Wrongful Dissociation Under RUPA: Toto, We’re Not in New York Anymore
October 17, 2022
Unlike the vast majority of states, New York hasn’t adopted the Revised Uniform Partnership Act (1997) (“RUPA”). A recent appellate decision by a court in a neighboring RUPA state — New Jersey — highlights the very different approaches taken by that court and the New York courts in determining when a partner’s dissolution of a partnership is wrongful under RUPA versus New York’s antiquated Partnership Law.
I’ll start in New York then head over to Jersey.
New York: Congel v Malfitano
In Congel v Malfitano, a 3% partner of a general partnership that owned a large shopping mall in Poughkeepsie, New York, acting under the assumption that the partnership was at-will, gave notice of dissolution of the partnership under Section 62 (1) (b) of New York’s Partnership Law providing that a partner may cause dissolution “without violation of the agreement between the partners . . . [b]y the express will of any partner when no definite term or particular undertaking is specified.”
Under Section 62 (2), a wrongful dissolution occurs when the partner by “express will” dissolves the partnership “in contravention of the agreement between the partners.”
Under Section 69 (2), a wrongful dissolution after which the remaining partners elect to continue the partnership exposes the partner who wrongfully dissolved to damages and a buy-out at fair market value excluding the good-will value of the business and subject to both minority and marketability discounts.
The partnership agreement in Congel stated that the partnership “shall continue until it is terminated as hereinafter provided,” and, in a separate provision, that the partnership is dissolved upon the “election by the Partners to dissolve the Partnership” and the “happening of any event which makes it unlawful for the business of the Partnership to be carried on or for the Partners to carry it on in Partnership.”
The trial court held that these provisions specified a “particular undertaking” within the meaning of Section 62 (1) (b), that the partnership therefore was not at-will, and that the 3% partner’s dissolution was wrongful. The intermediate appellate court agreed with the outcome but not the rationale, holding instead that the partnership agreement specified a “definite term.”
The New York Court of Appeals — the state’s highest court — also agreed with the outcome but disagreed with both lower courts’ rationales. In an opinion handed down in 2018, the Court put a dramatic new slant on a very old law — New York’s legislature enacted the original Uniform Partnership Act (1914) (“UPA”) in 1919 and hasn’t looked back since — by adopting a contract-centric approach that displaces the statute and looks to the partnership agreement in determining whether a partner wrongfully caused the partnership’s dissolution.
As the Court explained, “parties to a partnership agreement generally have the right to contract around a provision of the Partnership Law, provided of course they do so in language that is ‘clear, unequivocal and unambiguous.’” The Court then applied that principle to the partnership agreement before it, shunting the statute aside:
The partners clearly intended that the methods provided in the Agreement for dissolution were the only methods whereby the partnership would dissolve in accordance with the Agreement, and by implication that unilateral dissolution would breach the Agreement. In other words, the Agreement contemplated dissolution only in two instances, leaving no room for other means of dissolution that would be in accordance with its terms. It follows that Partnership Law § 62 (1) (b) has no application here, because the parties to the Agreement clearly specified under what terms it could be properly dissolved, i.e., what would constitute a dissolution under the Agreement and what would constitute a dissolution in contravention of it. Accordingly, this was plainly not intended to be an “at-will” partnership.
The Court’s affirmance of the wrongful dissolution determination left intact the lower courts’ acceptance of stiff minority and marketability discounts in its appraisal of the 3% partner’s partnership interest under the fair market value standard incorporated in Partnership Law Section 69. It also upheld a 15% discount under Section 69’s provision excluding good-will value in cases of wrongful dissolution. When all was said and done, the 3% partner walked away with a little over $900,000 for his partnership interest that, in an earlier stage of the case, had a stipulated, undiscounted, pro rata value close to $5 million.
Both involve general partnerships that own and operate shopping malls located in New York.
Both partnerships had written agreements with provisions addressing the partnership’s duration keyed to contingent future events that might never occur.
Both agreements also broadly described the partnership’s purpose (i.e., undertaking) as owning and operating a shopping mall.
In both cases, minority partners gave notices triggering dissolution by operation of law.
In both cases, the controlling partners deemed the dissolution wrongful, opted to continue the partnerships and buy out their ex-partners’ interests as required by statute, and then litigated damages claims for wrongful dissolution in the context of the resulting appraisal proceeding.
But one dissimilarity made all the difference: Congel involved a New York partnership governed by New York’s UPA-derived Partnership Law, the provisions of which the Court of Appeals disregarded by looking solely at the terms of the partnership agreement leading to a finding of wrongful dissolution. In contrast, Robertson involved a New Jersey partnership governed by New Jersey’s RUPA under which that state’s Appellate Division found no wrongful dissolution by analyzing the partnership agreement’s relevant terms through the lens of the statute.
The partnership agreement in Robertson provided that the purpose (read undertaking) of the partnership was “to acquire the land and premises” of the shopping mall property “and thereafter to hold, lease, manage and operate the same as a shopping center” — substantially the same as Congel‘s counterpart provision to “acquire and hold title to, and to lease, manage and operate” the shopping center “in accordance with this Partnership Agreement.”
As for duration, the two agreements also speak in conceptually alike terms, i.e., both provide for expiration of the partnership at some future, indefinite date tied to contingencies that might never happen: in Robertson, “the partnership shall continue until the sale, exchange or other disposition of the Mall or until terminated by the Managing General Partner or by a vote of a majority in interest of all the general partners”; in Congel, the partnership “shall continue until it is terminated” either by “the election by the Partners to dissolve the Partnership” or the “happening of any event which makes it unlawful for the business of the Partnership to be carried on or for the Partners to carry it on in Partnership.”
Unlike in Congel, however, the Robertson court stuck to the statute, stating that the “threshold issue is whether the partnership was an at-will partnership or a partnership established for a definite term or particular undertaking” under the section of the New Jersey statute incorporating Section 602 (b) (2) of RUPA. That section provides that a “person’s dissociation as a partner is wrongful in the case of a partnership for a definite term or particular undertaking” if it occurs “before the expiration of the term or the completion of the undertaking.”
The court went on to find it “uncontested that the Agreement does not contain a minimum or maximum durational term and is thus not limited to a specific timeframe,” and that the “real dispute centers around whether the partnership was formed for a particular undertaking.” It then quoted from the Official Comment to RUPA concerning “particular undertaking” which calls for “clear evidence of an agreement among the partners that the partnership . . . terminates at the conclusion of a particular venture whose time is indefinite but certain to occur.”
Based on the Comment and citing a few out-of-state case precedents, the court concluded that “none of [the] particular undertakings” contained in the Robertson partnership agreement’s purpose clause (“to acquire the land and premises . . . and thereafter to hold, lease, manage and operate the same as a shopping center”) “are certain to occur because nothing in the Agreement requires them to” and “[t]here is no mention of any purpose, intent, or requirement to sell the Mall.”
“As such,” the court summed up, “we are satisfied based on the record before us that the partnership did not agree to continue their relationship for a defined term or particular undertaking, and plaintiffs’ decision to dissociate was therefore consistent with the Agreement and Act and not wrongful.”
The balance of the Robertson court’s opinion details and affirms the portion of the lower court’s decision valuing the dissociated members’ partnership interests, which I won’t discuss here other than to mention that the lower court’s appraisal rejected application of minority and marketability discounts under the statutory fair-value standard as construed by New Jersey’s Supreme Court in Balsamides v Protameen Chemicals, Inc.
Contract vs. Statute
New York case precedent construing the meaning of “definite term” and “particular undertaking” as used in UPA-derived Partnership Law Section 62 (1) (b) essentially mirrors how those terms are construed in Robertson and, as far as I can tell, by courts in other RUPA states. In the absence of a partnership agreement in Congel, it’s quite likely the result in that case would have been the same as in Robertson, i.e., the Congel court would have found no wrongful dissolution.
The critical difference between the outcomes in Congel and Robertson lies elsewhere. The Court of Appeals in Congel viewed the partnership agreement’s terms governing dissolution as setting forth the partners’ binding, contractual intent without regard to whether those terms satisfy the statute’s criteria for at-will partnerships (no “definite term” or “particular undertaking”). In contrast, the Appellate Division’s analysis of the contractual terms in Robertson hewed to the statutory criteria for classifying a partnership as at-will.
RUPA Section 105 (c) (9) provides that a partnership agreement may not vary the power of a person to dissociate as a partner, whether rightfully or wrongfully. RUPA does not similarly prohibit a partnership agreement from varying Section 602 (b)’s wrongful dissociation criteria. It will be interesting to see if courts in RUPA states follow Congel‘s contract-centric approach in future cases where the partnership agreement’s defined events of dissolution do not meet the traditional “definite term” and “particular undertaking” criteria.