- Death of a General Partner, or How Not to Plan for Succession in a Limited Partnership
- April 29, 2013 | Author: Peter A. Mahler
- Law Firm: Farrell Fritz, P.C. - New York Office
When you come across a legal dispute among the partners of a New York limited partnership, the first thing you need to know is whether it’s an “old” or a “new” limited partnership, that is, whether it’s governed by the Limited Partnership Act adopted in 1922 (NYLPA) or the Revised Limited Partnership Act (NYRLPA) adopted in 1991 for partnerships formed after that date. Depending which law applies, the case will either be a mess or a bigger mess, which is one of the many reasons the limited partnership form has fallen into disfavor since New York’s adoption of the superior limited liability company form in 1994.
Manhattan Supreme Court Justice Saliann Scarpulla recently handed down a decision involving what I consider the messier category of limited partnership dispute governed by the old NYLPA. The court’s opinion in Poole v. West 111th Street Rehab Associates, 2013 NY Slip Op 30827(U) (Sup Ct NY County Apr. 19, 2013), addressed a particularly thorny issue whether and how the partnership could be continued and reconstituted with a new general partner following the death of the last remaining, original general partner. Upon examining the overlapping and arguably inconsistent, crazy-quilt provisions of the NYLPA, the partnership’s Certificate of Limited Partnership and its Limited Partnership Agreement, as well as the partners’ course of conduct, Justice Scarpulla held that the limited partner seeking a declaration of the partnership’s dissolution failed to establish his entitlement to relief as a matter of law, and that a trial was required to resolve disputed issues of fact.
When West 111th Street Rehab Associates was formed in 1989 to own and manage residential properties in Manhattan, it had four general and eight limited partners, all of whom were individuals drawn mostly from three different families. Two of the general partners died in 1996-97. In 2005, general partner Jonathan Poole - the plaintiff in the case at hand - resigned as general partner as part of a lawsuit settlement.
The last remaining general partner died in late 2008, whereupon Poole as a 10% limited partner sent the other limited partners a letter notifying them that Poole did not consent to the continuation of the partnership and maintaining that the partnership was dissolved and had to be liquidated.
The other limited partners disagreed with Poole and scheduled a meeting of the limited partners for the purpose of holding an election to continue the business of the partnership and to appoint a newly formed corporation named West 111 Rehab Corp. as successor general partner. Poole quickly filed a complaint seeking a declaration that the partnership was dissolved and simultaneously moved to enjoin the scheduled partnership meeting.
In February 2009, the court refused to enjoin the meeting but without prejudice to Poole’s right to reopen the issue and seek dissolution if the vote was invalid for any reason. The meeting took place later that month at which, over Poole’s dissent, the other limited partners voted in person or by proxy to appoint the new corporate general partner and to continue the business of the limited partnership.
In June 2009, the court issued an order denying Poole’s motion to set aside the February vote and to liquidate the partnership, stating that ‘[c]onsidering the current economic situation, such liquidation may not be in the best interest of the remaining partners”.
Following discovery Poole moved for summary judgment. He argued that the certificate of partnership and partnership agreement did not contain a provision authorizing the continuation of the partnership upon the death of the last remaining general partner absent the unanimous consent of the limited partners; that the February 2009 vote was invalid because certain individuals were not limited partners authorized to vote and because proxy voting was not permitted under the partnership’s organic documents; and because the new corporate general partner was not an “outside person or entity” allegedly as required by the partnership agreement.
The defendant partners opposed Poole’s motion, contending that the partnership documents provided for a continuation, not dissolution, of the partnership; that unanimous consent of the limited partners is not required to do so; and that there existed factual issues requiring a trial.
Justice Scarpulla’s recent decision sided with the defendants. The only relief she granted Poole was on his claim for an accounting, which the court found was authorized by NYLPA § 99(1)(b).
The complex interplay between the statutory provisions and those of the partnership certificate and agreement is best understood by a thorough reading of Justice Scarpulla’s 22-page decision. Here are some of her ruling’s highlights:
The provision in Section 10.1(b) of the partnership agreement, stating that the limited partners “may elect to continue the business of the partnership” within 90 days after “the death of one of the General Partners” does not require unanimous partner approval. Justice Scarpulla noted that the provision, “unlike others in the partnership agreement, does not call for ‘consent’ of the partners” and “[t[here is nothing else in the partnership agreement or certificate to suggest that the vote to continue the business of the partnership must be unanimous.”
NYLPA § 109, which states that the partnership is dissolved upon the “retirement, death or insanity” of a general partner unless the business is continued “by the remaining general partners (a) under a right to do so stated in the certificate, or (b) with the consent of all members,” is a default rule which must give way to the “contrary” provision in partnership agreement.
Justice Scarpulla found questions of fact and “ambiguities in the partnership governing documents” concerning the rightful conveyance by testamentary provision of limited partner interests to the heirs of certain deceased partners. Specifically, the partnership certificate contained a provision stating that a limited partner’s interest is assignable upon death without general partner approval, while the partnership agreement contained a provision seemingly prohibiting a testamentary bequest without general partner consent.
Justice Scarpulla also found “open issues preventing summary judgment” on the issue of proxy voting, as to which the partnership agreement was silent. “At best,” she wrote, there are “ambiguities in the governing documents.”
Justice Scarpulla also rejected, based on the need to further develop a factual record, each of Poole’s objections to the ability of the successor corporate general partner to serve in that role, including Poole’s contention that it was not an “outsider” as required by Section 10.1(b) of the partnership agreement, and that the agreement required at least two general partners.
Justice Scarpulla found additional “ambiguities” surrounding what the defendants characterized as “rather unfortunate language” in the partnership agreement suggesting that it required a buy-out of deceased limited partners for their unpaid pro rata share of “profit”, thereby forfeiting their capital contributions upon death. She also noted the absence of evidence that the partners historically had enforced the provision.
Absent settlement, it appears that the case is destined for trial.
I mentioned above the adoption of the NYRLPA in 1991. One of the many changes wrought by NYRLPA concerns the central issue in Poole, namely, the non-judicial dissolution of the limited partnership upon the “withdrawal” by resignation, death, removal or otherwise of the last remaining general partner. In contrast to NYLPA § 109 which I quoted above, under the default rule of NYRLPA § 121-801(d)(2), a majority in interest of the limited partners can agree in writing to continue the business of the partnership and to the appointment of one or more additional general partners. Had the partnership in Poole filed an amended certificate before its last original general partner died in 2008, thereby subjecting itself to the NYRLPA, the case may never have arisen.