The Quick Roll Leaf Manufacturing Co., founded in 1929 in upstate New York, bills itself as one of the world’s leading manufacturers of hot stamping foils and films made from gold, silver and other materials used for book binding, furniture, credit cards, and other applications. It now has the additional distinction of falling prey to an internecine court battle among its second-generation owners, resulting in the fracture of its partnership structure and a long, hard-fought contest over the valuation of the departing partners’ interests.
The silver lining — pun intended — is that the rest of us business divorce voyeurs now have the benefit of a recent appellate decision that clarifies the standard applicable under Section 69 of New York’s Partnership Law in determining the value of the interest of a partner who wrongfully dissolved the partnership, the business of which is continued by a non-breaching partner. The decision in Quick v. Quick, 2012 NY Slip Op 07284 (2d Dept Nov. 7, 2012), also addresses several other issues of interest to valuation professionals.
Beginning in 1966, the three sons of Quick Roll’s founder, Edward Quick, Sr., operated the firm as a general partnership. Charles Quick was responsible for the back office and financial records. Edward Quick, Jr. and John Quick took care of the machinery and manufacturing operations.
In 1977, the brothers adopted new Articles of Co-Partnership that fixed a 50-year term of partnership and required the partners to devote their full time and attention to the business. Around 1993, John ceased being an active partner. Around 1998, Charles stopped allocating John one-third of the profits and losses. In 2007, after Charles took the position that John no longer was a partner, John and Edward held a partnership meeting at which, over Charles’s objection, they voted to dissolve and liquidate Quick Roll.
Charles brought suit seeking a declaration that John was not a partner; that Edward wrongfully dissolved the partnership in violation of its Articles of Co-Partnership; and that Charles be allowed to continue the business under Partnership Law §69. John and Edward counterclaimed for an accounting. John also counterclaimed for re-constitution of his capital account based on his unallocated share of Quick Roll’s profits and losses since 1998.
The Lower Court’s Rulings
A trial was held in 2010 at which the court ruled that John was a partner when the vote to dissolve was held in 2007, and that John and Edward had wrongfully dissolved the partnership in violation of the 50-year term set forth in the Articles of Co-Partnership. The court also ruled that Charles was entitled to continue the business without his brothers and to pay them the value of their partnership interests less any damages caused by the dissolution, pursuant to Partnership Law §69(2)(b) and (c)(II).
The lower court appointed a referee to hear and determine the value of John’s and Edward’s partnership interests. The referee conducted a hearing at which the parties offered expert testimony concerning the value of the business including its machinery.
Charles’s expert concluded that the book value of the partnership as of the date of the wrongful dissolution was $1,226,179 including $286,300 for Quick Roll’s machinery. John’s and Edward’s expert concluded that the value of Quick Roll’s equity calculated at fair market value was $3,840,374 including $2,102,535 for machinery.
The referee ultimately ordered Charles to pay John and Edward $798,762 each for the pro rata value of their one-third partnership interests (i.e., based upon total partnership value of approximately $2.4 million), and determined that John was not entitled to a reconstituted capital account. Both sides appealed to the Appellate Division, Second Department, from portions of the final judgment.
Issue #1: Fair Market Value vs. Book Value
Partnership Law §69(2)(c)(II) provides that a partner who has wrongfully caused dissolution shall have, when the business is continued by the non-breaching partner:
the right as against his copartners and all claiming through them in respect of their interest in the partnership, to have the value of his interest in the partnership, less any damages caused to his copartners by the dissolution, ascertained and paid to him in cash, or the payment secured by bond approved by the court, and to be released from all existing liabilities of the partnership; but in ascertaining the value of the partner’s interest the value of the good-will of the business shall not be considered.
Note that the section’s reference to “the value of his interest” does not refer to any standard of value, and differs from the well-established “fair value” standard used in the Business Corporation Law for buy-out of dissenting and oppressed minority shareholders. Note that it also explicitly excludes the good-will value of the business.
In his appeal, Charles contended that the referee erred by adopting the fair market value analysis used by his brothers’s expert, and that the referee should have valued his brothers’s interests at book value. Charles primarily argued that book value was required by Quick Roll’s 1977 Articles of Co-Partnership which provided that, in the event of retirement or death of a partner, or if the business is liquidated following the death of a partner, the price of the partnership interest shall be one-third of the book value of the partnership and good-will shall not be considered.
John and Edward countered that the book value pricing provision in the Articles did not apply to the circumstances in the case, i.e., a continuation of the business following wrongful dissolution, that no liquidation occurred, and that a plain reading of §69(2)(c)(II) is that the legislature intended for fair market value to be used, not including good-will. The latter point, they argued, is evidenced by the statute’s express exclusion of good-will value, which would not be needed if the statute’s reference to the “value” of the partnership interest meant book value.
The appellate court sided with John and Edward, holding that fair market value is the proper standard of value. Here’s what the court wrote:
The Supreme Court did not improvidently exercise its discretion in using fair market value to determine the value of each defendant’s interest in the subject partnership pursuant to Partnership Law § 69(2). It is undisputed that the defendants wrongfully dissolved the subject partnership. The parties’ partnership agreement did not limit the interest of a partner who wrongfully dissolved the partnership to book value, and book value is an accounting method that does not reflect the fair market value of an asset. [Citations omitted.]
Judging by the parties’ briefs and the authorities cited by the court, the Second Department’s attribution of a fair market value standard to Partnership Law §69 appears to be a first-impression ruling.
Issue #2: Valuation of Gold Inventory
Charles also argued on appeal that the referee erred by adopting the enhanced value of Quick Roll’s gold inventory as determined by John’s and Edward’s expert appraiser, and that the referee should have adopted the lower value determined by Charles’s expert using the LIFO (last in first out) policy historically used by Quick Roll in its tax accounting.
John and Edward replied that LIFO and FIFO (first in first out) are merely “accounting conventions” as distinct from valuation processes, and that the applicable standard is fair market value calculated as of the valuation date.
In siding with John and Edward the appellate court again cited the applicable fair market value standard, writing as follows:
Contrary to the plaintiff’s contention, the Supreme Court did not improvidently exercise its discretion in adopting the valuation of the defendants’ expert as to the partnership’s gold inventory at its fair market value. The book value of the gold advanced by the plaintiff was premised upon historical costs, which did not accurately reflect the increased market value of the gold.
Issue #3: Valuation of Equipment and Machinery
Quick Roll’s equipment and machinery after depreciation had a reported book value of only $37,311. Charles’s expert testified that the equipment had a maximum value of $299,300. John’s and Edward’s expert testified that the machinery had a fair market value of $2,139,846. The referee, who conducted his own inspection of the equipment, added the sum of $700,000 to the reported book value.
On appeal Charles argued, and the appellate court agreed, that the referee erroneously substituted his own determination for that of the parties’ experts as to the fair market value of the equipment and machinery based upon his personal inspection, stating as follows:
Based upon the record before us, we agree with the court’s implicit finding that the plaintiff’s expert, unlike the defendants’ expert, appropriately took into consideration such factors as the age of the subject equipment, the niche market served by the partnership’s business, and the uncertainty of the business’s continued tenancy at its location at the time of dissolution. In addition, the plaintiff’s expert took into account the income stream of the business before arriving at a valuation method, and the fact that some equipment had been cannibalized for parts. Furthermore, unlike the defendants’ expert, the plaintiff’s expert had documentation to support all of his calculations. We therefore adopt the determination of the plaintiff’s expert that the partnership’s machinery and equipment had a maximum value of $299,300, representing an increase of $261,989 over the reported book value of $37,311.
Issue #4: Reconstitution of John’s Capital Account
Charles also won a partial victory in opposing John’s appeal from the denial of his claim for reconstitution of his capital account to reflect his unallocated one-third share of the partnership’s profits and losses between 1998 and 2007.
Charles argued that John’s claim asserted in 2007, seeking to reconstitute his capital account since 1998, was barred by the statute of limitations and/or equitable estoppel. The appellate court ruled in Charles’s favor on equitable estoppel grounds based essentially on John’s abandonment of the business, as follows:
The record establishes that John Quick ceased working for the partnership’s business in 1993, at which time he began operating a separate business entity. The record further establishes that by approximately 1999, John Quick had withdrawn the sum total of his capital account from the partnership, and, until the time the instant action was commenced in 1997, he never expressed any interest or expectation in receiving further partnership distributions. Accordingly, the Supreme Court properly, in effect, determined that John Quick was not entitled to a reconstituted capital account in the partnership.
In sum, with its downward adjustment for the lower value of Quick Roll’s equipment and machinery, the appellate panel modified the lower court’s judgment to award each of John and Edward the sum of $652,758 for their one-third partnership interests.
Over the past five years or so I’ve seen very few partnership valuation cases, especially at the appellate level. The last time I wrote on the subject was over three years ago, in Vick v. Albert, where the Appellate Division, First Department, held that marketability and minority discounts were allowable in valuation proceedings under Partnership Law §73 applicable when the business is continued by the survivors after the death of a partner (read here). Quick and Vick rhyme not only in name, but in their consistent equation of the word “value” as used in Sections 69 and 73 of the Partnership Law with the fair market value standard.
My thanks to Robert DiNardo, the attorney for John and Edward Quick, for providing me with copies of the appellate briefs.