I think it’s because general partnerships are a dying breed of business association, supplanted in our litigious society by limited liability entities such as S corporations and LLCs.
The occasional partnership dissolution cases that land in court these days tend to involve family or multi-family real estate partnerships formed decades ago, in which one or more of the original partners have passed away or are approaching retirement and looking either to exit or to transfer their partnership interest and/or management role to their children. Fittingly, along with elderly parties the statutes governing the disputes are found in the superannuated New York Partnership Law, essentially unchanged since its adoption in 1919.
Such was the case in Breidbart v Olshan, Decision and Order, Index No. 003610/12 [Sup Ct Nassau County May 27, 2015], involving a realty partnership formed in 1977 to acquire and develop under a long-term lease a commercial office building in Lake Success on Long Island. The partnership, known as Boundary Realty Associates, consisted of three partners: Olshan (50%), Rosenberg (25%), and Breidbart (25%). The written partnership agreement provided that the partnership would employ as managing agent for the first three years a firm owned and operated by Olshan at a fixed commission of 4% of gross rental income. The agreement also provided for termination of the partnership in 2020 or sooner upon the consent of a majority in interest of the partners.
After thirty-five years of partnership, during which time Olshan’s company continuously managed the building, in 2012 Breidbart brought suit against Olshan and his management company asserting claims for breach of fiduciary duty, waste, breach of contract, and an accounting. The suit accused Olshan of mismanaging the building, causing a 40% reduction in occupancy and lowering the property’s market value in order to induce the other partners to sell him their interests at artificially depressed values.
After the lawsuit’s commencement, Olshan transferred building management to a third-party managing agent and listed the property for sale with a reputable broker. Notwithstanding, Breidbart alleged that Olshan continued to hinder the securing of new tenants and refused multiple offers to purchase the property.
Breidbart subsequently moved to amend his complaint to add a claim for dissolution. The defendants cross moved to dismiss the complaint for failure to state a claim. The court granted leave to amend and converted the cross motion to dismiss to one for summary judgment.
The Court’s Decision
The decision by Nassau County Commercial Division Justice Vito M. DeStefano left Breidbart’s lawsuit wounded but still standing.
Breach of Fiduciary Duty and Waste. Breidbart’s complaint asserted overlapping claims against Olshan as partner and against his management company as agent for breach of fiduciary duty and waste of partnership assets. The claims attacked Olshan’s refusal to accept purchase offers for the property and his “unilateral decisions” concerning the building’s management which allegedly resulted in loss of tenants and neglect of the building’s physical condition.
Justice DeStefano held these allegations inadequate to withstand dismissal, writing as follows:
These allegations, without more, do not constitute bad faith. Rather, the complained-of conduct — mismanagement of the Building which has significantly lowered the fair market value of the Building — is not conduct which is so egregious that it could not have been the product of sound business judgment. In this regard, the court notes that the only allegation concerning misconduct, disloyalty or bad faith is in paragraph 16 of the amended complaint wherein Plaintiff alleges, “upon information and belief,” that Olshan has “pursued this course of conduct for the purpose of making the property less attractive and lowering its fair market value so as to induce his partners, including the plaintiff, to agree to sell him their interests in the partnership at a depressed value.” However, this assertion of [Olshan’s] wrongdoing lacks probative value inasmuch as it is based upon “information and belief” and does not derive from Plaintiff’s personal knowledge.
The last sentence in the above quote hints that Olshan never actually propositioned Breidbart to purchase the latter’s partnership interest at a below-market price, or at least that Breidbart, in his affidavit opposing the summary judgment motion, did not allege any such proposition.
Accounting. Breidbart’s complaint sought relief under Section 44 of the Partnership Law which gives any partner the right to a formal account of partnership affairs on the grounds, among others, the partner has been “wrongfully excluded from the partnership business” or “other circumstances render it just and reasonable.” Breidbart alleged that in 2009, Olshan stopped sending him monthly financials which he had been receiving the past 30 years, citing the “burden” on the accounting department and insisting on Breidbart’s adherence to the partnership agreement’s provision giving partners the right to personally inspect the books and records at the partnership’s New York office. Breidbart contended this amounted to a constructive denial of his inspection rights because his poor health limited his ability to travel from his California home.
Practitioners, take note: Justice DeStefano did not reach the merits of the accounting claim, instead dismissing it based on the complaint’s failure to allege that Breidbart made a demand for an accounting before commencing the action, as required by case law.
Breach of Contract. Breidbart’s breach of contract claim against Olshan’s management company for losing tenants and depressing the building’s value survived the dismissal motion, but just barely. Justice DeStefano, citing certain admissions by Breidbart in his affidavit and interrogatory answers, agreed with Olshan that no contract existed between the partnership and Olshan’s company, but he nonetheless allowed the claim to stand based on the court’s finding that the management company “provided management services to the partnership and served as managing agent for the Building for over 30 years raises questions of fact as to whether a contract implied in fact arose by virtue of the parties’ acts and not by any verbal or written words . . . and, if so, whether [the management company] breached that contract.”
Dissolution. Breidbart’s amended complaint sought to dissolve the partnership under Section 63 (1) (c), (d), and (f) of the Partnership Law which gives the court broad authority to enter a dissolution decree when a partner has been “guilty of such conduct as tends to affect prejudicially the carrying on of the business,” or a partner “willfully or persistently commits a breach of the partnership agreement, or otherwise so conducts himself in matters relating to the partnership business that it is not reasonably practicable to carry on the business in partnership with him,” or “[o]ther circumstances render a dissolution equitable.”
Breidbart argued in favor of dissolution on the ground that he and the other minority partner, Rosenberg, together holding a 50% partnership interest, were deadlocked with Olshan over the sale of the building and that they no longer trusted Olshan’s and his management company’s business decisions. Olshan countered that an “agreed-upon third party” was managing the building and seeking to procure new tenants, and that Breidbart failed to show the business could not practically continue through the end of the lease term.
Justice DeStefano sided with Breidbart and denied summary dismissal of his dissolution claim, citing the parties’ deadlock as to whether the building should be sold and also pointing to the partnership agreement’s provision contemplating dissolution upon the consent of a majority in interest prior to the partnership’s termination date at the end of 2020.
The Takeaway. Although the defendants’ dismissal motion was treated as one for summary judgment, the Breidbart decision offers valuable pleading tips and identifies pleading pitfalls for practitioners in crafting complaints in partnership disputes. It also contains a number of citations to partnership cases that are worth consulting before venturing into partnership litigation.