Partnership Agreement Cannot Be Modified by Conduct

On August 6, 2020, the First Department issued a decision in A&F Hamilton Hgts. Cluster, Inc. v. Urban Green Mgt., Inc., 2020 NY Slip Op. 04440, holding that a partnership agreement cannot be modified by conduct, explaining:

The principal, and dispositive, question presented on appeal is whether the unsigned amendment is effective, and therefore served to amend the 1999 agreement. That question turns on whether a signed amendment is necessary, or, as appellants argue, whether the unsigned amendment may become operative through the parties' conduct. We must determine if a signed writing was required under the Revised Limited Partnership Act. Surprisingly, this presents an issue of first impression.

The Revised Limited Partnership Act (RLPA) is in many respects a default statute that allows limited partnerships to chart their own course of governance, but imposes rules if the partnership does not explicitly opt out of specific provisions. Many substantive provisions in the act are qualified by the phrase except as may be provided otherwise in the partnership agreement. That phrase appears in RLPA § 121-110(c), which concerns, among other matters, the distributions and allocations of tax losses to partners. That section reads in full:

The partnership agreement of a limited partnership may be amended from time to time as provided therein; provided, however, that, except as may be provided otherwise in the partnership agreement, without the written consent of each partner adversely affected thereby, no amendment of the partnership agreement shall be made which (i) increases the obligations of any limited partner to make contributions, (ii) alters the allocation for tax purposes of any items of income, gain, loss, deduction or credit, (iii) alters the manner of computing the distributions of any partner, (iv) alters, except as provided in subdivision (a) of section 121-302 of this article, the voting or other rights of any limited partner, (v) allows the obligation of a partner to make a contribution to be compromised by consent of fewer than all partners or (vi) alters the procedures for amendment of the partnership agreement.

The unsigned amendment purports to alter the allocation of distributions and tax losses to the partners. The 1999 agreement contains no provision that would allow for such changes without a writing memorializing the consent of the adversely affected partners. Therefore, the default requirement of an executed writing applies, as provided in RPLA § 121-110(c). It is undisputed that no party has located, much less authenticated, an executed version of the unsigned amendment. As it has not been signed by any adversely affected partner, the unsigned amendment is of no effect.

Non-movants argue that parties can modify a contract by their conduct. That is true of course as a general matter. However, the contract in this case is one that is subject to a detailed statutory scheme, and therefore the modification by conduct argument requires greater scrutiny. The Fendt faction cites only one case that involved modification of a partnership agreement by conduct. However, that case did not involve a provision, such as RLPA § 121-110(c), that requires changes to specified aspects of the limited partnership to be consented to in writing, unless the parties' agreement provides otherwise.

Non-movants argue that the equitable exceptions to the statute of frauds provide support for their argument that an executed writing is unnecessary under the facts of this case. General Obligations Law § 15-301(1) states that any agreement that recites that it cannot be amended orally can only be amended in a writing signed by the party to be charged. The Fendt faction correctly points out that the equitable claims and defenses of waiver, estoppel and partial performance are still available to prove or enforce an oral modification of a contract within the statute of frauds. However, non-movants cite no case that has applied similar equitable claims and defenses in cases involving limited partnership agreements covered by the RLPA.

Given the detailed statutory scheme governing limited partnership agreements embodied in the RLPA, we find the non-movants' argument by analogy unpersuasive. By design, the RLPA sets forth a clear separation between general and limited partners. This separation is more defined than the division between managers and members in limited liability corporations. With few exceptions, the RLPA provides that a general partner has the liabilities of a partner in a non-limited partnership. In exchange for a more passive position, the limited partners are generally sheltered from personal liability to third parties who transact business with the limited partnership. The RLPA's default requirements of partner consent to substantive changes to a limited partnership agreement helps protect the passive limited partners from actions taken by general partners that might adversely affect the limited partners' interests. That default protection would be undermined if we were to engraft on to the RLPA the equitable exceptions applicable to the Statute of Frauds. Accordingly, we decline to do so.

(Internal quotations and citations omitted).

This decision relates to a significant part of our practice: business divorce (a break-up between the owners of a closely-held business). Contact Schlam Stone & Dolan partner John Lundin at jlundin@schlamstone.com if you or a client have questions regarding a business divorce.