Shifting alliances. Pacts made and broken. Territorial disputes. Sounds like nations at war, but it also describes an unusual, three-way battle over a real estate partnership being waged in Brooklyn Supreme Court in which Commercial Division Presiding Justice Carolyn E. Demarest (pictured) recently dealt with the fundamental question: Can someone become a partner absent compliance with the partnership agreement’s transfer restrictions?
Justice Demarest answered “yes” in a decision earlier this month, in Camuso v Brooklyn Portfolio LLC, 2014 NY Slip Op 50940(U) [Sup Ct, Kings County June 9, 2014]. Essentially, she found that each of the two 50% partners separately had validated the transfer of a 25% interest by one of them to his ex-wife, by means of stipulations in prior legal proceedings and in partnership tax returns identifying the ex-wife as a partner, resulting in a three-way, 50/25/25 partnership.
The ultimate issue in the case is the validity of a $5.9 million contract, executed on the partnership’s behalf solely by the remaining 50% partner, for the sale of the partnership’s realty to a third-party buyer. The court’s ruling didn’t resolve the contract’s enforceability, instead finding an issue of fact whether other provisions in the partnership agreement and the Partnership Law require unanimous partner approval for the sale.
Since around 1988, Henry Camuso and Arthur Gallinaro were 50/50 general and limited partners in Regent Associates, a real estate limited partnership that owns nine Brooklyn residential apartment buildings.
In 1997, Camuso and his wife, Madeline, executed a Marital Stipulation consenting to a divorce judgment that gave her half of Camuso’s partnership interest. Gallinaro did not sign the Marital Stipulation, but starting in 2010, Gallinaro filed partnership returns, not challenged by Camuso, that identified Madeline as a 25% partner. (The decision does not say whether Madeline objected to her omission on the tax returns for over ten years, or whether she received any economic benefits in the interim. It also doesn’t say what triggered her inclusion starting with the 2010 tax return or if, e.g., it had something to do with Gallinaro’s plan to sell the properties.)
In 2011 and 2012, Gallinaro received several third party offers — the highest for $5.9 million — to acquire the partnership’s properties. Allegedly, Camuso refused to go along with any sale unless he received 50% of the net sale proceeds, i.e., in derogation of Madeline’s 25% interest. Gallinaro then brought suit against Camuso and Madeline seeking to dissolve the partnership and to liquidate its assets. In that suit, Gallinaro and Madeline entered into a stipulation, to which Camuso was not a party, confirming the 50/25/25 partner interests of the three partners and stating Gallinaro’s and Madeline’s agreement to accept the $5.9 million third-party offer to acquire the nine properties.
Two months later, while his suit was still pending, Gallinaro signed a $5.9 million contract with a third-party buyer named Brooklyn Portfolio LLC. Camuso then filed his own lawsuit against Gallinaro, Madeline and Brooklyn Portfolio in which Camuso sought a declaratory judgment voiding the contract on the grounds that:
- Gallinaro never consented to the partial transfer of Camuso’s partnership interest to Madeline under the Marital Stipulation, as required by the partnership agreement, thus Madeline never became a partner and had no authority to approve the sale of partnership assets.
- As a 50% partner, Gallinaro lacked authority to enter into the contract of sale without Camuso’s consent as the other 50% partner.
Read Camuso’s complaint here.
Gallinaro’s Dismissal Motion
Gallinaro moved to dismiss Camuso’s complaint. In his initial set of motion papers, which Madeline supported, Gallinaro relied on Camuso’s Marital Stipulation and the partnership tax returns filed beginning in 2010, identifying Madeline as a general partner, as binding upon Camuso and as giving Gallinaro and Madeline, with a combined 75% partnership interest, the authority to approve the properties’ sale to Brooklyn Portfolio.
Camuso opposed the motion, arguing that under the partnership agreement and Partnership Law § 40(7), an individual cannot become a member of a partnership without the consent of all partners. Since Gallinaro did not consent to the Martial Stipulation, it was invalid, leaving in place Gallinaro and Camuso as 50/50 partners and therefore requiring Camuso’s consent for any sale of partnership assets.
Camuso’s opposing argument apparently made an impression on Gallinaro. In his reply papers, Gallinaro effectively abandoned Madeline by agreeing with Camuso that the Marital Stipulation was invalid for lack of Gallinaro’s consent and that Madeline was not a general partner. However, Gallinaro’s new argument continued, Camuso’s attempted, unauthorized transfer made him a Terminating General Partner under another section of the partnership agreement, thereby making Gallinaro the sole general partner with authority to sell the properties. Gallinaro also argued that, even if he lacked full authority to sell the properties, the contract of sale was still valid because Brooklyn Portfolio entered into it upon a reasonable belief that Gallinaro had such authority.
Justice Demarest’s Ruling
Neither Camuso’s nor Gallinaro’s arguments seeking to deprive Madeline of her partnership interest scored with Justice Demarest, based on their prior representations including:
- the Marital Stipulation executed by Camuso in 1997 and incorporated in his divorce judgment, transferring to Madeline half of Camuso’s interest;
- Gallinaro’s stipulation with Madeline in Gallinaro’s prior lawsuit, acknowledging her as a 25% partner;
- the partnership’s tax returns identifying Madeline as a partner beginning in 2010, which Justice Demarest characterized as representations that “bound” each of Camuso and Gallinaro; and
- Gallinaro’s representations in his initial motion papers seeking dismissal of Camuso’s complaint, in which he described Madeline as a 25% general partner.
Justice Demarest found that Gallinaro’s written representations in the court proceedings, together with the partnership tax returns, “ratified [Camuso’s] transfer of his 25% general and limited partnership interest to Madeline” notwithstanding provisions in the Partnership Law and the partnership agreement placing limitations on transferring partnership interests without the prior consent of the remaining partners. “Accordingly,” Justice Demarest held, “Madeline is a 25% general and limited partner of Regent.”
The court’s holding did not end the controversy, for two reasons. First, Justice Demarest found issues of fact whether the properties proposed for sale constitute all of the partnership’s assets, the disposition of which would require unanimous partner consent under Partnership Law § 20(3)(c), providing:
Unless authorized by the other partners or unless they have abandoned the business, one or more but less than all the partners have no authority to . . . [d]o any other act which would make it impossible to carry on the ordinary business of the partnership.
Second, Justice Demarest found insufficient documentary evidence to support Gallinaro’s and Brooklyn Portfolio’s assertion of the latter’s execution of the contract of sale in reliance on the former’s apparent authority to sign on the partnership’s behalf. In that regard, Justice Demarest noted allegations by Gallinaro in his prior lawsuit suggesting that Brooklyn Portfolio may have been aware of Camuso’s objection to the sale before entering into the contract.
The pick-your-partner principle is one of the core features of unlimited liability entities such as partnerships, hence the law’s default rules requiring prior consent of the remaining partners to the transfer of partnership interests. Camuso teaches that such consent may be found in the post-transfer actions of the remaining partners constituting ratification. It also teaches that the courts generally will not tolerate the taking of inconsistent positions in the same of in sequential litigations, or making representations to the court inconsistent with those made in tax returns.