new and interesting decision in a dispute among partners in a general or limited partnership. In this instance, I’m proven wrong by not one but by three recent decisions involving partnership disputes although, I have to point out in my own defense, two of the three spring from what I call legacy partnerships formed in the 1980’s, i.e., before the advent of LLCs in New York.

Camuso

The first is Camuso v Brooklyn Portfolio, LLC, 50 Misc 3d 1226(A), 2016 NY Slip Op 50273(U) [Sup Ct Kings County Mar. 8, 2016], which is making its second appearance on this blog.

My previous post examined a decision almost two years ago by Brooklyn Commercial Division Presiding Justice Carolyn E. Demarest in which she determined that a real estate partnership agreement’s transfer restrictions gave way to a marital divorce settlement conveying half of one partner’s 50% interest to his ex-wife where the other 50% partner, who never formally consented to the conveyance as required by the partnership agreement, nonetheless subsequently ratified the transfer in the partnership tax returns and by prior judicial admissions. Continue Reading A Potpourri of Partnership Breakups

KornreichManhattan Commercial Division Justice Shirley Werner Kornreich (pictured) is not known to mince words, so one has to sit up and take notice when she describes a partnership dissolution case as “yet another unfortunate example of a family business dispute that has developed into needless litigation” whose “outcome here is obvious.”

The judge’s admonition in Redel v Redel, 2015 NY Slip Op 31941(U) [Sup Ct NY County Oct. 16, 2015], springs from a suit against the plaintiff’s father and two sisters concerning a general partnership formed by the four of them over 30 years ago to acquire and hold a 10% interest in a limited partnership known as 225 Broadway Co. which owns an office building in lower Manhattan. The amended complaint (read here) identifies Leder Enterprises as an at-will family partnership with no written partnership agreement in which the father holds a 40% interest as managing partner and the sisters hold 20% apiece.

The complaint alleges that, in violation of various provisions of the Partnership Law, the father sold a 4% partnership interest to the plaintiff’s ex-boyfriend without her knowledge or consent; failed to provide plaintiff with reasonable access to partnership books and records; failed to provide a reasonable explanation for a $50,000 “shortfall” in plaintiff’s capital account; and failed to comply with the plaintiff’s demand for the immediate dissolution and winding up of Leder Enterprises. The complaint seeks declaratory judgments of dissolution and that the ex-boyfriend is not a partner, a formal accounting, and damages against the father for breach of fiduciary duty. Continue Reading Court Chides Parties in Family Partnership Dispute for “Needless” Litigation with “Obvious Outcome”

limited partnershipA post I wrote two years ago referred to the limited partnership as “the dinosaur of business forms in New York” destined for “virtual extinction” due to New York’s outmoded partnership laws coupled with the meteoric rise of the limited liability company. As the years roll by, the limited partnership’s obsolescence is especially pronounced for those governed by New York’s Uniform Limited Partnership Act of 1922 (“NYULPA”) codified in Article 8 of the New York Partnership Law, applicable to limited partnerships formed prior to, and exempted from, the New York Revised Uniform Limited Partnership Act of 1991 (“NYRULPA”) codified in Article 8-A of the Partnership Law.

The rarity of new business divorce cases involving NYULPA-governed limited partnerships makes it all the more intriguing when one comes along, as happened earlier this month in a case called Doppelt v. Smith, 2015 NY Slip Op 31861(U) [Sup Ct NY County Oct. 1, 2015], decided by Manhattan Commercial Division Justice Eileen Bransten.

Doppelt doesn’t disappoint, thanks to its holding that a provision in a limited partnership agreement, authorizing voluntary dissolution upon the majority vote of the limited partners, precluded the plaintiff’s claims seeking judicial (involuntary) dissolution. Although neither the court nor the parties labeled it as such, and while the defendant in his briefs referred to plaintiff’s lack of “capacity” to seek judicial dissolution, I believe a more apt description of the court’s holding is that, effectively, it enforced a contractual waiver of the limited partner’s statutory right to seek judicial dissolution. Continue Reading Court Enforces Waiver of Limited Partner’s Right to Seek Judicial Dissolution — Or Did It?

Hit or MissPartnership dissolution cases have an especial poignancy, more so than cases involving other forms of business entities.

I think it’s because general partnerships are a dying breed of business association, supplanted in our litigious society by limited liability entities such as S corporations and LLCs.

The occasional partnership dissolution cases that land in court these days tend to involve family or multi-family real estate partnerships formed decades ago, in which one or more of the original partners have passed away or are approaching retirement and looking either to exit or to transfer their partnership interest and/or management role to their children. Fittingly, along with elderly parties the statutes governing the disputes are found in the superannuated New York Partnership Law, essentially unchanged since its adoption in 1919.

Such was the case in Breidbart v Olshan, Decision and Order, Index No. 003610/12 [Sup Ct Nassau County May 27, 2015], involving a realty partnership formed in 1977 to acquire and develop under a long-term lease a commercial office building in Lake Success on Long Island. The partnership, known as Boundary Realty Associates, consisted of three partners: Olshan (50%), Rosenberg (25%), and Breidbart (25%). The written partnership  agreement provided that the partnership would employ as managing agent for the first three years a firm owned and operated by Olshan at a fixed commission of 4% of gross rental income. The agreement also provided for termination of the partnership in 2020 or sooner upon the consent of a majority in interest of the partners. Continue Reading Decision Yields Hits and Misses for Plaintiff in Partnership Dissolution Case

P'shipIn the early 1990’s New York enacted its version of the Revised Uniform Limited Partnership Act (NYRULPA), codified in Article 8-A of the New York Partnership Law §§ 121-101 et seq. The law’s modernized features include in §§ 121-1101 through 1105 provisions for the merger and consolidation of limited partnerships along with the right of dissenting limited partners to be paid “fair value” for their partnership interests as determined in an appraisal proceeding.

You can count on one hand the number of published New York court decisions over the last 25 years dealing with dissenting limited partners. In fact, until this year, it’s possible you could count the number on one finger, that being the Court of Appeals’ 2008 ruling in the Appleton Acquisition case which I wrote about here. Appleton held that a limited partner may not bring an action seeking damages or rescission based on allegations of fraud by the general partner in connection with a merger transaction, and that the statutory appraisal proceeding is the exclusive remedy for such claims. Appleton never reached the issue of appraisal.

It therefore appears that last month’s decision by Manhattan Supreme Court Justice Geoffrey D. Wright in Levine v Seven Pines Associates L.P., 2015 NY Slip Op 30138(U) [Sup Ct NY County Jan. 28, 2015], may be the first published ruling that addresses issues attendant to a fair value determination in a dissenting limited partner case under NYRULPA.

Now, if you’re hoping for a meaty decision that delves into the fine points of appraisal methodology, Levine is not your case. Rather, Levine was decided on pre-trial motions to fix a date for an appraisal hearing and to compel the respondent limited partnership to provide certain pre-trial disclosure. In addition, the procedural aspects of the dissenting limited partner provisions in § 121-1105 expressly piggyback on the well-established procedures set forth in § 623 of the Business Corporation Law dealing with dissenting shareholders. Still, the issues decided in Levine serve up some useful pointers for practitioners. Continue Reading Decision in Dissenting Limited Partner Case Directs Fair Value Hearing, Grants Discovery