A General Partnership in Perpetual Enmity

September 18, 2023

With the growing prevalence of limited liability companies, notable general partnership decisions become fewer and further between with each passing year.

A common fact pattern in which increasingly rare general partnership decisions continue to arise is family general partnerships founded decades ago by prior generations, with the current younger generation of partners, often siblings or cousins, finding themselves unwilling or unable to agree either upon a new entity structure (i.e., conversion to an LLC), or to disposition of the entity’s assets (i.e., sale to a third party).

In the absence of an agreement to the contrary, New York law imposes a requirement of unanimity upon either decision.

Inability to Achieve Unanimity Begets Conflict

Section 1006 (c) of the Limited Liability Company Law provides that a general-partnership-to-LLC-conversion “must be approved by all of the partners of the partnership. . . .” Noncompliance with the statute renders an attempted conversion “ineffective” (Miller v Ross, 43 AD3d 730 [1st Dept 2007]).

Likewise, Section 20 (c) (3) of the Partnership Law provides that “less than all the partners have no authority” to “[d]o any . . . act which would make it impossible to carry on the ordinary business of the partnership.” Cases applying Partnership Law § 20 (c) (3) hold that sale of a single real estate asset owned by a general partnership would make it impossible to carry on the business of the partnership, causes the partnership’s dissolution by operation of law, and therefore, requires unanimity, lack of which renders the attempted sale “null and void” (Camuso v Brooklyn Portfolio, LLC, 164 AD3d 739 [2d Dept 2018]).

The unanimity requirement for either of these important strategic transactions can make it exceedingly difficult to find a path forward if just one general partner withholds consent. It is, in fact, a recipe for deadlock.

The flipside of the unanimity requirement is that – at least in theory – partners of a general partnership at-will are free to disassociate from one another at any time without liability, which causes the entity’s dissolution by operation of law, after which the entity is supposed to liquidate its assets as part of its wind up.

I say “in theory” because in a lawsuit resulting in a recent decision by Brooklyn Commercial Division Justice Leon Ruchelsman, three sibling partners of a New York general partnership without a partnership agreement have found it exceedingly difficult – despite many years of litigation – to disassociate themselves from their antagonistic brother over their disagreement about what to do with the entity’s sole asset, an apartment building in Brooklyn.

All partners but one wanted to sell. The lone holdout, Arthur, refused. Litigation ensued. As the majority partners have learned to their immense frustration, breaking up – even in a general partnership at-will – can be hard to do.

A Tortured Litigation Path

In Matter of Rozof v Rozof, 2023 NY Slip Op 33125(U) [Sup Ct, Kings County Aug. 31, 2023]), Mark, Linda, and Judith first sued in 2016 in Nassau County Supreme Court for judicial supervision of the winding up of 391 1st Street Company following the death in 2011 of one general partner, their mother, Edna, and following the withdrawal of another general partner, Judith, just days before they commenced their lawsuit.

Former Nassau County Commercial Division Justice Stephen Bucaria denied Arthur’s motion to dismiss, but granted his motion to transfer venue to Kings County Supreme Court, where the proceeding apparently sat without a decision for three years.

No decision forthcoming, Mark, Linda, and Judith commenced a new proceeding in 2019 – essentially a duplicate of the one they commenced in 2016 – where the proceeding sat unbriefed (apparently due in part to settlement discussions) for three more years.

The Dismissal Motion

In late 2022, Arthur finally opposed and moved to dismiss the petition, arguing that his siblings “waived” judicial supervision of the winding up of the partnership because they acted, for all intents and purposes since Edna’s death in 2011, and since Judith’s withdrawal in 2016, as if the partnership continued post-dissolution. You can read Arthur’s affidavit and memorandum of law here and here. In response, the majority partners argued that continuation of the partnership business post-dissolution does not revive a dissolved entity. You can read Mark’s affidavit and accompanying memorandum of law here and here.

Neither side briefed the law of partnership reconstitution, Arthur devoting a mere three lines to the subject in his dismissal brief by quoting Partnership Law § 45 (2), which provides, “A continuation of the business by the partners or such of them as habitually acted therein during the term, without any settlement or liquidation of the partnership affairs, is prima facie evidence of a continuation of the partnership.”

By its express terms, however, Partnership Law § 45 applies only to continuation of a “partnership for a fixed term or particular undertaking,” not an at-will partnership dissolved by death or withdrawal of a partner like that owned by the Rozofs.

The Ruling: A Reconstituted Partnership Formed

Despite next to no briefing on the subject of partnership reconstitution, Justice Ruchelsman held:

In this case the partnership continued all operations upon Edna’s death. Likewise, the partnership continued all operations upon Judith’s withdrawal or retirement from the partnership. Concerning the continuation of the partnership after the death of Edna and the withdrawal of Judith, such continuation created a new partnership at will. . . [T]here can be no winding-up of the original partnership that has been replaced by the new partnership at will still functioning at this time. It would be improper to seek to wind-up a partnership that has continued in a new form with the remaining partners. The petitioners insist that they did not simply continue to operate without either Edna or Judith and that they were simply winding up the affairs of the partnership. However, Edna passed away in 2011 and the petitioners have not presented any evidence at all that any actions in furtherance of winding-up the partnership were undertaken. The petitioners continued to perform the same duties and responsibilities, and earn the same profits without Edna. That is not a winding-up of the partnership, rather it is a commencement of a new at will partnership. Furthermore, the desire to sell the asset in question is not evidence of any winding-up of a partnership that had already been terminated for over five years. Therefore, since the new partnership has replaced the old one there can be no winding-up of its affairs.

Justice Ruchelsman thus denied and dismissed the petition, leaving the majority partners with nothing to show for more than seven years of litigation.

Involuntary Partnership Reconstitution?

Can warring general partners of an at-will partnership be forced to “reconstitute” the partnership upon a partner’s death or withdrawal or other by-operation-of-law dissolution? Certainly not. For three reasons, like original partnership formation, partnership reconstitution requires unanimity.

First, to determine whether a partnership formed, courts “must consider whether the parties expressly or implicitly intended to become partners” (Hammond v Smith, 151 AD3d 1896 [4th Dept 2017]). Without intent, there can be no partnership at-will (or reconstituted partnership at-will).

Second, under a bedrock rule of partnership law, “any partner may repudiate the [partnership] at any time . . . . No one can be forced to continue as partner against his will” (Eskenazi v Schapiro, 27 AD3d 312 [1st Dept 2006] [quotations omitted]).

Under this principle, in Hotel Prince George Affiliates v Maroulis (62 NY2d 1005 [1984]), the Court of Appeals declined to enforce a written agreement among co-partners to reconstitute the partnership upon the death of a partner after the partner’s estate refused to honor the agreement. The Court ruled:

[I]t is unquestioned that each partner, including Rose, bound his or her estate to reform a partnership after the dissolution of the prior partnership in consequence of the death of a partner. While Rose’s estate could not be forced to reform the partnership, if a proper basis were established the estate might be held liable in damages for breach . . . of Rose’s agreement to do so.

Third, Partnership Law § 69 (2) (b), the at-will partnership reconstitution statute, provides that the partners who have not wrongfully caused dissolution may elect to continue the partnership in the same name, but only if “if they all desire” to do so.

All of these authorities seem to weigh against denying and dismissing the petition in Rozof. After all, the majority partners have been in continuous litigation since 2016 asserting their position that they did not, and would not, voluntarily continue the partnership with Arthur. At a minimum, a hearing would seem appropriate because of the sharp disagreement over the parties’ intent.

What Next?

What are the majority general partners in Rozof to do now?

For one, just last week, the petitioners filed a motion for leave to reargue.

Alternatively, the petitioners might sue to dissolve under Partnership Law § 63 (1) (f). As we wrote five years ago, under a very close set of facts – sibling majority general partners who wanted to sell the partnership’s sole real estate asset versus a lone sibling holdout who refused to sell – Justice Bransten ruled than an even 50/50 split is not required to show deadlock under the general partnership dissolution statute.

It seems rather superfluous to have to sue for dissolution where the entity is a general partnership at-will from which any partner can withdraw and cause a dissolution by operation of law at any time. But in light of Justice Ruchelsman’s decision, a petition to dissolve may be the only alternative for these perpetually antagonistic siblings.