limited partnershipA 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. Continue Reading Court Enforces Waiver of Limited Partner’s Right to Seek Judicial Dissolution — Or Did It?

A disproportionate number of court decisions applying New York’s Partnership Law involve law firm partnerships. That’s because, while use of general partnerships in the business world at large has been eclipsed almost entirely by other closely-held business forms offering both limited liability and partnership taxation, those same features are available to law firms and certain other professional practices by organizing as limited liability partnerships under New York’s LLP statute enacted in 1994.

Other than its organizational and limited liability attributes, New York LLPs are governed by the same, arcane Partnership Law provisions applicable to all general partnerships. One of the most existentially critical of these provisions is found in Partnership Law § 62 [4] stating that dissolution of the partnership is caused “[b]y the death of any partner.” Courts in New York and elsewhere construe this provision, modeled on § 31 [4] of the 1914 Uniform Partnership Act, as a default rule, that is, subject to override in the partnership agreement.

The tragic, accidental death in 2008 of one of two partners in a Manhattan law firm called Donovan & Yee, LLP, triggered a lawsuit in which the estate of the deceased partner is contesting the surviving partner’s continuation of the firm. Earlier this month, in Le Bel v Donovan, 2014 NY Slip Op 03608 [App. Div. 1st Dept, May 20, 2014], a panel of appellate judges unanimously construed contested provisions in the partnership agreement as overriding Partnership Law § 62 [4]’s dissolution default rule, by authorizing continuation of the partnership if a new partner is admitted within 90 days after the death. At the same time, however, the panel remanded the case for trial to determine whether the newly admitted partner was actually an equity partner or, as the estate contended, was part of an alleged “sham transaction” making her a partner in name only to avoid paying the estate one-half of the law firm’s assets upon dissolution.

You have to admit, as dissolution lawsuits go, it doesn’t get much more interesting than that.

Continue Reading Court in Law Firm Dissolution Suit Must Decide, Was Partnership a “Sham”?

 

Kensington Publishing Corporation, founded in 1974 by the late Walter Zacharius, is the largest independent publisher of mass-market books in the United States. When Zacharius died in 2011 at the age of 87, his obituary in the New York Times described Kensington as “a leading purveyor of bodice-rippers and other romance genres.”

Zacharius left behind his second wife, Suzanne, and two children from his first marriage, Steven and Judith. The three of them are now locked in a legal battle for control of Kensington, with Suzanne, who inherited 59% of the voting shares, pitted against her two stepchildren who own most of the remaining voting shares.

Why the battle for control when Suzanne owns a clear majority of the voting equity? The answer lies in a 2005 voting agreement made by Walter and his two children which effectively gave Steven and Judith the power, following Walter’s death, to vote his shares in any election of Kensington’s directors. The children subsequently have used their board control to frustrate Suzanne’s stated goal, to sell her majority interest in Kensington to a “major publishing house,” and allegedly to withhold distributions as part of a squeeze-out plan. Continue Reading Voting Agreement Triggers Fight for Control of Family-Owned Publishing House

It’s a common drafting technique in all sorts of agreements to use the phrase, “Notwithstanding anything to the contrary in this Agreement,” to establish precedence of the appurtenant contract term with all other terms in the agreement. Ken Adams, the blogger and author of A Manual of Style for Contract Drafting, recommends against use of the phrase, even though it saves the effort of having to review the rest of the document for possible inconsistencies. As Adams explains, “[t]o reduce the chance of a drafting error, and to make life easier for the reader, it would be best to determine whether the provision in question in fact needs to trump another provision and, if it does, to specify which provision.”

Had they heeded that advice, the parties in Schepisi v. Roberts, 2013 NY Slip Op 07577 (1st Dept Nov. 14, 2013), decided last week by the Manhattan-based Appellate Division, First Department, could have saved themselves a lot of trouble and expense litigating their dispute over a pair of LLC agreements containing dueling notwithstanding clauses concerning the level of management authority required to enter into related-party contracts with LLC members. Continue Reading LLC Agreement Falters from Dueling “Notwithstanding” Clauses

The removal of a limited partnership’s general partner for malfeasance, under the court’s general powers of equity, is a rarely exercised judicial remedy. A court’s replacement of the expelled general partner with a limited partner is even rarer. But that’s just what happened last month in Garber v. Stevens, Decision & Order, Index No. 601917/05 (Sup Ct NY County June 6, 2012), decided by Manhattan Commercial Division Justice Eileen Bransten (pictured).

It figures that Garber involves a relatively old (1974) limited partnership formed to hold ownership of a Brooklyn apartment building. This once-popular form of realty ownership involving passive investors largely has been eclipsed since the mid-1990’s by use of the limited liability company form, which is governed by a comparatively sophisticated and more flexible set of statutory default rules that may be varied or eliminated by agreement of the members.

The Garber partnership’s vintage also indicates that it is governed by the original Uniform Limited Partnership Act (ULPA) adopted by New York in 1922, which remained largely unchanged until 1991 when New York adopted the Revised Uniform Limited Partnership Act (RULPA). ULPA makes no reference to the removal power, whereas RULPA includes a provision (§121-402[c]) for removal of a general partner “as may be provided in the partnership agreement.”

Continue Reading The Court’s Equitable Power to Remove and Replace a Limited Partnership’s General Partner

Last February, in Tzolis v. Wolff, 10 NY3d 100 (2008), the New York Court of Appeals ruled that members of limited liability companies may bring derivative actions on behalf of LLCs notwithstanding the legislature’s deliberate omission of statutory authorization for derivative actions when it enacted the LLC Law in 1994.  (Read my post on Tzolis here).

The dissenting judges in Tzolis objected that the majority had created a common law right of derivative action "unfettered by the prudential safeguards against abuse that the Legislature has adopted when opting to authorize this remedy in other contexts," namely, the statutory provisions imposing demand, contemporaneous ownership, security, attorney fees and settlement restrictions on derivative suits brought on behalf of business corporations and limited partnerships.

The majority responded to this charge, stating that "the right to sue derivatively has never been ‘unfettered’"; that "the limitations on it are not all of legislative origin"; and most importantly:

What limitations on the right of LLC members to sue derivatively may exist is a question not before us today. We do not, however, hold or suggest that there are none.

In Tzolis‘s aftermath, lower courts have taken their cue from the majority’s response by imposing prior demand and contemporaneous ownership requirements on putative LLC derivative plaintiffs.

Continue Reading Post-Tzolis Rulings Address Demand and Contemporaneous Ownership Requirements for LLC Derivative Actions