Robert J. Congel, et al.,, Respondents,v.Marc A. Malfitano, Appellant.BriefN.Y.February 13, 2018To be Argued by: CAITLIN J. HALLIGAN (Time Requested: 20 Minutes) APL-2017-00005 Court of Appeals of the State of New York ROBERT J. CONGEL, BRUCE A. KENAN and JAMES A. TUOZZOLO, as the Executive Committee of POUGHKEEPSIE GALLERIA COMPANY, a general partnership, on behalf of THE POUGHKEEPSIE GALLERIA COMPANY, Plaintiffs-Respondents, – against – MARC A. MALFITANO Defendant-Appellant, ––––––––––––––––––––––––––––––– BRIEF FOR PLAINTIFFS-RESPONDENTS ANTHONY A. FIOTTO EMILY UNGER GOODWIN PROCTER LLP 620 Eighth Avenue New York, New York 10018-1405 Tel.: (212) 813-8800 Fax.: (212) 355-3333 CAITLIN J. HALLIGAN LEE R. CRAIN GIBSON, DUNN & CRUTCHER LLP 200 Park Avenue New York, New York 10166 Tel.: (212) 351-4000 Fax: (212) 351-4035 Attorneys for Plaintiffs- Respondents Dated: April 26, 2017 i CORPORATE DISCLOSURE STATEMENT Pursuant to 22 N.Y.C.R.R. § 500.1(f), Plaintiffs-Respondents Robert J. Congel, Bruce A. Kenan, and James A. Touzzolo, as members of the Executive Committee of the Poughkeepsie Galleria Company, a New York general partnership (“PGC” or the “Partnership”), by and through its attorneys, Gibson, Dunn & Crutcher L.L.P. and Goodwin Procter L.L.P., hereby state that PGC’s corporate subsidiaries are Poughkeepsie Galleria Holdings L.L.C and Poughkeepsie Galleria L.L.C., and that PGC’s affiliates include PGC 2, L.L.C. and PGC 2 NewCo, L.L.C. ii TABLE OF CONTENTS Page PRELIMINARY STATEMENT .............................................................................. 1 COUNTERSTATEMENT OF QUESTIONS PRESENTED ................................... 6 STATEMENT OF FACTS ....................................................................................... 8 I. The Partnership ............................................................................................... 8 II. Events Leading to Malfitano’s Wrongful Dissolution ................................. 11 III. Proceedings Below ....................................................................................... 13 A. Initial Proceedings Regarding Malfitano’s Wrongful Dissolution and Liability for Breach of the Partnership Agreement .......................................................................................... 13 B. The Valuation Proceedings ................................................................ 16 C. Further Appeal of Dissolution and Valuation .................................... 18 ARGUMENT .......................................................................................................... 20 I. Section 62 Does Not Nullify the Agreement’s Detailed Dissolution Provisions By Rendering the Partnership Dissolvable at Will ..................... 22 A. Section 62 Provides a Default Framework That Applies Where Parties Do Not Address Dissolution, Rather Than Imposing Mandatory Terms On All Partnership Agreements ........... 23 1. Section 62(1) Does Not Render A Partnership At Will If The Partnership Agreement Addresses Dissolution, Regardless of Whether it Includes a Definite Term or Particular Undertaking ............................................................. 23 2. Gelman Confirms that the Function of Section 62(1) Is To Fill Gaps in Incomplete Partnership Agreements .............. 29 B. Malfitano’s Contrary Interpretation Would Needlessly Undermine the Objectives of New York’s Partnership Law ............. 31 TABLE OF CONTENTS (continued) Page iii C. PGC’s Partnership Agreement is Not Dissolvable At Will ............... 34 1. PGC’s Partnership Agreement Addresses Terms of Dissolution and Leaves No Gaps for Section 62(1) To Fill ............................................................................................ 34 2. PGC’s Partnership Agreement Includes a Definite Term and Particular Undertaking............................................. 36 II. The Appellate Division Correctly Valued Malfitano’s Partnership Interest .......................................................................................................... 40 A. The Appellate Division Correctly Affirmed Supreme Court’s Factual Finding that the Partnership Has Goodwill ........................... 42 B. The Appellate Division Correctly Applied Marketability and Minority Discounts in Calculating the Value of Malfitano’s Partnership Interest ............................................................................. 45 1. The Record Supports Supreme Court’s Application of a 35 Percent Marketability Discount ....................................... 45 2. The Appellate Division Correctly Held That a Minority Discount May Be Used To Value a Partnership Interest, and That a 66 Percent Discount Applies Here ......................... 47 III. The Appellate Division Properly Affirmed the Award of Damages for Costs Directly Occasioned by Malfitano’s Breach of the Partnership Agreement ................................................................................. 51 CONCLUSION ....................................................................................................... 55 iv TABLE OF AUTHORITIES Page(s) Cases Aero Garage Corp. v. Hirschfield, 185 A.D.2d 775 (1st Dep’t 1992) ................................................................. 53, 54 Alper Restaurant, Inc. v. Catamount Dev. Corp., 137 A.D.3d 1559 (3d Dep’t 2016) ................................................................ 21, 31 Anastos v. Sable, 443 Mass. 146 (2004) ............................................................................. 40, 47, 51 Bernardine v. City of N.Y., 294 N.Y. 361 (1945) ........................................................................................... 50 Better Living Now, Inc. v. Image Too, Inc., 67 A.D.3d 940 (2d Dep’t 2009) .......................................................................... 40 BGW Dev. v. Mt. Kisco Lodge, 264 A.D.2d 433 (2d Dep’t 1999) .................................................................. 52, 53 BPR Grp. Ltd. P’ship v. Bendetson, 453 Mass. 853 (2009) ..................................................................................passim In re Brown, 242 N.Y. 1 (1926) ............................................................................................... 42 Cahill v. Haff, 248 N.Y. 377 (1928) ..................................................................................... 27, 40 Cannon v. Bertrand, 2 So. 3d 393 (La. 2009) ...................................................................................... 50 In re Century/ML Cable Venture, 294 B.R. 9 (S.D.N.Y. Bankr. 2003) .............................................................. 24, 25 Cinque v. Lago Enters. of Suffolk Cnty., 212 A.D.2d 608 (2d Dep’t 1995) ........................................................................ 43 TABLE OF AUTHORITIES (continued) Page(s) v City of Elmira v. Larry Walker, Inc., 150 A.D.2d 129 (3d Dep’t 1989) ........................................................................ 53 Cohen v. Cohen, 279 A.D.2d 599 (2d Dep’t 2001) .................................................................. 42, 43 Cole v. Macklowe, 99 A.D.3d 595 (1st Dep’t 2012) ......................................................................... 27 Congel v. Malfitano, 141 A.D.3d 64 (2d Dep’t 2016) .......................................................................... 19 Congel v. Malfitano, 2009 N.Y. Slip Op. 76792[U] (2d Dep’t Jul. 1, 2009) ....................................... 15 Congel v. Malfitano, 61 A.D.3d 807 (2d Dep’t 2009) .......................................................................... 14 Congel v. Malfitano, 61 A.D.3d 810 (2d Dep’t 2009) .......................................................................... 14 Congel v. Malfitano, 84 A.D.3d 1145 (2d Dep’t 2011) ........................................................................ 15 Copp v. Chestnutt, 23 Misc. 2d 457 (Sup. Ct. 1960) ......................................................................... 33 Corr v. Hoffman, 256 N.Y. 254 (1931) ........................................................................................... 23 Creel v. Lilly, 354 Md. 77 (1999) .................................................................................. 23, 27, 31 Dalton v. Educ. Testing Serv., 87 N.Y. 2d 384 (1995) ........................................................................................ 46 Dawson v. White & Case, 88 N.Y.2d 666 (1996) ................................................................................... 23, 43 TABLE OF AUTHORITIES (continued) Page(s) vi Dental Health Assocs. v. Zanganeh, 34 A.D.3d 622 (2d Dep’t 2006) .......................................................................... 24 DePinto v. Rosenthal & Curry, 237 A.D.2d 482 (2d Dep’t 1997) ........................................................................ 53 East Park Limited Partnership v. Lark, 167 Md. App. 599 (Md. Ct. of Spec. App. 2006) ............................................... 49 Ederer v. Gursky, 9 N.Y.3d 514 (2007) ........................................................................................... 23 Fischer v. Fischer, 197 S.W.3d 98 (Ky. 2006) .................................................................................. 39 In re Friedman v. Beway Realty Corp., 87 N.Y.2d 161 (1995) ..................................................................................passim Gelman v. Buehler, 20 N.Y.3d 534 (2013) ..................................................................................passim Girard Bank v. Haley, 490 Pa. 237 (1975) .............................................................................................. 39 Hardin v. Robinson, 178 A.D. 724 (1st Dep’t 1916) ........................................................................... 27 Hooker Chems. & Plastics Corp. v. Int’l Minerals & Chem. Corp., 90 A.D.2d 991 (4th Dep’t 1982) ......................................................................... 40 Landsman, Inc. v. Grand-Perridine Dev. Corp., 169 A.D.2d 460 (1st Dep’t 1991) ....................................................................... 33 Lanier v. Bowdoin, 282 N.Y. 32 (1939) ............................................................................................. 23 Meinhard v. Salmon, 249 N.Y. 458 (1928) ........................................................................................... 32 TABLE OF AUTHORITIES (continued) Page(s) vii Miami Subs Corp. v. Murray Family Tr., 142 N.H. 501 (1997) ........................................................................................... 39 Murphy v. U.S. Dredging Corp., 74 A.D.3d 815 (2d Dep’t 2008) .................................................................... 45, 46 Napoli v. Domnitch, 18 A.D.2d 707 (2d Dep’t 1962) .......................................................................... 24 Non-Linear Trading Co. v. Braddis Assocs., Inc., 243 A.D.2d 107 (1st Dep’t 1998) ....................................................................... 33 In re Opelika Mfg. Corp., 66 B.R. 444 (Bankr. N.D. Ill. 1986) ................................................................... 51 Osborne v. Workman, 273 Ark. 538 (1981) .....................................................................................passim Pailthorpe v. Tallman, 72 N.Y.S.2d 784 (S. Ct. 1947) ............................................................................ 24 People v. Schonfeld, 74 N.Y.2d 324 (1989) ......................................................................................... 28 Persky v. Bank of Am. Nat’l Ass’n, 261 N.Y. 212 (1933) ........................................................................................... 38 Piedmont Publ’g v. Rogers, 193 Cal.App.2d 171 (1961) ................................................................................ 44 In re Popkin & Stern, 340 F.3d 709 (8th Cir. 2003) .................................................................. 24, 28, 31 Quick v. Quick, 100 A.D.3d 611 (2d Dep’t 2012) ........................................................................ 47 Shomron ex rel. R&L Realty Assocs. v. Fuks, 13 Misc. 3d 1228(A) (Sup. Ct. 2006) ................................................................. 33 TABLE OF AUTHORITIES (continued) Page(s) viii Riviera Cong. Assoc. v. Yassky, 18 N.Y.2d 540 (1966) ......................................................................................... 23 Rose v. Montt Assets, Inc., 250 A.D.2d 451 (1st Dep’t 1998) ....................................................................... 12 Salter v. Ham, 4 Tiffany 321 (N.Y. 1865) .................................................................................. 23 Schneider v. Green, 1990 WL 151142 (S.D.N.Y. Oct. 1, 1990) ......................................................... 33 Scholastic, Inc. v. Harris, 259 F.3d 73 (2d Cir. 2001) ............................................................... 27, 38, 39, 40 Seligson v. Russo, 16 A.D.3d 253 (1st Dep’t 2005) ......................................................................... 33 Silverman v. Caplin, 150 A.D.2d 673 (2d Dep’t 1989) ........................................................................ 27 Spaulding v. Benenati, 57 N.Y.2d 418 (1982) ............................................................................. 42, 43, 44 Sterling v. Sterling, 21 A.D.3d 663 (3d Dep’t 2005) .......................................................................... 23 Sutton Carpet, Ltd. v. Midboro Mgmt., 918 N.Y.S.2d 400 (1st Dep’t 2010) .................................................................... 52 Temple v. United States, 423 F. Supp. 2d 605 (E.D. Tex. 2006) ................................................................ 51 Tropeano v. Dorman, 441 F.3d 69 (1st Cir. 2006) ................................................................................. 28 Vick v. Albert, 47 A.D.3d 482 (1st Dep’t 2008) ......................................................................... 49 TABLE OF AUTHORITIES (continued) Page(s) ix Zeibak v. Nasser, 12 Cal. 2d 1 (1938) ....................................................................................... 27, 37 Zimmerman v. Harding, 227 U.S. 489 (1913) ...................................................................................... 27, 37 Statutes BCL § 501 ................................................................................................................ 49 BCL § 623 ................................................................................................................ 47 NYPL § 4 ........................................................................................................... 28, 31 NYPL § 40 ............................................................................................................... 25 NYPL § 43 ............................................................................................................... 32 NYPL § 44 ............................................................................................................... 32 NYPL § 60 ............................................................................................................... 27 NYPL § 62 ........................................................................................................passim NYPL § 63 ......................................................................................................... 13, 33 NYPL § 69 ........................................................................................................passim NYPL § 71 ............................................................................................................... 41 NYPL § 73 ............................................................................................................... 41 NYPL § 74 ............................................................................................................... 41 UCC § 1-302 ............................................................................................................ 25 Other Authorities Bromberg & Ribstein On Partnership (2016) .................................................... 23, 41 TABLE OF AUTHORITIES (continued) Page(s) x Charles W. Murdock, The Evolution of Effective Remedies for Minority Shareholders & Its Impact Upon Valuation of Minority Shares, 65 Notre Dame L. Rev. 425, 484 (1999) ............................................... 48 H. Calvin Coolidge, Fixing Value of Minority Interest in a Business: Actual Sales Suggest Discount as High as 70%, 2 Estate Planning 141 (Spring 1975) ............................................................................................... 51 J. William Callison, Partnership Law Practice § 16.4 (2016-17) ............................ 27 Arthur Karger, The Powers of the New York Court of Appeals (2016) ................. 38 Larry E. Ribstein, A Theoretical Analysis of Professional Partnership Goodwill, 70 Neb. L. Rev. 38, 40 (1991) ........................................................... 44 Philip Saunders, Jr., Ph.D., Control Premiums, Minority Discounts, & Marketability Discounts, available at http://www.philipsaunders. com/TheFirm/Publications/ControlPremiums/tabid/96/Default.asp x (last visited April 25, 2017). ............................................................................ 45 Robert P. Schweihs, The Combined Discount, Gift & Estate Tax Valuation Insights (Winter 2010), available at http://www.willamette.com/insights_journal/10/winter_ 2010_5.pdf (Last visited April 25, 2017) ........................................................... 45 1 PRELIMINARY STATEMENT Appellant Marc A. Malfitano, who once served as a lawyer representing the business he ultimately tried to destroy, wrongfully dissolved the partnership at issue here (“PGC” or the “Partnership”) and in doing so exposed the Partnership to great risk. Now unhappy with the court’s valuation of his 3.08 percent interest and assessment of statutory damages, Malfitano asks this Court to disregard the clear intent of the carefully-crafted Partnership Agreement and declare that he was authorized to dissolve the Partnership at any time and for any reason—even though Malfitano himself has conceded that the Agreement does not allow unilateral dissolution. B61. He relies on a strained and incorrect interpretation of Section 62 of New York Partnership Law, which like many provisions of the Uniform Partnership Act, provides common-sense default terms that can supplement an incomplete partnership agreement. That provision allows a partnership to be dissolved at will if its governing agreement does not specify the terms of dissolution or otherwise limit the partnership’s duration or scope by including a definite term or particular undertaking. Malfitano claims that Section 62 should be read far more broadly, to require that a partnership agreement must include a definite term or particular undertaking— instead of other terms that define when dissolution is permitted—or else the entire agreement will be declared dissolvable at will by any partner, no matter how small 2 her interest. That interpretation would throw to the winds not only express terms of dissolution included in a partnership agreement, but also numerous other provisions that are standard in partnership (and joint venture) agreements, such as capital call obligations and terms for transferring a partnership interest. His interpretation would dramatically impinge upon the freedom of sophisticated parties to contract on terms they choose. And it would destabilize countless partnerships and constrain access to capital, as lenders become uneasy about entities that can be catapulted into complete disarray by the unilateral act of a partner who threatens to dissolve a partnership if the other partners do not accede to his demands. That result would be particularly problematic given New York’s role as the leading commercial law jurisdiction in the nation. This Court should reject Malfitano’s tortured interpretation of the Partnership Law, as has every other state high court to have considered the question. If the New York legislature meant to impose such draconian consequences whenever parties chose some means of dissolution other than a definite term or particular undertaking, it surely would have said so in plain language. It did not, and that should dispose of the question. While Malfitano contends that this Court’s recent decision in Gelman v. Buehler, 20 N.Y.3d 534 (2013), supports his reading of the statute, he misreads that ruling. Gelman instructs that where partners enter into a bare-bones, loosely defined 3 agreement—there, an oral deal between two recent business school graduates— Section 62 provides terms that can supplement an incomplete agreement. Thus, if the partners do not address dissolution at all or do not include a definite term or particular undertaking, then the partnership is dissolvable at will. But if they do agree on a mechanism for dissolution, nothing in Gelman prevents a court from giving effect to that agreement. Indeed, this case provides an important opportunity for the Court to confirm that such an agreement will be enforced. The facts of this case underscore why that is the just result, as well as the only coherent reading of the statute. The Agreement allowed Malfitano to exit without penalty by selling his shares to another partner or a bona fide third-party purchaser. He did not do so. While he pursued various statutory remedies designed to address conflict or oppression in a partnership, the courts below squarely rejected these requests as unsupported by the evidence. In other words, the courts determined that Malfitano suffered no wrong at the hands of his fellow partners, despite his allegations to the contrary. Instead, he deliberately dissolved the Partnership at a critical moment, jeopardizing a mortgage refinancing and risking the ongoing viability of the entire enterprise, and he should not be rewarded for his extortive conduct. The Agreement also provides an independent basis for affirming the Second Department’s ruling that Malfitano wrongfully dissolved. It includes both a definite 4 term and particular undertaking, which means that under any reading of Section 62, the Partnership is not at will. Malfitano also asks this Court to second-guess the valuation that the courts below assigned to his partnership interest. He claims that the Partnership lacked goodwill as a matter of law, that the lower courts incorrectly calculated a “marketability discount,” and that a “minority discount” cannot be used in valuing a wrongful dissolver’s partnership interest.1 As the Appellate Division correctly held, he is wrong on all counts. The numerous factual challenges Malfitano raises to the valuation of his interest are not properly before this Court, and in any event are meritless given the extensive evidentiary support for the findings below. Finally, Malfitano asks the Court to relieve him of the statutory obligation to pay damages for his wrongful conduct simply because they took the form of legal fees and expert expenses. Given the extraordinary risk created by Malfitano’s conduct, the Partnership was compelled to take legal action to avoid precipitous losses, including securing legal opinions and successfully challenging Malfitano’s dissolution in court so that the remaining partners could rightfully continue the business. Malfitano knew and in fact intended the harmful consequences that would result from his wrongful act and should not escape them. While a prevailing party 1 Each of these discounts is a commonly applied valuation tool, and they work in tandem to reflect market value in light of the lack of a well-defined market for an illiquid interest and the lack of control in a closely-held entity, respectively. 5 generally does not receive legal fees under the “American Rule,” New York Partnership Law requires a wrongful dissolver to pay the economic price of his action as damages, and costs incurred as a direct result of such dissolution are not exempt. 6 COUNTERSTATEMENT OF QUESTIONS PRESENTED Issue 1: Did the Appellate Division correctly hold that the Poughkeepsie Galleria Company Partnership was not at-will pursuant to Section 62 of New York Partnership Law and that Appellant Malfitano’s dissolution was therefore wrongful? Answer: Yes. The Partnership’s carefully crafted governing Agreement dictates the sole means of dissolution, provides a definite term and a particular undertaking, and clearly evidences in numerous provisions the partners’ intent that the Partnership not be dissolvable at will. Issue 2: Did the Appellate Division correctly exclude goodwill and apply marketability and minority discounts in calculating the value of Malfitano’s partnership interest? Answer: Yes. The Appellate Division properly affirmed Supreme Court’s factual findings that the value of Malfitano’s partnership interest properly excluded goodwill and incorporated a 35 percent marketability discount; correctly held that a minority discount applies in valuing a partnership interest; and properly accepted uncontroverted testimony that a 66 percent minority discount was appropriate. 7 Issue 3: Did the Appellate Division correctly award damages for legal fees and expert expenses directly occasioned and made necessary by Malfitano’s breach of the Partnership Agreement? Answer: Yes. Pursuant to Section 69 of New York Partnership Law, the Appellate Division properly affirmed Supreme Court’s award of legal fees and expert expenses that Respondents incurred to save the Partnership from what Supreme Court determined were the “devastating consequence[s]” of a mortgage default and forced liquidation due to Malfitano’s extortive conduct. B40-41. 8 STATEMENT OF FACTS I. The Partnership The Poughkeepsie Galleria Company Partnership (“PGC” or the “Partnership”) owns and operates the Poughkeepsie Galleria Shopping Center (the “Galleria”), a 1.2 million square foot mall. B174. The Partnership is one of nineteen partnerships—each a distinct undertaking for a particular property—with many common partners that own similar large malls across the northeast. B24. Each of the partnerships is managed by Pyramid Management, Inc. (“Pyramid Management” or “Pyramid”). B285. PGC was formed in 1985, by eight partners, including Malfitano, who was then well into his tenure as Pyramid’s general counsel. B147. PGC and Pyramid (on PGC’s behalf) designed and built the Galleria, secured a 25-year mortgage and dozens of long-term leases with nationally known tenants and other stores, and entered into agreements with vendors and suppliers for security, grounds-keeping, marketing and promotion, and entertainment for the mall. B285, B322-23, B562, B733. Currently, the Galleria has more than one hundred tenant stores and financing arrangements in excess of $100 million. See B179, B185, B398. The Partnership is governed by a 58-page agreement covering all aspects of the Partnership’s operations (the “Partnership Agreement” or “Agreement”). B82- 150. It vests control of PGC in a three-member Executive Committee (the 9 “Committee”), whose members, in turn, may only be removed by a majority vote of the partners. B120-23 §§ 6.1, 7.1. The Committee has “the exclusive right to manage the business of the Partnership,” along with various other powers, including setting the Partnership’s annual budget, borrowing funds and providing security for loans, and executing contracts for the Partnership. B107-12 §§ 5.1, 5.2. The Committee also has broad discretion over partner distributions and capital calls.2 RA142-43 ¶ 8. The Agreement sets forth procedures for exiting the Partnership that are common in closely-held entities. A partner may sell his interest to another partner. B126-31 §§ 9.2, 9.3. Partners may also sell to third parties, after giving other partners a right of first refusal.3 B129-31 § 9.3. If a partner is bankrupt, the Partnership may elect to purchase the partner’s interest at “Book Value.”4 B135-38 § 10. If a partner becomes disabled or a corporate partner dissolves or is otherwise terminated, the interest may pass to the partner’s “Personal Representative,” or the 2 While a majority of partners may “overrule or modify” the Committee’s decisions or “withdraw or modify” any power granted to the Committee, one partner, Moselle Associates, a general partnership majority owned by trusts for the benefit of the descendants of Committee member Robert Congel, controls more than 51 percent of the Partnership. B147, B335; RA143. 3 The Agreement also authorizes a partner to transfer his interest to a “Permitted Transferee,” which includes another partner, a partner’s spouse or issue and related trusts, certain defined beneficiaries of the partner or a trust, or any corporation wholly owned by any of these parties. B97 § 1.29, B126-29 § 9.2. 4 Book Value, which may be a negative number, is “the accounting value of any asset, liability or Partnership interest . . . as of a specific date.” B86 § 1.4. 10 Partnership may purchase the interest at Book Value. B139-40 § 11. Additionally, a partner’s failure to pay a capital call results in a “daily surcharge” and a block on distributions and voting power, and the partner ultimately may have his share bought at Book Value.5 See, e.g., B100-06 § 3.2(a)-(c). In all of these instances, the exiting member “shall cease to be a Partner.” B134 § 9.7. The Partnership Agreement also sets forth detailed procedures for dissolution. Section 2.3 provides that the Partnership “shall continue until it is terminated as hereinafter provided.” B98. In turn, Section 12.1, entitled “Dissolution of the Partnership,” states that “[t]he Partnership shall dissolve upon the happening of any of the following events: (a) [t]he election by the Partners to dissolve the Partnership” (which in turn requires a majority vote of the partners6); or “(b) [t]he happening of any event which makes it unlawful for the business of the Partnership to be carried on or for the Partners to carry it on in Partnership.” B140 § 12.1. The Agreement also specifies certain other events that will not trigger dissolution: “[t]he death, 5 As Pyramid Management’s general counsel, Malfitano spearheaded the buy-out of several partners who did not meet a capital call. RA455 at 36:14-22; RA474 at 383:22-384:1; RA478-79 at 401:11-403:22. Malfitano agreed that the “buy- out or the acquisition of those interests was valid,” RA479 at 403:15-17—which is plainly in tension with his view that the Partnership was and is at will, since his partners accepted the buyout without ever suggesting that the Partnership might be dissolvable at will. 6 Section 6.1 provides that “[t]he affirmative vote of no less than fifty-one percent (51%)” of the partners “shall be required to approve any matter presented for decision.” B120 § 6.1. 11 adjudication of incompetency or bankruptcy of a Partner or a Permitted Transferee shall not dissolve the Partnership.” B133 § 9.5. The exit of a partner or assignment of his interest pursuant to the Agreement’s terms will not impact the Partnership’s ongoing operation. See B98 § 2.3, B134 § 9.7, B140 § 12.1. II. Events Leading to Malfitano’s Wrongful Dissolution Beginning around 1978, Malfitano was a senior lawyer and eventually general counsel of Pyramid Management, B24, B557, and had responsibility for negotiating complex agreements related to properties that Pyramid manages such as the Galleria. B556. His employment had ended by 2004, but he remained a partner in PGC and four other Pyramid partnerships and continued to attend partnership meetings and receive distributions. B557, BA587; RA112. Through 2006, Malfitano received a pro rata share of nearly $45 million in distributions as a result of his interest in PGC alone. RA158. In 2003, Malfitano explored a buyout of his interest but could not agree with his partners on price. RA466 at 93:4-21. By 2005, he began objecting to several of the Partnership’s projects. RA90, RA97, RA102. Nonetheless, in September 2006, Malfitano joined the other partners in voting to refinance the Partnership’s existing $67 million mortgage, and PGC commenced negotiations with a new mortgage lender. B179; RA114. 12 On November 24, 2006, in the midst of these critical negotiations, Malfitano abruptly sent a letter to his partners stating that, “in accordance with Section 62(1)(b) of the Partnership Law, . . . I hereby elect to dissolve the Partnership and by this notice the Partnership is hereby dissolved.” B151. While Malfitano claimed that “[t]here has been a fundamental breakdown in the relationship between and among us as partners,” he did not specify any points of disagreement, call a special meeting as authorized by the Agreement, or ask a court to order an accounting or judicial dissolution. Shortly afterwards, Malfitano recorded a lis pendens on the Galleria property,7 RA22, believing that this action, along with the dissolution itself, would terminate the mortgage refinancing. RA455 at 34:1-16; RA471 at 114:9-23. As Malfitano fully appreciated, his dissolution could easily have devastated the Partnership’s business by forcing liquidation, see RA458 at 45:10-18, RA461 at 75:7-13, RA468 at 102:11-20, RA471 at 114:9-23, and the Committee had to respond forcefully. It retained counsel to enable the Partnership to continue operating,8 and passed a resolution directing that a Partnership representative meet 7 A notice of lis pendens puts third parties on notice that a party with an unrecorded or unperfected claim to real property has a claim or interest in that property. See Rose v. Montt Assets, Inc., 250 A.D.2d 451, 451 (1st Dep’t 1998). The notice here, which announced that the Partnership could “take no action inconsistent with the winding up of [its] affairs” as it had been dissolved, RA22, was cancelled by Supreme Court in April 2007, B72. 8 Partners who “have not caused [a] dissolution wrongfully, if they all desire to continue the business in the same name, . . . may do so,” provided they post a 13 with Malfitano to address his concerns. RA116. To assure potential lenders of the Partnership’s ongoing viability, the Committee obtained a preliminary opinion letter stating that a court would likely find Malfitano’s dissolution wrongful and authorize continued operation of the Partnership. RA70. The Committee also filed a complaint against Malfitano seeking a declaratory judgment that Malfitano’s dissolution was wrongful and the remaining partners could continue the Partnership’s business, and alleging that Malfitano had breached the Partnership Agreement and owed damages as a result. B160. Only after these and further steps were taken did the new mortgage lender proceed with the refinancing. RA66-67, RA76. III. Proceedings Below A. Initial Proceedings Regarding Malfitano’s Wrongful Dissolution and Liability for Breach of the Partnership Agreement Malfitano asserted various counterclaims, alleging that he had properly dissolved the Partnership and that the dissolution precluded the Partnership from completing the mortgage refinancing. B169-70. Malfitano also asked the court to appoint a receiver to wind down the Partnership and to order judicial dissolution under NYPL § 63. B170. bond “or pay to any partner who has caused the dissolution wrongfully, the value of his interest . . . at the dissolution.” NYPL § 69(2)(b). 14 State Supreme Court (Pagones, J.) denied Malfitano’s motion to dismiss and instead granted summary judgment for the Committee, holding that Malfitano had wrongfully dissolved and breached the Partnership Agreement. B62, B70-71. The court found that the Agreement’s dissolution provisions were clear and unambiguous, and noted Malfitano’s own admission that there was no “provision in the [P]artnership [A]greement for an individual partner to unilaterally dissolve the partnership.” B61. Supreme Court further held that the Agreement provided for a “particular undertaking” in light of its dissolution provisions and the narrowly defined purposes of the Partnership—“to acquire and hold title to, and to lease, manage and operate the Property in accordance with this Partnership Agreement.” B60, B98 § 2.4. Accordingly, the Court held that the Partnership was not “at-will” and that Malfitano had wrongfully dissolved, and dismissed his counterclaims for judicial dissolution and appointment of a receiver. B57, B62. The Appellate Division, Second Department, affirmed the denial of Malfitano’s motion to dismiss, recognizing the Agreement’s dissolution provision and holding that “the [P]artnership is not at will” because it “provide[s] for a ‘definite term.’” Congel v. Malfitano, 61 A.D.3d 807, 808-09 (2d Dep’t 2009) (“Congel I”); B68. In a separate opinion, the Appellate Division affirmed the summary judgment rulings that Malfitano wrongfully dissolved the Partnership and was liable for damages. Congel v. Malfitano, 61 A.D.3d 810, 811 (2d Dep’t 2009) 15 (“Congel II”); B66b. The Appellate Division also affirmed dismissal of Malfitano’s judicial dissolution claim and remanded for consideration of damages, B66b, and subsequently denied Malfitano’s motion for leave to reargue, Congel v. Malfitano, 2009 N.Y. Slip Op. 76792[U] (2d Dep’t Jul. 1, 2009) (“Congel III”); RA484-85. While his first two appeals were pending, Malfitano had filed numerous amended counterclaims and cross-claims, again alleging that he had properly dissolved, and renewed his request for judicial dissolution and appointment of a receiver. B211-12, B217, B220. Not content with merely dissolving PGC, Malfitano also asked the court to nullify the refinancing loan that he himself had approved. B211-12, B217, B220; RA114. State Supreme Court granted summary judgment across the board. RA5-6. Malfitano again appealed, and the Appellate Division affirmed these orders in their entirety. Congel v. Malfitano, 84 A.D.3d 1145 (2d Dep’t 2011) (“Congel IV”); RA20-21. While Congel IV was pending, Malfitano moved for partial summary judgment on other issues, including whether the Partnership was entitled to damages for Malfitano’s wrongful dissolution (including costs and attorneys’ fees), B49-50, even though the Appellate Division had already ruled for the Partnership on this issue, B66b. The Committee responded that Malfitano’s wrongful dissolution and breach compelled it to seek a ruling that the Partnership was not required to liquidate, because the failure to do so would have destroyed the Partnership and put at risk its 16 financing and its hundreds of agreements with tenants, banks, and local governments. RA305-07. State Supreme Court denied the motion and held that the Committee could seek “attorneys’ fees damages” because “[t]he costs and expenses of forming a new partnership and seeking a judicial ruling that the defendant’s dissolution was wrongful . . . are incidental and consequential damages caused by the defendant’s breach.” B50. Malfitano filed a notice of appeal from this ruling, but subsequently abandoned it. B. The Valuation Proceedings State Supreme Court conducted a bench trial to establish the value of Malfitano’s 3.08 percent partnership interest and the damages incurred by the Partnership as a result of his wrongful dissolution. The parties stipulated that the unadjusted value of Malfitano’s interest as of the date of his dissolution was $4,850,000. RA84. Because the Partnership Law mandates that a wrongful dissolver’s interest exclude the value of the partnership’s goodwill, the Partnership presented evidence that goodwill totaled $1,748,824 (36 percent of the stipulated value of Malfitano’s interest). RA165. Malfitano chose not to present any expert evidence to contest the Partnership’s evidence of the existence or value of goodwill. Using commonly applied appraisal and valuation methodology, the Partnership also presented evidence that the value of Malfitano’s interest should be reduced by a marketability discount of 35 percent and a minority discount of 66 percent. RA165. 17 Malfitano’s valuation expert testified that a marketability discount of 25 percent was appropriate. B482; RA187. Malfitano argued only that a minority discount was impermissible as a matter of law, and presented no evidence as to the amount of minority discount applicable to his interest. See, e.g., B482; RA356-365. The Partnership presented evidence of the costs incurred to mitigate the damages of Malfitano’s wrongful dissolution and avoid liquidation, see, e.g., B769-71, B972, B980-986, B1019-1030; Malfitano opted to present no evidence on this point. State Supreme Court set the value of Malfitano’s interest, minus statutorily mandated exclusions and discounts, at $2,679,625. B43-45. Noting that the “Poughkeepsie Galleria and its tenants attract regular, loyal shoppers,” and that Malfitano’s expert “proffered no testimony addressing the existence or value of goodwill in the partnership,” the court concluded that the Partnership possessed goodwill. B35-36. The court further found that 15 percent of the value of the Partnership, or $727,500 of the value of Malfitano’s interest, was attributable to goodwill, and excluded that amount from the total value as required by NYPL § 69(2)(c)(II). B35-36. Turning to discounts, the court weighed the expert testimony regarding the appropriate marketability discount rate (Malfitano had not contested the applicability of this discount) and set the rate at 35 percent. B36-38. Relying on In re Friedman v. Beway Realty Corp., 87 N.Y.2d 161 (1995), which held that a 18 minority discount does not apply in a Business Corporation Law (“BCL”) “fair- value” appraisal proceeding given the distinct objectives of that statutory appraisal remedy, the court decided without analysis that a minority discount should not be applied in valuing a wrongful dissolver’s partnership interest. B36-37. The court found that, as a result of Malfitano’s wrongful dissolution, the Partnership was required “to incur enormous legal fees” in “vigorously defend[ing] [its] position” to avoid the “devastating” impact of a forced liquidation, and underscored that Malfitano was “clearly much more responsible than the plaintiffs” for the protracted litigation. B40-43. The court noted that “there has been extensive motion and appellate practice that required the plaintiffs to incur enormous legal fees,” but that the Partnership “limited [its] damages request” to those costs “incurred with the final ruling that the dissolution was wrongful.” B40-41. After significantly reducing the number of hours and hourly rate, B42-43, the court awarded the Partnership $1,516,452 in legal fees and $79,705.50 in expert expenses. B43. C. Further Appeal of Dissolution and Valuation On further appeal, Malfitano argued that this Court’s 2013 decision in Gelman v. Buehler, 20 N.Y.3d 534 (2013), required reversal of the Appellate Division’s rulings that Malfitano had wrongfully dissolved the Partnership and challenged Supreme Court’s valuation of Malfitano’s interest and damages. The Appellate 19 Division again affirmed that Malfitano had wrongfully dissolved. Congel v. Malfitano, 141 A.D.3d 64 (2d Dep’t 2016) (“Congel V”); B7-8. While it referenced law-of-the-case principles, the court expressly held that Gelman was “plainly distinguishable from the facts” presented here: “In contrast to Gelman,” the court explained, “the written partnership agreement here specified that the partnership would continue until terminated by a majority vote of the partners, and thus was not dissolvable at-will by a single partner.” B8 The Appellate Division affirmed Supreme Court’s ruling regarding the existence and amount of goodwill, holding that “[t]he evidence supported the Supreme Court’s determination that the subject property was not, as the defendants contended, a mere real property holding company. . . but rather, had goodwill in connection with the operation of the shopping mall that it owned.” B12-13. The Appellate Division also affirmed the application of a 35 percent marketability discount, but reversed Supreme Court’s ruling on a minority discount, holding that the policy concerns underpinning calculation of “fair value” under the BCL were not implicated when valuing shares held by a wrongfully dissolving partner. Id. The Court held that a minority discount did apply, and found the Partnership’s “expert’s 20 testimony that a 66 percent minority discount was appropriate to be credible and supported by the record.”9 B12. Finally, the Appellate Division affirmed the court’s ruling that legal fees and expert expenses “were recoverable expenditures directly occasioned and made necessary by the defendant’s breach of the partnership agreement, and were thus properly included as damages.” B12. This Court granted Malfitano’s Motion for Leave to Appeal on January 10, 2017. B1. ARGUMENT This Court should affirm the Appellate Division’s rulings in their entirety. Section 62 does not require or even permit a court to disregard a partnership agreement’s detailed provisions regarding dissolution—along with other terms regarding exit options, capital calls, and the like—and deem the partnership dissolvable at will simply because the agreement includes a dissolution mechanism that does not take the form of a definite term or particular undertaking. That 9 The total of the minority and marketability discounts applied is not added together, but rather multiplied in successive steps after first excluding goodwill. NYPL § 69(2)(c)(II); B2-3. First, the 15 percent goodwill is multiplied by the stipulated value and excluded; second, the 35 percent marketability discount is multiplied by the reduced value; and last, the 66 percent minority discount is multiplied by the second reduced value. When so applied, the combined marketability and minority discount percentage is 66.22 percent of the agreed- upon stipulated value, excluding goodwill. 21 interpretation would dangerously destabilize countless partnerships and joint ventures,10 override express contractual agreements by sophisticated partners, and open the door to costly and inefficient strategic behavior by minority partners. That is exactly what occurred here, and is precisely why every state high court to have considered this argument has rejected it. This result is fully consistent with Gelman v. Buehler, which looked to Section 62 to fill in the gaps of a bare-bones, incomplete partnership agreement that gave no consideration whatsoever to dissolution. In any event, the Partnership Agreement includes both a definite term and particular undertaking, which means that it cannot be dissolved at will regardless of how Section 62 is construed. The valuation of Malfitano’s partnership interest should also be affirmed. The Appellate Division correctly applied the law regarding goodwill and the appropriate discount tools for valuing a wrongful dissolver’s interest. The underlying factual findings are not properly before this Court and regardless, they are fully supported by the record. Finally, the Appellate Division properly affirmed the award of damages for costs the Partnership incurred to secure a ruling that Malfitano’s dissolution was wrongful and the Partnership was not required to liquidate. Malfitano was uniquely 10 The NYPL governs joint ventures as well as partnerships. See, e.g., Alper Restaurant, Inc. v. Catamount Dev. Corp., 137 A.D.3d 1559, 1561 (3d Dep’t 2016). 22 positioned to appreciate the potentially devastating impact of his wrongful dissolution—indeed, he testified that he fully anticipated it and wanted the Partnership to liquidate—and he cannot escape responsibility simply because the steps required to mitigate that harm took the form of litigation. I. Section 62 Does Not Nullify the Agreement’s Detailed Dissolution Provisions By Rendering the Partnership Dissolvable at Will PGC was not—nor did the partners ever intend it to be—a partnership at will. The Partnership Agreement included specific dissolution provisions that ensured stability, and also provided the opportunity for individual partners to exit if they desired. Malfitano argues that Section 62 of the NYPL nonetheless requires this Court to cast aside the plain words of the Partnership Agreement and deem the Partnership dissolvable at will. The Appellate Division rejected Malfitano’s reading of Section 62, and this Court should as well. Section 62 operates as a default mechanism, thereby ensuring that a partnership formed without any explicit provision for dissolution, or any definite term or particular undertaking, does not persist without limitation. The statute surely does not preclude sophisticated parties from agreeing to be bound by dissolution provisions like those set forth in the Partnership Agreement, nor does it require (or permit) a court to override such provisions. And even if Section 62 were interpreted to require a definite term or particular undertaking, the PGC Agreement includes 23 both. Thus, the Appellate Division’s ruling that Malfitano wrongly dissolved the Partnership should be affirmed. A. Section 62 Provides a Default Framework That Applies Where Parties Do Not Address Dissolution, Rather Than Imposing Mandatory Terms On All Partnership Agreements 1. Section 62(1) Does Not Render A Partnership At Will If The Partnership Agreement Addresses Dissolution, Regardless of Whether it Includes a Definite Term or Particular Undertaking Partnerships are and have always been creatures of contract. See, e.g., Salter v. Ham, 4 Tiffany 321, 327 (N.Y. 1865). Because partnerships encompass a wide variety of economic activity, see Sterling v. Sterling, 21 A.D.3d 663, 665 (3d Dep’t 2005) (two-brother dairy farm partnership); Dawson v. White & Case, 88 N.Y.2d 666, 668 (1996) (sophisticated international law firm partnership), partners have long been free to craft their governing agreements as they see fit, see, e.g., Ederer v. Gursky, 9 N.Y.3d 514, 526 (2007); Lanier v. Bowdoin, 282 N.Y. 32, 39 (1939); Corr v. Hoffman, 256 N.Y. 254, 272 (1931). Partners “may include in the partnership articles ‘practically any agreement they wish.’” Riviera Cong. Assoc. v. Yassky, 18 N.Y.2d 540, 548 (1966). Indeed, partnerships are “the most malleable form of business association.” Bromberg & Ribstein On Partnership § 1.01(B)(7) (2016). The Uniform Partnership Act (“UPA”)—drafted in 1914 and enacted by New York in 1919—maintains this bedrock freedom to contract. The NYPL provides a range of common-sense default terms that are available to fill gaps in a partnership 24 agreement. But as other state high courts have stressed, the UPA terms are not intended to impinge on partners’ freedom to choose the terms that bind them, particularly with respect to express dissolution provisions. See BPR Grp. Ltd. P’ship v. Bendetson, 453 Mass. 853, 863-64 (2009); In re Popkin & Stern, 340 F.3d 709, 714 (8th Cir. 2003) (addressing Missouri’s UPA); Creel v. Lilly, 354 Md. 77, 101 (1999); Osborne v. Workman, 273 Ark. 538, 542 (1981). Consistent with this approach, New York courts have long permitted parties to contract around partnership law’s default terms and craft their own means of ending a partnership. For instance, partners may agree upon their own procedures for dissolution. See, e.g., Dental Health Assocs. v. Zanganeh, 34 A.D.3d 622, 624 (2d Dep’t 2006) (partnership not dissolved where notice of dissolution did not comply with terms of partnership agreement); Napoli v. Domnitch, 18 A.D.2d 707, 708-09 (2d Dep’t 1962) (partner’s ability to dissolve even at-will partnership was subject to right specified in written agreement for another partner to purchase his interest). Partners may also predetermine the consequences of dissolution. Pailthorpe v. Tallman, 72 N.Y.S.2d 784, 788 (S. Ct. 1947) (parties’ agreement to preset valuation of partner’s interest in event of dissolution enforceable even if agreement is inconsistent with NYPL’s terms). And, most importantly, partners may define for themselves which acts will (or will not) trigger dissolution. See, e.g., In re Century/ML Cable Venture, 294 B.R. 9, 24-26 (S.D.N.Y. Bankr. 2003) (holding 25 that partners properly rejected UPA’s default term that a partner’s bankruptcy causes dissolution). Malfitano asks the Court to set aside this core principle and hold that Section 62(1)(b) nullifies all dissolution terms expressly set forth in a partnership agreement if the agreement does not include a definite term or particular undertaking. But as the Arkansas Supreme Court explained, the prefatory words of Section 62(1)— “Dissolution is caused without violation of the agreement between the partners”— confirm that the circumstances enumerated in that subsection trigger dissolution only if dissolution would not otherwise violate the partnership agreement. Osborne, 273 Ark. at 541. In other words, the agreement controls. Accordingly, Section 62(1)(b) provides common-sense limits on the duration or scope of the partnership that can supplement a partnership agreement which does not otherwise specify how the partnership will end. BPR, 453 Mass. at 864 & nn.15, 6; Osborne, 273 Ark. at 541.11 11 While other sections of the UPA provide that they are “subject to any agreement between [the partners],” see NYPL § 40, no such magic words are required. Similar UPA provisions that lack such a proviso have been held to be default terms as well. See, e.g., In re Century/ML Cable Venture, 294 B.R. at 24-26 (Section 62(5), which is not explicitly “subject to any agreement between [the partners],” is a default term only); accord Osborne, 273 Ark. at 541. And in uniform codes, language such as that found in Section 40 generally does not carry talismanic status either. See UCC § 1-302(c) (“The presence in certain provisions of [the UCC] of the phrase ‘unless otherwise agreed,’ or words of similar import, does not imply that the effect of other provisions may not be varied by agreement under this section.”). Unlike recent statutes such as the Revised Uniform Partnership Act (“RUPA”), older uniform codes such as the UPA did not always 26 Section 62(1)(b) thus operates to fill the gaps in a partnership agreement like that in Gelman—an oral deal that lacked any express provision for dissolution or any definite term or particular undertaking. See Gelman, 20 N.Y.3d at 536-37. It reflects the reasonable assumption that when parties do not appear to have contemplated any means of ending their partnership, they should not be bound together without limit. In those instances, the statute reads into the partnership agreement a term allowing any partner to dissolve at will. NYPL § 62(1)(b). Malfitano’s contrary reading of Section 62(1)(b)—that it allows (even requires) dissolution at will of all partnership agreements without a definite term or particular undertaking—makes no sense, as this case proves. Under Malfitano’s radical interpretation, not only would Section 62(1)(b) eviscerate the PGC Partnership Agreement’s dissolution provisions, but it would also effectively nullify numerous other provisions that are routinely included in partnership agreements— such as consequences for death, incapacity, and bankruptcy; liability for capital calls; and restrictions on transfers of partnership interests. See Part I.C.1., infra. This reading of the NYPL would tremendously impinge upon freedom to contract. An at-will partnership is one in which the parties’ agreement or practice fails to show their intent as to a partnership’s “durational term” or “defined project.” spell these points out, and the absence of these statutory innovations is no reason to read the older UPA as more rigid than other uniform codes. 27 Scholastic, Inc. v. Harris, 259 F.3d 73, 85 (2d Cir. 2001); see also Zimmerman v. Harding, 227 U.S. 489, 492 (1913); Hardin v. Robinson, 178 A.D. 724, 728-29 (1st Dep’t 1916); Creel, 354 Md. at 101; Zeibak v. Nasser, 12 Cal. 2d 1, 12–13 (1938). But where the partners do demonstrate their intent about how and when the partnership should dissolve, that intent should be respected.12 See J. William Callison, Partnership Law Practice § 16.4 (2016-17) (In particular, courts must “consider all the terms of the agreement before concluding that the partnership agreement is at will.”); Cole v. Macklowe, 99 A.D.3d 595, 595 (1st Dep’t 2012) (“[W]hen the agreement between partners is clear, complete and unambiguous, it should be enforced according to its terms.”); Silverman v. Caplin, 150 A.D.2d 673, 674 (2d Dep’t 1989) (“If . . . it is evident that a written partnership agreement is a complete expression of the parties’ intention, the language of the partnership agreement controls and will not be questioned.”). Surely if the New York Legislature (or the drafters of the UPA) meant to require inclusion of a definite term or particular undertaking in a partnership agreement, upon the extraordinary penalty of excising a range of other standard 12 Malfitano cites to NYPL § 60 for the proposition that dissolution occurs when one partner changes his relationship to the partnership. Opening Br. at 16. That provision is irrelevant here. A partner cannot be forced to remain in the partnership contrary to her will, but if her exit breaches the partnership agreement, she has wrongfully dissolved and may incur economic consequences for her conduct. See Cahill v. Haff, 248 N.Y. 377, 382 (1928); NYPL § 69(2). 28 partnership terms, it would have said so plainly. Indeed, the drafters could have achieved that result handily, by instructing that absent such provisions, dissolution would result “notwithstanding any agreement between the partners to the contrary.” See Osborne, 273 Ark. at 541. Their failure to do so defeats Malfitano’s argument.13 For all of these reasons, all other state high courts that have considered the issue have concluded that a provision such as Section 62(1)(b) operates as a default and does not mandate that all agreements lacking a definite term or particular undertaking be treated as at-will and subject to unilateral dissolution at any time by any partner. BPR, 453 Mass. at 864 (same for Massachusetts analogue); In re Popkin, 340 F.3d at 714 (same for Missouri analogue); Osborne, 273 Ark. at 542 (same for Arkansas analogue); see also NYPL § 4(4) (requiring that New York Partnership Law be interpreted consistently with other UPA-enacting states).14 This 13 The title of Section 62—“Dissolution is caused”—confirms the point. The title demonstrates that the legislature intended that the section generally would be descriptive, to show how dissolution is caused, and not prescriptive, decreeing how dissolution “shall” or “must” be caused. People v. Schonfeld, 74 N.Y.2d 324, 328-29 (1989) (holding that where the legislature intends to make a provision mandatory, it employs the word “shall” or “must”). 14 The First Circuit’s opinion in Tropeano v. Dorman, 441 F.3d 69 (1st Cir. 2006), is not to the contrary. There, the Court addressed a partnership agreement that originally provided for a 30-year term but had been modified prior to that term’s expiration to provide that the partnership could be dissolved by a vote of 60 percent of the partners. Id. at 78. Reading those two provisions together, the Court held that this modification served to authorize dissolution upon a 60- percent vote prior to the elapsing of the definite term. But the partners’ original agreement—that the partnership was dissolvable at will after thirty years— remained operative. Id. Tropeano does not purport to interpret Massachusetts’ 29 Court should hold the same. So long as partners establish some endpoint such as a dissolution mechanism and allow partners to enter into an agreement clear-eyed about the obligations they assume, Section 62’s objectives are wholly satisfied. 2. Gelman Confirms that the Function of Section 62(1) Is To Fill Gaps in Incomplete Partnership Agreements While Malfitano contends that Gelman v. Buehler, 20 N.Y. 3d 534 (2013), requires this Court to reverse the Appellate Division and deem PGC a partnership at will, the Appellate Division’s ruling is fully consistent with Gelman.15 In Gelman, two recent business school graduates entered into a “partnership formed by oral agreement” to seek funding from unidentified investors to buy an unidentified distressed business in an unspecified industry, revitalize the business, and flip it for profit. Id. at 536. They did not expressly contemplate how their partnership would end, and after a dispute over Gelman’s demand for majority ownership—a key component of any partnership agreement, but one that they failed to consider— Buehler dissolved the partnership. Id. at 536. Gelman sued, claiming the dissolution was wrongful. Id. analog to NYPL § 62(1)(b), which, of course, the Massachusetts High Court has held to be a mere default term that partnership agreements may contract around, BPR, 453 Mass. at 864. 15 Malfitano’s retroactivity argument, Opening Br. at 22-26, is a red herring. Respondents do not contend that Gelman is restricted to prospective application, but rather that it is consistent with—and certainly does not require reversal of— the Appellate Division’s ruling below. B8. 30 This Court correctly applied Section 62(1)(b) to fill the gaps of the parties’ woefully incomplete oral agreement. Because the parties had not committed to a partnership with any “definite term” or “particular undertaking,” or otherwise specified any other terms of dissolution that would provide an end to the partnership, the Court held that Buehler’s dissolution was not in “violation of the agreement between the parties.” Id. at 537-39. The only possible agreed-upon duration, the Court explained, was the partners’ inchoate notion to remain joined until a “liquidity event” occurred—presumably, when they successfully flipped their future (unspecified) business. Id. at 536. That purported endpoint was so speculative and “fraught with uncertainty” that it failed to evidence an intent to agree to anything but a partnership at will. Id. at 538. Although an oral contract as loose as Gelman’s can give rise to a valid partnership, the agreement’s incompleteness is precisely why the UPA exists: the statute supplies terms that courts can import into such an agreement. BPR, 453 Mass at 864 n.15 (collecting cases in which oral agreements failed to specify terms of dissolution). Notably, “none of the partnership agreements” in cases deeming agreements at will “appears to have set forth the circumstances under which the partnership could be dissolved without breaching the partnership agreement,” id.— in other words, they were as incomplete as the Gelman agreement on this point. 31 But where a partnership agreement does include a mechanism for dissolution, there is no basis for discarding that term and replacing it with a UPA default provision, as the other state high courts to have considered the issue have held. See id. at 864; Osborne, 273 Ark. at 542; see also Creel, 354 Md. at 101; see also NYPL § 4(4) (requiring this Court to harmonize New York’s UPA with the interpretations of other UPA states); accord In re Popkin, 340 F.3d at 714. As detailed below, the PGC Agreement specifies the circumstances that trigger dissolution, and there is no reason to nonetheless allow a partner to dissolve at will. B. Malfitano’s Contrary Interpretation Would Needlessly Undermine the Objectives of New York’s Partnership Law Malfitano’s interpretation of Section 62 would destabilize not only New York partnerships—a critical blow given New York’s prominence as a global commercial center—but also partnerships and other entities nationwide. See Alper Restaurant, Inc., 137 A.D.3d at 1561 (noting that law of general partnerships applies to joint ventures). Any entity governed by partnership law with an agreement that specifies terms of dissolution but opts not to hew to a definite term or a particular undertaking would be unilaterally dissolvable by any partner—even one with a mere 3.08 percent interest. That rule would be disastrous. It would open the door to costly strategic behavior by minority partners, which is exactly what happened here. Malfitano disagreed with decisions made by his partners, and even charged them with 32 misconduct—a charge Supreme Court dismissed early in this litigation. RA5-6. He declined to pursue the exit options available under the Agreement, B126-131 §§ 9.2, 9.3—most likely concluding that he wanted more than what the market would pay for his illiquid minority interest, see Part II.B, infra—and instead walked out on his partners in the midst of a refinancing. If Malfitano has his way, partners will be faced with the proverbial Hobson’s choice: either accede to abusive minority demands or face dire consequences. More broadly, access to capital will inevitably tighten because lenders will worry that partnerships or joint ventures will perpetually face the risk of a sudden and unexpected liquidity crisis (or worse) triggered by a disgruntled partner’s threat of dissolution, just as happened here. See, e.g., RA65- 71. This Court should reject a rule that grants a minority partner such extortive authority. Nor is this interpretation needed as a protection against majority oppression. The NYPL gives minority partners meaningful remedies that fully protect their interests. A partner can sue for an accounting “[i]f he is wrongfully excluded from the partnership business or possession of its property by his copartners,” NYPL § 44; see also id. § 43, or for a breach of the robust fiduciary duties that general partners owe each other, NYPL § 43; Meinhard v. Salmon, 249 N.Y. 458, 463-64 (1928) (Cardozo, J.); see also B112-13 § 5.6 (reinforcing fiduciary duties). Minority partners may also obtain judicial dissolution in a variety of circumstances, including 33 where the court finds it “equitable.”16 NYPL § 63(f); see also Shomron ex rel. R&L Realty Assocs. v. Fuks, 13 Misc. 3d 1228(A) (Sup. Ct. 2006), aff’d sub nom. Shomron v. Griffin, 70 A.D.3d 406 (2010) (fraudulent concealment); Copp v. Chestnutt, 23 Misc. 2d 457, 459 (Sup. Ct. 1960) (mismanagement of business). Notably, Malfitano pursued each of these remedies. He sought to amend his counterclaims to seek an accounting, but the court deemed those claims “palpably insufficient and patently devoid of merit,” RA13-16; he alleged breach of fiduciary duty, but the court rejected his accusation, B62; RA20, and he sought judicial dissolution, but the court denied his request because it lacked “any evidence which would establish that there are triable issues of fact.” RA5-6. Plainly frustrated that the facts did not warrant the relief he wanted, Malfitano now asks this Court to interpret Section 62(1)(b) to effectively rewrite the Partnership Agreement. The Court should reject that ill-founded invitation. 16 Judicial dissolution is also available where a partner breaches or makes it “not reasonably practicable to carry on the business in partnership with him,” or when “[t]he business of the partnership can only be carried on at a loss.” Id. § 63(d)- (e). New York courts have granted judicial dissolution when the partners’ relationships have “deteriorated beyond repair,” see Schneider v. Green, 1990 WL 151142, at *10 (S.D.N.Y. Oct. 1, 1990), to remedy deadlock, Seligson v. Russo, 16 A.D.3d 253, 253 (1st Dep’t 2005); Landsman, Inc. v. Grand-Perridine Dev. Corp., 169 A.D.2d 460, 460 (1st Dep’t 1991), or where the partnership is “bereft of operating revenue,” Non-Linear Trading Co. v. Braddis Assocs., Inc., 243 A.D.2d 107, 119 (1st Dep’t 1998). 34 C. PGC’s Partnership Agreement is Not Dissolvable At Will 1. PGC’s Partnership Agreement Addresses Terms of Dissolution and Leaves No Gaps for Section 62(1) To Fill PGC is manifestly not a partnership at will, and Section 62 of the New York Partnership Law does not make it one. PGC’s comprehensive, written agreement reflects a strong preference for stability. It sets forth express dissolution terms and exit options, which leave no gaps for Section 62(1)(b) to fill. The Agreement also includes numerous other provisions that would be eviscerated if the Partnership was dissolvable at will. Under the plain terms of the Partnership Agreement, Malfitano was not authorized to unilaterally dissolve, as he himself admitted, and he must be held to that Agreement’s terms. B61. The Agreement explains exactly how dissolution can occur. Section 2.3 states that that PGC “shall continue until it is terminated as hereinafter provided.” B98 § 2.3. Dissolution, which begins the windup process that culminates in termination, occurs when a majority of partners elect to dissolve, or upon an event which makes continued operation of the business unlawful. B120 § 6.1, B140 § 12.1. This provision reflects the parties’ decision that dissolution should occur only when the requisite percentage of partners deem it to be in the best interests of the entity—an approach that takes into account the relatively illiquid asset the Partnership owns and operates. 35 The Agreement also stipulates certain events that will not result in dissolution of this Partnership: Neither a partner’s death, nor an adjudication of incompetency or a bankruptcy causes dissolution or termination. B87-88 § 1.10, B98 § 2.3, B133 § 9.5, B134 § 9.7, B140 § 12.1. And to ensure continuity of the business, the Partnership Agreement provides a succession plan by conferring rights and obligations on the partner’s “Personal Representative,” B97 § 1.31, in the event a partner suffers any of these unfortunate fates, B98 § 2.3, B133 § 9.5, B138-139 § 11.1. The Partnership Agreement also provides clear transfer and exit options. A PGC partner may transfer his interest freely to a family member. B126-29 § 9.2. Or a partner may exit the Partnership by selling his interests to another partner or to a third party, subject to an express right of first refusal. B126-131 §§ 9.2, 9.3. If Section 62 made PGC an at-will partnership, these options would all be nugatory; a partner could simply walk away and demand the full value of his interest at any time. The Agreement’s capital call provisions, which are common terms in partnership agreements, further confirm the partners’ intent that the Partnership is not dissolvable at will. The partners each agreed to “contribute[] additional capital” upon ten days’ notice. B99 § 3.1(b)(i). If a partner does not or cannot contribute, that partner’s failure leads to a default, which ultimately allows the other partners to 36 buy out the defaulting partner’s shares at Book Value.17 B103-06 § 3.2(c). If the Partnership were dissolvable at will, these capital-call provisions would be meaningless; any partner unwilling or unable to contribute required capital could simply dissolve the Partnership to avoid default. See supra at 10 n.5. There can be no doubt that PGC’s agreement explicitly addresses dissolution, and that the partners did not intend to allow dissolution at will. Section 62(1)(b) thus has no application here, as the courts below correctly held. 2. PGC’s Partnership Agreement Includes a Definite Term and Particular Undertaking Even if this Court were to adopt Malfitano’s construction of Section 62, the Partnership would not be dissolvable at will. First, PGC’s partnership agreement includes a “definite term,” as the Appellate Division held. B68; see Gelman, 20 N.Y.3d at 537 (defining “definite term” as “durational in nature and refers to an identifiable termination date”). The Partnership Agreement provides that “[t]he purposes of this Partnership shall be to acquire and hold title to, and to lease, manage and operate the Property in accordance with this Partnership Agreement.” B98 § 2.4. Partnerships that lease leveraged property like the Galleria are not dissolvable at will, and their natural, agreed-upon endpoint is the point at which the entity’s 17 The Partnership Agreement provides that a defaulting partner’s interest, if calculated to be a negative number per Book Value, will be purchased at “zero dollars.” B103 § 3.2(c). As of the dissolution date, the value of the Partners’ shares was negative. RA139. 37 obligations to its lenders and tenants expire. Sophisticated actors joining partnerships that manage and run a multi-million-dollar commercial property can expect nothing else. See Zeibak, 12 Cal. 2d at 12-13. The United States Supreme Court held as much in a case decided contemporaneously with the drafting of the UPA. See Zimmerman v. Harding, 227 U.S. 489 (1913). There, the Court held that even though a partnership agreement to operate a hotel did not expressly state its duration, the partners had “by implication” agreed “to continue [the partnership] during the term of the lease of the hotel property” at issue there. Id. at 492. The California Supreme Court reached a similar conclusion, finding that for a partnership managing and leasing theaters, “the term of the venture, at least implicitly, was of similar duration as the term of the leases under which the theaters were operated.” Zeibak, 12 Cal.2d at 13. The same is true here. Soon after the Partnership formed, it took out a mortgage with a maturity date of October 1, 2012. RA132. Practically at the outset of the Partnership—two decades before Malfitano dissolved—the Partners had committed to that mortgage, consistent with the Partnership’s prescribed purpose of operating and leasing a leveraged commercial property. See B98 § 2.4. The Partnership had also entered into leases with tenants lasting until at least July 31, 2009, RA83. These dates are concrete commitments; they set forth a “specific” and “reasonably certain termination date” and thus “satisfy the ‘definite term’ element 38 of Section 62(1)(b),” unlike the inchoate “liquidity event” endpoint proffered in Gelman. See Gelman, 20 N.Y.3d at 538. Second, the Partnership Agreement includes a particular undertaking.18 The Partnership plainly has a single purpose—leasing, managing, and operating a single shopping mall. Cf. Scholastic, 259 F.3d at 86 (rejecting as too “varied” a Partnership that developed, packaged, produced, and distributed films and television shows is not one “formed to perform a particular project”). That purpose is mandatory, not merely permissive. See B98 § 2.4 (specifying that the purpose “shall be,” not “includes,” leasing, managing, and operating a single shopping mall). Unlike the partnership in Gelman, which failed to refer to any “specific industries,” see 20 N.Y.3d at 538, the Partnership here not only refers to a specific industry, but even identifies a specific venture on a specific plot of land.19 18 Contrary to Malfitano’s contentions, Respondents are not precluded from arguing that the Partnership has a “particular undertaking.” That question was clearly presented to Supreme Court and the Appellate Division and is thus cognizable here. See Arthur Karger, Powers of the N.Y. Ct. App. § 14.1 (2016). Supreme Court held that the Partnership had a particular undertaking, B60; the Appellate Division affirmed on the alternative ground that the Partnership Agreement specifies a “definite term,” B68. That Respondents, having been awarded complete relief, did not cross-appeal the Appellate Division’s favorable ruling does not preclude Respondents from advancing to this Court a theory of affirmance advanced to the lower courts. See Karger § 14.1; cf. Persky v. Bank of Am. Nat’l Ass’n, 261 N.Y. 212, 218-19 (1933). For the same reasons, there is no bar to arguing that the Agreement included a “definite term.” 19 To conclude that the Partnership lacks a particular undertaking would ignore modern financing requirements for leveraged property. Indeed, PGC’s two subsidiaries are constituted as standard lender special purpose entities with a very 39 To the extent Malfitano suggests that a “particular undertaking” must have a durational term in addition to a specific purpose, see Opening Br. at 27, he is wrong. While some courts have suggested that a real estate partnership which lacks the express purpose of selling a particular piece of property is nonetheless dissolvable at will, Fischer v. Fischer, 197 S.W.3d 98, 105 (Ky. 2006) (citing Girard Bank v. Haley, 490 Pa. 237, 244 n.9 (1975)); see also Miami Subs Corp. v. Murray Family Tr., 142 N.H. 501, 509 (1997), that approach improperly conflates a definite term and a particular undertaking. Partnerships with a definite term ensure that the partners can be certain of the duration of their commitment; partnerships with a particular undertaking ensure that the partners can be certain of the scope of their commitment. The statutory text clearly distinguishes between the two: a partnership with a “definite term or particular undertaking” renders a partnership not at will. NYPL § 62(1)(b) (emphasis added); see also Scholastic, 259 F.3d at 85 (noting that the partnership is not at will if it “specifies a durational term, or a defined project”). To read both “definite term” and “particular undertaking” to be durational, as Malfitano proposes, and as this Court arguably indicated in dicta in Gelman, 20 N.Y.3d at 537, would render the words “or particular undertaking” meaningless. limited permissible scope of activities. These two entities again reflect that PGC is a partnership with a limited and clearly defined purpose that confines the scope of a partner’s commitment to the Partnership and renders the Partnership not dissolvable at will. 40 Under that reading, only a durational term would suffice to avoid “at-will” designation, regardless of how precisely a partnership agreement defined the undertaking at hand. Should the Court nonetheless determine that Section 62(1)(b) renders all partnerships without a definite term or a particular undertaking at will and that this Agreement has neither, it should return to fundamental principles of contractual interpretation. As such, it should remand for further proceedings to determine whether evidence beyond the contract (including lease terms or mortgage maturity date) demonstrates the parties’ intent to agree to a partnership of definite term or particular undertaking.20 II. The Appellate Division Correctly Valued Malfitano’s Partnership Interest As Supreme Court and the Appellate Division correctly recognized, Malfitano was not entitled to receive the full 3.08 percent of the Partnership’s liquid value. The NYPL establishes different economic consequences for permissible versus wrongful dissolutions.21 NYPL § 69; see also Anastos v. Sable, 443 Mass. 146, 149- 50 (2004) (discussing Massachusetts’ UPA provision identical to NYPL § 69); BPR, 20 See, e.g., Better Living Now, Inc. v. Image Too, Inc., 67 A.D.3d 940, 941 (2d Dep’t 2009); Hooker Chems. & Plastics Corp. v. Int’l Minerals & Chem. Corp., 90 A.D.2d 991, 991-92 (4th Dep’t 1982); Scholastic, 259 F.3d at 86. 21 Wrongful dissolution is not prohibited. Just as parties to a contract may breach but pay damages, partners may do the same. See Cahill, 248 N.Y. at 382. 41 453 Mass. at 863 (same). In addition to assessing the wrongful dissolver “damages” for breach of contract, see NYPL § 69(2)(a)(II), the statute excludes the value of the Partnership’s goodwill and gives the wrongful dissolver only the “value of his interest in the partnership”—i.e., what Malfitano would have received if he had sold his interest subject to the terms of the Partnership Agreement, in which case the price would have been constrained by the economic factors that marketability and minority discounts capture. See Part II.B, infra. This calculus denies a wrongful dissolver the windfall that would result if he were paid the full pro-rata liquidation value of his interest (the amount he would have received if he dissolved in accordance with the Agreement). Compare NYPL § 69(1), with id. § 69(2)(c)(II); see also Bromberg & Ribstein § 7.13(b)(1) (noting that damages are often difficult to prove, so the goodwill exclusion is added to “deter wrongful dissolution”).22 The lower courts assessed the value of Malfitano’s interest consistent with these aims. Much of what Malfitano objects to reflects factual determinations not properly reviewed by this Court. To the extent he presents legal arguments, they 22 The other NYPL provisions Malfitano references, Opening Br. at 18, are irrelevant. Section 71 sets the “Rules for Distribution” when a partnership liquidates and has no application here, where the Partnership has continued after Malfitano’s wrongful dissolution pursuant to Section 69(2). Sections 73—which discusses the right of a partner to additional compensation post-dissolution, not the value of his interest at dissolution—and Section 74—which provides a right of accounting upon winding up—likewise are irrelevant. 42 lack a foundation in policy, precedent, and the text and objectives of the NYPL itself. Accordingly, the Appellate Division’s valuation should be affirmed. A. The Appellate Division Correctly Affirmed Supreme Court’s Factual Finding that the Partnership Has Goodwill The Appellate Division correctly affirmed Supreme Court’s determinations that PGC had goodwill, and that the value of that goodwill must be excluded from the value of Malfitano’s interest. See B12, B35-36; see also NYPL § 69(2)(c)(II) (“[I]n ascertaining the value of the partner’s interest the value of the good-will of the business shall not be considered.”); Cohen v. Cohen, 279 A.D.2d 599, 600 (2d Dep’t 2001). Malfitano chose not to offer evidence regarding the value of PGC’s goodwill, and Supreme Court reasonably concluded that a 15 percent exclusion was appropriate. B35-36. Malfitano’s insistence that partnerships like PGC lack goodwill as a matter of law is mistaken. Goodwill reflects the value of what “[m]en will pay for any privilege that gives a reasonable expectancy of preference in the race of competition.” In re Brown, 242 N.Y. 1, 6 (1926) (Cardozo, J.). It arises from “local position, or common celebrity, or reputation for skill or affluence, or punctuality, or from other accidental circumstances or necessities, or even from ancient partialities or prejudices.” Spaulding v. Benenati, 57 N.Y.2d 418, 424 n.3 (1982) (quoting Joseph Story, Commentaries on the Law of Partnership § 99, p. 170). 43 Whether a particular business has goodwill is a factual question, as this Court has held. For example, in Dawson v. White & Case, 88 N.Y.2d 666 (1996), the Court rejected an argument that law firms have no goodwill as a matter of law. Id. at 672. While ultimately concluding that White & Case had no goodwill, the Court’s holding was “based on the specific facts presented, and should not be construed as a prohibition against the valuation, in the appropriate case, of law firm goodwill.” Id. at 672. Indeed, the Court underscored that it had rejected similar per se goodwill bars in the past. Id. at 673 (citing Spaulding, 57 N.Y.2d at 422-424). A per se bar is no more appropriate for businesses that own thriving local landmarks like the Galleria than it would be for a law firm. The cases Malfitano cites are not to the contrary. See Opening Br. at 42, 49; (citing Cohen, 279 A.D.2d 599; Cinque v. Lago Enters. of Suffolk Cnty., 212 A.D.2d 608 (2d Dep’t 1995)). Although both cases concluded that the businesses at issue had no goodwill, those rulings were based on the specific factual findings made by the trial courts in each case, and both decisions emphasize that goodwill is a question of fact. Cohen, 279 A.D.2d at 600; see Cinque, 212 A.D.2d at 608. Even if it were appropriate for this Court to consider Malfitano’s attacks on Supreme Court’s affirmed factual findings, his challenges would fail. As the Appellate Division held, the record supports Supreme Court’s determination that the Partnership has goodwill because, among other reasons, the Galleria “and its tenants 44 attract regular, loyal shoppers.” B34-35; see also, e.g., B322-23 (expert testimony regarding Galleria). Malfitano’s own valuation expert conceded that he had no experience calculating goodwill, B502-03, and it was more than reasonable for Supreme Court to reject his views. Malfitano’s objections, see Opening Br. at 41-44, are unavailing. It is irrelevant that the Partnership’s financial statements do not list goodwill as an asset, given unrebutted expert testimony that goodwill is not typically recorded on a balance sheet unless it was purchased from another entity. B430. Accord Piedmont Publ’g v. Rogers, 193 Cal.App.2d 171, 190 (1961); Larry E. Ribstein, A Theoretical Analysis of Professional Partnership Goodwill, 70 Neb. L. Rev. 38, 40 (1991). Nor does Malfitano’s proffered distinction between PGC and its managing agent, Pyramid Management, preclude a finding that PGC has goodwill. B33. While Pyramid Management might have its own goodwill due to its effective management services, the trial court reasonably determined that the Galleria itself has added value due to its reputational and status advantages in the market. B35. See Spaulding, 57 N.Y.2d at 424 n.3 (defining goodwill). And if the Galleria were sold, its goodwill would transfer to the buyer independent of any relationship the buyer has with Pyramid Management. 45 B. The Appellate Division Correctly Applied Marketability and Minority Discounts in Calculating the Value of Malfitano’s Partnership Interest This Court should also affirm the Appellate Division’s application of marketability and minority discounts. Both are standard valuation tools—indeed, “discount” is a misnomer, because rather than discounting value, these tools merely serve to calculate the true market value of an interest or share. Each one accounts for a distinct economic factor that affects what a seller could expect to receive for his interest in the open market. As PGC’s expert testified, these tools are used in tandem and reflect different valuation concerns.23 1. The Record Supports Supreme Court’s Application of a 35 Percent Marketability Discount Marketability gauges how “quickly and easily an ownership interest can be converted to cash if the owner chooses to sell,” RA146 ¶ 17, and a marketability discount thus reflects the reduced value of an interest that is less-than liquid because of the absence of a well-defined market of buyers, see Murphy v. U.S. Dredging Corp., 74 A.D.3d 815, 818 (2d Dep’t 2008). Simply put, it is easier to sell shares of 23 See, e.g., Robert P. Schweihs, The Combined Discount, Gift & Estate Tax Valuation Insights (Winter 2010), available at http://www.willamette. com/insights_journal/10/winter_ 2010_5.pdf (Last visited April 25, 2017); Philip Saunders, Jr., Ph.D., Control Premiums, Minority Discounts, & Marketability Discounts, available at http:// http://www.philipsaunders.com/TheFirm /Publications/ControlPremiums/tabid/96/Default.aspx (last visited April 25, 2017). 46 a public company than to sell shares of a closely held, illiquid entity, and, as such, interests in the latter entity—like PGC—are inherently less valuable. See RA154 ¶ 36. Malfitano never contested the applicability of a marketability discount before Supreme Court. See RA366-67 (challenging only amount of marketability discount). Even if he had preserved that argument, it lacks merit. See Murphy, 74 A.D.3d at 818 (even in the more restrictive evaluative context of the Business Corporation Law (“BCL”), marketability discounts are acceptable). As for the amount of the discount, Supreme Court’s factual findings are not properly reviewed by this Court, see Dalton v. Educ. Testing Serv., 87 N.Y. 2d 384, 391 (1995), and in any event are fully supported by the record. As the trial court found, PGC’s expert testified extensively about how and why to apply a marketability discount here. B37. He analyzed the effect of the Partnership’s right of first refusal and the difficulty of trading the interest on a secondary market or converting it into cash. RA152-53 ¶¶ 33-34. While Malfitano’s expert testified to the contrary, B38, it was entirely reasonable for Supreme Court to deem PGC’s expert more credible and accept the 35 percent discount proposed by PGC’s expert instead of the 25 percent suggested by Malfitano’s expert. See B7, B12. 47 2. The Appellate Division Correctly Held That a Minority Discount May Be Used To Value a Partnership Interest, and That a 66 Percent Discount Applies Here The Appellate Division correctly held that minority discounts may be used in valuing partnership interests. This Court has observed that minority discounts simply reflect “the financial reality that minority shares in a closely held entity are worth less because they represent only a minority, rather than a controlling interest.” Friedman, 87 N.Y.2d at 164. And there is no reason that this “financial reality” should not be accounted for by using a minority discount to value a wrongful dissolver’s interest in a partnership. See Quick v. Quick, 100 A.D.3d 611, 612 (2d Dep’t 2012); BPR, 453 Mass. at 863; Anastos, 443 Mass. at 149-50. This Court held in Friedman that a minority discount cannot be applied in a BCL proceeding to appraise the “fair value” of a minority shareholder’s shares in a corporation. Friedman, 87 N.Y.2d at 164. But as the Appellate Division recognized, Friedman does not weigh against applying a minority discount here. B10. Section 623 of the BCL requires that minority shareholders be paid “fair value” upon exercising their appraisal rights because of the context in which those rights are typically exercised: after a significant change to a business that the majority has adopted over the minority’s dissent. Id. at 167-69; BCL § 623. At that point, the value of stock will likely be materially different from the value prior to dissent and appraisal. Friedman, 87 N.Y.2d at 167-69. Thus, “[t]he rationale” for requiring that 48 dissenting shareholders receive “fair” value, as opposed to third-party market value, of their shares is “the recognition that the events that trigger the valuation process may either disrupt or preclude the market for the shares.” Charles W. Murdock, The Evolution of Effective Remedies for Minority Shareholders & Its Impact Upon Valuation of Minority Shares, 65 Notre Dame L. Rev. 425, 484 (1999); see Friedman, 87 N.Y.2d at 170 (quoting Murdock, supra). Use of minority discounts in that volatile context may be unfair and inappropriate. By contrast, the NYPL requires that a wrongfully dissolving partner be paid the “value of his interest in the partnership,” NYPL § 69(2)(c)(II) (emphasis added). Wrongful dissolution may occur at any time, and valuation of a partner’s interest occurs only if the remaining partners have agreed to continue their business as if nothing changed. NYPL § 69(2)(b). Unlike appraisal, wrongful dissolution is not necessarily preceded by upheaval, so trial courts need not substitute the “fair value” of an interest for the actual value a third party would pay. Third party market value—and nothing more—is all the compensation to which a wrongful dissolver is entitled, and a minority discount is an essential tool for calculating that value because it captures any impact that a lack of control may have on that third party market price. The different policy goals of the BCL and the NYPL confirm that Friedman has no application here. The BCL’s appraisal provision is remedial; it “protects 49 minority shareholders from being forced to sell at unfair values imposed by those dominating the corporation.” Friedman, 87 N.Y.2d at 162. Wrongful dissolution, by contrast, is not meant to protect the minority from the majority. If anything, the economic consequences of wrongful dissolution set forth in Section 69 protect the non-dissolving partners from the wrongful dissolver.24 Likewise, the BCL requires that minority and majority shares be treated the same, see BCL § 501, which is another reason why a minority discount cannot be used, Friedman, 87 N.Y.2d at 169. But not so with the NYPL. Thus, “[a] partnership minority discount would not contravene the distinctly corporate statutory proscription against treating holders of the same class of stock differently, or undermine the remedial goal of the appraisal statutes to protect shareholders from being forced to sell at unfair values, or inevitably encourage oppressive majority conduct.” Vick v. Albert, 47 A.D.3d 482, 483-84 (1st Dep’t 2008). The out-of-state cases Malfitano cites, Opening Br. at 46-48, provide no support for prohibiting the use of minority discounts here. In East Park Limited Partnership v. Lark, 167 Md. App. 599 (Md. Ct. of Spec. App. 2006), a Maryland court applied a statute similar to the BCL and determined that whether a particular discount should be used was “a question of fact to be decided by the trier of fact,” 24 Indeed, partners may secure payment to a wrongful dissolver with a bond rather than paying a lump sum in cash, see NYPL § 69(2)(b), which confirms that Section 69 is intended to protect non-dissolvers. 50 and that the legislature left “particular valuation decisions, such as the application of discounts, up to the courts.” Id. at 616-17. The Louisiana Supreme Court reached the same conclusion in Cannon v. Bertrand, 2 So. 3d 393 (La. 2009), holding that a minority discount was inappropriate “[u]nder the particular facts of this case.”25 Id. at 396. The record amply supports the Appellate Division’s adoption of a 66 percent minority discount rate. See Bernardine v. City of N.Y., 294 N.Y. 361, 367 (1945) (reviewing whether Appellate Division’s first-instance factual findings were “in conformity with the preponderance of the proof”). PGC’s expert identified specific terms in the Agreement and events in the Partnership’s history that would reduce the amount of a third-party offer for a minority interest, including the control vested in Executive Committee, particularly with respect to borrowing funds and making capital calls and distributions. RA146 ¶ 17; RA150 ¶ 26. PGC’s expert also compared the value of Malfitano’s interest to other securities sold or exchanged at approximately the same time, RA148 ¶ 22, examined minority discounts applied to 25 Citing Cannon, Malfitano argues that applying a minority discount when a dissolving partner sells his interest to the majority partners would give the majority partners a windfall. Opening Br. at 46-47. But failing to apply a minority discount would in fact give Malfitano a windfall by paying him more than he would have received if he had sold his interest to a third party, as the Agreement allows. Cf. Cannon, 2 So.3d at 396-97 (noting that a rightful dissolver “should not be penalized for doing something the law allows him to do” (emphasis added)). 51 other partnerships, and compared the limits on minority influence on those partnerships to those included in the Partnership Agreement, B332-39; RA150 ¶ 26. While disagreeing with PGC as to whether Friedman barred a minority discount—a holding that the Appellate Division reversed—Supreme Court found PGC’s expert generally credible, and the Appellate Division agreed. See B10, B37- 39. Malfitano chose to offer no testimony regarding the appropriate discount. The Appellate Division’s application of the 66 percent discount was well-supported and should be affirmed.26 III. The Appellate Division Properly Affirmed the Award of Damages for Costs Directly Occasioned by Malfitano’s Breach of the Partnership Agreement The Appellate Division properly affirmed Supreme Court’s award of damages for Malfitano’s wrongful dissolution and breach of the Partnership Agreement. Section 69 provides that when a partner wrongfully dissolves a partnership, the other partners may recover “damages for breach of the agreement.” NYPL § 69(2)(a)(II), 26 This valuation is consistent with minority discounts applied in other cases. See, e.g., Temple v. United States, 423 F. Supp. 2d 605, 620-621 (E.D. Tex. 2006) (60 percent minority discount); In re Opelika Mfg. Corp., 66 B.R. 444, 450 (Bankr. N.D. Ill. 1986) (50-60 percent minority discount); see also H. Calvin Coolidge, Fixing Value of Minority Interest in a Business: Actual Sales Suggest Discount as High as 70%, 2 Estate Planning 141 (Spring 1975) (analyzing raw sales data evidencing that minority discount could be as high as 78 percent); see also Anastos, 443 Mass. at 147-48, 152 (affirming trial court’s valuation, which applied discounts based on the lack of a “ready market” to sell the partnership interest and the interest’s minority status). 52 (c)(II). Malfitano’s dissolution risked devastating harm to the Partnership, and Malfitano knew that. As Pyramid Management’s former general counsel, he was intimately familiar with the Partnership’s finances, the nature of the business, and the impact of his dissolution. See, e.g., RA468 at 102:11-14. Malfitano also knew that the Partnership was in the process of refinancing its debt, which totaled $67 million. B391. He wanted to block that financing, see RA471 at 114:9-23; B211, most likely to extort a disproportionate value for his partnership interest. His dissolution would have had just that effect had the Partnership not acted quickly. When Malfitano sent his letter of dissolution, lenders strongly reconsidered doing business with the Partnership, and for good reason: If the Partnership was dissolved lawfully, it would have been required to liquidate, NYPL § 69(1), and there would have been no entity left to seek financing and no Partnership property to be refinanced. See B771-72. To address this crisis, the Partnership was forced to spend substantial sums both to “form[] a new partnership,” and to procure an urgently needed judicial determination that it was not required to liquidate. See B41. Supreme Court and the Appellate Division found that these costs, which included sums spent on counsel and expert witnesses, were compensable as damages “directly occasioned and made necessary” by Malfitano’s breach of the Partnership Agreement. B12, B40-43; Sutton Carpet, Ltd. v. Midboro Mgmt., 918 N.Y.S.2d 400 (1st Dep’t 2010); BGW Dev. v. Mt. Kisco Lodge, 264 A.D.2d 433 (2d Dep’t 1999); 53 Aero Garage Corp. v. Hirschfield, 185 A.D.2d 775, 776 (1st Dep’t 1992); City of Elmira v. Larry Walker, Inc., 150 A.D.2d 129, 132-33 (3d Dep’t 1989) (requiring City to pay damages for legal fees incurred to rebid a contract after breach that contract). The legal fees and expert expenses that the Partnership incurred in obtaining a decree of wrongful dissolution27—costs for which Malfitano was “clearly much more responsible” than the Partnership, B43—were compensable. As in BGW Development v. Mt. Kisco Lodge, 264 A.D.2d 433 (2d Dep’t 1999), the costs were “not incurred in an attempt to compel the defendant . . . to fulfill its contractual obligations,” id., but were directly necessitated by Malfitano’s breach and attempt to kill the business. The partners had to demonstrate that the Partnership was duly constituted despite the dissolution, and to do so, they needed to demonstrate that the dissolution was wrongful. NYPL § 69(2)(b). The declaratory judgment they sought was not simply an effort to hold Malfitano to his bargain (as in a generic breach of contract suit) but rather to save the business that his breach would have otherwise destroyed. Cf. DePinto v. Rosenthal & Curry, 237 A.D.2d 482, 482-83 (2d Dep’t 1997) (recognizing that “litigation expenses incurred in an attempt to avoid, minimize, or reduce the damage” caused by attorney malpractice are recoverable in 27 Even setting aside the discount in hours and rates that the court applied here, see B42-43, the Partnership has expended far more in responding to Malfitano’s conduct than it sought as damages. 54 a malpractice suit); Aero Garage Corp., 185 A.D.2d at 776 (“These legal expenses were incurred by plaintiff in attempting by itself to fulfill defendants’ obligations under the contract.”). Nor can Malfitano escape the consequences of his actions by invoking the “American Rule,” which in the usual case requires each party to pay its own legal fees. As an initial matter, its rationale—that litigants should not be discouraged from seeking redress for perceived wrongs in court—has nothing to do with this case. Malfitano was not assessed legal fees because PGC prevailed in a legal dispute against him. He was assessed legal fees and expert expenses as damages because he knowingly forced PGC to file an action to salvage the business and to show its prospective lender that Malfitano’s act was wrongful and that PGC’s business could continue pursuant to NYPL § 69. Indeed, Malfitano would have owed far more in damages if the Partnership had not mitigated by quickly seeking a judicial declaration of wrongful dissolution, among other steps, in order to secure its financing. The disastrous consequences that would have resulted—nullification of the financing, appointing of a receiver, and prompt liquidation of the Partnership assets—would have carried a much heftier price than the costs he was directed to pay. To the extent partners are deterred from wrongfully dissolving because they will pay a price for that act—especially when the goal of the dissolution is to destroy 55 a critical partnership transaction—such deterrence is precisely the point of Section 69’s assessment of damages for wrongful dissolution. It is irrelevant that this price may take the form of legal fees and expert expenses the wrongful dissolver knew would be all but inevitable. In the unique circumstances of this case, where the wrongful dissolver was acutely aware of the harm his conduct would inflict—and, in fact, intended to cause that harm—and was aware that legal action would be the natural and foreseeable consequence of that conduct, the “American Rule” does not trump the NYPL’s more specific and directly applicable objective. Accordingly, this Court should affirm Supreme Court and the Appellate Division’s holdings that PGC’s legal fees and expert expenses were “directly occasioned and made necessary by” the breach, and also affirm the factual findings below as to the amount of those damages. See B12, B40-43. CONCLUSION For the foregoing reasons, the Appellate Division should be affirmed in full. Dated: New York, New York April27, 2017 Respectfully submitted, . Halligan LeeR. Crain GIBSON, DUNN & CRUTCHER LLP 200 Park A venue New York, New York 10166 Telephone: (212) 351-4000 Facsimile: (212) 351-4035 CHalligan@gibsondunn.com Anthony A. Piotto Emily Unger GOODWIN PROCTER LLP The New York Times Building 620 Eighth A venue New York, New York 10018-1405 Telephone: (212) 813-8800 Facsimile: (212) 355-3333 Attorneys for Plaintiffs-Respondents 56 PRINTING SPECIFICATIONS STATEMENT This computer generated brief was prepared using a proportionally spaced typeface. Name of typeface: Times New Roman Point size: 14 Line spacing: single-spaced) Double (except for footnotes and quoted excerpts which are The total number of words in the plaintiffs-respondents' brief, inclusive of point headings and footnotes and exclusive of pages containing the corporate disclosure statement, table of contents, table of authorities, proof of service, or certificate of compliance, etc, is 13,069. I hereby certify that the above is true and correct to the best of my knowledge. April 26, 201 7 57