Not long ago, we wrote about the vital need for strict compliance with contractual options to buy or sell closely-held business equity interests. As we noted then, failure to strictly comply with any contractual conditions precedent to the exercise of a buy-sell option may result in the option’s total failure.

The requirement of strict compliance with contractual conditions precedent applies to other areas of business divorce, a lesson the limited partners of a Cayman Islands limited partnership learned the hard way in Molberg v Phoenix Cayman Ltd., ___ AD3d ___, 2025 NY Slip Op 01048 [1st Dept Feb. 20, 2025]).

In Molberg, the limited partners tried – but failed – to exercise a 30-day notice of default and cure provision in the limited partnership agreement for removal of the general partner “for cause.”

Molberg was a truly stunning reversal of fortune for the limited partners, and a valuable lesson for our readers: for those hoping to remove the manager of a closely-held business “for cause” upon written notice and an opportunity to cure, strict compliance with the language of the contract is mandatory. Even if well-intentioned, anything less than strict compliance may prove costly.

The Partnership and its Contract

Aram Phoenix Holdco, LP (the “Partnership”) was a limited partnership with 15 limited partners and a limited partnership agreement (the “Partnership Agreement” or “LP Agreement”). The general partner was Phoenix Cayman Ltd. (“Phoenix”). The aim of the Partnership was to invest in underperforming residential mortgage backed securities – the same risky assets that caused the financial meltdown of the late 2000s. What could go wrong?

Section 6 (d) of the Partnership Agreement provided that the “General Partner may . . . be removed with Cause upon the affirmative act of a Supermajority in Interest.”

“Cause” meant that the General Partner “committed a knowing, willful and material breach of th[e] Agreement that is not cured within 30 days after the General Partner’s receipt of a notice from the Partnership with respect to such breach.”

“Supermajority in Interest” meant “the action or consent of Limited Partners holding at least 75%” of the limited partnership interests.

Section 12.8 selected the “laws of the Cayman Islands,” and Section 12.14 selected the “United States District Court for the Southern District of New York,” as the governing law and venue for litigation. The parties apparently chose to waive both by litigating in the Commercial Division in Manhattan, and by briefing, for the most part, the substantive law of New York.

Section 12.9 required the loser in litigation “in any . . . way pertaining to Partnership affairs or th[e] Agreement” to pay the legal fees of the “prevailing party.”

The Attempted Removal of the General Partner

On April 28, 2023, Karoline Molberg (“Molberg”), executor of the estate of her father, a deceased limited partner, Hans Erik Molberg, sent a letter to Phoenix, complaining that Phoenix was delinquent in its responsibilities under Section 8.2 of the Partnership Agreement to provide “books, records, financial statements and other reports” of the Partnership. Molberg wrote that  “demand is hereby made” for Phoenix to “distribute audited financials,” a “Schedule K-1,” and “quarterly reports.”

Nowhere to be found in the letter were the words “knowing,” “willful,” “material,” “breach,” “default,” or “cure.” The signature block of the letter stated that it was signed on behalf of the limited partner’s estate, not on behalf of the Partnership itself.

Emails ensued between Phoenix and the limited partners. Dissatisfied with Phoenix’s response, the limited partners adopted a “Consent of a Supermajority in Interest of the Limited Partners of the Partnership,” characterizing the April 28, 2023 letter as a “Notice of Breach and Demand” to cure, and resolved to remove Phoenix as general partner “for Cause in accordance with Section 6.1 (d) of the Partnership Agreement, effective immediately.”

Phoenix asserted that the notice was ineffective, prompting Molberg, individually and derivatively, to sue Phoenix to enforce its removal as general partner, becoming the second of two lawsuits by the limited partners against Phoenix. The complaint alleged two claims – declaratory judgment of removal under Section 6.1 (d), and attorneys’ fees under Section 12.9 of the Partnership Agreement.

The Dismissal Motion

Phoenix moved pre-answer to dismiss the complaint.

In a Decision and Order, former New York County Commercial Division Justice Barry R. Ostrager denied dismissal, ruling that the “April 28, 2023 communication sufficiently put defendants on notice that the [Partnership Agreement]’s thirty-day cure period was being triggered.”

The Court ruled that “failure to specifically reference the 30-day cure period or the cure period provision” in the Partnership Agreement was not “sufficient,” “on its own,” to “invalidate” the notice.

The Court concluded:

Considering the attendant circumstances in this case—the multiple correspondences from limited partners requesting the financials at issue, the ongoing lawsuit captioned Black v. Phoenix (index number 652460/2020) based on the same set of facts, and the fact that the April 28, 2023 correspondence was imperative in its demand for the documents and the cited basis for these documents—the April 28, 2023 Notice sufficiently notified defendants that the contractual cure period was being triggered.

The Appeal

Ten months later, Phoenix perfected an appeal of the dismissal decision, arguing that the April 2023 letter was too “ambiguous” to constitute a valid notice of default and demand to cure, and even if it were, Molberg did not send her letter on behalf of “Partnership” itself, as required by Section 6.1 (d) of the Partnership Agreement.

Phoenix argued: “When, as here, the requirements of a notice provision are not strictly followed, the supposed ‘notice’ is invalid.” You can read all the appeal briefs here, here, and here.

In a conclusive loss for Molberg and her co-limited partners, the Appellate Division “unanimously reversed, on the law,” the motion court’s denial of dismissal.

The Court wrote:

Dismissal of this action is warranted because the April 28, 2023 letter did not trigger the 30-day cure period under the subject LP Agreement. Although a limited partner could theoretically send notice on the Partnership’s behalf, that is not what happened here. Rather, the letter was signed by a single limited partner who did not purport to be acting in anything other than her individual capacity. The letter was written in the first-person singular, no other limited partners were copied or referenced, and there was no language in the letter suggesting that it was being sent ‘derivatively,’ ‘on behalf of,’ or even ‘for the benefit of’ the Partnership.

The Court continued:

The letter also did not provide notice of any breach – of § 8.2 or any other provision of the LP Agreement. It did not use the words ‘notice,’ ‘breach,’ or ‘cure’ and did not reference the contractual removal provision or definition of ‘Cause.’ Although the letter cited the General Partner’s obligation to provide financial information under § 8.2 . . ., it is best read as a prospective demand for audited financials, and it did not put defendants on a notice that a ‘knowing, willful and material breach’ of the LP Agreement had already occurred and the 30-day cure period was triggered.

As a result, the appeals court directed the clerk to enter judgment dismissing the complaint in full.

Don’t Make the Same Mistake

Molberg aligns with decisions holding that “[w]here a contract contains a condition precedent-type notice provision,” “strict compliance will be required,” “substantial performance will not suffice,” and “failure to strict comply” may result in “waiver of a claim” (Misty Cleaning Servs., Inc. v Individual Group Home Living Program, Inc., 223 AD3d 897 [2d Dept 2024] [quotations omitted]).

This rule of law of strict compliance applies to “conditions precedent to a termination ‘for cause’” (id.; see Summit Dev. Corp. v Fownes, 74 AD3d 563 [1st Dept 2010] [“Where a contract provides that a party must fulfill specific conditions precedent before it can terminate the agreement, those conditions are enforced as written and the party must comply with them”] [quotations omitted]).

For Molberg and her co-limited partners, the loss almost certainly came as an immense shock.

At the time of the appellate decision, Molberg had a motion for summary judgment on the complaint, including for an award of attorneys’ fees, fully briefed and calendared for oral argument in April.

Just seven days after the appellate decision, the motion court issued a Decision and Order cancelling oral argument, denying summary judgment, and marking the case disposed.

Just four days after that, undoubtedly with glee, Phoenix filed a motion for $1.1 million in litigation expenses as the “prevailing party” under Section 12.9 of the Partnership Agreement.

All of this could have been avoided with a precisely-worded default and cure notice. For our readers, the lesson is unmistakable: if you hope to remove a controller for cause, or the contract otherwise imposes conditions precedent to removal, comply with the contract’s language to the punctilio. Strict performance is the standard, and anything less can lead to a catastrophically expensive litigation loss.