It seems that every time I comment on the dearth of business divorce cases involving partnerships in an era increasingly dominated by limited liability companies, up pops a new and interesting decision in a dispute among partners in a general or limited partnership. In this instance, I’m proven wrong by not one but by three recent decisions involving partnership disputes although, I have to point out in my own defense, two of the three spring from what I call legacy partnerships formed in the 1980’s, i.e., before the advent of LLCs in New York.
The first is Camuso v Brooklyn Portfolio, LLC, 50 Misc 3d 1226(A), 2016 NY Slip Op 50273(U) [Sup Ct Kings County Mar. 8, 2016], which is making its second appearance on this blog.
My previous post examined a decision almost two years ago by Brooklyn Commercial Division Presiding Justice Carolyn E. Demarest in which she determined that a real estate partnership agreement’s transfer restrictions gave way to a marital divorce settlement conveying half of one partner’s 50% interest to his ex-wife where the other 50% partner, who never formally consented to the conveyance as required by the partnership agreement, nonetheless subsequently ratified the transfer in the partnership tax returns and by prior judicial admissions.
The underlying controversy concerned the enforceability of a contract to sell all of the partnership’s realty to an outside buyer for $5.9 million, pitting the other 50% partner and the ex-wife with 25% — both of whom authorized the contract — against the ex-husband with his 25% remainder interest who refused to authorize the sale unless he received 50% of the sale proceeds — effectively reneging on his divorce settlement.
Justice Demarest’s decision two years ago set the stage for discovery followed by summary judgment motions by the outside buyer seeking to enforce the contract of sale and by the ex-husband seeking to have it declared invalid because it lacked unanimous partner consent.
The court held that, under the partnership agreement’s express and unambiguous terms, the sale of all of the realty assets would result in the dissolution of the partnership, which in turn required the unanimous consent of the partners, hence the ex-husband’s refusal to authorize the contract of sale rendered it void. In so ruling the court rejected the putative buyer’s argument that the contract’s authorization by two of three partners holding 75% of the partnership interests sufficed under a provision in the partnership agreement requiring majority rather than unanimous partner consent for “all policy and decisions in connection with the day-to-day operation of the Property.”
Justice Demarest’s decision also relied on § 20 (3) (c) of the Partnership Law requiring unanimous partner approval for “[any] act which would make it impossible to carry on the ordinary business of the partnership,” which Justice Demarest found would be the effect of a sale of all of the subject partnership’s realty assets.
Unlike the first go-round two years ago, this time the other 50% partner and the ex-wife did a one-eighty and took positions adverse to the putative buyer. If you know anything about the frothy New York real estate market, probably you’ve already guessed correctly the reason for their reversal: the market value of the properties more than doubled since the onset of the litigation, as confirmed in a decision filed a few days ago by Justice Demarest in which she notes that all three partners are jointly negotiating to sell the properties to a new buyer for $14.5 million.
Update August 26, 2018: The Appellate Division, Second Department, last week rejected the putative buyer’s appeal in a unanimous opinion affirming Justice Demarest’s decision. You can read it here.
Next up is Tillinger v Gordon, Short Form Order, Index No. 603463/14 [Sup Ct Nassau County Mar. 23, 2016], an action brought by the sons/executors of a deceased 25% partner in a general partnership formed with two others in 1980 for the purpose of managing and renting an apartment complex then-owned by the decedent and his brother who also was a 25% partner in the management company.
After the brother died in 1993, his son succeeded to his 25% interest notwithstanding provision in the partnership agreement giving the surviving partners a right to purchase it “upon a true and proper valuation.”
The plaintiffs’ decedent died in 2010. Again, neither of the surviving partners elected to purchase the decedent’s interest. The decedent’s two sons asserted a right to participate in the management company’s business, which the surviving 50% partner refused to permit.
In their lawsuit, the sons alleged that the 50% partner paid himself excessive compensation totaling almost $1 million and filed partnership tax returns falsely reporting distributions to them of about $450,000. Their complaint sought a declaratory judgment that they are each 12.5% partners with full management rights based on the surviving partners’ “waiver” of their elective right to purchase the decedent’s interest, an accounting, and damages against the 50% partner for breach of fiduciary duty.
The defendants moved to dismiss the complaint, arguing that the partnership was dissolved upon the death of the plaintiffs’ father in 2010, and that the plaintiffs’ sole remedy was an accounting. The plaintiffs responded with their own motion to amend their complaint to add a claim for judicial dissolution of the partnership.
The court’s decision by Nassau County Commercial Division Justice Stephen A. Bucaria agreed with the defendants that the partnership dissolved by operation of law in 2010 upon the death of plaintiffs’ father, hence the sons could not seek judicial dissolution in either of their alleged capacities as co-executors or as successors-in-interest. He did find, however, that their father’s estate holds a 25% interest in the income and assets of the partnership, and that they are entitled to seek an accounting of the affairs of the partnership from the date of their father’s death through the present. Justice Bucaria also held that upon the accounting, the plaintiffs may pursue their claims for breach of fiduciary duty.
Last up is Hammond v Smith, 2016 NY Slip Op 50670(U) [Sup Ct Monroe County Apr. 22, 2016], which, unlike the Camuso and Tillinger cases in which someone sought to dissolve or wind up an established partnership, involved someone trying to prove — unsuccessfully, as it turned out — the existence and enforceability of a partnership in the absence of a written agreement.
The plaintiff in Hammond contended that the defendant approached him in early 2004 to form a joint business venture for the design and production of tools used in photolithography utilizing plaintiff’s knowledge and expertise and the resources and reputation of plaintiff’s separate company.
The plaintiff’s complaint alleged that he worked on the project without compensation for the next year and a half, contributing his design expertise and helping to promote the venture; that they referred to themselves as “partners” and met with legal counsel to discuss the partnership’s terms including plaintiff’s 20% partnership share; and that in reliance on the defendant’s statements that he was seeking counsel to “reduce their agreement to writing,” the plaintiff continued to advance products and services for the partnership’s benefit without markup and continued to bear expenses for which he was either untimely reimbursed or not reimbursed. Plaintiff alleged that, by the time they agreed to part ways in August 2005, his efforts generated orders in excess of $6 million from which he sought his share of profits.
The defendant moved for summary judgment finding that there was no partnership between the parties and dismissing the complaint. Defendant contended that he received customer orders before the plaintiff’s initial involvement with the project and, although he was “open to a partnership,” the parties never actually formed a partnership or agreed on the material terms of their business relationship.
The court’s decision by Monroe County Commercial Division Justice Matthew A. Rosenbaum focused on the core criterion of any partnership, namely, the existence of an agreement to share in the venture’s profits and losses.
Upon his analysis of the evidence, Justice Rosenbaum determined that the undisputed facts did not support the claimed partnership. “There is no evidence before the Court,” he wrote, “that Plaintiff ‘had skin in the game’ and was at risk of losing anything in the event the project was not successful, and Plaintiff did not incur liabilities to get the project underway. . . . Moreover, the value of Plaintiff’s services to the project is not evidence of shared losses.” The defendant alone, the court found, financed the project and took the risk of financial loss if the project failed.
As for sharing profits, Justice Rosenbaum found that “[t]he record is replete with inconsistencies from Plaintiff on alleged profit sharing” and that “[t]here was no agreement or meeting of the minds on the partnership terms between the parties with respect to the material terms of their partnership.” Rather, the court observed,
the uncontroverted proof demonstrates that the parties did not intend to form a partnership, but rather intended to focus on the project and structure their relationship along the way as their contributions to the project evolved. . . . The most that ever existed between the parties was an agreement to work in furtherance of the project and to evaluate and reevaluate the structure of their relationship along the way. Those evaluation and reevaluations never resulted in a partnership agreement between the parties.
The lesson to be learned from Hammond, namely, don’t undertake and contribute to a proposed joint venture absent a written agreement defining the business relationship, is not a new one or, given the enormous expense and distraction of litigation, is it one to be ignored by the ultimately victorious party who defeats the claimed partnership. Precautions should be taken all around.