P'shipIn the early 1990’s New York enacted its version of the Revised Uniform Limited Partnership Act (NYRULPA), codified in Article 8-A of the New York Partnership Law §§ 121-101 et seq. The law’s modernized features include in §§ 121-1101 through 1105 provisions for the merger and consolidation of limited partnerships along with the right of dissenting limited partners to be paid “fair value” for their partnership interests as determined in an appraisal proceeding.

You can count on one hand the number of published New York court decisions over the last 25 years dealing with dissenting limited partners. In fact, until this year, it’s possible you could count the number on one finger, that being the Court of Appeals’ 2008 ruling in the Appleton Acquisition case which I wrote about here. Appleton held that a limited partner may not bring an action seeking damages or rescission based on allegations of fraud by the general partner in connection with a merger transaction, and that the statutory appraisal proceeding is the exclusive remedy for such claims. Appleton never reached the issue of appraisal.

It therefore appears that last month’s decision by Manhattan Supreme Court Justice Geoffrey D. Wright in Levine v Seven Pines Associates L.P., 2015 NY Slip Op 30138(U) [Sup Ct NY County Jan. 28, 2015], may be the first published ruling that addresses issues attendant to a fair value determination in a dissenting limited partner case under NYRULPA.

Now, if you’re hoping for a meaty decision that delves into the fine points of appraisal methodology, Levine is not your case. Rather, Levine was decided on pre-trial motions to fix a date for an appraisal hearing and to compel the respondent limited partnership to provide certain pre-trial disclosure. In addition, the procedural aspects of the dissenting limited partner provisions in § 121-1105 expressly piggyback on the well-established procedures set forth in § 623 of the Business Corporation Law dealing with dissenting shareholders. Still, the issues decided in Levine serve up some useful pointers for practitioners.

The Merger

Seven Pines Associates L.P. owns a 305-unit apartment building in Yonkers, New York. The partnership has 12 partnership units, each representing 8.33% of the partnership. In November 2013, the general partner, who, together with other insiders controlled 77% of the partnership units, proposed a merger under which the disinterested limited partners were given the option to sell their interests at $650,000 per unit or to acquire an interest in the successor for a contribution of $10,000 per unit.

All of the disinterested limited partners accepted one or the other option, except the Levine Trust which dissented as to its one-half unit. In subsequent negotiations the partnership offered the Levine Trust $325,000 for its one-half unit interest based on a November 2013 realty appraisal done in connection with the merger that valued the apartment building around $16 million. The Levine Trust demanded around $1.5 million based on a 2012 appraisal done in connection with a financing that valued the building around $33 million.

The Appraisal Proceeding

In March 2014, the Levine Trust commenced an appraisal proceeding by petition seeking payment for the fair value of its interest (read here). It also filed a motion to set a hearing date. The following month the partnership filed an answer (read here), affidavits and a memorandum of law (read here) opposing the petition and asking the court to determine summarily the value of the Trust’s interest at $325,000. In its memorandum, the partnership argued (1) that the valuation date was November 11, 2013, and not January 8, 2014, as contended by the Levine Trust; (2) that the valuation of the Trust’s interest was subject to a 55% distribution rate as per the limited partnership agreement; (3) that the court should give no weight to the 2012 appraisal or other evidence relied on by the Trust for its $1.5 million valuation; and (4) that the court should accept as conclusive the partnership’s $325,000 valuation based on the November 2013 appraisal.

The Levine Trust’s reply memorandum (read here) primarily argued that it did not have the burden of proving the fair value of its partnership interest, and that it was for the court to make that determination based on a full record developed at an evidentiary hearing considering all relevant factors and evidence including the 2012 realty appraisal.

In June 2014, the Trust filed a second motion, this time asking the court to compel the partnership to  produce certain pre-trial disclosure including 2012 quarterly financial statements and other documents given to the bank relating to the 2012 financing appraisal. The Trust also sought to compel production of 2014 financials, rent rolls and vacancy reports, and to depose persons with knowledge of the different capitalization rates used by the partnership for purposes of the merger proposal and for the independent appraisal being offered in the litigation. Read here the Trust’s memorandum of law in support of its discovery motion and here the partnership’s opposing memorandum.

The Court’s Decision

Justice Wright’s analysis not surprisingly rejected the partnership’s request to fix without a trial the fair value at $325,000, which he describes as “akin to a summary judgment motion,” stating:

New York Business Corporation Law § 623 (h) (4) clearly suggests that an evidential bench hearing is permitted, and necessary, to assist the court in determining fair market [sic] value where there is a dispute as to the value, as there is here. Therefore, the court grants Levine’s request for a trial on this matter.

Justice Wright next addressed the Levine Trust’s discovery motion, which he granted in part and denied in part after observing that BCL § 623 (h) (4) “also permits the court to order pretrial disclosure, including experts’ reports relating to the fair value of the shares, whether or not intended for use at the trial.”

The court agreed with the Trust’s demand for disclosure of documents concerning the 2012 appraisal, stating as follows:

The first piece of information Levine seeks is the 2012 Appraisal, which he now has a copy of, and all documents and communications in connection with it. Specifically, he seeks all documents and communications in connection with the 2012 Appraisal sent to Signature Bank, as there appears to be a discrepancy between the values contained in the 2012 financials and the actual values relied on for the 2012 Appraisal. While Seven Pines has submitted a spreadsheet showing that there were discrepancies, Levine is entitled to more than a spreadsheet of figures created by Seven Pines without any original documentation attached. Thus, Levine must be provided with Seven Pines’ 2012 quarterly financials and any other documents given to Signature Bank in connection with the 2012 Appraisal.

Justice Wright also agreed with the Trust’s request to take the deposition of a witness with knowledge of the merger price calculation. Here’s what he wrote:

The second piece of information Levine seeks is an explanation as to why Seven Pines used a 4.9% capitalization rate in determining the cash merger price in the merger proposal, but the BCS Appraisal, now relied on by Seven Pines, used a 6.75% capitalization rate. Levine also seeks an explanation as to why Seven Pines used the 2012 Net Operating Income in determining the cash merger price when it allegedly knew that the 2013 Net Operating Income would be greater. As these are issues of relevance, the court will permit Levine to seek the deposition of a person with knowledge of these facts.

Finally, the court denied the Trust’s demand for the partnership’s 2014 financials, rent rolls and vacancy reports, finding that such data was not relevant to the statutory fair value date “as of the close of business on the day prior to the [partners’] authorization date . . . which at the latest would be January 8, 2014, as argued by Levine.”

A Few Takeaways

  • Although there may be some case law out there I don’t know about, I can’t recall ever seeing a contested dissenting shareholder case in which a court summarily determined fair value without holding a hearing. Still, from the company’s tactical standpoint it’s not necessarily a bad idea to use opposition to the initial petition as an opportunity to educate the court before trial as to the perceived weaknesses of the dissenting owner’s challenges to the company’s valuation and offer.
  • Appraisal proceedings commenced under BCL § 623, which applies to corporations, LLCs and limited partnerships, are filed as so-called special proceedings in turn governed by Article 4 of the Civil Practice Law and Rules which ordinarily does not permit pretrial disclosure unless ordered by the court, and sparingly so. Section 623 still requires court authorization but essentially flips the presumption in favor of disclosure, which makes perfect sense given the dissenting owner’s obvious need for detailed financial information to provide to its own appraisal expert.
  • An appraisal case such as Levine normally lands before a justice of the Commercial Division. Practice in Commercial Division cases, particularly since the recent revisions to the Commercial Division rules, strongly encourage a full exchange of disclosure in all cases, including exchange of expert reports which are vital in appraisal cases, followed by depositions of the experts.