Save the Date! On November 7 & 8, 2024, the LLCs, Partnerships and Unincorporated Entities Committee of the ABA's Business Law Section, a/k/a The Best Damn Committee in the ABA, is hosting its annual LLC Institute in Tampa, Florida. This year's CLE-accredited program features panels on important topics of interest to transactional counsel, litigators, and anyone else invested in the field of closely held "uncorporations." I'll be on a panel highlighting recent LLC caselaw in business divorce matters. The program also features a keynote address by the inimitable Professor Dan Kleinberger on Oppression Doctrine in the Age of LLCs, and the annual Lubaroff Award Dinner honoring Paul Altman of Richards Layton & Finger. There'll be plenty of time to network and meet heavy hitters in the field, and there's a reception hosted by Holland & Knight the evening of the 6th. Stay tuned for details on registration and accommodations, which should be available soon on the Business Law Section's events page. Hope to see you there!
The era of the old-fashioned general partnership long ago petered out, largely displaced by subchapter S corporations and, in the last few decades, limited liability companies, both of which allow pass-through taxation without exposure to personal liability for company obligations.
Which explains why, other than occasional posts on this blog about professional service providers (primarily lawyers) organized as limited liability partnerships, our forays into cases governed by general partnership law — whether it's New York's ancient Partnership Law drawn from the 1914 Uniform Partnership Act, or the Revised Uniform Partnership Act of 1997 adopted in most other states — are few and far between. Each time I write about a general partnership case, I figure it's the last time.
I'm proved wrong once again, this time by two recent partnership cases involving novel issues decided by appellate courts in Pennsylvania and New Jersey. So without further ado . . .
Pennsylvania Supreme Court Holds That Spouse of Deceased Partner, Who for Years Afterward Was Acknowledged as a Partner, Does Not "Step Into the Shoes" of the Deceased Partner for Purposes of Enforcing the Original Partnership Agreement's Buy-Sell Provision
I've lost count how many times I've cautioned that any buy-sell agreement between co-owners that prices the buy-out at book value upon death or other trigger event, virtually guarantees litigation when triggered. Estate of Caruso v Caruso is one of those cases, fought in the setting of a realty holding general partnership, that went up to the Pennsylvania Supreme Court.
The basic facts are as follows:
- In 1983, brothers Peter and John Caruso, along with their mother, formed a general partnership called Hays Land Company ("HLC") that over the years acquired nine real properties.
- At inception they entered into a written partnership agreement with a "Buy-Sell on Death of Partner" provision stating that if the Partnership is dissolved by the death of a partner, the remaining partners are obliged to purchase the deceased partner's interest at "net book value."
- Shortly before the mother's death in 1997, she conveyed her interest in HLC to Peter and John, making them 50/50 partners.
- John died in 2003, survived by his wife and executor Geraldine.
- Neither did Peter exercise his buy-out of John's interest upon the latter's death, nor did Geraldine attempt to enforce a buy-out.
- From 2003 until 2015, while Peter continued to operate HLC, Geraldine and Peter equally owned 50% of HLC, and Geraldine received 50% of distributions as reflected in HLC's tax reporting.
- Following Peter's death in 2015, survived by his daughter and executor, Sandra, Geraldine attempted to exercise the 1983 partnership agreement's buy-out of Peter's estate's 50% interest at book value in the amount of approximately $118,000.
- Sandra refused to accept the offer, asserting that the 1983 partnership agreement was not in effect when Peter died because the partnership had ended upon John's death in 2003.
Geraldine brought suit against Sandra, seeking a declaratory judgment that the partnership agreement still governed her relationship with Peter at the time of his death, and requesting specific performance of the buy-sell at book value.
The case wound its way through a series of lower court proceedings, ultimately resulting in victory for Geraldine on the grounds that (1) Peter's failure to take any affirmative action to dissolve the partnership upon John's death, coupled with (2) Peter's subsequent dealings with Geraldine including distributions and tax reporting, evidenced an agreement by Peter and Geraldine to continue the partnership under the terms of the 1983 agreement. The lower court rejected Sandra's argument that Geraldine never "stepped into the shoes" of John as a signatory and party to the 1983 agreement.
Following an affirmance by the intermediate appellate court, the Pennsylvania Supreme Court granted leave to appeal on the question
whether an individual, who is not an original party to a partnership agreement, nor a third-party beneficiary of it, and where the terms of the agreement do not permit assignment of a partner's interest to a non-party, may be permitted to "step into the shoes" of a party to the agreement and, thus, to enforce the contractual rights conferred on that party by the agreement.
In a 24-page opinion authored by the Chief Justice, the Supreme Court answered the question in the negative, essentially finding that upon John's death in 2003, Peter and Geraldine entered into a new partnership unbound by the 1983 agreement to which Geraldine was not a signatory or party, "thus its provisions, including its buy-out provision in Paragraph 14, were binding and enforceable as between [Peter, John, and their mother] exclusively."
Other key aspects of the Court's analysis include:
- The 1983 agreement had no successor provision conferring on spouses or heirs the power, upon death, to assume and exercise any rights thereunder.
- Neither John nor Peter made any lifetime or testamentary assignment of their partnership rights under the 1983 agreement to Geraldine.
- Geraldine's standing as legal representative of Peter's estate only gave her powers with respect to the administration of the estate, i.e., she does not "stand[] in his shoes with respect to all of his legal rights, including those under the Partnership Agreement."
- There was no evidence that Geraldine was a third-party beneficiary under the 1983 agreement.
- The evidence showing that Peter and Geraldine continued to carry on the business of HLC after John's death, and shared in its profits, supported the conclusion that Peter and Geraldine had formed a partnership with respect to operating HLC after John's death, but evidence of this "newly-formed partnership, in and of itself, does not establish that they also intended that their respective rights and duties under the new partnership would be governed by the terms of the 1983 Partnership Agreement."
Nowhere in the Court's opinion is there any mention, either in the appeal before it or in the lower court proceedings, of Sandra decrying the inequitable pricing of the demanded buy-out at book value of multiple real properties at a presumed fraction of their current fair market value. With her victory on appeal, Sandra presumably can force a dissolution and winding up of the partnership, or negotiate a fair buy-out by Geraldine, or a buy-out by Sandra of Geraldine, if so inclined.
New Jersey Appellate Court Holds Partner's Failure to Respond to Notice of Breach Justifies Dissociation and Dissolution Under "Not Reasonably Practicable" Standard, and That Effective Dissolution Date is Date of Dissolution Order, Not Date of Breach
In AC Ocean Walk, LLC v Blue Ocean Waters, LLC, decided last May by the Superior Court of New Jersey, Appellate Division, the court addressed several issues of first impression under that state's Revised Uniform Partnership Act ("NJ RUPA"):
- how to interpret the "not reasonably practicable" standard under the statutory provision for judicial dissociation of a partner;
- whether a partner's singular act, in failing to respond to another partner's notice of breach given per the terms of the partnership agreement, satisfies the "not reasonably practicable" standard for judicial dissociation of a partner;
- how to interpret the "not otherwise reasonably practicable" standard under the statutory provision for judicial dissolution of the partnership; and
- whether the effective dissolution date is the date the court orders dissolution or the date of the breach and dissociation upon which the judicial dissolution is predicated.
The case involves a general partnership formed by two LLCs ("AC Ocean" and "Blue Ocean") for the purpose of acquiring, renovating, and operating a casino resort in Atlantic City. The partnership agreement among other things specified each partner's operational and funding rights and obligations.
Around two years after the resort reopened, seeking resolution of disagreements primarily over Blue Ocean's funding obligations, AC Ocean sent Blue Ocean a notice of breach as dictated by the partnership agreement, alleging that Blue Ocean owed over $2.4 million for its share of various capital and other expenditures. The notice advised that the partnership would terminate if Blue Ocean did not cure the breach within 10 days.
For reasons unknown, Blue Ocean never responded to the notice of breach. AC Ocean subsequently filed suit seeking judicial dissociation of Blue Ocean and judicial dissolution of the partnership.
After discovery and filing of summary judgment motions, the lower court ruled that Blue Ocean's failure to respond to the notice of breach warranted its dissociation under NJ RUPA's provision authorizing dissociation where "the partner engaged in conduct relating to the partnership business which makes it not reasonably practicable to carry on the business in partnership with the partner."
The lower court further characterized Blue Ocean's dissociation as wrongful, and on that basis granted dissolution of the partnership under other provisions of NJ RUPA authorizing the court to dissolve a partnership formed for a definite term or particular undertaking if a partner wrongfully dissociates before the expiration of the term or completion of the undertaking.
The lower court lastly determined that the effective date of the partnership's dissolution was the tenth day after AC Ocean gave notice of breach, rather than the date of the court's dissolution order.
Blue Ocean appealed the lower court's orders to the Appellate Division, which in its 21-page signed opinion by the Chief Justice, upheld the lower court's dissociation and dissolution rulings but reversed on the dissolution date, instead holding that the effective date of dissolution was the date of the court's dissolution order.
Here are some of the highlights of the court's analysis:
- After noting the absence of New Jersey case authority construing the "not reasonably practicable" standards for judicial dissociation and dissolution, the court looked to, and agreed with, precedent in several other RUPA states — specifically Connecticut, Kansas, and Montana — in holding that Blue Ocean's singular act of not responding to the notice of breach satisfied the standard for dissociation because it evinces "irreparable deterioration" of the partnership relationship, a refusal to "personally interact" with AC Ocean, and an "impasse regarding important business" due to lack of communication between partners.
- As to judicial dissolution, the court adopted the lower court's reliance on Blue Ocean's counsel's "admission" at oral argument that the partnership "should be dissolved," but even without that concession, held that the order of dissolution was "on solid ground" based on Blue Ocean's conduct in not responding to the notice of breach "which allows judicial dissolution under the same 'not reasonably practicable' standard that applies to the dissociation of individual partners" (again citing the out-of-state decisions).
- In reversing the lower court's ruling and fixing the effective dissolution date as the date of the lower court's order of dissolution, the appellate court once again noted the absence of New Jersey precedent and looked to Connecticut and Nebraska cases applying those states' similar RUPA provisions. The court also stressed the "plain language" of NJ RUPA's provision allowing for judicial dissolution and winding up of a partnership where, "'[o]n application by a partner, [there is] a judicial determination that . . . it is not otherwise reasonably practicable to carry on the partnership business in conformity with the partnership agreement'" (emphasis in original).
The court's opinion sheds no light on the reasons why Blue Ocean never responded to AC Ocean's notice of breach. Its obligation under the partnership agreement to respond within 10 days could have been satisfied, as the court noted, merely by sending a response in which it "simply denied" AC Ocean's allegations in the notice of breach.
A very heavy price to pay, indeed, for such a small oversight.
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