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When an aggrieved party feels his or her back against the wall, there is a strong temptation to assert every claim under the sun against the adversary. Offense is the best defense, so they say. But when the claims don't stick, litigants may find that more isn't necessarily more... but it sure can tie up a case for years, particularly in the backlogged Second Department.
Today's case—Waldorf Invs. L.P. v Waldorf—offers a solid back-to-basics review of the issues that can be litigated when a limited partnership goes south (and the viability of those claims), but at the cost, figuratively and literally, of 8 years of litigation.
Background
Waldorf Investments, L.P. is a limited partnership that owns a parcel of real property located at 30 Prospect Street in Huntington, NY.
The Partnership is owned by 4 siblings of the Waldorf family (no, not those Waldorfs, or these Waldorfs):
- Plaintiff Christopher: general partner (20%) and limited partner (20%)
- Defendants William and Stephen: general partners (20% each)
- Defendant Kathleen: limited partner (20%)
Waldorf Investments filed a Certificate of Limited Partnership with the New York Secretary of State, but—you guessed it—has no partnership agreement.
While Christopher was generally kept in the loop about business decisions of the Partnership by his siblings, it appears that William, Stephen, and Kathleen were the more active partners. For a period of time prior to 2014 (more on that below), a related entity owned by the 3 defendants, Waldorf Risk Solutions, LLC, occupied the premises allegedly without paying rent.
The Fire
Family tensions erupted in 2014, when a fire demolished the property. The Partnership received about a half-million dollars in insurance proceeds.
Christopher contends that the circumstances of the fire were "suspicious," not-so-subtly hinting at insurance fraud in light of the fact that his siblings were "insurance experts" who procured a policy that covered the building but not the owner (i.e. the Partnership).
In any event, after the fire, Christopher wanted to sell the property, but the rest of his siblings (including the other two GPs) wanted to redevelop it. Christopher was out-voted. Accordingly, once the insurance proceeds came in, the funds were used for redevelopment purposes instead of distributed as profits to the partners.
Soon thereafter, Christopher commenced an action asserting, as amended, a whopping 22 causes of action sounding in various contract and business tort claims, framed as direct and derivative claims on his own behalf and on behalf of the Partnership, as well as direct claims on behalf of the Partnership.
In 2018, Defendants Successfully Knock Out 18 of the 22 Claims
The case landed on the desk of then-Suffolk County Commercial Division Justice Elizabeth Hazlitt Emerson. On October 15, 2018, Justice Emerson issued a decision and order dismissing 18 of the 22 claims, but granting Plaintiffs an accounting.
Justice Emerson dismissed Christopher's derivative claims (Claims 8-14) for lack of standing. As a general partner, Christopher could not maintain a derivative action on behalf of the partnership. Christopher argued that because he is also a limited partner, he has standing to maintain the derivative claims. But, Judge Emerson rejected this argument, citing Stark v Goldberg, 297 AD2d 203 (2d Dept 2002), because none of the other limited partners (i.e. Kathleen) joined him.
From there, Justice Emerson swiftly dismissed the direct claims asserted on behalf of Waldorf Investments (Claims 1-7) as duplicative of the already dismissed derivative claims, for which Christopher does not have standing to assert on behalf of the entity.
Justice Emerson then dismissed Claims 17 (unjust enrichment), 18 (conversion), 19 & 20 (breaches of fiduciary duty) as duplicative of Claim 15, breach of the Certificate of Limited Partnership.
But it wasn't all bad news for Plaintiffs. The court granted Christopher an accounting of Waldorf Investments, essentially directing defendants to account for the insurance proceeds and redevelopment expenditures, i.e. the only real activity the Partnership had been engaged in during the relevant period.
This left Claims 16 (breach of the Certificate of Limited Partnership), 21 (judicial dissolution), and 22 (breach of fiduciary duty) to be later decided.
Plaintiffs did not move to reargue or appeal the dismissal decision.
Justice Emerson Grants Summary Judgment Dismissing Plaintiffs' Remaining Claims
Following the delivery of the accounting, and the close of discovery, Defendants moved for summary judgment to dismiss the balance of Christopher's claims. On March 29, 2022, Justice Emerson granted Defendants' motion.
Breach of Certificate of Limited Partnership
The Certificate of Limited Partnership provides:
All annual net profits of the Partnership shall be divided among the General and Limited Partners in the same proportions as the Partner's then capital interest accounts, unless retained for the Partnership investment and business activities.
Christopher contended that the Partnership failed to distribute profits from 2008-2017, including the post-fire insurance proceeds received in 2014.
Justice Emerson held that any claim for profit distribution in breach of the partnership certificate prior to 2011 was barred by the applicable 6 year statute of limitations.
As for post-2011 profits, it was uncontested that none of the partners received distributions after 2009. Contrary to Christopher's contention, the court held that the Partnership was not required to distribute profits, as the Certificate clearly permitted the Partnership to retain profits "for the Partnership investment and business activities." As the Defendants submitted evidence that the Partnership retained monies for post-fire redevelopment, as permitted by the Certificate, there was no breach.
Judicial Dissolution
Christopher argued for deadlock due to the partners being unable to agree on decisions affecting the day-to-day operations of the Partnership and management of the real property. Therefore, it was not reasonably practicable for the Partnership to carry on its business.
Justice Emerson disagreed. Citing the well-known standard in Matter of 1545 Ocean Avenue, the court held: "Dissolution is reserved for situations in which the entity's management has become so dysfunctional or its business purpose so thwarted that it is no longer practicable to operate the business, such as in the case of a voting deadlock or where the defined purpose of the entity has become impossible to fulfill."
The Court found that the record reflects that the Defendants have been carrying on the business by redeveloping the property. Just because Christopher disagrees with the direction and speed of progress does not demonstrate that it is not reasonably practicable for the Partnership to continue.
Using language from the Matter of Arrow Inv. Advisors case (2009 Del. Ch. LEXIS 66) (as cited in Matter of 1545 Ocean Avenue), Justice Emerson concluded: "Courts will not dissolve an entity merely because it has not experienced a smooth glide to profitability or because events have not turned out exactly as the owners originally envisioned."
Breach of Fiduciary Duty
Christopher's remaining breach of fiduciary duty claim was premised on the allegations that he had been excluded from the management and business affairs of the Partnership, and that the Partnership concealed bank and other financial records from him. Christopher sought relief in the form of a mandatory injunction requiring the Partnership to hold quarterly meetings and restoring his access to the books and records.
But here, too, Justice Emerson disagreed. Nothing in the Partnership Law or the Certificate requires the Partnership to hold quarterly meetings. As for prior meetings, the evidence demonstrated that Christopher was, in fact, invited to participate but he chose not to attend. Finally, as the accounting (granted per the Court's order in 2018, and delivered in 2019) provided the requested financial information, Christopher's requested relief was deemed not necessary.
Justice Emerson further held that the bulk of Christopher's opposition papers repeated the derivative allegations already dismissed (i.e. allegations concerning waste, mismanagement arising out of Defendants' use of the premises without paying rent, misapplication of the insurance proceeds), and could not serve to defeat dismissal of Christopher's direct breach of fiduciary duty claim.
Second Department Affirms
The Second Department affirmed. The Appellate Court found that Defendants adequately demonstrated that the insurance proceeds were retained by the Partnership to redevelop the property, as permitted by the Certificate, and that there were no rent payments owed to the Partnership to be distributed.
As for the judicial dissolution claim, the Second Department found no grounds for dissolution under the Revised Partnership Law § 121-802 ("whenever it is not reasonably practicable to carry on the business in conformity with the partnership agreement") or Partnership Law §63 (1) (d) ("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") under the standard described in Matter of 1545 Ocean Avenue. Defendants, the Court found, have been carrying on the business of the partnership by working to redevelop the property.
Curiously, the Appellate Court declined to discuss breach of fiduciary duty, concluding with the ubiquitous, "[T]he parties' remaining contentions wither are without merit or need not be reached in light of our determination."
A Parting Thought on LP Judicial Dissolutions
As I was preparing today's post, I found myself quietly griping about what I thought was impreciseness on the part of both the motion court and the appellate court citing to Matter of 1545 Ocean Avenue for the judicial dissolution legal standard. How could these esteemed jurists cite to an LLC dissolution case in the context of a limited partnership dissolution, even if the language of LLC Law § 702 was lifted from Revised Partnership Law § 121–802 and Partnership Law § 63 (1) (d)? Why not cite a case specifically applying the "not reasonably practicable" judicial dissolution standard to a limited partnership?
Well, as it turns out, those cases don't exist.
As pointed out back in 2010 in Matter of 1545 Ocean Avenue (see here for a refresher), and repeated in Matter of Natanel v Cohen in 2014 (litigated by our very own Peter Mahler), and based on my subsequent limited research, it appears there are no New York cases that interpret and apply this standard in the context of limited partnerships. Go fig.
The closest we get is Seligson v Russo, a case that granted judicial dissolution of a limited partnership where, "the degree of dissension, reflected by the intense personal hostility, poses an irreconcilable barrier to the continued functioning and prosperity of the entity, a hopeless deadlock occurs which mandates dissolution as the only liable remedy," as affirmed by the First Department, "in light of the 50-50 deadlock between the parties and the consequent inability of the partnership to make any decisions" (291 AD2d 301 [1st Dept 2005]). But while the court granted dissolution under the specific hopelessly deadlocked circumstances of that case, neither the trial court nor the appellate court in Seligson offered guidance on where to draw the line for future applications.
As best I can tell, there are less than a handful of cases that even cite Revised Partnership Law § 121–802... and we've covered most of them here in this post.
Given how infrequently we come across limited partnership judicial dissolution cases (in no small part because of the dwindling number of limited partnerships overall), who knows when, or if, we will ever see such a case defining the standard. In the meantime, Matter of 1545 Ocean Avenue it is!
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