Limited Partnerships and the Self-Fulfilling Dissolution Petition

Farrell Fritz, P.C.
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  • If a written limited partnership agreement contains detailed provisions governing partner withdrawal and dissolution, can a court nonetheless look to the statutory “default rules” in the Revised Limited Partnership Act (the “RLPA”) to supply additional grounds for withdrawal and dissolution not found in the contract?
  • Under RLPA, is the filing by a limited partner of a petition to dissolve the limited partnership enough, on its own, to automatically dissolve the entity without regard to the merits of whether the entity should, or ought to be, dissolved?
  • Under RLPA, is an order appointing a receiver of a limited partnership enough, on its own, to automatically dissolve the limited partnership?

A recent decision from Manhattan Commercial Division Justice Andrew Borrok, Weinstein v RAS Prop. Mgmt. LLC, Decision and Order [Sup Ct, NY County Oct. 23, 2020], rendered first-impression holdings on each of these issues, raising important questions about the interplay between contractual and statutory withdrawal and dissolution principles for New York limited partnerships, the outcome of which may have enormous impact upon owners of New York limited partnerships.

The Facts

In 1982, Ninety-Five Madison Company (the “Partnership”) was formed as a New York limited partnership to own and operate a 16-story commercial building in Manhattan. Over time, Weinstein became limited partner and RAS Property Management LLC (“RAS”) general partner of the Partnership. The Partnership had a comprehensive Limited Partnership Agreement, Section 9.1 of which set forth several grounds for dissolution:

Events Which Cause a Dissolution. The Partnership shall continue in full force and effect until December 31, 2050, except that the Partnership shall be dissolved prior thereto upon the happening of any of the following events:

A. An election to dissolve the Partnership made in writing by the Partners;

B. The withdrawal or Bankruptcy of a General Partner if the Partnership is not continued in accordance with Section 8.5 hereof;

C. Any event which shall make it unlawful for the existence of the Partnership to be continued; or

D. The sale or disposition of the Property or all or substantially all of the real property assets of the Partnership.

In 2010, the Partnership filed a Certificate of Adoption adopting RLPA to govern the affairs of the Partnership.

The First Phase of Supreme Court Litigation

Earlier this year, we wrote about the first phase of the Weinstein litigation.

On June 26, 2019 (an important date, as we shall see later), Weinstein filed a petition for judicial dissolution of the Partnership under RLPA § 121-802, coupled with claims the Court concluded were derivative in nature. In November 2019, five months into the lawsuit, Weinstein died, resulting in the Court dismissing Weinstein’s petition for lack of standing because she ceased to be a partner as of her death.

The Arbitration Proceeding

At the same time the Supreme Court litigation raged, a tenant at the Partnership’s commercial building with no connection to Weinstein prosecuted an arbitration proceeding against the Partnership, alleging claims against the Partnership related to the initial physical alterations to move into its leased space.

On August 7, 2019 (another important date, as we shall see later), the arbitrator, former Appellate Division – Second Department Associate Justice Stephen G. Crane, issued an arbitral award appointing a receiver for the Partnership over the opposition of RAS. Later, Manhattan Commercial Division Justice Saliann Scarpulla issued an order confirming the award.

The Second Phase of Supreme Court Litigation

After Justice Borrok dismissed the original petition, Weinstein’s executors (the “Estate”) filed an amended petition seeking, among other things, an order adjudging the Partnership dissolved by operation of law under RLPA §§ 121-801 and 121-402.

Section 121-801 governs non-judicial dissolution of limited partnership, subsection (d) of which states:

A limited partnership is dissolved and its affairs shall be wound up upon . . . an event of withdrawal of a general partner unless . . . within ninety days after the withdrawal of the . . . general partner, not less than a majority in interest of the limited partners agree in writing to continue the business of the limited partnership . . .

Section 121-402 specifies events resulting in withdrawal of the general partner by operation of law, subsection (e) of which states:

A person ceases to be a general partner of a limited partnership . . . unless otherwise provided in the partnership agreement . . . (i) if within one hundred twenty days after the commencement of any proceeding against the general partner seeking . . . dissolution . . . the proceeding has not been dismissed or stayed . . . or (ii) if within ninety days after the appointment without his consent or acquiescence of a . . . receiver . . . of the general partner or of all or any substantial part of his properties, the appointment is not vacated or stayed . . . (emphasis added).

Relying upon these provisions, the Estate argued that the filing of the dissolution petition against the Partnership on June 26, 2019, resulted in withdrawal of RAS as general partner and dissolution of the Partnership on October 24, 2019, 120 days after commencement of the dissolution proceeding, the dissolution proceeding was not dismissed or stayed, and the limited partner did not elect to continue the Partnership.

Additionally, the Estate argued, the appointment of a receiver for the Partnership on August 7, 2019, resulted in withdrawal of RAS as general partner and dissolution of the Partnership on November 5, 2019, 90 days after appointment of the receiver, the appointment was not vacated or stayed, and the limited partner did not elect to continue the Partnership.

The Dismissal and Summary Judgment Motions

RAS moved to dismiss the dismiss the amended petition. You can read its opening and reply briefs here and here. RAS argued:

  • The Court should not look to RLPA §§ 121-801 and 121-402 to find grounds for partner withdrawal and dissolution because the Limited Partnership Agreement’s provisions governing those subjects opted out of the statutes;
  • A general partner may, as in the case of RAS, be a distinct legal entity from the limited partnership (for example, a partnership, joint venture, corporation, or limited liability company). Sections 121-402 (e) (i) and (ii) were meant apply to petitions to dissolve, or appointment of receivers for, the general partner entity, as distinct from the limited partnership itself. Although the Estate sued to dissolve the Partnership and named RAS as a party, it did not sue to dissolve RAS, the general partner, so Section 121-402 (e) (i) was inapplicable. And although the arbitrator appointed a receiver for the Partnership, none was appointed for RAS, the general partner, so Section 121-402 (e) (ii) was inapplicable. Thus, there was no general partner withdrawal under Section 121-402, and no dissolution under Section 121-801.

The Estate cross-moved for summary judgment for a ruling that the Partnership dissolved by operation of law. You can read its dismissal opposition / summary judgment cross-motion papers here and here.

The Decision

In a series of three novel holdings, the Court granted the Estate’s motion for summary judgment and denied RAS’s motion to dismiss.

First, the Court concluded that it could in effect merge the Limited Partnership Agreement’s provisions governing withdrawal and dissolution with the default grounds under RLPA:

To the extent that the respondents broadly maintain that neither Section 121-402 (e) (i) or (e) (ii) is applicable because those provisions only apply ‘unless otherwise provided in the partnership agreement’ (NY RLPA § 121-402 (e), this argument . . . fails. The Partnership Agreement does not provide an exhaustive list of events which constitute a general partner withdrawal or otherwise explicitly opt-out of Section 121-402 (e) . . . In fact, the Partnership Agreement addresses what happens upon the withdrawal of the general partner — i.e., dissolution unless there is an election to continue the business of the partnership by the Limited Partner.

Second, the Court concluded that the pendency of the Estate’s dissolution petition against the Partnership, upon the passage of time alone, resulted in the Partnership’s dissolution:

Ms. Weinstein commenced this proceeding on June 26, 2019 seeking the judicial dissolution of the Partnership and the appointment of a receiver. There was no stay or dismissal of the action prior to the 120th day following June 26, 2019, which was October 24, 2019. The action was stayed only on November 25, 2019 when Ms. Weinstein died, i.e., via the automatic stay imposed upon the death of any party. . . The original verified petition was properly brought by Ms. Weinstein against RAS . . . seeking RAS’s removal, i.e., it was ‘a proceeding against the general partner,’ the 120th days from the date of commencement occurred prior to Ms. Weinstein’s death, and there was no election to continue the business of the Partnership.

Third, the Court concluded that appointment of a receiver in the arbitration, upon the passage of time alone, resulted in a second event of withdrawal and dissolution of the Partnership:
RAS ‘withdrew’ and ceased being the general partner because a receiver was appointed over the Partnership’s assets on August 7, 2019 in the JAMS Arbitration and such receivership was not vacated within 90 days . . . and, not only was approval of the Limited Partner for the continuation of the business of the Partnership never obtained, RAS never even sought it. Therefore, . . . the Partnership was dissolved on November 5, 2019 — i.e., approximately 21 days before the Limited Partner died.

Commentary on Weinstein

In Congel v Malfitano, 31 NY3d 272 [2018], the Court of Appeals addressed the interplay between written general partnership agreements addressing the subject of partner withdrawal and dissolution and the Partnership Law’s default provisions addressing the same subject. The Court wrote in broad language:

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.

Congel held that the partners in that case, by including in their written agreement detailed provisions governing withdrawal and dissolution, “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,” entirely supplanting the default rules for determining whether or not the partnership was “at will.” At the time, we described Congel as ushering in a new “contract-centric approach” to general partnership dissolution cases. I can see no reason why the “contract-centric” emphasis of Congel should not apply to limited partnerships. I leave for others to decide whether Weinstein is consistent with Congel (which the parties did not brief, so the Court did not address in Weinstein), or whether it is at least arguable that the parties to the Limited Partnership Agreement, by carefully delineating in Section 9.1 exactly five independent grounds for dissolution, intended those grounds to be exclusive, displacing the statutory default rules governing withdrawal and dissolution.

The Court’s interpretation of RLPA § 121-402 (e) is the first of its kind in New York, although there are at least two out-of-state decisions, including Kenworth v Kenworthy, 149 SW3d [TX Ct App 2004], and T.P. Racing, P.L.L.P v Simms, 307 P3d 56 [Ariz Ct App 2013], both interpreting the dissolution and receivership language of their states’ versions of Section 121-402 to apply to, and cause an event of withdrawal of a general partner only upon, a dissolution proceeding or receivership commenced against the general partner of the limited partnership.

The outcome of Weinstein may come as a surprise to owners of New York limited partnerships and those who advise them. After Weinstein, if you happen to be (or represent) a person or entity with an interest in a limited partnership, you may want to consider amending your limited partnership agreement (or adopting one if you do not have one) to explicitly opt out of the default rules of Section 121-402 (e). If you do not, a dissolution petition or receivership against the limited partnership may become a ticking time bomb which, unless dismissed, stayed, or vacated, can become self-effectuating to dissolve the limited partnership.

Finally, under Weinstein, if you happen to be opposing a dissolution proceeding against, or receivership for, a limited partnership, it is incumbent upon you to obtain a dismissal, stay, or vacatur within the 120- and 90-day periods of RLPA § 121-402 (e). Otherwise, under Weinstein, there is a risk the limited partnership may dissolve by operation of law before you have a chance to reach the merits of the case.

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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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