Wednesday, March 13, 2019

California Court Enforces the Spirit of the Prohibition on Transfer of an Interest in a Limited Partnership

California Court Enforces the Spirit of the Prohibition on Transfer

of an Interest in a Limited Partnership


In SP Investment Fund III, LLC v. Zell, B278003, 2018 WL 6787328 (Ca. Ct. App. 2nd Dist. Div. 3 Dec. 26, 2018), the court considered a purported sale of an interest in a limited partnership for which the partnership agreement required the general partner’s consent for a transfer of a limited partner’s interest.  Unable to acquire that consent, the purchaser sought to receive all of the distributions as made and as well the right to direct the record holder as to how to vote the interest.  The seller sought to rescind the purchase/sale, and the purported purchasers brought suit.  After reviewing the default rule under the N.Y. Limited Partnership Act (N.Y. Partnership Law, art. 8-a, §§ 121-101 et seq.), the court also observed that:
However, as we have described, the RLPA permits partnerships, through their partnership agreements, to restrict transfers of partnership interest without consent.  Newport Highlands has opted to exercise this statutory right: Its partnership agreement provides that a limited partner’s transfer of distribution rights and withdrawal from the partnership, as well as a transferee’s admission to the partnership, are “[s]ubject to the Consent of the Operating General Partner.” Id. at *8.
From there, the court held:
Newport Highland’s restrictions on transfer, and the general partner’s ability to control with whom it does business, would be wholly frustrated if we were to enforce the purchase agreement in the present circumstances.  That is, were we to enforce the purchase agreement according to its terms, SP, although not formally a member of the partnership, would have all the rights of a limited partner-to receive partnership profits and distributions, to review partnership documents, and to direct how Zell “vote[s], elect[s] or act[s] with regard to the partnership or Partnership Interest.” As such, the partnership’s ability to restrict with whom it does business-and specifically to choose not to do business with SP, which it repeatedly has expressed it desire to do-would be entirely thwarted. Id. at *9.
On that basis the court found there to be no enforceable agreement for the purchase/sale of Zell’s limited partnership interest.

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