Corporate Frankenstein “Partnership to Form a Corporation” Lives Another Day
May 14, 2018
Lawyers are famous for arguing seemingly inconsistent positions at the same time. We practitioners lovingly refer to the technique as “arguing in the alternative.” The famous Texas trial lawyer, Richard “Racehorse” Haynes, gave a vivid example:
Say you sue me because you say my dog bit you. Well, this is my defense: My dog doesn’t bite. And second, in the alternative, my dog was tied up that night. And third, I don’t believe you really got bit. And fourth, I don’t have a dog.
A litigator’s stock in trade, arguing multiple positions at once can be vital to advance the client’s interests and to preserve arguments for later appellate review. Sometimes, though, one comes across arguments so seemingly in tension that they don’t quite seem able to coexist. A recent appellate decision, Alam v Uddin, 2018 NY Slip Op 02763 [2d Dept Apr. 25, 2018], involved a rather odd array of apparently conflicting arguments on both sides.
The plaintiff, Mohammed Alam, alleged that he and the defendant, Md Gias Uddin, “entered into a partnership agreement” as 50/50 partners “to form the corporation Bhat & Chowdhury, Inc.,” which operates a store in Queens. What exactly is a “partnership agreement to form a corporation”? Why would one allege such a thing? Apparently, Alam received no stock in the corporation itself, which is why he relied on an alleged partnership agreement. The partnership agreement, which you can read here, was styled a “Partnership Agreement [of] Bhat & Chowdhury Inc.” and provided in section “1” that, “The parties hereby form a partnership under the corporation Bhat & Chowdhury Inc.” Can a business be both a partnership and a corporation at the same time? One might think not. But in this peculiar case, one would be wrong.
In the complaint, despite alleging a “partnership,” Alam described himself in some places as a “partner,” in others as a “shareholder.” Alam alleged that after leasing a commercial space and operating on it a “99 Cents Store and Mini Grocery,” Uddin asked to be bought out of the business, then changed his mind and offered to buy out Alam. When the two could not agree on a buyout arrangement, Uddin allegedly physically locked Alam out of the store, refused to make distributions, and fraudulently used Alam’s credit card to buy merchandise. Alam sued Uddin for breach of the partnership agreement and breach of fiduciary duty.
Uddin “denied the validity of the partnership agreement.” He “alleged that his signature on the agreement was forged” and that he was “the sole owner of Bhat & Chowdhury.” Uddin also argued that even if there was a partnership, he “terminated the partnership agreement in February 2013, when he told the plaintiff that he did not want to be in a partnership with him.”
The disputed partnership agreement contained an arbitration provision, which stated: “Any controversy or claim arising out of or relating to this agreement, or the breach thereof, shall be settled by arbitration in accordance with the arbitration laws of the State of New York.” Here’s where Uddin took arguing in the alternative a bit too far. As the appeals court explained:
While maintaining that his signature on the partnership agreement was a forgery, the defendant argued that, nonetheless, because the purported partnership agreement included a broad arbitration clause, the matter should be sent to an arbitrator.
Uddin essentially argued, “I did not sign the partnership agreement. My signature is a forgery. Even though I did not sign it, however, the Court should give me the benefit of it, enforce it in my favor, and dismiss the case.”
In the underlying decision by Queens County Commercial Division Justice Marguerite A. Grays, available here, the court declined to consider Uddin’s arbitration argument on procedural grounds because of an earlier motion he made asking for essentially the same relief, which the court denied because Uddin did not attach the partnership agreement to his papers.
On appeal, the Second Department held that the lower court should have considered Uddin’s arbitration argument. On the merits, the appeals court held that Uddin’s total denial of having signed the partnership agreement essentially prohibited him from enforcing its arbitration provision:
Where a party has applied for an order compelling arbitration, the court shall direct the parties to arbitrate if, among other conditions, “there is no substantial question whether a valid agreement was made” (CPLR 7503[a]). Here, the defendant alleged that his signature on the purported partnership agreement was a forgery and thus no valid agreement was made. Contrary to the defendant’s contention, the question of forgery is a threshold question for the court and not an arbitrator to determine.
The appeals court also held, without explanation, that Uddin did not demonstrate his entitlement to dismissal of the complaint on the grounds that “the partnership agreement was invalid” or that “the partnership was dissolved in February 2013” when Uddin allegedly declared that he “did not want to be in a partnership” with Alam. The latter holding seems consistent with the partnership agreement’s language that the partnership could be dissolved only “by agreement of both the partners.”
Finally, the court held, in a bit of arguing in the alternative of its own, that “even if the defendant had established that the partnership was previously dissolved, such fact would not warrant dismissal of the complaint, which seeks an accounting and other relief to which the plaintiff would be entitled even had the defendant established that the partnership was dissolved.”
And with that, claims based upon a bizarre kind of entity – a hybrid partnership-corporation – managed to survive dismissal. It’s hard to tell what the drafter of the partnership agreement in Alam had in mind. Was the agreement a forgery, as Uddin alleged, perhaps devised as an artifice merely to give Alam an ownership interest in a business where he really had none? Or was it just a not-so-carefully prepared document, drafted without the benefit of counsel (or possibly with inexperienced counsel)? It’s a constant refrain on this blog: with a little more care and detail devoted to the transactional documents, a lot of litigation may have been avoided entirely.