It’s amazing how the antiquated provisions of New York’s original Uniform Limited Partnership Act (NYULPA), adopted in 1922, continue to bedevil some of the legacy real estate investment partnerships that pre-date New York’s enactment in 1991 of the Revised ULPA (NYRLPA).

Last April I wrote about a recent decision in the Poole case involving a thorny question under NYULPA whether a real estate limited partnership could be reconstituted with a new general partner following the death of the last remaining general partner (read here). Now along comes a decision in another real estate limited partnership dispute governed by NYULPA, this time raising the question, among others, whether limited partners have a statutory right to assign their economic interests notwithstanding provision in the partnership agreement requiring the advance consent of the general partner.

Earlier this month, in Eastwood Investors V, LLC v. Morrisania Associates, 2013 NY Slip Op 31921(U) (Sup Ct NY County Aug. 12, 2013), Manhattan Commercial Division Justice Barbara R. Kapnick refused to enforce assignments of limited partner profit interests, made without the general partner’s consent, based on a provision in the partnership agreement barring the assignment of a limited partnership interest “in whole or in part except with the prior written consent of the General Partner.”  In so ruling, the court rejected the putative assignee’s contention that the right to assign a profit interest is mandated by NYULPA § 108’s provisions stating that a “limited partner’s interest is assignable” and that an assignee who does not become a substitute partner is “entitled to receive” the assignor’s profit share.

Justice Kapnick’s decision may not be the last word. The plaintiff assignee already has filed a notice of appeal, followed closely by the defendants’ notice of cross appeal from the portion of Justice Kapnick’s ruling permitting the plaintiff to replead certain claims in its capacity as attorney-in-fact for the assignors.

Background

According to the complaint in Eastwood (read here), the limited partnership Morrisania Associates was formed in 1972 to own and manage an affordable housing project in the South Bronx. The partnership agreement (read here) designates Two Trees, Inc. as the sole general partner holding a 1% interest and 14 individual limited partners holding the remaining interests. Allegedly, in the 40 years since Morrisania’s formation, the general partner made no attempt to sell or refinance the realty, thereby denying the limited partners the opportunity to liquidate their interests and saddling them with tax liabilities exceeding distributions.

Beginning in April 2009, without seeking or getting the general partner’s prior consent, plaintiff Eastwood acquired by assignment from nine or so limited partners a 79.82% aggregate partnership interest in Morrisania. The general partner refused Eastwood’s requests to acknowledge the assignments as valid and to substitute Eastwood as limited partner, and it continued to issue tax Form K-1s to the assignor limited partners.

Eastwood filed suit in August 2012, seeking declaratory relief validating its status as substitute limited partner entitled to exercise all of the limited partner rights held by its assignors including the right to receive all economic benefits. The complaint also claimed Eastwood’s entitlement to exercise its assignors’ rights as attorney-in-fact; that by virtue of certain prior assignments accepted by the general partner notwithstanding the lack of prior consent, it had waived the right to condition Eastwood’s assignments on prior consent; and that Eastwood had super-majority voting power to dissolve Morrisania as provided in the partnership agreement.

The Dismissal Motion

Defense counsel for the partnership and its general partner filed a pre-answer motion asking the court to dismiss Eastwood’s complaint in its entirety on the ground that the assignments to Eastwood were invalid.  The legal analysis in their memorandum of law (read here) primarily relied on Sections 7.05 and 7.09 of the partnership agreement, which stated:

[7.05] The Partnership Interest of a Limited Partner may not be transferred or assigned in whole or in part except with the prior written consent of the General Partner.

[7.09] Any attempted assignment or transfer in violation of the provisions of this Article VII shall be void and ineffectual and shall not bind the Partnership.

Eastwood’s opposing memorandum of law (read here) argued that dismissal was unwarranted because there had been a “consistent course of conduct” over an extended period prior to the assignments at issue in which the general partner accepted other limited partner assignments made without the general partner’s prior consent, thereby establishing a “waiver” of the formality.

Alternatively, assuming Eastwood did not have the right to be substituted as a full-fledged limited partner, it contended that it was a valid assignee of the economic benefits of the limited partnership interests. Eastwood cited in support NYULPA § 108(3) which provides:

An assignee, who does not become a substituted limited partner, . . . is only entitled to receive the share of the profits or other compensation by way of income, or the return of his contribution, to which his assignor would otherwise be entitled.

Eastwood’s brief also cited case law, including Rapoport v. 55 Perry Co., 50 AD2d 54 (1st Dept 1975), for the proposition that under the NYULPA, an assignment of a limited partner’s interest without the general partner’s consent as required by the partnership agreement nonetheless entitles the assignee to receive the assignor’s economic benefits.

In their reply memorandum of law (read here), defendants argued that Rapoport and other cases cited by Eastwood were distinguishable, and they instead cited cases recognizing the general enforceability of contractual anti-assignment provisions. Defendants also countered Eastwood’s waiver argument based on the partnership agreement’s anti-waiver clause and on the complaint’s own allegations reciting the general partner’s express refusal to accept the assignments to Eastwood.

Justice Kapnick’s Ruling

The court’s written decision makes reference to its decision dictated on the record at oral argument on May 23, 2013, which, unfortunately, is not posted online. As best as I can deduce, the dictated decision rejected Eastwood’s primary claim, seeking recognition as a full-fledged, substituted limited partner of Morrisania, based on the plain language of Sections 7.05 and 7.09 of the partnership agreement.

Justice Kapnick’s written decision limits its discussion to Eastwood’s alternative claim for recognition of its economic rights as an assignee assuming it is not deemed to be a substitute limited partner. The argument, predicated on NYULPA § 108’s provisions, falls short in Justice Kapnick’s view because the NYULPA’s provisions:

are default provisions that only “come into play in the absence of an agreement.” Ederer v. Gursky, 9 NY3d 514, 526 (2007); Bailey v. Fish & Neave, 8 NY3d 523, 529 (2007) (provisions of NYPL “cannot be implied as part of the [partnership] agreement so as to make a different contract from that which the parties intended nor override the agreement which the parties, in fact, made.”); see also Lanier v. Bowdoin, 282 NY 32 (1939); Raymond v. Brimberg, 99 AD2d 988 (1st Dep’t 1984). Since the Limited Partnership Agreement here specifically provides in Section 7.05 that the interest of a Limited Partner may not be transferred in “whole or in part” without consent of the General Partner, there can be no valid assignment of any part of the limited partnership interests, including a right to the economic benefits.

Is NYULPA § 108 a Default Statute?

It is true that some of the NYULPA’s provisions are expressed as default rules that apply in the absence of provision otherwise in the certificate of limited partnership or limited partnership agreement. But not all.

NYULPA § 108(1) states that a limited partnership interest “is assignable.” Is “is assignable” a permissive, default rule in the sense of “may be assignable” and therefore subject to elimination or qualification in the partnership agreement, or is it a mandatory rule in the sense of “shall be assignable” and thus not subject to provision otherwise in the partnership agreement?

Or is it ambiguous? In my prior post on the Poole case I noted a 1994 law review article by the late Professor John Ronayne comparing NYULPA and NYRLPA. It includes the following commentary on the change made to NYULPA § 108(1) in its NYRLPA § 121-702(a)(1) analog:

Section 121-702 of NYRLPA clarifies the language of NYULPA which merely stated that “a limited partner’s interest is assignable.” This left a question as to whether the certificate or partnership agreement could place any limitations on assignments. The new language specifies “[e]xcept as provided in the partnership agreement, a partnership interest is assignable in whole or part.” [Emphasis added.]

This comment made almost 20 years ago, it seems to me, goes to the heart of the permissive vs. mandatory issue that will be argued in the Appellate Division assuming the parties pursue their appeals. Stay tuned.