United States: Second Department Applies 66% Minority Discount To Interest

On May 18, 2016, in Congel v. Malfitano, the New York State Appellate Division, Second Department held that a minority discount could be applied to the value of a minority partner's interest after he dissolved a partnership, in violation of a written partnership agreement.

This decision, which effectively reduced the value of his interest by hundreds of thousands of dollars, serves as a cautionary tale to minority partners in joint ventures who attempt to cash out their interests by wrongfully dissolving the partnership, when the remaining partners wish to continue the venture.


In 2006, Marc A. Malfitano, a 3.08% partner in a partnership formed pursuant to a 1985 written agreement, for the purpose of owning and operating the Poughkeepsie Galleria Shopping Center, advised his partners that he had elected to dissolve the partnership. He based his unilateral decision on an alleged "fundamental breakdown in the relationship between and among us as partners."

In 2007, the members of the partnership's executive committee ("Plaintiffs"), sued Mr. Malfitano ("Defendant") for breach of contract and a declaration that the Defendant wrongfully dissolved the partnership. The Plaintiffs claimed that the Defendant's unilateral dissolution violated the partnership agreement, and that his reason for doing so was to force his partners to buy out his interest for a steep premium. The Defendant counterclaimed for the value of his interest pursuant to Partnership law § 69(2)(c)(II), which provides that, in the event of a wrongful dissolution, if the remaining partners elect to continue the partnership, the partner who caused the wrongful dissolution is entitled to have "the value of his interest in the partnership, less any damages caused to his copartners by the dissolution, ascertained and paid to him in cash . . . but in ascertaining the value of the partner's interest the value of the good-will of the business shall not be considered." Partnership Law § 69(2)(c)(II).

Thereafter, the Defendant moved to dismiss the complaint for failure to state a cause action, arguing that, under Partnership Law § 62(1)(b), he was permitted to dissolve the partnership because it was at-will and indefinite in duration. The Supreme Court, Dutchess County, denied the Defendant's motion, and the Second Department affirmed, reasoning that the partnership agreement provided that the partnership would be dissolved upon a majority vote of the partners and therefore, it had a "definite term." As such, the partnership was not at-will.

In a separate decision, the Supreme Court granted Plaintiffs' motion for summary judgment, finding that defendant wrongfully dissolved the partnership and breached the partnership agreement. The Second Department later affirmed the ruling. Subsequently, to determine the amount the Defendant would be entitled to recover for his partnership interest the Supreme Court conducted a non-jury trial on the value of Defendant's interest in the partnership, and the amount of damages the Plaintiffs incurred as a result of the wrongful dissolution.

After considering expert testimony from both parties, the Supreme Court found that the Defendant was entitled to only $857,164.75, a fraction of the $4,850,000 unadjusted value of Defendant's interest. The court applied a 15% discount for the value of the partnership's goodwill and a 35% discount due to the limited marketability of the Defendant's interest. The Court also reduced the amount due to the Defendant by the amount of legal fees that the partnership incurred due to the wrongful dissolution. Significantly, however, the Supreme Court – based on case law applicable to minority shareholders of a close corporation – declined to apply a "minority discount" to reflect the lack of control that a minority partner holds in the partnership.

The Second Department Decision

Both parties appealed to the Second Department. The Defendant contended that, in light of a recent New York Court of Appeals decision, the Court should revisit its prior determination that he wrongfully dissolved the partnership. The Second Department found the Court of Appeals decision distinguishable, however, since it involved an alleged oral partnership agreement that lacked a definite term of duration, and was therefore dissolvable at will. By contrast, the partnership agreement at issue in Congel v. Malfitano was written, and contained a specific provision which precluded the Defendant from dissolving the partnership absent a majority vote.

With regard to the decision not to apply a minority discount to the Defendant's interest, the Second Department held that the Supreme Court should have done so. It first noted that the Plaintiff's valuation expert testified that, based on the sales of comparable minority interests and certain restrictions on minority partners under the partnership agreement, the applicable minority discount would be 66%. Nevertheless, the expert testified that he did not apply the discount to his valuation because he was advised that, under the relevant law, it was not applicable.

In rejecting the holding below, the Second Department found that the Supreme Court's reliance on cases concerning the rights of minority shareholders in close corporations was misplaced. It explained that those cases involved claims under Business Corporation Law § 623, which allows minority stockholders to withdraw from a corporation and be compensated for the fair value of their shares when the majority takes action that is hostile to the minority shareholder, and Business Corporation Law § 1118, which provides that, following a minority stockholder's petition for dissolution for oppressive majority conduct, if the corporation elects to purchase the minority stockholder's interest, it must pay the minority shareholder fair value.

The Second Department reasoned that, under those inapposite statutes, a minority discount is not applied in determining the "fair value" of a minority shareholder's interest, because applying such a discount would allow a majority shareholder to reap a windfall by "cashing out" a dissenting shareholder, and incentivize oppressive majority conduct. Thus, although a minority shareholder's interest would be properly discounted for other purposes, the statutes' objective is to achieve a fair appraisal for a dissenting minority shareholder, and therefore, the discount should not be applied under such circumstances.

In stark contrast to the valuation of a dissenting minority shareholder's interest under the Business Corporation Law, the Court continued, Partnership Law § 69(2)(c)(II) does not involve oppressive majority conduct. To the contrary, the Defendant wrongfully dissolved the partnership, and therefore, applying a minority discount to the Defendant's interest would not contravene any of the objectives set out in the Business Corporation Law.

The Second Department next pointed to an analogous case from the Supreme Judicial Court of Massachusetts, Anastos v. Sable, 443 Mass 146, 819 NE2d 587, as further support for its holding. In that case, the plaintiff, who held a one-third minority interest in a partnership, wrongfully dissolved the partnership. The defendant's partners, though, elected to continue the partnership as a going concern. In valuing the minority partner's interest, the trial court applied a minority discount to reflect the fact that there was "no ready market" for the interest. On appeal to the Supreme Judicial Court of Massachusetts, the court rejected the minority partner's contention that he was entitled to its full liquidation value, explaining that the minority partner could not compel liquidation of the business, and because the partnership was a going concern, the minority partner's interest should not be valued as if his interest was a business asset to be liquidated.

Applying the reasoning from Anastos, the Second Department concluded that since the partnership was a going concern and the Defendant did not have a right to compel the partnership to liquidate its assets, he was not entitled to receive a proportionate share of the liquidation value.

Accordingly, the Court remitted the matter to the Supreme Court to apply a 66% minority discount – a figure that the Court drew from Plaintiffs' expert's testimony – to the value of the Defendant's interest.

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