Manhattan Commercial Division Justice Shirley Werner Kornreich (pictured) is not known to mince words, so one has to sit up and take notice when she describes a partnership dissolution case as “yet another unfortunate example of a family business dispute that has developed into needless litigation” whose “outcome here is obvious.”
The judge’s admonition in Redel v Redel, 2015 NY Slip Op 31941(U) [Sup Ct NY County Oct. 16, 2015], springs from a suit against the plaintiff’s father and two sisters concerning a general partnership formed by the four of them over 30 years ago to acquire and hold a 10% interest in a limited partnership known as 225 Broadway Co. which owns an office building in lower Manhattan. The amended complaint (read here) identifies Leder Enterprises as an at-will family partnership with no written partnership agreement in which the father holds a 40% interest as managing partner and the sisters hold 20% apiece.
The complaint alleges that, in violation of various provisions of the Partnership Law, the father sold a 4% partnership interest to the plaintiff’s ex-boyfriend without her knowledge or consent; failed to provide plaintiff with reasonable access to partnership books and records; failed to provide a reasonable explanation for a $50,000 “shortfall” in plaintiff’s capital account; and failed to comply with the plaintiff’s demand for the immediate dissolution and winding up of Leder Enterprises. The complaint seeks declaratory judgments of dissolution and that the ex-boyfriend is not a partner, a formal accounting, and damages against the father for breach of fiduciary duty.
The Dismissal Motion
The defendants moved to dismiss the complaint, arguing that Leder Enterprises was not dissolvable at will based on provisions in 225 Broadway’s partnership agreement, the term of which runs to 2033 and whose other provisions restrict a limited partner’s right to withdraw from the limited partnership and to withdraw any portion of its capital contribution. They also denied any wrongdoing in connection with the supposed shortfall in plaintiff’s capital account, and countered that the plaintiff had been offered reasonable access to partnership books and records kept at its accountant’s office. (Read here and here the defendants’ opening and reply briefs.)
In response, the plaintiff primarily argued that the limited partnership agreement of 225 Broadway does not govern Leder Enterprises which had no written partnership agreement and therefore was dissolvable at will under Partnership Law § 62 or under Partnership Law § 63 based on the father’s conduct making it not reasonably practicable to carry on the business in partnership with him. (Read here the plaintiff’s opposing brief.)
The Court’s Decision
The plaintiff may have been gratified by Justice Kornreich’s agreement with her that 225 Broadway’s partnership agreement “does not govern the parties’ rights as partners in [Leder Enterprises],” but that’s as far as it went. Finding the agreement to be “highly relevant,” Justice Kornreich concluded that under Partnership Law § 62 (1) (b), which authorizes partnership dissolution “[b]y the express will of any partner when no definite term or particular undertaking is specified,” Leder Enterprises is not dissolvable at will because it was formed for a “particular undertaking,” namely, “to serve as an investment vehicle for a 10% interest in the LP, an SPV [Special Purpose Vehicle] formed to purchase, develop, and manage the Building.”
Justice Kornreich also rejected judicial dissolution under Partnership Law § 63, finding no allegation or evidence of wrongdoing by the father or that it was not reasonably practicable to carry on the partnership’s business as a passive investment vehicle that merely required “rudimentary services to account for its revenues.”
The court’s decision also noted that the defendants’ offer, to allow the plaintiff to inspect partnership records at the accountant’s office, “is exactly what she is legally entitled to,” and that the plaintiff’s remaining claims concerning the father’s sale of a 4% interest to plaintiff’s ex-boyfriend, and the alleged discrepancy in her capital account, may be time-barred or have no impact on plaintiff’s partnership interest.
“The Only Rational Outcome”
As noted at the top of this post, a sense of the lawsuit’s futility comes through in the court’s decision as well as in the transcript of oral argument (read here) where, after observing that the 225 Broadway partnership agreement does not allow dissolution of the limited partnership or limited partner withdrawal, Justice Kornreich challenged plaintiff’s counsel, “basically I don’t understand what you’re asking for here.”
At the same time, acknowledging that the parties are in need of a business divorce, the judge also showed impatience with the defendants’ resistance to dissolution in light of provisions in the 225 Broadway partnership agreement that would allow the Redel family members to separate — if not cash out — their limited partnership interests upon the dissolution and reconstitution of Leder Enterprises without the plaintiff. Declaring that “a business divorce whereby Donna walks away with her 20% or is bought out is the only rational outcome,” Justice Kornreich’s decision laid out a road map for resolution sans litigation:
The outcome here is obvious. Donna [the plaintiff] will be provided with the ability to inspect Leder’s books and records at the offices of Leder’s accountants, Scott & Guilfoyle. Defendants have offered to provide her with this level of access, which is exactly what she is legally entitled to. With respect to the capital shortfall, it appears to have existed for over a decade, and no one knows why. Nothing nefarious is alleged. As for the supposed problems associated with the dissolution of Leder, contrary to defendants’ contentions, a dissolution of Leder need not impact the parties’ investment in the LP. Rather than fight amongst themselves, the parties could effect a business divorce whereby Donna walks away with 20% and complies with section 7.6 of the LP Agreement to ensure that she becomes a Substituted Limited Partner. Doing so would not cause the dissolution of the LP. That said, Donna, of course, is not entitled to receive a return of her capital contributions in the LP or any other cash by virtue of her split from Leder. Donna would simply effectively own a 2% share in the Building via the LP (20% of 10%), an illiquid holding until 2033. Alternatively, Donna could be bought out under section 7.3. Regardless, the only illogical outcome is to litigate. [Footnotes omitted.]
It appears from the court record the parties have taken the judge’s advice to heart, by jointly requesting a settlement conference scheduled for later this month.