Legal scholars have noted that “[f]rom ancient Roman times until the end of the nineteenth century, the partnership was the dominant form for organizing jointly owned business firms.” (H. Hansmann, et al., The New Business Entities in Evolutionary Perspective [Feb. 2005]). Since then, at least in the United States, the general partnership has been largely supplanted by other, statutorily enabled business forms providing limited liability, namely, corporations and, more recently, limited liability companies.
The dearth of business firms organized as general partnerships helps explain the dearth of case law in recent decades addressing partnership rights and duties (the exceptions being cases dealing with limited partnerships and limited liability partnerships which, in New York, continue to be governed to varying degrees by the general Partnership Law).
Thus I was pleasantly surprised when, last month, up popped a new decision by the New York Court of Appeals — the state’s highest appellate court — addressing a core issue under Section 62 of New York’s ancient Partnership Law permitting a partner to dissolve the partnership unilaterally if “no definite term or particular undertaking is specified.”
The decision in Gelman v. Buehler, 2013 NY Slip Op 01991 (Ct App Mar. 26, 2013), involved a claim for breach of an oral partnership agreement between two individuals. The complaint (read here) alleged that Gelman and Buehler were recent business school graduates who decided to form a 50/50 partnership in 2007 to raise $600,000 capital for the purpose of establishing a “search fund” to research and identify for acquisition an operating business with growth potential. A second capital raise was contemplated to purchase the targeted business which was then to be managed by the two partners for “approximately” four to seven years before selling it at a profit for themselves and their investors.
Following their agreement made in September 2007, the partners prepared a private placement memorandum and pursued prospective investors. In February 2008, the defendant Buehler allegedly demanded a majority stake in the partnership and, after Gelman refused, advised Gelman that he “quit the partnership.”
Gelman filed suit against Buehler in 2009 asserting a claim for breach of the oral partnership agreement based on Buehler’s “leaving the partnership prior to the termination event of selling the business and paying back the investors.”
Buehler moved to dismiss the complaint based on his argument that the partnership was at-will and could be dissolved unilaterally by either partner at any time in the absence of a “definite term” or specification of a “particular undertaking” within the meaning of Partnership Law § 62.
The Lower Court Decisions
By Decision and Order in March 2010 (read here), Manhattan Commercial Division Justice Barbara R. Kapnick ruled in Buehler’s favor and dismissed the complaint. Gelman appealed to the Appellate Division, First Department, which by a 3-2 vote reinstated Gelman’s claim for breach of contract (read here).
The majority found that the complaint adequately alleged a definite term of the partnership, “namely, to achieve the liquidity event” upon the sale of the acquired business. The majority also held that Buehler “could not unilaterally dissolve the partnership since the partnership had the specific undertaking of acquiring a business and expanding it until the investors would receive a return on their capital investments.” The two dissenting judges agreed with the lower court that “a partnership formed for the purpose of acquiring, improving and reselling a business with no specified term of duration is a partnership at will.”
The Court of Appeals’ Decision
Buehler appealed to the Court of Appeals which heard oral argument last February (see video of argument here, read transcript here) and, late last month, unanimously reversed the Appellate Division’s order and dismissed Gelman’s complaint on the ground that the partnership was dissolvable at will under Partnership Law § 62.
The court’s opinion, authored by Associate Judge Victoria A. Graffeo, begins its analysis by noting that, under the common law pre-dating New York’s adoption of the model Uniform Partnership Law of 1914 (“UPA”),
“a contract of partnership, containing no stipulation as to the time during which it shall continue in force . . . may be dissolved by either partner at his own will, at any time” (Karrick v. Hannaman, 168 U.S. 328, 333-34 ), unless the “partnership has for its object the completion of a specified piece of work, or the effecting of a specified result” (Hardin v. Robinson, 178 App Div 724, 729 [1st Dept 1916]).
Judge Graffeo goes on to explain that these concepts were codified in UPA § 31 through its use of the phrase “definite term or particular undertaking,” which was then incorporated in Partnership Law § 62(1)(b) upon New York’s adoption of the UPA in 1919.
Implying that the issue has not previously been addressed authoritatively in New York case law, Judge Graffeo looks to decisions in other jurisdictions to construe the phrases “definite term” and “particular undertaking.” Here’s what she says about “definite term,” making clear that it is a time-based reference:
Since the enactment of the Partnership Law in New York, courts in other jurisdictions have held that the commonly-used statutory phrase — a “definite term” — is intended to be durational in nature and refers to an identifiable termination date (see e.g. Scholastic Inc. v Harris, 259 F3d 73, 85-86 [2d Cir 2001]; Johnson v Kennedy, 350 Mass 294, 298, 214 NE2d 276, 278 ; Posner v Miller, 356 Mich 6, 9, 96 NW2d 110, 111-112 ; Nicholes v Hunt, 273 Or 255, 261-262, 541 P2d 820, 823-824 ; Willman v Beheler, 499 SW2d 770, 775 [Mo 1973]; Fisher v Fisher, 83 Cal App 2d 357, 360, 188 P2d 802, 804 ).
And here’s what she writes about the meaning of “particular undertaking,” emphasizing that the achievement of the partnership’s business goal must not be open-ended:
A “particular undertaking” has been defined to require a specific objective or project that may be accomplished at some future time, although the precise date need not be known or ascertainable at the time the partnership is created (see e.g. Tropeano v Dorman, 441 F3d 69, 77-78 [1st Cir 2006] [“Business activities which may continue indefinitely are not ‘particular’ in nature and do not constitute particular undertakings”]; Scholastic Inc. v Harris, 259 F3d at 86; Fischer v Fischer, 197 SW3d 98, 104 [Ky 2006], quoting Girard Bank v Haley, 460 Pa 237, 244, 332 A2d 443, 447 ; Miami Subs Corp. v Murray Family Trust, 142 NH 501, 509, 703 A2d 1366, 1371 ; Harshman v Pantaleoni, 294 AD2d 687, 688 [3d Dept 2002]).
Applying these meanings to Partnership Law § 62(1)(b), Judge Graffeo’s opinion for the court concludes that Gelman’s complaint fails to allege either a “definite term” or “particular undertaking.” As to the former she writes:
. . . Gelman’s complaint lacks a fixed, express period of time during which the enterprise was expected to operate. Instead, the complaint alleges a flexible temporal framework: the parties were to solicit investments for an indefinite length of time; conduct an open-ended (possibly two-year) search for an unidentified business in an unknown business sector or industry; secure additional capital investments over the course of an unspecified period of time; and then purchase and operate the enterprise for an indeterminate duration (perhaps four to seven years) until a liquidity event would hopefully occur. Since the complaint does not set forth a specific or even a reasonably certain termination date, it does not satisfy the “definite term” element of section 62 (1) (b).
She next concludes that Gelman’s complaint does not meet the definition of “particular undertaking”:
Furthermore, when the entire scheme is considered, the alleged sequence of anticipated partnership events detailed in the complaint are too amorphous to meet the statutory “particular undertaking” standard for precluding unilateral dissolution of a partnership. The stages of the plan, as alleged by Gelman, were to: (1) raise money; (2) identify a business to buy; (3) raise more money to purchase the business; (4) “operate the business to increase its value”; (5) “achieve the liquidity event”; (6) “sell the business”; and (7) secure profit from the sale. But these objectives are fraught with uncertainty and are less definitive than the declarations referring to specific industries that have been found to be inadequate by other courts (see e.g. Scholastic Inc., 259 F3d at 86 [objective of the partnership was the “‘development, packaging, production and distribution of theatrical feature films . . . while also involved . . . in television development and production'”]; Sanley Co. v Louis (197 AD2d 412, 413 [1st Dept 1993] [partnership’s purpose was to acquire, manage and resell real estate]). In contrast, the Third Department ruled that the “particular undertaking” requirement was satisfied in St. Lawrence Factory Stores v Ogdensburg Bridge & Port Auth. (202 AD2d 844, 845 [3d Dept 1994]) because the agreement identified the specific purpose of the partnership as the development and construction of a retail factory outlet center on an identified parcel of real property. Nothing in Gelman’s complaint approaches such precision.
In sum, under Partnership Law § 62 as construed in Gelman, a partner unilaterally may dissolve a partnership without breach unless the partnership agreement (1) has an identifiable termination date or (2) a specific objective or project to be accomplished at a future time somewhere short of indefinite. The latter element necessarily depends on the specific facts of each case, but given how few partnership cases get litigated, don’t hold your breath awaiting further case law development.
One can’t help but wonder, pretending Gelman came out the other way, how the plaintiff possibly could have established non-speculative damages from Buehler’s wrongful termination of their nascent partnership which had yet to identify a target business for acquisition. I can only surmise that opening the door to wholly subjective damages claims was in the back of the minds of the Court of Appeals judges in deciding to adopt a stiffer interpretation of the statute’s exceptions to the at-will partnership rule.