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THE INDEMNIFICATION CLAUSE IN THE PARTNERSHIP AGREEMENT DID NOT INCLUDE “UNMISTAKABLY CLEAR” LANGUAGE INDICATING THE WAIVER OF THE “AMERICAN RULE” REQUIRING EACH PARTY TO PAY THAT PARTY’S OWN ATTORNEY’S FEES; PLAINTIFF WAS NOT ENTITLED TO ATTORNEY’S FEES ASSOCIATED WITH DEFENDANT’S UNSUCCESSFUL DISSOLUTION ACTION (CT APP).

​The Court of Appeals, in a full-fledged opinion by Judge Rivera, reversing the appellate division, determined the indemnification clause in the partnership agreement did not serve to waive the “American Rule” that each party is responsible for that party’s own attorney’s fees. The indemnification clause states: “The Partnership and the other Partners shall be indemnified and held harmless by each Partner from and against any and all claims, demands, liabilities, costs, damages, expenses and causes of action of any nature whatsoever arising out of or incidental to any act performed by a Partner which is not performed in good faith or is not reasonably believed by such Partner to be in the best interests of the Partnership and within the scope of authority conferred upon such Partner under this Agreement, or which arises out of the fraud, bad faith, willful misconduct or negligence of such Partner.” Here defendant had brought an unsuccessful dissolution action and plaintiff argued defendant was obligated to pay plaintiff’s attorney’s fees because the indemnification clause waived the American Rule:

Under the American Rule, “attorney’s fees are incidents of litigation and a prevailing party may not collect them from the loser unless an award is authorized by agreement between the parties, statute or court rule” … . The American Rule is intended to increase “free access to the courts” for those who would otherwise be discouraged from seeking “judicial redress of wrongs” for fear of having to pay a defendant’s attorney’s fees … . …

The Rule is straightforward enough, but in the context of private agreements to avoid the Rule, courts have had to determine the intent of vague fee-shifting language and broad indemnification provisions that do not explicitly allow for the prevailing party in an action between contracting parties to collect attorney’s fees … .. To the extent that some of these decisions presume that broadly worded indemnification provisions by their nature are intended to cover attorney’s fees in direct party actions, they deviate from this Court’s exacting standard that the agreement must contain “unmistakably clear” language of the parties’ intent to encompass such actions … . * * *

Here, the indemnification provision makes no explicit mention that partners may recoup attorney’s fees in an action on the contract. Nor is there any basis to infer the provision is limited to actions between the partners.  Sage Sys., Inc. v Liss, 2022 NY Slip Op 05918, CtApp 10-20-22

Practice Point: Unless “unmistakably clear” language in a contract indicates an one party’s agreement to pay another party’s attorney’s fees, the American Rule applies and each party pays that party’s own attorney’s fees.

 

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PLAINTIFF WAS SEEKING THE PROCEEDS OF A JOINT VENTURE, WHICH, UNDER PARTNERSHIP LAW, INVOLVES PERSONAL PROPERTY, NOT REAL PROPERTY; PLAINTIFF HAD NO INTEREST IN THE REAL PROPERTY WHICH WAS TO BE USED AS AN INN OPERATED AS A JOINT VENTURE; THERFORE THE LIS PENDENS FILED BY PLAINTIFF SHOULD HAVE BEEN CANCELLED (FOURTH DEPT).

The Fourth Department, reversing Supreme Court, determined there was no relationship between plaintiff’s action seeking the assets of a joint venture and the ownership of the real property associated with the joint venture (to be used as an inn). Therefore defendants’ motion to cancel the lis pendens should have been granted:

“A notice of pendency may be filed in any action in a court of the state or of the United States in which the judgment demanded would affect the title to, or the possession, use or enjoyment of, real property” (CPLR 6501). Because the provisional remedy of a notice of pendency is an ” ‘extraordinary privilege’ ” … , the Court of Appeals has held that to be entitled to that remedy, there must be a “direct relationship” between the relief sought in the complaint and the title to or possession of the disputed property … . In making that determination, a court must use “a narrow interpretation,” and its “analysis is to be limited to the pleading’s face” … . …

Supreme Court erred in denying their motion insofar as it sought to cancel the notice of pendency because there was no direct relationship between title to or possession of the property and the relief sought by plaintiff. We therefore modify the order accordingly. Reviewing the complaint on its face, we conclude that plaintiff seeks merely to enforce her purported 50% share in the joint venture and does not assert an interest in the property itself. Indeed, the complaint alleges that title to the property was, at all relevant times, held by Properties LLC, of which plaintiff was not a member. It is well settled that ” ‘the legal consequences of a joint venture are equivalent to those of a partnership’ ” … , and thus a joint venturer’s interest in a joint venture constitutes an interest in only personal property, not real property, thereby precluding recourse to a notice of pendency … . Renfro v Herrald, 2022 NY Slip Op 03593, Fourth Dept 6-3-22

Practice Point: Partnership law applies to joint ventures. Here the joint venture was the operation of an inn. Plaintiff sought the assets of the joint venture, which involves only personal property, not real property. Plaintiff had no interest in the real property (the inn). Therefore the lis pendens filed by the plaintiff should have been cancelled.

 

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THERE WAS A FIDUCIARY RELATIONSHIP BETWEEN THE PARTIES AS PARTNERS AND CO-OWNERS OF A BUSINESS, GIVING RISE TO AN ABSOLUTE RIGHT TO AN ACCOUNTING, NOTWITHSTANDING THE EXISTENCE OF AN ADEQUATE REMEDY AT LAW (FIRST DEPT).

The First Department, reversing (modifying) Supreme Court determined the petitioners were entitled to an accounting for a business, Ocinomled, Ltd., because there was a fiduciary relationship between the parties as partners and co-owners of Ocinomled:

This Court has held “whenever there is a fiduciary relationship between the parties . . . there is an absolute right to an accounting notwithstanding the existence of an adequate remedy at law” … . It is undisputed that there is a fiduciary relationship between the parties as partners and co-owners of Ocinomled. An equitable accounting is “designed to require a person in possession of financial records to produce them, demonstrate how money was expended and return pilfered funds in his or her possession” … . While it is clear that respondents produced the full books and records, and the Special Referee went through thousands of documents and reviewed numerous expert reports, this is insufficient …, particularly because respondents’ bookkeeping was described as inadequate, and sometimes nonexistent, and there was evidence respondents intentionally destroyed key financial data during the litigation. Matter of Grgurev v Licul, 2022 NY Slip Op 02088, First Dept 3-29-22

Practice Point: There is a fiduciary relationship between partners and co-owners of a business giving rise to an absolute right to an accounting, despite the existence of an adequate remedy at law.

 

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ALTHOUGH PLAINTIFF SOUGHT DISSOLUTION OF THE PARTNERSHIP AND COULD NOT COMPEL PARTITION IF THE PARTNERSHIP EXISTS, PLAINTIFF SHOULD HAVE BEEN ALLOWED TO AMEND THE COMPLAINT TO ADD A CAUSE OF ACTION FOR PARTITION IN THE ALTERNATIVE (SECOND DEPT).

The Second Department, reversing (modifying) Supreme Court, determine plaintiff should have been allowed to amend the complaint to allege a cause of action for partition in this partnership dispute. Although plaintiff sought dissolution of the partnership, and could not compel partition if the partnership exists, partition would be available if the existence of the partnership is not proven:

“Absent prejudice or surprise resulting from the delay in making the motion, leave to amend should be granted unless the proposed amendment is patently without merit or palpably improper” … . Here, the plaintiff has alleged the existence of a general partnership and has sought, inter alia, to dissolve it, while the defendant has consistently denied the existence of such partnership. If the plaintiff prevails in establishing the existence of the partnership, then he cannot compel partition of the partnership property … . However, since the existence of the partnership is disputed by the defendant, we see no reason why the plaintiff should not be permitted to plead, in the alternative (see CPLR 3014, 3017[a]), a cause of action to compel partition of the jointly held properties in the event no partnership is found to exist … . Ratto v Oliva, 2021 NY Slip Op 03860, Second Dept 6-16-21

 

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THE DETAILED STATUTORY SCHEME OF THE REVISED LIMITED PARTNERSHIP ACT (RLPA) PRECLUDED ENFORCEMENT OF THE UNSIGNED PURPORTED AMENDMENT TO THE PARTNERSHIP AGREEMENT (FIRST DEPT). ​

he First Department determined the 1999 partnership agreement controlled and the purported 2004 amendment to the agreement, which was not executed, could not be enforced. The decision is too detailed to fairly summarize here. Suffice to say that the detailed statutory scheme of the Revised Limited Partnership Act (RLPA) precluded ignoring the Statute of Frauds with respect to the unexecuted amendment:

By design, the RLPA sets forth a clear separation between general and limited partners. This separation is more defined than the division between managers and members in limited liability corporations. With few exceptions, the RLPA provides that a general partner has the liabilities of a partner in a non-limited partnership. In exchange for a more passive position, the limited partners are generally sheltered from personal liability to third parties who transact business with the limited partnership (see generally, Bruce A. Rich, Practice Commentaries, McKinney’s Cons. Laws of NY, Book 38, Revised Limited Partnership Act, at 317, 334-336). The RLPA’s default requirements of partner consent to substantive changes to a limited partnership agreement helps protect the passive limited partners from actions taken by general partners that might adversely affect the limited partners’ interests. That default protection would be undermined if we were to engraft on to the RLPA the equitable exceptions applicable to the Statute of Frauds. Accordingly, we decline to do so. A&F Hamilton Hgts. Cluster, Inc. v Urban Green Mgt., Inc., 2020 NY Slip Op 04440, First Dept 8-6-20

 

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FORMER LAW FIRM PARTNER WAS ENTITLED TO AN ACCOUNTING; IN DETERMINING THE BUYOUT PRICE UPON THE PARTNER’S WITHDRAWAL FROM THE PARTNERSHIP, THE TERMS OF THE PARTNERSHIP AGREEMENT, RATHER THAN PARTNERSHIP LAW, CONTROL (SECOND DEPT).

The Second Department determined plaintiff, a former partner in a law firm, was entitled to an accounting and a buyout price calculated pursuant to the provisions of the partnership agreement:

” The right to an accounting is premised upon the existence of a confidential or fiduciary relationship and a breach of the duty imposed by that relationship respecting property in which the party seeking the accounting has an interest'” … . A plaintiff seeking an accounting has to show that he or she entrusted money or property to the defendant with respect to which he or she has an interest or which, in equity, ought to be divided … . Here, we agree with the Supreme Court’s determination awarding the plaintiff summary judgment on the cause of action for an accounting to determine the amount due to him pursuant to the terms of the partnership agreement. ” … [W]here . . . there is a fiduciary relationship between the parties, there is an absolute right to an accounting notwithstanding the existence of an adequate remedy at law” … Here, it is undisputed that there was a fiduciary relationship between the plaintiff and the defendants. …

… “[A] partnership is a voluntary, contractual association in which persons carry on a business for profit as co-owners. In the agreement establishing a partnership, the partners can chart their own course” … . … [W]hile New York’s Partnership Law provides certain default provisions where a partnership agreement is silent, where the agreement clearly sets forth the terms between the partners, it is the agreement that governs … .

Here, the partnership agreement expressly provides that the partnership “shall not be dissolved” upon the resignation of a partner. The terms of the partnership agreement take precedence over Partnership Law § 62, which permits a partnership to be dissolved at any time by any partner. The firm was not dissolved, but rather, the plaintiff withdrew from the firm on August 3, 2010. Accordingly, pursuant to the terms of the partnership agreement, the plaintiff was entitled to the buyout price, as defined in that agreement, and payable in accordance with the terms of that agreement. Zohar v LaRock, 2020 NY Slip Op 04202, Second Dept 7-22-20

 

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NOTICE PURPORTING TO DISSOLVE A PARTNERSHIP WAS A NULLITY BECAUSE IT DID NOT COMPORT WITH THE RELEVANT PROVISIONS OF THE PARTNERSHIP AGREEMENT (FIRST DEPT).

The First Department determined the notice issued by two partners purporting to dissolve the partnership was a nullity because the notice did not comport with the relevant provisions of the partnership agreement:

On October 15, 2015, two of the partners issued a notice purporting to withdraw from and dissolve the partnerships, pursuant to New York Partnership Law § 62(1)(b), “which,” the notice said, “provides that a partnership is terminable at will on notice.” * * *

“New York's Partnership Law creates default provisions that fill gaps in partnership agreements, but where the agreement clearly states the means by which a partnership will dissolve, or other aspects of partnership dissolution, it is the agreement that governs the change in relations between partners and the future of the business” … . Where, as here, a partnership agreement contains provisions governing the dissolution of the partnership by the will of the partners, ordinary contract principles apply … , and a notice by a partner or partners to dissolve a partnership in contravention of the partnership agreement's dissolution provisions is a legal nullity and does not effect a dissolution of the partnership. Wiener v Weissman, 2018 NY Slip Op 06205, First Dept 9-26-18

PARTNERSHIP LAW (NOTICE PURPORTING TO DISSOLVE A PARTNERSHIP WAS A NULLITY BECAUSE IT DID NOT COMPORT WITH THE RELEVANT PROVISIONS OF THE PARTNERSHIP AGREEMENT (FIRST DEPT))/CONTRACT LAW (PARTNERSHIP LAW, NOTICE PURPORTING TO DISSOLVE A PARTNERSHIP WAS A NULLITY BECAUSE IT DID NOT COMPORT WITH THE RELEVANT PROVISIONS OF THE PARTNERSHIP AGREEMENT (FIRST DEPT))

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COMPLAINT ALLEGING BREACH OF A JOINT VENTURE AGREEMENT SHOULD HAVE BEEN DISMISSED, TWO ESSENTIAL ELEMENTS OF A JOINT VENTURE, SHARING COSTS AND CONTROL, WERE ABSENT (FIRST DEPT).

The First Department, reversing Supreme Court, determined the underlying breach of contract complaint should have been dismissed. Plaintiff alleged the contract created a joint venture. But the absence of an agreement to share costs and control precluded any finding that a joint venture had been formed by the contract:

In order to properly plead the existence of a joint venture agreement, a plaintiff must allege “acts manifesting the intent of the parties to be associated as joint venturers, mutual contribution to the joint undertaking through a combination of property, financial resources, effort, skill or knowledge, a measure of joint proprietorship and control over the enterprise, and a provision for the sharing of profits and losses”… . “An indispensable [element] of a contract of partnership or joint venture, both under common law and statutory law, is a mutual promise or undertaking of the parties to share in the profits of the business and submit to the burden of making good the losses” … .

Here, plaintiff fails to indicate the losses he would be jointly and severally liable for, and points to no provision in the alleged agreement for the sharing of any losses. Instead, there is nothing more than a conclusory allegation that any losses would be borne equally by the parties. To the contrary, the allegations in the complaint before us clearly state that any prospective losses were intended to be paid solely from defendant's share of the proceeds of the project. The failure to provide for the sharing of losses from the project is fatal to plaintiff's claim that a joint venture was created … .

Moreover, the complaint specifically alleged that management and control of the enterprise was to be completely vested in defendant, thus negating another element of a joint venture … . Slabakis v Schik, 2018 NY Slip Op 05962, First Dept 8-30-18

PARTNERSHIP LAW (JOINT VENTURE, COMPLAINT ALLEGING BREACH OF A JOINT VENTURE AGREEMENT SHOULD HAVE BEEN DISMISSED, TWO ESSENTIAL ELEMENTS OF A JOINT VENTURE, SHARING COSTS AND CONTROL, WERE ABSENT (FIRST DEPT))/CONTRACT LAW (JOINT VENTURE, COMPLAINT ALLEGING BREACH OF A JOINT VENTURE AGREEMENT SHOULD HAVE BEEN DISMISSED, TWO ESSENTIAL ELEMENTS OF A JOINT VENTURE, SHARING COSTS AND CONTROL, WERE ABSENT (FIRST DEPT))/JOINT VENTURE (COMPLAINT ALLEGING BREACH OF A JOINT VENTURE AGREEMENT SHOULD HAVE BEEN DISMISSED, TWO ESSENTIAL ELEMENTS OF A JOINT VENTURE, SHARING COSTS AND CONTROL, WERE ABSENT (FIRST DEPT))

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A PARTNERSHIP CANNOT OPERATE THROUGH AN EXISTING CORPORATE STRUCTURE (FOURTH DEPT).

The Fourth Department, reversing Supreme Court, noted that a partnership cannot operate through an existing corporate structure:

Plaintiffs operated a court reporting partnership from 1975 to 1999. Upon dissolution of the partnership, they agreed to consolidate their business with defendant, an existing court reporting corporation … . * * *

… [A] party “cannot recover on a claim that he [or she] and [another individual] entered into a joint venture to be set up and run through the corporate . . . structure” … . “[A]s a general rule, a partnership may not exist where the business is conducted in a corporate form, as each is governed by a separate body of law . . . Parties may not be partners between themselves while using the corporate shield to protect themselves against personal liability” … . Although that rule has been qualified “so as not to preclude members of a preexisting joint venture from acting as partners between themselves and as a corporation to the rest of the world,’ ” that qualification is inapplicable here because defendant [corporation]  was formed before the partnership was allegedly created by an oral agreement … . In other words, “there was no preexisting joint venture that later spawned the creation of a corporation in which aspects of the joint venture could survive” … . Bianchi v Midtown Reporting Serv., Inc., 2018 NY Slip Op 04895, Fourth Dept 6-28-18

​PARTNERSHIP LAW (A PARTNERSHIP CANNOT OPERATE THROUGH AN EXISTING CORPORATE STRUCTURE (FOURTH DEPT))/CORPORATION LAW (A PARTNERSHIP CANNOT OPERATE THROUGH AN EXISTING CORPORATE STRUCTURE (FOURTH DEPT))/JOINT VENTURES (A PARTNERSHIP CANNOT OPERATE THROUGH AN EXISTING CORPORATE STRUCTURE (FOURTH DEPT))

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PURPORTED DISSOLUTION OF THE PARTNERSHIP VIOLATED THE PARTNERSHIP AGREEMENT, PLAINTIFFS NOT ENTITLED TO ATTORNEY’S FEES, GOODWILL REDUCTION SUPPORTED BY THE RECORD, MINORITY DISCOUNT APPLIED (CT APP).

The Court of Appeals, in a comprehensive opinion by Judge Fahey, over a two-judge partial dissenting opinion, determined that the defendant’s attempt to dissolve a partnership violated the partnership agreement, the plaintiffs were not entitled to attorney’s fees, the reduction for goodwill was supported by the record, the lack-of-marketability discount issue was not preserved, and the minority discount was applicable. The dissent agreed with everything except the applicability of the minority discount:

… [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”… . No particular magic words need be recited, provided that the parties’ intent is clear.  * * *

Here, the Agreement stated that the Partnership “shall continue until it is terminated as hereinafter provided,” and, in a subsequent provision, stated that the Partnership would dissolve upon “[t]he election by the Partners to dissolve the Partnership” or “[t]he 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 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. * * *

We conclude … that to award fees to plaintiffs would be to contradict New York’s well-established adoption of the American Rule that “the prevailing litigant ordinarily cannot collect . . . attorneys’ fees from its unsuccessful opponents” … . Contrary to Supreme Court, the standard is not which party was “more responsible” for the litigation. Attorneys’ fees are treated as “incidents of litigation” … . * * *

A minority discount is a standard tool in valuation of a financial interest, designed to reflect the fact that the price an investor is willing to pay for a minority ownership interest in a business, whether a corporation or a partnership, is less because the owner of a minority interest lacks control of the business. Congel v Malfitano, 2018 NY Slip Op 02119, CtApp 3-27-18

PARTNERSHIP LAW (PURPORTED DISSOLUTION OF THE PARTNERSHIP VIOLATED THE PARTNERSHIP AGREEMENT, PLAINTIFFS NOT ENTITLED TO ATTORNEY’S FEES, GOODWILL REDUCTION SUPPORTED BY THE RECORD, MINORITY DISCOUNT APPLIED (CT APP))/DISSOLUTION OF PARTNERSHIP (PURPORTED DISSOLUTION OF THE PARTNERSHIP VIOLATED THE PARTNERSHIP AGREEMENT, PLAINTIFFS NOT ENTITLED TO ATTORNEY’S FEES, GOODWILL REDUCTION SUPPORTED BY THE RECORD, MINORITY DISCOUNT APPLIED (CT APP))/ATTORNEYS (ATTORNEY’S FEES, PARTNERSHIP LAW, PURPORTED DISSOLUTION OF THE PARTNERSHIP VIOLATED THE PARTNERSHIP AGREEMENT, PLAINTIFFS NOT ENTITLED TO ATTORNEY’S FEES, GOODWILL REDUCTION SUPPORTED BY THE RECORD, MINORITY DISCOUNT APPLIED (CT APP))/GOODWILL REDUCTION (PARTNERSHIP LAW, PURPORTED DISSOLUTION OF THE PARTNERSHIP VIOLATED THE PARTNERSHIP AGREEMENT, PLAINTIFFS NOT ENTITLED TO ATTORNEY’S FEES, GOODWILL REDUCTION SUPPORTED BY THE RECORD, MINORITY DISCOUNT APPLIED (CT APP))/LACK OF MARKETABILITY DISCOUNT (PARTNERSHIP LAW, PURPORTED DISSOLUTION OF THE PARTNERSHIP VIOLATED THE PARTNERSHIP AGREEMENT, PLAINTIFFS NOT ENTITLED TO ATTORNEY’S FEES, GOODWILL REDUCTION SUPPORTED BY THE RECORD, MINORITY DISCOUNT APPLIED (CT APP))/MINORITY DISCOUNT (PARTNERSHIP LAW, PURPORTED DISSOLUTION OF THE PARTNERSHIP VIOLATED THE PARTNERSHIP AGREEMENT, PLAINTIFFS NOT ENTITLED TO ATTORNEY’S FEES, GOODWILL REDUCTION SUPPORTED BY THE RECORD, MINORITY DISCOUNT APPLIED (CT APP))

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