Tuesday, April 16, 2013
New York Court of Appeals Addresses What is a Partnership for a Particular Term or for a Particular Undertaking
New York Court of Appeals Addresses What is a Partnership for a
Particular Term or for a Particular Undertaking
Recently the New York Court of Appeals, that being the highest appellate state in that jurisdiction, addressed the assertion that a particular partnership was not one for either a particular term or for a particular undertaking. Such categorization is an important aspect of partnership law; while New York retains its enactment of the 1914 Uniform Partnership Act, and has not adopted the 1997 Revised Uniform Partnership Act, it is in effect interpreting language that continues to exist in Kentucky’s adoption of the Uniform Partnership Act. Further, partnerships for a particular term or for a particular undertaking continue to exist under RUPA. Gelman v. Buehler, 2013 N.Y. slip op. 01991 (N.Y. Ct. App. Mar. 26, 2013).
Gelman and Buehler entered into an oral partnership agreement pursuant to which they would (a) raise capital with which to identify a potential acquisition target, (b) identify that target, (c) raise additional funds, (d) acquire the acquisition target, (e) manage the acquisition target to greater profitability and (f) sell the acquisition for a profit for both the investors and themselves. However, within months of the creation of this oral partnership agreement (neither party contested its contents), the relationship broke down and Buehler announced he was leaving the partnership. The outcome of the dispute would turn upon whether the partnership is one either at will or, in the alternative, for a particular term or for a particular undertaking.
Under partnership law, any partner may, at any time, withdraw from a partnership at will and in so doing initiate its dissolution. No damages flow from a partner so acting. In contrast, if a partnership is for a particular term or for a particular undertaking, while each individual partner retains the power to withdraw from the partnership, damages may be awarded to compensate the partnership for the consequences of that withdrawal.
At the trial level, Buehler prevailed in his argument that the partnership was one at will, there being neither a definite term nor a definite undertaking. That decision was, however, reversed by the intermediate Court of Appeals which, on a 3-2 vote, determined that the partnership did have a definite term, running through the expected liquidity event as to the acquired business. Further, it found that the partnership was one for a particular undertaking, namely that of “acquiring a business and expanding it until the investors would receive a return on their capital investments.”
The Court of Appeals would agree with the trial court’s decision, overturning the ruling of the Appellate Division. Citing a number of cases as to what is a “particular undertaking” including the decision of the Kentucky Court of Appeals rendered in Fischer v. Fischer, 197 S.W.3d 98 (Ky. 2006), it found that the partnership was not one for a term in that there had been no agreement as to its duration; a term partnership requiring some sort of identifiable termination date.
As to the argument that the partnership was for a particular undertaking, the Court of Appeals determined that the partnership lacked a “specific objective or project” that may be accomplished at some future time; its plan for acquisition and resale was “too amorphous” to satisfy the statutory requirements.
The partnership having, ultimately, been one at will, no damages flowed from its termination.
A curious point in the complaint (hat tip to Peter Mahler for posting it on his blog) is that a LLC (identified as a corporation) was organized in Delaware as, apparently, the vehicle through which funds would be solicited. Still, it was asserted that “The LLC was not intended to take the place of the partnership agreement between the parties.” Complaint ¶ 20. The relationship between the LLC and the partnership is not further explained in the Complaint, and the LLC is not addressed in the Court of Appeals’ decision. Was the partnership the LLC’s member? One of the plaintiff’s claims was for damages flowing from the potential investors’ decisions to not invest in the LLC. The alleged damages resulting from the prospective investors withdrawing their commitments from the LLC gave rise to claims in favor of the LLC and not of Gelman individually.