In Congel v. Malfitano, 31 N.Y.3d 272 (N.Y. 2018), the court addressed three issues of note regarding involuntary dissolution of partnerships by a partner under Section 62(1)(b) of New York’s Partnership Law. The court held that the remedy is unavailable where partnership agreement terms provide the exclusive means of dissolution, that attorneys’ fees for improperly invoking the remedy are available as damages only when directly occasioned by the improper dissolution and a minority discount is properly applied when the remaining partners decide to continue the business and buy out the wrongfully dissolving partner’s interest.
In 1985, defendant Marc Malfitano and seven others entered into an agreement to form a general partnership to operate a shopping mall. Years later, Malfitano was not happy with certain conduct by plaintiffs, the three-member executive committee with day-to-day management authority for the partnership. Accordingly, Malfitano gave written notice that he was unilaterally dissolving the partnership pursuant to Section 62(1)(b) of New York’s Partnership Law. Plaintiffs filed suit seeking a declaration that the dissolution was invalid and for damages. After protracted proceedings, including two appeals, the New York Court of Appeals, the state’s highest court, grated leave for Malfitano to appeal.
First, the court addressed whether Malfitano properly dissolved the partnership. Section 62(1)(b) provides “that a partner may unilaterally dissolve a partnership, without violating the partnership agreement, if ‘no definite term or particular undertaking is specified’ in the agreement and the partnership is therefore ‘at will.’” Id. at 280. Both the trial court and the appellate court concluded that the partnership was not at will, so Malfitano’s dissolution was wrongful. The Court of Appeals agreed with the outcome, but because it did not comply with the terms of the partnership agreement, regardless of the statute.
The partnership agreement provided 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.’” Id. at 289. The court held that the partners intended that the partnership agreement provide the exclusive means for dissolution, and, by implication, that unilateral dissolution under Section 62(1)(b) would breach the Agreement. Thus, where partners agree to exclusive dissolution terms in a partnership agreement, Section 62(1)(b) is unavailable.
Second, the Court of Appeals held, in contrast to both lower courts, that plaintiffs were not entitled to attorneys’ and experts’ fees, as part of their damages under Partnership Law Section 69(2)(a)(II). That Section provides that “[w]hen dissolution is caused in contravention of the partnership agreement ... [e]ach partner who has not caused dissolution wrongfully shall have ... [t]he right, as against each partner who has caused the dissolution wrongfully, to damages for breach of the agreement.” Id. at 290 (internal quotation marks omitted).
The plaintiffs argued that the attorneys’ and experts’ fees they incurred pursuing the litigation were “damages” under Section 69(2)(a)(II). The court rejected that argument, finding it would “contradict New York’s well-established adoption of the American Rule that ‘the prevailing litigant ordinarily cannot collect ... attorneys’ fees from its unsuccessful opponents.’” Id.
The court distinguished two cases relied on by plaintiffs that characterized certain attorneys’ fees as “damages” because they did not relate to the lawsuit. Rather, the fees were “recoverable expenditures directly occasioned and made necessary by the breach” of the partner who improperly caused the entity’s dissolution. Id. at 291 (discussing City of Elmira v. Larry Walter, Inc., 546 N.Y.S.2d 183 (N.Y. App. Div. 1989), aff’d 76 N.Y.2d 912 (1990); Aero Garage Corp. v. Hirschfeld, 586 N.Y.S.2d 611 (N.Y. App. Div. 1992)).
The court stated, “the cited cases clearly rely on a distinction between, on the one hand, legal fees incurred in prosecuting or defending a successful civil lawsuit and, on the other hand, legal fees, in the nature of damages, incurred in carrying out separate acts necessitated by the breach.” Congel, 2018 WL 1473551, at 291-92. According to the court, awarding plaintiffs’ fees as damages “would mean that fees could be awarded to the victorious party in any breach of contract litigation, as long as that party persuaded a court that it had to litigate the issue in order to avoid the consequences of defendant’s breach.” Id. at 292. The exception would swallow the American Rule.
Third, as a matter of apparent first impression, the court addressed whether the courts below properly applied a minority discount to Malfitano’s share of the partnership where the other partners continued the business as going concern, rather than liquidating it. New York Partnership Law Section 69(2)(c)(II) provides for purchase of a wrongfully dissolving partner’s partnership interest in the event the other partners decide to continue the business.
The court found that the minority discount was properly applied. The court noted that a minority discount is a standard valuation tool intended to reflect that an investor is willing to pay less for a minority ownership interest in a business because a minority owner lacks control of the business. Because New York Partnership Law Section 69(2)(c)(II) expressly assumes that the business will continue, rather than be liquidated, “the statute does not contemplate a valuation of the entire business as if it were being sold on the open market, but rather a determination of the fair market value of the wrongfully dissolving partner’s interest as if that interest were being sold piecemeal and the rest of the business continuing as a going concern.” Id. at 296. In that circumstance, “a minority discount is applicable, because a minority interest is worth less to anyone buying that interest alone.” Id.
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