With the growing prevalence of limited liability companies, notable general partnership decisions become fewer and further between with each passing year.
A common fact pattern in which increasingly rare general partnership decisions continue to arise is family general partnerships founded decades ago by prior generations, with the current younger generation of partners, often siblings or cousins, finding themselves unwilling or unable to agree either upon a new entity structure (i.e., conversion to an LLC), or to disposition of the entity’s assets (i.e., sale to a third party).
In the absence of an agreement to the contrary, New York law imposes a requirement of unanimity upon either decision.
Inability to Achieve Unanimity Begets Conflict
Section 1006 (c) of the Limited Liability Company Law provides that a general-partnership-to-LLC-conversion “must be approved by all of the partners of the partnership. . . .” Noncompliance with the statute renders an attempted conversion “ineffective” (Miller v Ross, 43 AD3d 730 [1st Dept 2007]).
Likewise, Section 20 (c) (3) of the Partnership Law provides that “less than all the partners have no authority” to “[d]o any . . . act which would make it impossible to carry on the ordinary business of the partnership.” Cases applying Partnership Law § 20 (c) (3) hold that sale of a single real estate asset owned by a general partnership would make it impossible to carry on the business of the partnership, causes the partnership’s dissolution by operation of law, and therefore, requires unanimity, lack of which renders the attempted sale “null and void” (Camuso v Brooklyn Portfolio, LLC, 164 AD3d 739 [2d Dept 2018]).
The unanimity requirement for either of these important strategic transactions can make it exceedingly difficult to find a path forward if just one general partner withholds consent. It is, in fact, a recipe for deadlock.
The flipside of the unanimity requirement is that – at least in theory – partners of a general partnership at-will are free to disassociate from one another at any time without liability, which causes the entity’s dissolution by operation of law, after which the entity is supposed to liquidate its assets as part of its wind up.
I say “in theory” because in a lawsuit resulting in a recent decision by Brooklyn Commercial Division Justice Leon Ruchelsman, three sibling partners of a New York general partnership without a partnership agreement have found it exceedingly difficult – despite many years of litigation – to disassociate themselves from their antagonistic brother over their disagreement about what to do with the entity’s sole asset, an apartment building in Brooklyn.
All partners but one wanted to sell. The lone holdout, Arthur, refused. Litigation ensued. As the majority partners have learned to their immense frustration, breaking up – even in a general partnership at-will – can be hard to do.Continue Reading A General Partnership in Perpetual Enmity