A post I wrote two years ago referred to the limited partnership as “the dinosaur of business forms in New York” destined for “virtual extinction” due to New York’s outmoded partnership laws coupled with the meteoric rise of the limited liability company. As the years roll by, the limited partnership’s obsolescence is especially pronounced for those governed by New York’s Uniform Limited Partnership Act of 1922 (“NYULPA”) codified in Article 8 of the New York Partnership Law, applicable to limited partnerships formed prior to, and exempted from, the New York Revised Uniform Limited Partnership Act of 1991 (“NYRULPA”) codified in Article 8-A of the Partnership Law.
The rarity of new business divorce cases involving NYULPA-governed limited partnerships makes it all the more intriguing when one comes along, as happened earlier this month in a case called Doppelt v. Smith, 2015 NY Slip Op 31861(U) [Sup Ct NY County Oct. 1, 2015], decided by Manhattan Commercial Division Justice Eileen Bransten.
Doppelt doesn’t disappoint, thanks to its holding that a provision in a limited partnership agreement, authorizing voluntary dissolution upon the majority vote of the limited partners, precluded the plaintiff’s claims seeking judicial (involuntary) dissolution. Although neither the court nor the parties labeled it as such, and while the defendant in his briefs referred to plaintiff’s lack of “capacity” to seek judicial dissolution, I believe a more apt description of the court’s holding is that, effectively, it enforced a contractual waiver of the limited partner’s statutory right to seek judicial dissolution.
The case involves a New York limited partnership called Smith Energy 1986-A Partnership formed in 1986 to purchase two leases in Texas for the production and sale of crude oil. In 2014, a 2.32% limited partner sued Smith Energy’s general partner primarily seeking damages and an accounting based on alleged failures to distribute profits, issue K-1s, and hire a specified escrow agent.
The complaint (read here) also included several causes of action requesting judicial dissolution of Smith Energy. The dissolution claims cite no statute, but their language broadly tracks the grounds for judicial dissolution found in Partnership Law § 63 including the allegation that the general partner’s conduct made it not reasonably practicable to carry on the business in partnership with him. Although § 63 is part of the Uniform Partnership Act (“NYUPA”) governing general partnerships, it is made applicable to limited partnerships through NYULPA § 99 (c) declaring that a limited partner has “the same rights as a general partner to . . . have dissolution and winding up by decree of court.”
The defendant filed a pre-answer motion to dismiss the complaint. As concerns the dissolution claims, he relied on Article 10.1 (d) of Smith Energy’s Limited Partnership Agreement (read here) defining as an event of voluntary dissolution the “vote of at least a majority in interest of the Limited Partners to dissolve.” His opening brief (read here) argued that the provision stripped the 2.32% plaintiff of “capacity to assert a claim of dissolution under the terms of the Partnership Agreement.” The brief cited no supporting statutory or case law.
The plaintiff’s counsel’s opposing submission (read here), also bereft of supporting authority, responded that Article 10.1 (d) “violates the clear language of [NYULPA § 99 (c)] and thus, is unenforceable,” and that the statute “sets forth no proscription on the amount or level of ownership interest that a limited partner must retain before being permitted by law to seek dissolution of the partnership.”
In his reply memorandum (read here), the defendant countered that “[r]ather than violate New York law, as Plaintiffs claim in opposition, the specific provisions of the Partnership Agreement . . . impose an agreed upon limitation to it — one fully enforceable by its terms,” and that the plaintiff “failed to articulate . . . public policy considerations which might render [Article 10.1 (d)] unenforceable.”
Justice Bransten’s decision agreed with the defendant’s argument and dismissed the dissolution claims, writing as follows:
It is well-settled that “partners may fix their partnership rights and duties by agreement.” Bailey v. Fish & Neave, 8 N.Y.3d 523, 528 (2007) (citations omitted). This includes any rights and duties ‘”concerning the sharing of profits and losses, priorities of distribution on winding up of the partnership affairs and other matters. If complete, as between the partners, the agreement so made controls.”‘ Id. at 528-529 (quoting Lainer v. Bowdoin, 282 N.Y. 32, 38 (1939)). Thus, since the Partnership Agreement is not barred by law and provides a complete scheme for dissolution, it controls over New York Partnership Law § 99. See Lainer, 282 N.Y. at 38. Accordingly, given that plaintiffs lack the vote of at least a majority in interest of limited partners, they cannot seek to dissolve Smith Energy.
Note that the decision does not adopt the defendant’s articulated objection to plaintiff’s “capacity” to sue. I agree that, whatever you make of Article 10.1 (d), it doesn’t defeat a limited partner’s capacity or standing to seek legal redress. Rather, the court’s analysis adopts a different approach, satisfying itself that Article 10.1 (d), as a matter of the partners’ expressed contractual intent, displaces (waives) the limited partners’ right under NYULPA § 99 to seek judicial dissolution. In other words, § 99 is a default statute, under which the rights it grants can be modified or eliminated by agreement.
Can it? Neither of the two cases cited in the above-quoted passage involved a limited partner’s claim for judicial dissolution. In Bailey the court upheld an amendment by the majority of the partners of a law firm organized as a general partnership, affecting compensation to withdrawing partners. In Lanier the court enforced the distribution scheme upon dissolution set forth in a brokerage firm’s partnership agreement, over a limited partner’s objection that the applicable Partnership Law provisions dictated otherwise.
I’ve not thoroughly researched the issue, but I’m not aware of any New York cases besides Doppelt addressing whether a contractual waiver of a limited partner’s statutory right to seek judicial dissolution is enforceable. I am aware of, and have written about, New York cases holding that a provision in a shareholders or operating agreement of a close corporation or LLC waiving the statutory right to seek judicial dissolution is void as against public policy. Do limited partnerships merit different treatment? The point does not appear to have been raised by the plaintiff in Doppelt.
Even assuming the right to seek judicial dissolution can be waived by agreement, then there’s the question whether Article 10.1 (d) of the limited partnership agreement in Doppelt does so. The provision solely defines events of voluntary dissolution unrelated to the judicial dissolution rights granted by Partnership Law § 99 (c). It contains no explicit waiver language, much less an explicit waiver of the right to seek involuntary (judicial) dissolution. Is it clear that Article 10.1 (d), to borrow the court’s term lifted from the Lanier and Bailey cases, is “complete” as to the subject matter of dissolution in both its voluntary and involuntary forms?
The answers to these questions would appear no longer to have significance to the parties in Doppelt for one, overriding reason: Articles 2.3 and 10.1 (b) of Smith Energy’s Limited Partnership Agreement provide for its natural termination and automatic dissolution as of less than three months from now, on December 31, 2015. For that same reason I don’t expect to see any appeal from Justice Bransten’s decision which, in addition to dismissing the dissolution claims, dismissed most of the plaintiff’s other claims with leave to replead on the ground they are derivative claims asserted improperly as direct claims.
Whatever fate awaits the parties in Doppelt, it will be interesting to see if the decision gets cited in any future cases involving limited partnerships, or more likely LLCs, in opposition to judicial dissolution claims based on express or implied waivers in the parties’ agreements.