Betting the Farm On An Oral Partnership Agreement

Farrell Fritz, P.C.
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The Cummins Nursery in upstate New York grows, harvests, plants, and grafts fruit trees — mainly apple trees — which along with scions and rootstocks it sells by the tens of thousands each year. There’s also a farm stand and apple picking during the harvest season. According to its website, owner Steve Cummins acquired the 40 acre farm and nursery in the 1990’s to carry on the work of his father, an apple breeder and rootstock scientist affiliated with Cornell University who, in the 1960s and ’70s, made major strides in the development and propagation of disease-resistant apple trees.

According to Alan Leonard and the complaint he filed in the Tompkins County Supreme Court, Steve Cummins does not own Cummins Nursery. Rather, Leonard contends that the tree farm business and the property on which it operates is owned by a 50/50 partnership between him and Cummins formed in 2004 pursuant to an oral partnership agreement. Leonard now wants the partnership dissolved and a receiver appointed to sell the business and realty, and to distribute the net proceeds equally to himself and Cummins.

Last week, the Albany-based Appellate Division, Third Department, handed down a ruling in Leonard v Cummins reversing the lower court’s partial dismissal of Leonard’s claims. While court decisions involving disputes over the validity of oral partnership agreements are a dime a dozen, the Leonard case being no exception, the Leonard case also raised two atypical issues of interest:

  • Leonard’s complaint alleged that he demanded as early as 2009 that Cummins reduce to writing their partnership agreement and transfer the realty to the partnership, and that Cummins demurred. Is Leonard’s lawsuit filed in 2019 for enforcement of the agreement and dissolution of the partnership barred by the statute of limitations?
  • Cummins raised a statute of frauds defense to Leonard’s claim that the farm property belongs to the alleged partnership. Does Leonard’s partial performance of the alleged oral partnership agreement get around the statute of frauds governing conveyances of realty?

Leonard’s Complaint

Leonard’s complaint alleges that in 2004, at which time Cummins’ tree farm business was struggling and his mortgaged farm property had no equity, Cummins verbally offered to form a partnership with Leonard for the purpose of owning the real estate and jointly operating the business, with the two of them as equal partners sharing profits and losses equally. Leonard’s complaint further alleges:

  • Cummins’ offer was conditioned on Leonard’s agreement to leave his studies at Cornell University, to devote his full efforts to the business, and to live on the farm.
  • Cummins offered as his capital contribution the debt-encumbered land and business.
  • Cummins and Leonard left for “future determination” the capital contribution to be made by Leonard.
  • Cummins represented that their partnership agreement would be effective immediately and would be reduced to writing at a later date.
  • Leonard accepted the offer, left his studies at Cornell, and began working full-time for the partnership business.
  • Leonard was given access to, and subsequently became a signatory on, the business’s accounts into which all business income was deposited and from which all personal and business expenses of both Cummins and Leonard were paid.
  • Cummins referred to Leonard as his “business partner” and “co-owner” in statements made to third parties.
  • In 2006, Leonard made improvements to and moved into a cabin on the property.
  • In 2007, Leonard made cash contributions to the partnership totaling $55,000, after which the business became profitable.
  • In 2009, and from time to time afterward, Leonard requested that the partnership agreement be reduced to a writing and that the realty be transferred into “joint title”, in response to which Cummins gave excuses for why it wasn’t necessary to formalize their partnership agreement.
  • In  2017, Cummins stated for the first time to Leonard that he did not consider them to have been partners.
  • In 2018, Cummins demanded that Leonard cease participation in the business and vacate his residence on the property.

Leonard’s complaint seeks a declaration that he and Cummins formed a partnership; that the farm is property of the partnership; that the partnership be dissolved and a receiver appointed to sell the partnership assets including the realty; an accounting; and distribution of the partnership’s net assets to the two partners.

The Lower Court Partially Dismisses the Complaint

Cummins filed a pre-answer motion to dismiss the complaint, raising three arguments: (1) that the complaint fails to state a valid claim for enforcement of the alleged partnership; (2) that the claims are time-barred; and (3) that the statute of frauds bars Leonard’s claim for conveyance of the realty to the alleged partnership.

The lower court, in a decision last year by Justice Gerald A. Keene, rejected the first two arguments but accepted the third.

Leonard adequately alleged facts supporting the formation of an equal partnership based on verbal agreement, Justice Keene found, based on allegations that “there was a combination of property, skill or knowledge in the form of physical labor performed by the parties and a $55,000 contribution of cash from the plaintiff.”

As for the statute of limitations, Justice Keene held that under Partnership Law § 74 and CPLR 213(1), the six-year limitations period for Leonard’s partnership accounting claim did not commence until the alleged dissolution of the partnership in late 2018.

While upholding the complaint’s allegations of partnership formation, Justice Keene nonetheless agreed with Cummins that Leonard’s claim to classify the alleged partnership’s likely most valuable asset — the realty — as partnership property was barred by the statute of frauds codified in General Obligations Law § 5-703(2), requiring a written contract for the sale of any real property or interest therein. Justice Keene rejected Leonard’s reliance on the exception to the statute of frauds based on his alleged part performance of the agreement, writing:

The exception does not apply in cases where one of the purported partners is the owner of the property before the partnership was entered into. Here, [Cummins] owned the property long before [Leonard] allegedly became his partner. The exception applies to cases where two parties orally agree to form a partnership and purchase a property from a third party. [Citations omitted.]

The Appellate Court Reinstates the Claim to Declare the Realty as Partnership Property

Cummins appealed from the lower court’s adverse rulings concerning formation of the partnership and the statute of limitations. Leonard cross appealed from the lower court’s exclusion of the realty from the alleged partnership’s property. You can read the parties’ opening appellate briefs here and here.

The Third Department’s unanimous decision agreed with the lower court that Leonard’s complaint “states a cause of action sufficient for a declaration that a partnership was formed,” adding:

Accepting all of the facts alleged in the complaint as true, plaintiff and defendant agreed to carry on the tree farm and farm stand business together and equally share in its profits and losses. Plaintiff had access and control over the business accounts, lived on the farm and devoted his full energies to it for over a decade. Plaintiff contributed time, effort and skill as well as $55,000.

The court also agreed with the lower court’s determination that the action was timely brought either under under CPLR 213(4)’s six-year statute of limitations for an action based on a wrongful refusal to convey real property, “which begins to run from when the defendant wrongfully refuses to convey title,” or, as the lower court concluded, under Partnership Law § 74 which begins to run from the date of dissolution of the partnership.

The Third Department disagreed, however, with the lower court’s exclusion of the farm property from the assets of the alleged partnership. Acknowledging that Cummins’ alleged agreement to convey the farm to the partnership “falls squarely within the statute of frauds,” the court explained that,

General Obligations Law § 5-703 (4) has carved out an exception to the statute of frauds to permit courts of equity to compel the specific performance of agreements in cases of part performance. A party’s partial performance of an alleged oral contract will be deemed sufficient to take such contract out of the statute of frauds only if it can be demonstrated that the acts constituting partial performance are unequivocally referable to said contract. [Internal quotations and citations omitted.]

In his appellate brief, Cummins argued that Leonard’s allegations that he left Cornell and lived and worked full time on the farm were not unequivocally referable to an agreement by Cummins to contribute his farm property, and were no less referable to alternative scenarios including a partnership to operate the tree farm business without ownership of the realty. The court disagreed, concluding that Leonard’s allegations, assumed to be true for purposes of a pre-answer dismissal motion, met the standard for pleading the part-performance exception to the statute of frauds. Here’s what it wrote:

In his complaint, [Leonard] alleges that he drastically changed his behavior after the agreement, including leaving his studies at Cornell University to devote his full attention to the partnership. [Leonard] also claims that he moved onto the subject premises, that he contributed financially to the business, which was struggling under burdensome mortgage payments, and that [Cummins] referred to him as his business partner and co-owner of the farm. [Leonard] also made substantial improvements to both his residence on the farm, in which he resided full time, and to the farm itself. Given that all of these actions are unequivocally referable to the alleged oral agreement, we find that dismissal of the complaint under CPLR 3211 (a) (5) based upon the statute of frauds was improper.

Final Thoughts on Leonard

The procedural posture of the Leonard decisions essentially dictated the outcome. Cummins’ pre-answer motion to dismiss required the court to assume the truth of the complaint’s factual allegations, and by the same token barred Cummins from introducing evidence outside the pleadings.

I mention this because in cases of this sort lacking any writings between the parties directly evidencing their intent to form or not to form a partnership, the business’s accounting, banking, and tax reporting records usually take on a leading role. None such evidence is mentioned in the proceedings before Justice Keene and the Third Department. For instance:

  • What kind of tax returns did the business file? We can safely assume they weren’t partnership returns reflecting Leonard as a partner, otherwise Leonard’s counsel surely would have so alleged in the complaint. The same can be said for any type of pass-through tax entity that would have generated a Schedule K-1 allocating income and loss to Leonard.
  • If Cummins tax reported the business as a sole proprietorship, how did each of Cummins and Leonard report the compensation paid to Leonard? Was Leonard treated as a W-2 employee subject to withholding, or as an independent contractor picking up 1099 income, or off the books?
  • Was Leonard’s personal tax reporting consistent or inconsistent with his claim to own a 50% partnership interest in the operating business?
  • How was the $55,000 allegedly contributed by Leonard accounted for in the business’s internal accounting and tax reporting? If as a capital contribution, to what account of what incorporated or unincorporated entity? If not as a capital contribution, as a loan? A loan to whom? Did it bear interest? Was it repaid?
  • What person or entity owned the business’s operating account when Leonard became a signatory and in what capacity was he identified on the banking resolution or other authorization forms?
  • Does the business maintain any insurance policies or licenses for any of its business operations, the applications for which require identification of the owners?

It’s been over a year since Justice Keene filed his decision. Since then presumably the parties have engaged in discovery proceedings including depositions exploring the above issues and more. It wouldn’t surprise me to see one or the other or both parties filing summary judgment motions following the completion of discovery, which should give us a much more expansive and clearer picture of the evidence supporting or refuting each side’s position.

The Leonard case is another in a never-ending parade of cases involving closely held business entities in which courts are tasked with deciding ownership issues in the absence of any written agreement or other documentation such as certificates of ownership. As one judge summed up the phenomenon some years ago, “In the real world, particularly that in which close corporations operate, clear evidence of share ownership is often not found in the corporate books and records, for any number of reasons.”

Possibly one or both of Leonard and Cummins had their own reasons for not documenting the nature of their business relationship at the time of its formation and in the years that followed. They’re now paying the price with litigation already well into its second year.  Absent settlement, the outcome of their respective bets on the farm is in the hands of a third party outside their control — the court. It’s a lesson to be taken seriously by anyone contemplating entering into a multi-owner business relationship.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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