Rare Partnership Dissolution Decision Applies Deadlock Standard to Dissolution Under Partnership Law
January 22, 2018
As LLCs have become the dominant form of closely-held business in New York, cases involving dissolution of partnerships have become more and more rare. Section 63 of the Partnership Law is the statute governing judicial dissolution of New York general partnerships. The last time this blog wrote about a general partnership dissolution under Partnership Law § 63 was Summer 2015, a testimonial to how uncommon they have become.
After a lengthy interlude, along comes Magid v Magid, 2017 NY Slip Op 32603(U) [Sup Ct NY County Dec. 14, 2017].
Magid involved a fact pattern familiar to this blog’s regular readers – an entity owned by siblings, an income-producing property, a rising real estate market, some family members who want to sell, others who do not. Litigation ensues. Usually, the various dissolution statutes under the Business Corporation Law (BCL) or the Limited Liability Company Law (LLC Law) provide the standards to resolve the dispute.
In Magid, Manhattan Commercial Division Justice Eileen Bransten considered the applicable standards for judicial dissolution – particularly based on deadlock – under Partnership Law § 63. Magid raises the question – is the standard for judicial dissolution based on deadlock under Partnership Law § 63 any different than under BCL § 1104, the deadlock statute for corporation dissolutions?
In 1981, Norman Roberts, Abraham Magid, and Abraham’s son, Lawrence Magid, formed 110 East 13th Street Associates (the Partnership) to own and operate a six-story, mixed-use commercial and 20-unit residential apartment building (the Building) in the East Village of Manhattan.
The Partnership had a written Partnership Agreement. Seven written amendments later, Abraham’s four sons, Lawrence, Richard, Marc, and Harold, along with a limited partnership Abraham created, owned the Partnership through single-purpose LLCs in varying percentages as follows:
- Lawrence: 39.5%
- Harold: 3%
- Richard: 21.25%
- Marc: 21.25%
- Abraham and Sally Magid Family Partnership, L.P. (the Abraham LP): 15%
The Partnership Agreement provided that the Partnership “shall continue until November 30, 2030” except upon “mutual written consent of the Partners to terminate and dissolve,” the “sale or other divestiture of all or substantially all real estate or interest in real estate held or owned by the Partnership,” or certain other events. Thus establishing (at the least) a “definite term”
for the Partnership, the partners could not withdraw except in “contravention” (i.e.
, breach) of the Partnership Agreement under Partnership Law § 62 (1) (a), and (2)
The Partnership had three managing members – Lawrence, Marc, and the Abraham LP – whom the Partnership Agreement collectively vested with the power to “sell or exchange all of the real property owned by the Partnership” without the consent of the non-managing partners.
In 2015, Marc received an offer to sell the Building for $25 million. All of the managing (and non-managing) partners but Lawrence wanted to sell. Lawrence’s refusal thwarted a sale. When Lawrence blocked the sale, the partners called a meeting to remove him as property manager for the Building. Disputes also arose over whether to refinance the property.
The Extent of the Dissention
According to the court, there was “some level of acrimony and dysfunction among the parties, though they do not agree on how badly the relationship among the partners has deteriorated.” As the court explained, “Beginning either with the death of Abraham, the family patriarch, or with [Lawrence’s] refusal to consent to a sale of the building, the parties have, allegedly, been unable to engage with each other in a civil manner.” The “documented instances” of hostility included “acrimonious email exchanges between the brothers,” “verbal altercations,” and an alleged “physical altercation.”
Despite the personal conflicts, Lawrence argued that the “day to day business of the partnership continues uninterrupted, the building remains competently managed, and 110 East has been very profitable, even during the pendency of this action.”
In the first cause of action of the amended complaint, available here, the partners teamed up against Lawrence to demand dissolution due to “effective deadlock between Plaintiffs on one hand (who collectively hold, through their respective LLCs, a 60.5% interest and consist of two of the three Managing Partners) and Lawrence on the other hand (who holds, through his LLC, a 39.5% interest and is the third Managing Partner) with regard to business decisions of the Partnership, including the decision to sell the Building.”
The Summary Judgment Motions
The majority partners moved for summary judgment on their dissolution claim and Lawrence cross-moved for summary judgment dismissing the claim. Justice Bransten construed the claim as brought under Partnership Law § 63(1)(d) and (f), which state that a court may dissolve a partnership where “[a] partner wilfully or persistently commits a breach of the partnership agreement, or otherwise so conducts himself in matters relating to the partnership business that it is not reasonably practicable to carry on the business in partnership with him,” or “[o]ther circumstances render a dissolution equitable.”
The Court’s Analysis of Deadlock
In Seligson v Russo, 16 AD3d 253 [1st Dept 2005] – the most recent appeals court decision to consider Partnership Law 63(1)(f) – the court held, “[i]n light of the 50-50 deadlock between the parties and the consequent inability of the partnership to make any decisions, it was equitable to dissolve this partnership.”
In contrast to Seligson, Magid involved the majority suing a lone minority holdout to dissolve the business. Is deadlock ever appropriate where the factions are unevenly split? As Justice Bransten explained:
While the cases cited by plaintiffs have largely concerned partnerships where the competing owners or ownership groups each held 50% of the partnership, defendants do not point to any authority stating that a 50/50 division is necessary for the court to find that a partnership is irretrievably deadlocked.
On an apparent issue of first impression, the court held that an even 50/50 split was not essential to show deadlock under Partnership Law § 63. The court concluded that the Partnership was potentially “deadlocked on, at the very least, the issues of refinancing, a sale of the Premises, and the removal of [Lawrence] as property manager, when [Lawrence] has responded to his partners’ proposals related to those issues with threats of litigation.”
Despite ruling for the majority on the threshold question of whether they could ever show deadlock in the absence of a 50/50 split, the court ultimately held:
the parties have raised issues of fact as to the level of dysfunction caused by their personal animosity, and whether such dysfunction impacts the management of the Premises and 110 East’s ability to function. Under these circumstances, summary judgment is not appropriate for either side.”
Analogs Under the BCL and LLC Law
Magid represents a flexible approach to the concept of deadlock. The court concluded that a minority partner’s refusal to consent to a sale or refinancing, coupled with the intense acrimony his refusal provoked, could potentially constitute deadlock despite the absence of even division among the managing partners, and even though the minority member arguably had every right under the Partnership Agreement to withhold his consent.
Would the outcome have been different if Magid involved a corporation? The short answer is yes. By definition, there must be an even split to show deadlock under the corporate deadlock statute, BCL § 1104. The statute explicitly states that a petition must be brought by “the holders of shares representing one-half of the votes of all outstanding shares of a corporation” showing that the directors, shareholders, or factions thereof are “so divided” that (i) the “votes required for action by the board cannot be obtained,” (ii) the “votes required for the election of directors cannot be obtained,” or (iii) “dissolution would be beneficial to the shareholders.” The usual go-to in the case of an unevenly divided board or shareholders is the “oppression” statute, BCL § 1104-a. But in Magid, the plaintiffs would have been incapable of showing oppression because they were a clear majority.
What if Magid involved an LLC? The LLC dissolution statute, LLC Law § 702, does not speak in terms of deadlock, nor is deadlock alone sufficient to dissolve an LLC. As the court held in In re 1545 Ocean Ave., LLC, 72 AD3d 121, 129 [2d Dept 2010], “‘[d]eadlock’ is a basis, in and of itself, for judicial dissolution under Business Corporation Law § 1104,” but “no such independent ground for dissolution is available under LLCL 702.” “Instead, the court must consider the managers’ disagreement in light of the operating agreement and the continued ability of 1545 LLC to function in that context.” So while deadlock may suffice to dissolve under the Partnership Law and BCL, not necessarily under the LLC Law.