Questions of Fact Preclude Dissolution of Partnership on Summary Judgment

On December 12, 2017, Justice Bransten of the New York County Commercial Division issued a decision in Magid v. Magid, 2017 NY Slip Op. 32603(U), holding that questions of fact precluded summary judgment in a dissolution action, explaining:

On their first cause of action, plaintiffs seek an Order dissolving 110 East, and giving plaintiffs the right to wind up 110 East by selling the Premises and conducting a final accounting and distribution of the partnership assets. . . .

Partnership Law § 63 provides that the court may order the dissolution of a partnership where a partner willfully or persistently commits a breach of the partnership with him, or where other circumstances render a dissolution equitable. Where the partners are deadlocked, and the partnership is consequently unable to make any decisions, it is equitable to dissolve the partnership. No one can be forced to continue as a partner against his will. As the Appellate Division, First Department has said when discussing the related area of the duties of shareholders in a closely held corporation:

The law exacts a high degree of fidelity and good faith in dealings between partners in a the conduct of the affairs of the partnership. The same obligations are likewise applicable to shareholders in a close corporation. However, where a deadlock exists to the extent that dissension becomes the order of the day, the impasse may effectively destroy the loyalty and good faith expected of such stockholders in their dealings with each other. The inevitable result is the downfall of the business. In such a case, dissolution affords to the court an appropriate remedy to judicially direct what in actuality is obvious to all, that the deadlock and the dissension have effectively destroyed the orderly functioning of the corporation.

The reason for such dissension is irrelevant; the only issue is whether the relationship between the partners is irretrievably dysfunctional.

At the outset, the court notes that defendants do not accurately identify the requirements to show a deadlock. While the cases cited by plaintiffs have largely concerned partnerships where the competing owners of ownership groups each held 50% of the partnership, defendants do not point to any authority stating that a 50/50 division is necessary for the court to find that a partnership is irretrievably deadlocked. Indeed, it is seemingly disingenuous for L. Magid to argue that the partnership is not deadlocked on, at the very least, the issues of refinancing, a sale of the Premises, a the removal of L. Magid as property manager, when L. Magid has responded to his partners' proposals related to those issues with threats of litigation. Nor have defendants shown that 110 East's continued profitability and day-to-day operations necessarily defeat plaintiffs' claim.

This Court notes, contrary to the defendants' argument, it has already had to intervene in this action to order the parties not to communicate with each other, except through counsel. It is not at all clear that 110 East would continue to function in the absence of this directive. Further, whether or not the dissension has impacted or will impact 110 East's or any partner's finances is irrelevant to whether dissolution is warranted.

L. Magid argues that his status as property manager and his refusal to consent to a sale of the Premises are both protected by the 110 East Agreement, and, thus, cannot be the basis of a deadlock. However, the 110 East Agreement does not require the consent of all managing partners to terminate a contract with an outside entity, such as the property manager; though it does require such consent to enter into a contract in the first place.

. . .

Ultimately, a decision on this cause of action requires credibility judgments of the kind that are inappropriate on a motion for summary judgment. It is clear that, despite defendants' efforts to downplay it, significant acrimony and dissension exists among the partners. Such dissension is farther amplified by the fact that, unlike many partnerships, 110 East is a family partnership, with all of its attendant personal factors. Moreover, the alleged complaints regarding the management of the building are intertwined with the broader partnership disputes, as L Magid also serves as property manager. Yet, dissension and animosity, by themselves, are not enough; the discord must raise an irreconcilable barrier to the continued functioning and prosperity of the partnership.

Here, the parties have raised issues of fact as to the level of dysfunction caused by their personal animosity, and whether such dysfunction impacts the management of the Premises and 110 East's ability to function. Under these circumstances, summary judgment is not appropriate for either side.

(Internal quotations and citations omitted) (emphasis added).

This decision relates to a significant part of our practice: business divorce (a break-up between the owners of a closely-held business). Indeed, Schlam Stone & Dolan partner Jeffrey M. Eilender and associate Lee J. Rubin were contributors to the recently-released 2017 Supplement to Litigating the Business Divorce by Kurt Heyman and Melissa Donimirski. Contact Jeffrey Eilender at jeilender@schlamstone.com or Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a business divorce.