Swing Of The Pendulum: A Tale Of Two "For Cause" Removals

Strict compliance with contractual conditions precedent, yea or nay? In New York, it depends.

Now, the general rule is that strict compliance with contractual conditions precedent is required. The New York Court of Appeals has previously held: "Express conditions must be literally performed, substantial performance will not suffice" (MHR Capital Partners LP v Presstek, Inc., 12 NY3d 640 [2009] [defendant's obligation to perform under a stock purchase agreement did not arise because an express condition precedent—consent from the lender—was not fulfilled]).

Today, we look at two cases decided by the First Department this year—Molberg v Phoenix Cayman Ltd and 242 Tenth Investors LP v GVC 242 Tenth Sponsor, LLC— that involve near-identical set ups: limited partnerships; attempted removal of a general partner by a limited partner under a provision of the partnership agreement; objections by the GP based on the removal notice's noncompliance with contractual conditions precedent; and a resulting lawsuit by the LP seeking declaratory judgment validating the GP's removal and for an award of attorneys' fees. But, with polar opposite outcomes.

In Molberg, the First Department dismissed a removal claim for failure to strictly perform the conditions precedent prior to removal. A few months later, in 242 Tenth Investors, the First Department reinstated a removal claim, excusing strict performance and finding triable issues of fact.

Let's discuss.

Molberg v Phoenix Cayman Ltd.

Read here for a more thorough treatment of the Molberg decision in a post by Frank McRoberts.

In Molberg, a limited partner transmitted a letter to the general partner complaining of delinquency in the GP's financial and fiduciary obligations (i.e., failure to provide books and records, distribute audited financials, etc.). Dissatisfied with the GP's response (or presumptive lack thereof), the limited partners adopted a Consent to remove the GP for cause under the limited partnership agreement. When the GP would not go quietly, the LP sued to enforce the "for cause" removal.

New York Commercial Division Justice Barry R. Ostrager denied pre-answer dismissal of the claim, ruling that, "considering the attendant circumstances in this case"—namely, multiple, repeat requests for financials by other limited partners, a parallel lawsuit involving the same set of facts, and the letter's demand for documents—the letter sufficiently put GP on notice that the partnership agreement's 30-day cure period was being triggered.

The First Department reversed, finding that the letter did not adequately trigger the 30-day cure period—an express condition precedent prior to removal under the partnership agreement. The letter did not contain any of the buzz words required (i.e. "notice," "breach," "cure," "cause") nor any reference to specific provisions of the partnership agreement that would put the GP on notice that the LP considered the GP's actions a "knowing, willful and material breach" of the agreement, for which the 30-day cure period was triggered.

The First Department dismissed the complaint. GP filed a motion for $1.1 million in attorneys fees as the "prevailing party."

Lesson (courtesy of Frank McRoberts): "[I]f 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."

242 Tenth Investors LP v GVC 242 Tenth Sponsor, LLC

But now, we find a swing in the opposition direction.

242 Tenth Investors concerns a limited partnership formed in 2019 for the acquisition and renovation of a mixed-use building in Manhattan.

The parties entered into a limited partnership agreement and negotiated business plan. Certain "Major Decisions" required the Investor's express written consent, including any material deviation from the Business Plan or the budget (i.e. costs exceeding $50,000).

The agreement also grants Investor the right to remove Sponsor as General Partner if exercised within 90 days of Investor's "actual knowledge" of a triggering event. A triggering event is a default event that requires written notice and a 30-day opportunity to cure. The removal provision also requires that as a condition to removal, Investor must either, (i) cause all Loan Guarantors designated by Sponsor to be released from all Loan Guaranties, or (ii) cause a Creditworthy Indemnitor to indemnify such Loan Guarantors.

Unauthorized Budget Overruns Prompt Removal of the Sponsor as General Partner

The approved budget for the project renovations was $576,870.

According to the Investor, the Sponsor undertook a massive, unauthorized expansion of the project scope, rebranding the work as a "Substantial Rehabilitation." Sponsor claims that after the property was acquired, the physical conditions and building systems were worse than anticipated.

By August 2020, a year later, the renovation costs had skyrocketed to more than double the approved budget—over $1.1 million—without the Investor's required consent

On October 23, 2020, Sponsor provided a construction update to Investor, which disclosed for the first time the extensive and fundamental changes to the size and scope of the plan, the majority of which had already occurred, and the increased costs of the renovations. Having spent all of the capital already invested in the project, Sponsor issued a capital call a few days later, on October 30, 2020.

On January 20, 2021, Investor informed Sponsor of its decision to terminate Sponsor as General Partner, effective February 15, 2021, due to Sponsor's material breaches of the partnership agreement. The removal letter was attached to Investor's January 20 email, and advised that a hard copy would follow by "terrestrial mail." Sponsor received the hard copy letter on January 25, 2021.

Sponsor responded a few days later, rejecting Investor's attempt to remove Sponsor as General Partner. A few days after that, Investor sent another letter to Sponsor asking to discuss an orderly transition, but Sponsor continued to reject the validity of its removal.

Investor commenced a lawsuit on February 23, 2021, for declaratory judgment validating the removal, breach of the partnership agreement, and other related claims.

The parties cross-moved for summary judgment.

Supreme Court Summarily Dismisses Investors Claims, Finding Removal Notice "Invalid and Void"

The case landed on the desk of Justice Joel M. Cohen, Commercial Division, New York County.

Justice Cohen granted Sponsor's motion for summary dismissal of all claims, and denied Investor's cross-motion for summary judgment.

The court's decision hinged on its determination that, "the Investor's purported removal of Sponsor as general partner is not valid or enforceable because Investor failed to satisfy several conditions precedent to such removal under the plain language of the LPA."

First, Justice Cohen found the notice untimely. While the letter was emailed on January 20, 2025 (i.e. before the 90-day period expired), Sponsor received the certified mail copy (as required under the notice provisions of the agreement) on January 25, 2021, four days after the expiration of the 90-day period.

But even if timely, the court found that Investor failed to provide the required 30-day cure period before exercising the removal right. The court rejected Investor's argument that the removal notice was effective as of February 15, 2021, finding that a period to cure has to occur before removal.

Finally, the court found that Investor did not satisfy the conditions precedent concerning the release of the Loan Guarantors from the Loan Guaranties. Investor argued that it tried to engage with Sponsor to discuss the transition, but Sponsor refused to cooperate. But, here too, the court found there was no evidence that Sponsor's refusal to cooperate took place before the removal, or that Sponsor's actions otherwise prevented Investor from alternatively locating a "Creditworthy Indemnitor."

Justice Cohen also dismissed the breach of contract claim for lack of claimed damages, and directed Sponsor to submit an application for attorneys fees as the "prevailing party."

The Investor appealed.

First Department Reinstates Removal Claim and Breach of Contract Claim, and Remands for Further Proceedings

The First Department modified on all grounds appealed from, finding triable issues of fact and remanding back to the Supreme Court for further proceedings.

The Appellate Court did not treat the notice's timeliness question as fatal. Finding the removal notice only "arguably untimely," the court noted that Sponsor received "actual written notice" by email within the 90-day period and received the certified mail copy "only" four days after the period expired. Sponsor further "failed to show they experienced any prejudice from the timing and manner of delivery."

The First Department also found triable issues of fact as to whether Sponsor's blanket refusal to cooperate in its removal and transition prevented Investor's compliance with the condition precedent requiring the release of the Loan Guaranties or securing a Creditworthy Investor, in light of Sponsor's statements to Investor that, "it had no right to speak with any lenders."

The Appellate Court also excused the 30-day cure period requirement, finding that the breaches triggering the removal were "not breaches that could have been cured at the time the removal notice was sent, as evinced by the fact that the renovations were largely complete and the partnership's funds were already spent by that time." The court further noted that the evidence showed the Sponsor "denied any breach, did not seek retroactive approval, and made clear that it had no intention of refunding the renovation expenditures."

Finally, the First Department reinstated Investor's breach of contract claim for nominal damages and, critically, counsel fees should Investor prevail on its reinstated removal claim.

Lesson: While New York courts typically demand strict compliance with contractual provisions (particularly express conditions precedent), contractual compliance cannot be weaponized to insulate from obvious breaches of contractual and fiduciary duties.

Final Thoughts

Two general partner removals. Two opposite results.

As I see it, the difference between the cases was the level of culpability of the GP in the underlying breach. In Molberg, the GP's lack of financial transparency was in dispute and it was unclear whether any financial malfeasance actually took place. In 242 Tenth Investor, the Sponsor did not deny that it dramatically changed the scope of the project without Investor's consent, spent all of the project's capital (i.e., the Investor's money), and never informed Investor that the budget had doubled.

So in one case, strict compliance was appropriate and enforced. In the other, procedural formalities were not allowed to swallow substantive justice.

We see these strict compliance vs fairness considerations play out in other areas of business divorce as well. For example, in the context of capital calls, in one instance, the Fourth Department invalidated a capital call for failure to strictly comply with the notice provision in the operating agreement. In another case, the court enjoined a majority member from enforcing a capital call under the operating agreement until the minority member had a chance to petition for dissolution. In yet another case, the court cancelled a capital call exercised under the operating agreement as "invalid," where the member opted to finance through self-interested loans, rather than capital calls throughout the development of the project, and only made a capital call later to subsidize his losses.

Ultimately, strict compliance with contractual provisions is always the optimal and safest route to exercise your rights. But, even without (and depending on the circumstances), you may want to shoot your shot anyway—you never know if you'll catch the sympathetic ear of the court.

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