On January 10, 2016, the New York Court of Appeals decided to hear a case that has significant consequence in the field of partnership dissolution.  The case, Congel v. Malfitano,[1] concerns the allegedly wrongful dissolution of a shopping mall partnership under Partnership Law § 69.  In 2016, Justice Thomas A. Dickerson, writing for a unanimous Second Department panel, held that a former partner’s unilateral notice of dissolution was wrongful because under Partnership Law § 69(2)(1)(b) the partnership was not “at-will” given that the written agreement contained a “definite term.”  The Second Department also ruled that it is appropriate to apply minority and goodwill discounts in determining the value of a defendant’s interest in a partnership.  Finally, the Second Department concluded that an award of attorney’s fees was proper because the expenditures are only incurred because of the former partner’s wrongful conduct.  Thereafter, the defendant partner filed a motion for leave to appeal to the New York Court of Appeals, which was granted on January 10, 2016.[2]  The Court will likely hear the appeal later this year.

Background

The dispute in Congel centers on a partnership agreement to operate a shopping center in Poughkeepsie, New York.  In November 2006, the Defendant—who owned a 3.08% interest in the partnership—sent a letter advising that he had unilaterally elected to dissolve the partnership because there had been a “fundamental breakdown in the relationship between and among us as partners.”[3]  Plaintiffs, who are members of the partnership’s Executive Committee, brought suit alleging that Defendant wrongfully dissolved the partnership in violation of the partnership agreement and for damages.  Defendant asserted a counterclaim under Partnership Law § 69(2)(c)(II), which provides that if a partner wrongfully caused a dissolution, he is entitled to “the value of his interest in the partnership, less any damages caused to his copartners by the dissolution.”  Partnership Law § 69(2)(c)(II) also provides that the value of the partner’s interest should be reduced by the value of the goodwill of the business—that is the value of the partnership above and beyond its tangible assets.

Defendant filed a motion to dismiss, arguing that the partnership was “at-will” so that he was free to unilaterally dissolve it.  The Supreme Court denied this motion, and in 2009 the Second Department affirmed, ruling that “the partnership was not at-will since the partnership agreement, which indicated that the partnership shall dissolve upon an election of a majority of the partners, provided for a ‘definite term.’”[4]  Following that decision, the Supreme Court granted summary judgment in favor of Plaintiffs on their claim that the partnership was wrongfully dissolved.

After granting summary judgment, the trial court held a nonjury trial to determine the amount owed to Defendant for his interest in the partnership.  Plaintiffs argued that the value of Defendant’s interest should be reduced “to account for marketability and the defendant's status as a minority partner.”[5]  The trial court ruled that it was not permitted to apply any minority discount in valuing Defendant’s partnership interest.  Both parties appealed. 

At trial, Plaintiff also argued Defendant’s interest should be reduced by the goodwill of the business.  In response, Defendant contended that the partnership was a real-estate holding company and therefore had no “goodwill” under New York case law.  The trial court ruled that the partnership operated the shopping mall and therefore had goodwill.  The trial court also reduced Defendant’s partnership interest by the attorney’s fees that the partnership incurred in the litigation, reasoning that such fees were an element of damages due to the Defendants wrongful dissolution.

The Second Department Decision

The first issue addressed by the Second Department was whether to reconsider its prior decision in the case that Defendant’s dissolution of the partnership was wrongful given the Court of Appeals’ intervening decision in Gelman v. Buehler.[6]  Gelman held that “[i]n absence of a definite term of duration” an oral partnership agreement is “dissolvable at will by either partner.”[7]

On that issue, Justice Dickerson concluded that the law of the case doctrine foreclosed the Second Department’s reconsideration.  Moreover, the Second Department distinguished the Gelman case, which involved an oral agreement, because the partnership agreement at-issue in Congel was written and provided that “the partnership would continue until terminated by a majority vote of the partners, and was thus not dissolvable at-will by a single partner.” 

Next, the Second Department considered whether to apply a minority discount.  The court ruled that the trial court’s reliance on Court of Appeals precedent that a minority discount cannot be applied in a dissenting shareholder’s fair value appraisal proceeding was misplaced.  The Panel ruled that in partnership cases, the valuation is necessary not because of the sort of oppressive majority conduct that triggers an appraisal right, but instead because of the wrongful conduct of a minority partner.  Thus, the Second Department determined that a minority discount should be applied to this case. 

The Second Department also addressed whether to apply a discount for the partnership’s goodwill.  The court ruled that the evidence supported the trial court’s determination that the partnership was not a real property holding company, and that it had goodwill from the operation of the shopping mall.

The Second Department also affirmed the trial court’s award of attorney’s fees to the partnership.  The Panel reasoned that the expenses were created by Defendant’s breach of the partnership agreement, and thus were a proper element of damages.     

Motion for Leave to Appeal

Defendant’s appeal presents three questions for the Court of Appeals.  The first deals with whether the Second Department erred in failing to apply the Court of Appeals’ decision in Gelman.  On that question, Defendant argues that the Appellate Division should have applied the Gelman decision because: “It is well established that . . . a change in decisional law usually will be applied retrospectively to all cases still in the normal litigating process.”[8]

The second issue concerns whether the Second Department erred in applying a minority discount and a goodwill discount.  On this point, Defendant argues that the Court’s precedent in minority shareholder cases also applies to partnership cases.  Defendant cautions that applying a minority discount would encourage oppressive conduct by the majority.  Defendant also argues that the Second Department was incorrect in finding that the Partnership had goodwill from the operation of the shopping mall.  Instead, Defendant argues that the record supports a conclusion that the partnership was a real property holding company.

The third question involves the Second Department’s decision to affirm the award of attorney’s fees. On this point, Defendant contends that the Second Department ignored the “American Rule,” which is generally followed by New York courts and provides that each party bears their own costs of defense.  Further, Defendant contends that the award of attorney’s fees is only appropriate where an agreement, statute, or court rule permits recovery and that no such statute or rule exists in breach of contract cases.

Conclusion

How the Court of Appeals decides this case may have broad implications in future business dissolution cases that are adjudicated in the New York courts.  In addition, the Congel appeal presents an opportunity for further refinement as to the situations in which the attorney’s fees can be awarded in New York.