See full size imageAccording to a summary on the website of the Uniform Law Commissioners, thirty-four states have adopted the Revised Uniform Partnership Act of 1994 (RUPA) which, among other significant changes to the original Uniform Partnership Act of 1914 (UPA), no longer provides for automatic dissolution of a general partnership upon the ordinary dissociation of a partner, including upon the death of a partner.  Under the default rules of RUPA §§601 and 801, the partnership continues after the death of a partner subject to the partnership’s obligation under §701 to purchase the deceased partner’s interest for a buyout price equal to the greater of liquidation or going-concern value.  (Read here a summary of RUPA’s major revisions.  Read here the text of RUPA.)

New York is in the minority of states that has not adopted RUPA.  Thus under §62(4) of New York’s UPA-based Partnership Law enacted in 1919, absent contrary agreement the death of a partner automatically triggers dissolution of an at-will general partnership.  While Partnership Law §73 permits continuation of the partnership accompanied by a buyout of a deceased member’s interest under certain, narrowly-defined circumstances (e.g., see my previous piece on the Vick v. Albert case), otherwise the partnership must be dissolved and its business wound up.

Such was the case in Matter of Franzese (Franzese Realty Associates), 2009 NY Slip Op 33139(U) (Sup Ct Nassau County Dec. 16, 2009), in which Nassau County Commercial Division Justice Timothy S. Driscoll was tasked with cleaning up a messy dispute between the surviving siblings of a family-owned real estate partnership.  Franzese does not involve any novel legal issues, but it nonetheless merits attention as an example of how courts deal with some of the typical problems that arise during the winding up of the partnership, and particularly the question of receivership.

Franzese Realty Associates is a family-owned business that owns and operates real estate on Long Island.  It was founded by Charles Franzese who died in 1987, after which the three partners consisted of his children Patrick, Donna and Rosemarie.  Apparently there never was a written partnership agreement.  Since the father’s death, virtually all of the partnership’s actions were determined by 2/3 vote with Donna as the lone dissenter.  Among such actions was the decision by Patrick and Rosemarie to manage the partnership’s business through a separate management company formed by Rosemarie who was a licensed real estate broker.  After 1990, Rosemarie and her daughter Lucille as an employee of the management company performed all duties relating to the marketing and financial obligations of the partnership.

The acrimony between Donna and her siblings was acute.  Between 1990 and 2007, Donna commenced five litigations against her family members relating to the partnership, including challenges to her father’s and mother’s wills; an action alleging that Patrick and others defrauded her of her interest in the partnership properties and seeking to remove Rosemarie as managing agent; another action against Rosemarie demanding an accounting; and an action for partition of the partnership properties.  All of the proceedings terminated with dismissal or voluntary  discontinuance.

Rosemarie died in March 2009.  In September 2009, Patrick brought a court petition seeking a declaration that the partnership was dissolved pursuant to Partnership Law §62(4) as of the date of Rosemarie’s death, directing that the partnership’s affairs be wound up, and that a partnership accounting be prepared.  Patrick’s petition also asked that the court appoint him receiver of the partnership during the winding up (see Partnership Law §§68 and 74) with authority to sell the assets at public auction and to retain Rosemarie’s company and her surviving daughter, Lucille, to serve without compensation as managing agent during the winding up, and enjoining Donna from interfering with the winding up.

Donna consented to the petition’s request to wind up the partnership’s affairs and to sell its assets at auction, however, she opposed appointment of Patrick as sole receiver and the appointment of Rosemarie’s company as managing agent, and she also opposed any restraint on her own participation in the winding up.  Donna contended that Lucille did not have experience as managing agent and that she would have “no problem” working with Patrick in the winding up notwithstanding the past acrimony and litigation.

Justice Driscoll’s decision and order grants the unopposed request for a declaration of dissolution as of the date of Rosemarie’s death under §62(4).  As to the contested issue of control during the winding up, Justice Driscoll notes that under §68 the surviving partners have the presumptive right to wind up the partnership affairs.  He also observes that the appointment of a receiver is an “extreme remedy” that should be “used sparingly in partnership dissolution actions” and is justifiable only when the party requesting it “has made a clear evidentiary showing of the necessity for the conservation of the property at issue and the need to protect the moving party’s interests.”  He then concludes that Patrick’s showing falls short of the standard, stating as follows:

While it is clear that the relationship between [Patrick] and [Donna] is strained, and that [Donna] has instituted extensive litigation related to the Partnership in which she has not been successful, the Court cannot conclude that she has engaged in fraud or waste that would support the appointment of a receiver.  For the same reasons, the Court denies [Patrick’s] applications for injunctive relief and an accounting.

It’s hard to argue with this analysis.  After all, Donna was the outside, non-managing partner over the prior twenty years.  Rather, the situation called for the court to predict, based on past, unsuccessful legal challenges by Donna, that Donna’s co-equal stewardship of the winding up as presumptively allowed by §68 would result in a dissipation of partnership assets.  While Justice Driscoll was not prepared to engage in such speculation, he did see fit to give Donna a gentle reminder of her promise to work cooperatively alongside her brother, writing:

The Court is hopeful that [Donna] is being candid when she affirms that she is willing to work with [Patrick] in the winding up, and that the winding up can be effected without future litigation.

Justice Driscoll’s order accordingly denies appointment of a receiver, authorizes the partnership business to be continued by Patrick and Donna during the action’s pendency upon each of them filing a $50,000 surety’s bond, and directs them to conduct the winding up in the manner prescribed by Partnership Law §71 governing distributions.

In recent decades this kind of general partnership case involving real property assets has become exceedingly rare due to the tax and liability concerns favoring use of S corporations and limited liability companies.  Outside the family context, it’s just as rare to find a general partner who, unlike Donna, is not actively involved in the business.  When the occasion does arise involving serious acrimony between managing partners, the courts are more likely to appoint a neutral receiver to oversee the winding up.