A basic and well-known principle of partnership law is that, absent an agreement to the contrary, general partners have authority to unilaterally bind the partnership to contracts with third parties.

In New York, the rule is codified in Section 20 (1) of the Partnership Law, which states:

Every partner is an agent of the partnership for the purpose of its business, and the act of every partner, including the execution in the partnership name of any instrument, for apparently carrying on in the usual way the business of the partnership of which he is a member binds the partnership . . .

Generally speaking, partners also have the power to unilaterally convey partnership real property, as codified in Section 21 of the Partnership Law which states, “Where title to real property is in the partnership name, any partner may convey title to such property by a conveyance executed in the partnership name . . .”

Important restrictions exist, though – statutory and potentially contractual – on general partners’ ability to bind the partnership to transactions which may, in effect, cause the dissolution of the business. These restrictions can be a trap for the ill-informed, as emphasized by a recent Brooklyn appeals court decision in Camuso v Brooklyn Portfolio, LLC, 164 AD3d 739 [2d Dept 2018]. Camuso is a reminder that careful due diligence is vital when buying partnership real property. Continue Reading When Dealing in Partnership Owned Real Property, Caveat Emptor

A few weeks ago, this blog – in the first of a three-part series about business valuation proceedings – addressed the various statutory triggers by which owners of New York partnerships, corporations, and limited liability companies can wind up in a contested business appraisal proceeding.

So you, or your client, have found yourself in an appraisal proceeding. The question then becomes: What are the legal rules, principles, and standards that apply in the valuation proceeding itself? That is the subject of today’s article.

“Value” Versus “Fair Value”

The ultimate purpose and objective of an appraisal proceeding is to determine the correct “value,” the term found in the Partnership Law (i.e. Sections 69 and 73), or “fair value,” the term used in both the Business Corporation Law (i.e. Sections 623 and 1118) and Limited Liability Company Law (i.e. Sections 509, 1002, and 1005), of an owner’s interest in a business for the purpose of a buyout of liquidation of that ownership interest.

The interplay of the “value” and “fair value” standards raises a trio of threshold questions. Continue Reading Basics of Valuation Proceedings – Litigating an Appraisal from Start to Finish – Part 2

There’s a lot to digest in last week’s decision by the Court of Appeals — New York’s highest court — affirming and modifying in part the intermediate appellate court’s ruling in Congel v Malfitano, a “wrongful dissolution” case I previously covered here and here, in which a minority partner in a general partnership that owns a shopping mall, whose former 3% interest had a stipulated top-line, pro rata value of $4.85 million, after massive valuation discounts and a seven-figure damages award for the majority’s legal fees, ended up with a judgment against him for about $1 million.

Let’s begin with a synopsis of Judge Eugene M. Fahey’s opinion for the court:

  • Instead of focusing, as did the lower courts, on whether the partnership met Partnership Law § 62 (1) (b)’s durational criteria of “definite term” or “particular undertaking,” the court decided the wrongfulness of the minority partner’s unilateral dissolution without recourse to the statute, and instead employed a purely contractual approach in affirming the lower courts’ finding of wrongful dissolution based on the partnership agreement’s “clear and unequivocal terms” providing the exclusive means by which the partnership could be dissolved.
  • The court affirmed the lower courts’ application of 35% marketability, 66% minority, and 15% goodwill discounts, which collectively erased around 80% of the stipulated top-line valuation. As to the minority discount, based on the objectives and policies underlying the “terminological difference” between the statutes, the court refused to read into Partnership Law § 69 (2) (c) (II) — which requires the court to determine the “value” of the partner’s interest when the remaining partners elect to continue the business following a wrongful dissolution — the case law disallowing any minority discount under the “fair value” standard found in sections 1118 and 623 of the Business Corporation Law governing buyouts in shareholder oppression and dissenting shareholder cases. Two of the panel’s seven judges dissented from this part of the court’s decision and would have disallowed the minority discount as a matter of law.
  • In the one bright spot for the minority partner, the court’s opinion struck the approximately $1.6 million (plus 9% interest) damages award for the majority’s legal fees, holding that the award contravened the so-called American Rule under which each side pays its own litigation expenses absent a contractual or statutory fee-shifting provision, and that the damages recoverable under Partnership Law § 69 are only designed to compensate for legal fees or other losses “incurred in carrying out separate acts necessitated by the breach.”

The court remitted the case to the trial court to recalculate damages (I’ll explain below). As best as I can tell, the likely net effect of the rulings will be to swing the judgment from around $1 million against the minority partner to around $1 million in his favor — still a jaw-dropping reduction from the pro rata value of the partnership interest he gave up.

Continue Reading New York’s High Court Takes Fresh Approach to Wrongful Dissolution, Sustains Valuation Discounts, Limits Damages in Partnership Case

NewYorkCourtofAppealsIn a controversial ruling last year in Congel v Malfitano, the Appellate Division, Second Department, affirmed and modified in part a post-trial judgment against a former 3.08% partner in a general partnership that owns an interest in a large shopping mall, and who unilaterally gave notice of dissolution, finding that

  • the partnership had a definite term and was not at-will for purposes of voluntary dissolution under Partnership Law § 62 (1) (b) based on the partnership agreement’s provisions authorizing dissolution by majority vote, notwithstanding a 2013 ruling by the Court of Appeals (New York’s highest court) in Gelman v Buehler holding that “definite term” as used in the statute is durational and “refers to an identifiable terminate date” requiring “a specific or even a reasonably certain termination date”;
  • the former partner’s unilateral notice of dissolution therefore was wrongful; and
  • having wrongfully dissolved the partnership and upon the continuation of its business by the other partners, under Partnership Law § 69 (2) (c) (II) the amount to be paid to the former partner for the value of his interest properly reflected a 15% reduction for the partnership’s goodwill value, a 35% marketability discount, a whopping 66% minority discount, and a further deduction for damages consisting of the other partners’ litigation expenses over $1.8 million including statutory interest.

The Appellate Division’s decision, which I wrote about here, and the former partner’s subsequent application for leave to appeal to the Court of Appeals, which you can read here, reveal, to say the least, a remarkable result: the former partner, whose partnership interest had a stipulated topline value over $4.8 million, ended up with a judgment against him and in favor of the other partners for over $900,000.

But the story’s not over. Last week, the Court of Appeals issued an order granting the former’s partner’s motion for leave to appeal. Sometime later this year, the Court of Appeals will hear argument in its magnificent courtroom pictured above and issue a decision in the Congel case which likely will have important ramifications for partnership law whatever the outcome. Continue Reading Court of Appeals to Decide Controversial Partnership Dissolution Case

Top 10BI’m pleased to present my 9th annual list of this past year’s ten most significant business divorce cases. The list includes important appellate rulings by the First and Second Departments on dissolution of foreign business entities, shareholder rights to inspect book and records, and valuation of partnership interests, along with an interesting mix of trial court rulings on issues affecting LLC members and fair value appraisals. I’ve also included a likely bellwether New Jersey Supreme Court ruling concerning grounds for LLC member expulsion. All ten were featured on this blog previously; click on the case name to read the full treatment. And the winners are:

  1. Matter of Raharney Capital, LLC v Capital Stack LLC, 138 AD3d 83, 2016 NY Slip Op 01425 [1st Dept Feb. 25, 2016], which brought to an end a longstanding departmental split over the question whether New York courts have jurisdiction over dissolution suits involving foreign business entities, with the First Department in Raharney agreeing there is no jurisdiction.
  2. Matter of Pokoik v 575 Realties, Inc., 143 AD3d 487, 2016 NY Slip Op 06648 [1st Dept Oct. 11, 2016], an appellate ruling of apparent first impression in New York in which the court upheld shareholder inspection rights concerning the books and records of the corporation’s wholly-owned subsidiary.
  3. Huang v Northern Star Management LLC, 2016 NY Slip Op 32194(U) [Sup Ct NY County Oct. 24, 2016], one of only a handful of New York cases involving challenges to cash-out LLC mergers in which Justice Charles E. Ramos of the Manhattan Commercial Division denied a preliminary injunction sought by a minority shareholder who alleged that the merger violated the LLC’s operating agreement.
  4. IE Test, LLC v Carroll, 2016 WL 4086260 [NJ Sup Ct Aug. 2, 2016], an important ruling by the New Jersey Supreme Court in which it reversed the lower court’s judicial expulsion of an LLC member under a narrowed construction of that state’s enabling statute mirroring the Revised Uniform LLC Act’s expulsion provision.
  5. La Verghetta v Lawlor, 2016 NY Slip Op 30423(U) [Sup Ct Westchester County Mar. 9, 2016], a highly detailed and thorough fair-value appraisal opinion by Westchester County Commercial Division Justice Alan D. Scheinkman involving a chain of fitness clubs in which the court confronted dueling expert appraisals whose methodology and conclusions of value were light years apart and ultimately fashioned its own appraisal that, among other important findings, rejected a discount for lack of marketability.
  6. Congel v Malfitano, 141 AD3d 64, 2016 NY Slip Op 03845 [2d Dept May 18, 2016], a controversial ruling currently before the New York Court of Appeals on a pending application for leave to appeal, in which the Second Department upheld a wrongful dissolution judgment against a minority partner and further imposed a 66% discount for lack of control on the value of the partner’s interest.
  7. Gilbert v Weintraub, Short Form Order, Index No. 602290/15 [Sup Ct Nassau County Jan. 29, 2016], presenting the novel issue whether a co-manager of an LLC with no operating agreement can resign as manager while retaining his member status and engage in competitive business activity, where Nassau County Commercial Division Justice Timothy S. Driscoll held that further factual development was needed to determine whether it was reasonable for the resigned manager’s fiduciary duty to extend beyond his resignation and, if so, for how long.
  8. Matter of Hudson (Pure Lime USA, Inc.), Short Form Order, Index No. 600127/16 [Sup Ct Nassau County June 16, 2016], in which Nassau County Commercial Division Justice Stephen A. Bucaria dismissed a 50% shareholders’ dissolution petition alleging director deadlock where the governing shareholders’ agreement authorized one of the respondent’s designees on the four-member board to cast the deciding vote in case of a tie vote.
  9. MFB Realty LLC v Eichner, 2016 NY Slip Op 31242(U) [Sup Ct NY County June 24, 2016], in which Manhattan Commercial Division Justice Saliann Scarpulla dismissed derivative claims by a purported LLC member for lack of standing based on the plaintiff’s failure to obtain the required super-majority consent to its admission as a full-fledged member of the LLC notwithstanding it having obtained such consent to the initial assignment of the interest.
  10. Fakiris v Gusmar Enterprises LLC, 53 Misc 3d 1215(A), 2016 NY Slip Op 51665(U) [Sup Ct Queens County Nov. 21, 2016], where Queens County Commercial Division Justice Martin E. Ritholtz denied a motion to dismiss claims for breach of fiduciary duty brought against a non-member designated as tie-breaker under the LLC’s operating agreement, finding factual issues whether the tie-breaker engaged in any misconduct.

66discountTalk about playing your cards wrong.

A partner with a 3.08% interest worth $4.85 million in a partnership that owns a major shopping mall likely will walk away with only a few hundred thousand dollars after a court decision finding that he wrongfully dissolved the partnership and deducting from the value of his interest the other partners’ damages including legal fees, a 15% discount for goodwill, a 35% marketability discount, and a whopping 66% minority discount.

Last week’s decision by the Brooklyn-based Appellate Division, Second Department, in Congel v Malfitano, 2016 NY Slip Op 03845 [2d Dept May 18, 2016], rejected the partner’s appeal from the trial court’s determination of wrongful dissolution and also upheld its valuation determination with one major exception: the appellate court held that the trial court erred by failing to apply a minority discount and that it should have applied a 66% minority discount based on the “credible” expert testimony “supported by the record.”

The defendant partner’s fateful decision took place in 2006, when he sent his fellow partners a written notice unilaterally electing to dissolve the partnership due to what he described as a “fundamental breakdown in the relationship between and among us as partners.” The other partners quickly responded with a damages lawsuit claiming that he had wrongfully dissolved in violation of the partnership agreement in an effort to force the partnership to buy out his interest at a steep premium. The defendant, arguing that the partnership was at-will and of indefinite duration, denied wrongful dissolution and counterclaimed for his full, pro rata share of the partnership’s value upon dissolution. Continue Reading Partner Who Wrongfully Dissolved Partnership Hit With Whopping 66% Minority Discount