Just a few weeks ago, Frank McRoberts authored a post titled, “The Pick-Your-Partner Principle.” It featured a more-than-decade old case about the dissolution of a real estate partnership and emphasized the fundamental principle that no partner can be forced to remain in partnership with another person against his or her will.

The inverse of that principle is also true: a partner can assign his economic interest in a partnership, but he cannot unilaterally bestow partner status (including voting and information rights) on his assignee.

While the distinction between assignable economic rights and non-assignable management/information rights is conceptually sound, a recent decision from the Second Department, SM Owner, LLC v Envoy Towers Co., L.P., 2026 NY Slip Op 00395 (2d Dept Jan. 28, 2026) shows how an assignee of an economic interest may be left not only out of the boardroom, but also out in the cold financially.

Link to A 50-Year Real Estate Partnership and a Series of Assignments. A 50-Year Real Estate Partnership and a Series of Assignments.

Envoy Towers Company was formed in 1961 to acquire a 20-story residential building in Midtown East.  The Partnership began with three general partners who contributed a modest amount of capital toward the purchase of the property.  Most of the purchase price was funded with investments from 162 limited partners.

SM Owner LLC traces its ownership to one of the original limited partners via a series of assignments:

• In 1966, one of the Partnership’s limited partners assigned its interest in the Partnership to Harry Marx, which assignment was memorialized by a “consent and waiver” executed by each of the General Partners. 
• When Harry Marx died in 1992, his estate assigned the limited partnership interest to Stanley Marx.
• In November 2022, Stanley Marx assigned the limited partnership interest to SM Owner LLC.  In connection with that assignment, Stanley and SM asked the General Partners to execute a “consent and waiver” similar to the one that had been executed in 1966.  The General Partners did not sign the consent and waiver, but they did exchange some emails suggesting that they had consented to the assignment.

Link to The Partnership Agreement’s Assignment Provision. The Partnership Agreement’s Assignment Provision.

Article Eighteenth of the Partnership Agreement addresses assignments of partnership interests:

With the consent of the general partners and only with such consent any limited partner may assign his interest in the partnership.  No limited partner shall have the right to substitute an assignee as a substituted limited partner in his place.”

Parse the two sentences in that clause. 

The first provides that the general partners’ consent is required in order for a limited partner to assign his or her interest. 

The second sentence arguably is more complicated.  “No limited partner shall have the right to substitute . . .”  Does that prohibition mean that there are no circumstances under which an assignee can become a limited partner?  Or does it mean that no limited partner has the unilateral right to have their assignee become a limited partner—i.e., that the General Partners’ consent is required for an assignee to become a full-fledged limited partner?

Link to The Partnership Agreement on Admission of New Limited Partners. The Partnership Agreement on Admission of New Limited Partners.

A search for contextual clues leads to Article Seventh, governing the admission of new limited partners:

The general partners are authorized to admit to the partnership additional limited partners . . . each of whom shall become a signatory hereto by executing a conformed counterpart of this agreement . . . and whereby each additional limited partners shall be deemed to have adopted and have agreed to be bound by all of the provisions of this agreement.”

So, for an individual to be admitted as a limited partner, they must sign the Partnership Agreement and agree to be bound by its terms.

Link to SM Seeks to Enforce Partnership Rights. SM Seeks to Enforce Partnership Rights.

A few months after SM accepted its assignment, it learned that the General Partners and 10 limited partners had agreed to extend the term of the partnership for another 40 years—meaning that the liquidation payout SM was expecting would not arrive. 

That extension struck SM as problematic, since the Partnership began with 162 limited partners and only 10 had signed.  SM promptly demanded documents sufficient to understand how the partnership went from the original 162 limited partners down to 10.

After several rounds of correspondence, the Partnership stopped cooperating.  It refused SM’s requests on the grounds that only limited partners—and not assignees—have the rights to inspect certain books and records of the Partnership.

Link to SM Owner Is a Mere Assignee, Says Trial Court. SM Owner Is a Mere Assignee, Says Trial Court.

SM ultimately filed a two-count suit against the Partnership and the General Partners seeking to inspect the books and records of the Partnership under both Partnership Law 121-106(b) and the Partnership Agreement.

Nassau County Justice Eileen Daly-Sapraicone dismissed SM’s action.  She held that “[t]he plain language of the Partnership Agreement prohibits the substitution of a limited partner[,] allowing only for an assignment of the partnership interest which entitles the assignee to receive distributions and allocations of profits and losses.” 

Link to The Appellate Question: Limited Partner or Mere Assignee. The Appellate Question: Limited Partner or Mere Assignee.

SM argued on appeal that the trial court misread Article Eighteenth of the Partnership Agreement.  Article Eighteenth meant that an assignee of a limited partnership interest would not become a limited partner unless the General Partners consented.  It did not mean, as the Trial Court held, that there were no circumstances—even the General Partners’ consent—by which an assignee could become a limited partner.

SM buttressed its reasoning with a few interesting arguments:

• If Article Eighteenth was—as the Partnership contends—an outright ban on new limited partners, then Article Seventh, which allows for new limited partners that meet certain conditions, would have no effect.
• Likewise, if only economic interests (and not limited partner membership) can be assigned, then eventually there will be no limited partners left at all, which absurdity could not be the intent of the Partnership Agreement.
• The General Partners’ course of dealing over the 50-year lifetime—including apparently recognizing Harry Marx as a limited partner after the 1966 assignment—favors SM’s interpretation of Article Eighteenth.

And, argued SM, there were at least issues of fact concerning whether or not the General Partners had consented to the assignment of full-fledged partnership rights to SM.

The Partnership in response dismissed all of SM’s arguments as an attempt to create ambiguity where there was none.  The second sentence of Article Eighteenth expressly prohibits an assignee from becoming a limited partner; SM’s claims end there.

Link to The Second Department Affirms. The Second Department Affirms.

By Order dated January 28, 2026, the Second Department affirmed dismissal of SM’s books and records claims.  In a terse decision, the Court found the “partnership agreement utterly refutes the plaintiff’s allegation that it became a limited partner by assignment.” 

The Second Department noted that Article Seventh of the Partnership Agreement set forth the conditions by which a limited partner could be admitted, including that the “additional limited partner sign the partnership agreement and be bound by its terms.”  And there was no allegation that either Harry Marx or Stanley Marx signed the Partnership Agreement or that their admission otherwise complied with the conditions in Article Seventh.

Based on SM’s (and his predecessors’) failure to comply with Article Seventh, the Second Department found that SM was not saved by Article Eighteenth.  The language, “No limited partner shall have the right to substitute an assignee as a substituted limited partner in his place,” both evidenced the Partnership’s intent to observe the differences between mere assignees and limited partners, and prohibited assignees from becoming limited partners. 

In short, if SM wanted to become a limited partner, it had to comply with Article Seventh, which it did not do.

Link to More Opacity on Transfer Restrictions? More Opacity on Transfer Restrictions?

All is not lost for SM.  In a related action, SM sued seeking a declaration that the Partnership was dissolved upon the resignation of the last of the original General Partners.  Nassau County Commercial Division Justice Murphy denied the Partnership’s motion to dismiss that action.

It’s tempting to dismiss SM Owner as a cased confined to the peculiar language of its partnership agreement.  I think there’s more to it.

In a 2022 post, Frank McRoberts discussed New York’s public policy against unreasonable transfer restrictions.  Frank summarized the caselaw (in both the Corporate and Partnership context) as follows: “[E]quity in a closely-held partnership, corporation, or limited liability company is valuable personal property. Under this principle, a transfer restriction . . . or buy-sell agreement that would impose a “forfeiture” (Atlantis), cause an ownership interest to become “void,” result in “annihilation of property” (Lam and Rafe), or “bestow a windfall” (Lipper and Cole), is vulnerable to attack as unenforceable under public policy.

Through that prism, it’s easier to see where the holding in SM Owner gets interesting, on two fronts:

First, the requirement in Article Eighteenth that assignments of economic interests only are “valid only with the consent of the General Partners” sits in uneasy tension with the judiciary’s longstanding skepticism toward restraints that unduly burden the alienability of ownership interests.

Second, the case highlights the reality that even where assignments are permitted, the economic benefits of ownership remain subject to the whims of the majority. Here, the General Partners’ decision to extend the partnership’s existence for another forty years postponed a substantial payout to the assignees for decades.

Link to A Partner or an Owner of a Partnership Interest? A Partner or an Owner of a Partnership Interest?

In the end, SM Owner shows the two competing views of closely held business ownership.  The first, that an ownership interest in a closely held business is a personal property right—one whose transferability lies at the core of its value.  And the second, that no business owner should be forced into the boardroom with individuals not of his or her choosing. Friction between those views often rewards those who remain in control of the business.