When Dealing in Partnership Owned Real Property, Caveat Emptor

November 26, 2018

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.

The Partnership and its Partners

This blog has twice written about decisions in the Camuso litigations, both authored by retired Commercial Division Justice, now mediator, Carolyn E. Demarest, the first of which you can read here. Distilled to the essentials, the facts are as follows.

In 1988, Camuso, Gallinaro, and two others entered into a written partnership agreement forming Regent Associates (“Regent”) as a New York limited partnership. Camuso and Gallinaro eventually became equal 50% partners of the partnership. Years later, Camuso and his wife divorced. In their divorce judgment, Camuso and his wife agreed to “equally divide” between themselves Camuso’s 50% partnership interest in Regent, leaving Regent’s partners as Gallinaro (50%), Camuso (25%), and Camuso’s ex-wife (25%).

The Dissolution Litigation

In 2012, Gallinaro filed a complaint against Camuso and his ex-wife for judicial dissolution of Regent due to a “stalemate” in the management of Regent’s affairs, including mismanagement of its portfolio and an inability of the partners to agree to sell the properties. The complaint referred to offers from certain unidentified third parties to buy Regent’s properties, and of Gallinaro’s desire to sell them.

The Purported Sale

During the dissolution litigation, Gallinaro and Camuso’s ex-wife entered into a proposed Stipulation and Order stating that the two collectively owned 75% of Regent, that Gallinaro had received an offer to buy Regent’s nine properties, and that the two agreed to accept the offer “immediately upon execution of this Stipulation and Order by the Court.” On August 12, 2013, Gallinaro, acting as general partner of Regent, entered into a contract of sale with Brooklyn Portfolio, LLC (“Brooklyn Portfolio”), to sell Regent’s nine properties for $5.9 million.

The Real Property Litigations

Two months after Gallinaro entered into the contract of sale on behalf of Regent, and before the sale closed, Camuso filed a complaint for a declaratory judgment, along with a notice of pendency upon the properties, to declare that the contract of sale was null and void. Brooklyn Portfolio brought a countersuit to declare that the sale contract was enforceable and binding on Regent. The two lawsuits were joined, and on dueling motions for summary judgment, Justice Demarest, in a decision previously written about here, denied Brooklyn Portfolio summary judgment and granted Camuso summary judgment. Brooklyn Portfolio appealed.

The Appellate Court’s Decision

On appeal, the Appellate Division was asked to decide whether Regent’s partnership agreement required unanimous consent of all partners to sell the partnership property.

Section 3.1 of the partnership agreement stated that the partnership’s purpose was to acquire title to, develop, rent, sell, or otherwise dispose of the nine specified real properties.

Section 1.3 (c) stated that the partnership’s term “shall terminate” upon “the divesting by the Partnership of its entire interest in the Property and of title to all assets, real or personal, that it may receive from a sale, exchange or other disposition of its entire interest in the Property.”

Although the partnership agreement allowed majority vote for most decisions, Section 6.3 stated that “prior written consent” of all partners was required to “dissolve the Partnership.”

Applying these provisions, the appeals court held:

The partnership agreement vested the general partners with the power and authority to manage Regent by majority rule, including the sale of the property, but with certain exceptions. One of those exceptions was that the general partners could not dissolve Regent without the consent of all of the general partners. We also agree with the Supreme Court that, under the terms of the partnership agreement and the contract of sale, consummation of the sale to Brooklyn Portfolio would, in itself, effect the dissolution of Regent. Upon dissolution of Regent, only liquidation and termination remained. Because Gallinaro failed to obtain unanimous consent for the sale of the property to Brooklyn Portfolio, the contract of sale was null and void.

Camuso‘s holding is reminiscent of Congel v Malfitano, 31 NY3d 272 [2018]. In Congel, the Court of Appeals ruled:

New York’s Partnership Law creates default provisions that fill gaps in partnership agreements, but where the agreement clearly states the means by which a partnership will dissolve, or other aspects of partnership dissolution, it is the agreement that governs the change in relations between partners and the future of the business.

In Camuso, as the Appellate Division noted, the lower court held that a sale without Camuso’s consent would violate Partnership Law 20 (3) (c), which states that a partner lacks authority to bind the partnership to any “act which would make it impossible to carry on the ordinary business of the partnership.” Courts occasionally apply this provision to prohibit a unilateral sale of all, or substantially all, of the assets of the partnership because it would effectively cause the partnership’s dissolution. In Camuso, however, the Court decided the issue of whether the sale would effect dissolution of the partnership based solely on the contract, and, as in Congel, “without recourse to the statute.”

Conclusion

What are some lessons from Camuso? If you, or a client, are contemplating buying real property from a partnership, read any applicable partnership agreements and seriously consider performing due diligence about the partnership’s entire portfolio to determine if the transaction could be considered a sale of all, or substantially all, of the partnership’s property, i.e., a transaction that would in effect cause the partnership’s dissolution.

According to Peter Curry, practice group leader of Farrell Fritz’s real estate department, a careful title company will look to the applicable partnership agreements, if any, as well as the language of the Partnership Law, to carefully consider whether the transaction may require all partners’ consent. Best practice is to get written consents of all partners, where possible, at the time of execution of the contract of sale. If one partner dissents – or if there is even a whiff of dissention – that may be enough, in and of itself, to think twice about proceeding. If one waits until post-contract, the buyer may risk the contract’s invalidation, and the seller may face potential claims from both buyer and broker. In other words, a lot of litigation and nothing to show for it.

No doubt making Brooklyn Properties’ loss even more bitter, in March 2017, a year-and-a-half before the Appellate Division’s ruling in Camuso, Kings County Commercial Division Justice Sylvia G. Ash entered a final judgment following a bench trial in Gallinaro’s dissolution proceeding judicially dissolving Regent and approving Regent’s conveyance of its properties to another buyer, this time with Camuso’s consent, for more than twice what Brooklyn Portfolio would have acquired the properties for in 2013. As a result, instead of a lucrative real property deal, after five years of litigation, all Brooklyn Portfolio walked away with was a hefty legal bill. Buyer beware indeed.