Robert J. Congel, et al.,, Respondents,v.Marc A. Malfitano, Appellant.BriefN.Y.February 13, 2018Dutchess County Clerk’s Index No. 2007-220 Appellate Division Docket No. 2013-07052 Court of Appeals No. 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, v. MARC A. MALFITANO, Defendant-Appellant. DEFENDANT-APPELLANT’S REPLY BRIEF HARRIS BEACH PLLC Attorneys for Defendant-Appellant 677 Broadway, Suite 1101 Albany, New York 12207 Telephone: (518) 701-2700 Of Counsel: Victoria A. Graffeo, Esq. Aubrey A. (Roman) Ohanian, Esq. May 25, 2017 To be Argued by: VICTORIA GRAFFEO (Time Requested: 20 Minutes) i TABLE OF CONTENTS Page TABLE OF AUTHORITIES .................................................................................... ii PRELIMINARY STATEMENT AND COUNTERSTATEMENT OF FACTS ..................................................................... 1 ARGUMENT ............................................................................................................. 5 POINT I THE PARTNERSHIP AGREEMENT DID NOT PRECLUDE MALFITANO FROM EXERCISING HIS RIGHTS UNDER PARTNERSHIP LAW § 62 ............................................................. 5 POINT II MALFITANO RIGHTFULLY ELECTED TO DISSOLVE THE AT-WILL PARTNERSHIP IN ACCORDANCE WITH PL § 62 (1) (b) .................................. 12 A. The Partnership Agreement does not contain a “definite term” ........................................................................ 14 B. The Partnership Agreement does not state a “particular undertaking” ............................................................ 17 POINT III THE RECOVERY OF ATTORNEYS’ FEES IS NOT PROVIDED BY LAW OR THE TERMS OF THE PARTNERSHIP AGREEMENT ............................................................................... 20 POINT IV THE PARTNERSHIP IS A REAL ESTATE HOLDING COMPANY AND DOES NOT POSSESS GOODWILL ................................................................. 24 CONCLUSION ........................................................................................................ 28 ii TABLE OF AUTHORITIES Page Cases Alessi v Brozzetti, 228 AD2d 917 [3d Dept 1996] .................................................18 BPR Grp. Ltd. Partnership v Bendetson, 453 Mass 853 [2009] ............................................................................................ 10 Burger, Kurzman, Kaplan & Stuchin v Kurzman, 139 AD2d 422 [1st Dept 1988] .............................................................................. 7 Canter’s Pharmacy, Inc. v Elizabeth Assoc., 396 Pa Super 505 [1990] ......................................................................................18 Chandler Medical Bldg. Partners v Chandler Dental Group, 175 Ariz. 273 [1993] ................................................................................18 Chapel v Mitchell, 84 NY2d 345 [1994] .................................................................22 Clapp v LeBoeuf, Lamb, Leiby & MacRae, 862 F Supp 1050 [SDNY 1994] ...........................................................................12 Cohen v Cohen, 279 AD2d 599 [2d Dept 2001] .............................................. 24, 25 Cohen v Lord, Day & Lord, 75 NY2d 96 [1989] ...................................................... 6 Cooper v Isaacs, 448 F2d 1202 [DC Cir. 1971] ........................................................ 4 Dawson v White & Case, 88 NY2d 666 [1996] ............................................... 25, 27 Fisher v Fischer, 83 Cal App 2d 357 [1948] ............................................................15 Flemming v Barnwell Nursing Home and Health Facilities, Inc., 15 NY3d 375 [2010] ....................................................................21 Gelman v Buehler, 20 NY3d 534 [2013] ......................................................... passim Gurnee v. Aetna Life & Cas. Co., 55 NY2d 184 [1982] .........................................14 iii Harshman v Pantaleoni, 294 AD2d 687 [3d Dept 2002] ......................................................................................... 13, 18, 19 In re Century/ML Cable Venture, 294 BR 9 [SDNY 2003] ....................................................................................................6, 10 In re Cinque v Largo Enters. of Suffolk Cty., 212 AD2d 608 [2d Dept 1995] .............................................................................25 Johnson v Kennedy, 350 Mass 294 [1966] ..............................................................15 Kaplan v Schachter & Co., 261 AD2d 440 [2d Dept 1999] ......................................................................................................26 Matter of A.G. Ship Maintenance Corp. v Lezak, 69 NY2d 1 [1986] .................................................................................................21 Matter of Brown, 242 NY 1 [1926] .................................................................. 25, 27 Medimmune, LLC v Board of Trustees of the University of Massachusetts, 2015 WL 5783381 [June 3, 2015] ..........................................10 Montgomery-Otsego-Schoharie Solid Waste Management Authority v County of Otsego, 249 AD2d 702 [3d Dept 1998] .............................................................................21 Morris v Crawford, 304 AD2d 1018 [3d Dept 2003] ....................................... 12, 20 Mount Vernon City School Dist. v Nova Casualty Co., 19 NY3d 28 [2012] ...............................................................................................21 Napoli v. Domnitch, 18 AD2d 707 [2d Dept 1962] ................................................13 Odette Realty Co. v DiBianco, 170 AD2d 299 [1st Dept 1991] ....................................................................................................... 7 People v Favor, 82 NY2d 254 [1993] ......................................................................14 Posner v Miller, 356 Mich 6 [1959].........................................................................15 Prudential Ins. Doc. Of America v Hilton Hotels Corp., 1996 WL 340002 [SDNY 1996] ....................................................... passim iv Riverside S. Planning Corp. v CRP/Extell Riverside, L.P., 13 NY3d 398 [2009] ............................................................ 12, 17 Riviera Congress Associates v Yassky, 18 NY2d 540 [1966] .................................. 6 Saltzstein v Payne, et al., 292 AD2d 585 [2d Dept 2002] ................................ 25, 26 Sanley Co. v Louis, 197 AD2d 412 [1st Dept 1993] ...............................................18 Scholastic, Inc. v Harris, 259 F 3d, 85 [2d Cir. 2001] .............................................15 Siddall v Keating, 8 AD2d 44 [1st Dept 1959], aff’d 7 NY2d 846 [1959] ......................................................................................25 Stone v Stone, 292 So 2d 686 [La 1974] .................................................................14 Tropeano v Dorman, 441 F3d 69 [1st Cir. 2006] ....................................................18 Vermont Teddy Bear Co. v 538 Madison Realty Co., 1 NY3d 470 [2004] .................................................................................... 5, 11, 17 William v Behler, 499 SW2d 770 [Mo 1973] .........................................................15 Statutes Gen. Bus. Law § 198-a ............................................................................................21 N.Y.P.L. § 62 .................................................................................................. 4, 5, 11 N.Y.P.L. § 62 (1) ........................................................................................................ 4 N.Y.P.L. § 62 (1) (b) ........................................................................................ passim N.Y.P.L. § 62 (2) ............................................................................................... 4, 5, 8 N.Y.P.L. § 62 (4) ............................................................................................. 5, 7, 11 N.Y.P.L. § 62 (5) ..................................................................................................5, 10 N.Y.P.L. § 62 (6) ............................................................................................. 4, 8, 10 N.Y.P.L. § 63 ............................................................................................................. 8 N.Y.P.L. § 69 ...........................................................................................................21 v N.Y.P.L.§ 69 (1) .......................................................................................................24 N.Y.P.L. § 69 (2) (a) (II) ..........................................................................................21 N.Y.P.L. § 69 (2) (c) (II) ..........................................................................................24 Rules C.P.L.R. 5031 ...........................................................................................................21 C.P.L.R. 909 .............................................................................................................21 Other Authorities Banks, New York Contract Law, Attorneys’ Fees § 27:20 [2006] ......................................................................................................22 Bromberg and Ribstein on Partnership, § 7.02, Causes of Dissociation and Dissolution: Partner Act Not in Contravention of the Partnership Agreement, 2E .............................. 13, 14 1 PRELIMINARY STATEMENT AND COUNTERSTATEMENT OF FACTS Appellant Marc Malfitano (“Malfitano”), a minority partner of the Poughkeepsie Galleria Partnership, complied fully with the provisions of the Partnership Law when he acted under Section 62 (1) (b) of that statute to pursue dissolution of the Partnership1. His decision to rely on this available statutory remedy to remove himself from the Partnership occurred after a series of events left him questioning his ability to remain a partner while continuing to uphold his fiduciary obligations. This was not a decision that should have resulted in a vicious attack on Malfitano’s character, or a total loss of his $4,850,000.00 interest in the Partnership plus a judgment against him of nearly $1,000,000.00. It is imperative to correct the misstatements of fact urged upon this Court by the Executive Committee because they seek to ascribe vindictive motives to Malfitano. The Executive Committee’s inaccurate claim that Malfitano voted to approve refinancing is an attempt to portray Malfitano as a malicious partner who should be punished for “jeopardizing” the transaction (Respondents’ Brief at 3, 11). In fact, the record establishes that Malfitano did not vote to approve refinancing the Partnership (R. at RA113-114). Partnership minutes reveal that the Malfitano asked for a “matrix” outlining the different financing options “before” 1 Unless stated otherwise below, all abbreviations used within this Reply Brief are consistent with the terms as defined in Malfitano’s main brief (“Appellant Brief”). 2 the Partnership engaged in refinancing (R. at RA114). Malfitano was unable to comment on the final refinancing proposal because he was excluded from the meeting at which the partners approved refinancing with Duetsche Bank (R. at RA117-121). Despite the Executive Committee’s unfair assertions that Malfitano intended to “extort[]” and “harm[]” his fellow partners (Respondents’ Brief at 3-4), the record establishes that Malfitano is the victim of the Executive Committee’s actions, not the villain. Malfitano’s true purpose for electing to dissolve the Partnership was to preserve his ethical obligations as a partner (R. at B212-15, B559-60). It was his sincere belief that refinancing proceeds were being sought to fund a settlement payment owed by Executive Committee members Congel and Tuozzolo stemming from a federal lawsuit that did not involve the Partnership in this case or its property (id). Malfitano also believed that the Executive Committee was charging hundreds of thousands of dollars in expenses each year against the Partnership that were not incurred in accordance with any agreement with the Partnership, and that the Executive Committee was providing funds to the son of Executive Committee member Congel (id). His concerns regarding the legality of the purpose for the refinancing precipitated his being “blackballed” by the Executive Committee, 3 which refused to respond to Malfitano’s correspondence and denied him access to the Partnership’s financial books and records (R. at B196, 205). Malfitano should not be punished for expressing his increasing discomfort with the Executive Committee’s actions and priorities by resorting to the statutory provision that allowed him to rightfully recoup his interest and dissolve this at-will Partnership, especially considering that the Partnership has, at no time, been detrimentally affected by Malfitano’s election as it seamlessly reconstituted and continued its business operations. Against this factual backdrop, the Appellate Division erred when it sanctioned a wrongful dissolution. The Partnership Agreement does not contain an exclusive vehicle to dissolve the Partnership, nor does it specifically preclude reliance on PL § 62 (1) (b). Thus, Malfitano had the ability to dissolve the at-will Partnership since the Agreement lacked a definite term and a particular undertaking. Malfitano, along with each of his fellow partners, had the statutory right to elect to dissolve the Partnership at any time, for any reason – or no reason at all – Section 62 (1) (b). The Appellate Division misapplied the definition of “definite term” as defined in Gelman v Buehler (20 NY3d 524 [2013]) in ruling that the Partnership here was not at will and that Malfitano’s election to dissolve was wrongful. That foundational error subjected his financial interest to grossly inequitable and inappropriate discounts and reductions. 4 This outcome – which resulted in Malfitano losing the value of his interest in the Partnership and being charged with a large judgment – should be reversed to protect minority partners who no longer believe that they can continue in their business relationships while safeguarding their fiduciary obligations (R. at B212- 15, B559-60). Moreover, the implications of this case are expansive and extend beyond these facts. Should the Court agree with the Executive Committee and find that Paragraph 12 of the Partnership Agreement precludes Malfitano from acting under PL § 62 (1) (b), the Court would be establishing a draconian precedent: the presence of any dissolution mechanism within a partnership agreement invalidates all of the self-help dissolution provisions in PL § 62 (1) and arguably § 62 (6), regardless of the at-will status of a partnership, and renders the dissolution provisions sanctioned by PL § 62 (1) and (6) “wrongful,” subjecting the dissolving partner to damages. This rationale would also render PL § 62 (2) moot. Such a result would not only be inconsistent with the policy underpinning PL § 62 – to allow “partners to extricate themselves from business relationships which they fe[el] have become intolerable” (see Cooper v Isaacs, 448 F2d 1202, 1206 [DC Cir. 1971]) – it is also contrary to the recognized rule that partnership agreements may only displace provisions of the Partnership Law if done expressly and specifically (see infra Point I). 5 This case presents the Court with the opportunity to reaffirm the general applicability of PL § 62 (1) (b) in recognition that minority partners, such as Malfitano, have the statutory right to dissolve partnerships that do not have any temporal limitations or specific objectives without the fear of lessening the value of their interest in the business or being subjected to breach of contract damages. ARGUMENT POINT I THE PARTNERSHIP AGREEMENT DID NOT PRECLUDE MALFITANO FROM EXERCISING HIS RIGHTS UNDER PARTNERSHIP LAW § 62 If the experienced partners involved in the Poughkeepsie Galleria Company Partnership intended to negate the statutory right to dissolve the Partnership as provided in PL §§ 62 (1) (b) or (2), they certainly knew how to do so since they disavowed the dissolution by death provision found in PL § 62 (4) and the bankruptcy of any partner provision found in PL § 62 (5). But since they failed to do so, this Court should not add a provision that the Partnership Agreement did not incorporate (see Vermont Teddy Bear Co. v 538 Madison Realty Co., 1 NY3d 470, 475 [2004]). The absence of such a provision allowed all partners– including Malfitano –to use PL § 62 (1) (b) to express an intent to dissolve the Partnership without violating or “nullif[ing]”2 the terms of the Partnership Agreement. 2The Executive Committee’s argument (Resp. brief at 25) that Malfitano’s election to dissolve 6 General partnerships are creatures of contractual agreements, both written and oral. Recognizing their contractual nature, courts have acknowledged, and the parties here agree, that a partnership agreement can “contract around nearly any provision of partnership law” (see In re Century/ML Cable Venture, 294 BR 9, *25-26 [SDNY 2003]; see also Riviera Congress Associates v Yassky, 18 NY2d 540, 548 [1966] [recognizing that “partners may include in the partnership articles practically any agreement they wish”] [internal quotation marks and citations omitted]; Cohen v Lord, Day & Lord, 75 NY2d 96, 102-04 [1989] [absent “prohibitory provisions of the statutes or of rules of the common law relating to partnerships, or considerations of public policy, the partners may include in the partnership articles any agreement they wish”]). As a corollary to the freedom-to-contract rule is the requirement that any amendment or circumvention of the Partnership Law must be “specifically and unequivocally” contained in the governing partnership agreement (In re Century, 294 BR at *26 [citations omitted]; see also Prudential Ins. Doc. Of America v Hilton Hotels Corp., 1996 WL 340002, *4 [SDNY 1996] [partnership agreements can contract around “any provision of partnership law. However, they must do so specifically and unequivocally”] [citation omitted]). The Executive Committee’s the Partnership automatically violated the Partnership Agreement regardless of the Partnership’s at-will status because the Partnership Agreement generally speaks to dissolution was not presented to the trial court or Appellate Division for consideration and as an unpreserved issue it should not be considered by this Court. In any event, Malfitano urges the dismissal of this argument as meritless. 7 Brief overlooks this necessary component. The failure to expressly revoke or displace a specific provision of the Partnership Law results in the statutory provision controlling should a dispute over the agreement’s terms arise (Burger, Kurzman, Kaplan & Stuchin v Kurzman, 139 AD2d 422, 423-24 [1st Dept 1988]). In Odette Realty Co. v DiBianco (170 AD2d 299, 300 [1st Dept 1991]), the Appellate Division recognized that partnership agreements can explicitly state, contrary to the PL, that the withdrawal of a partner will not cause a dissolution of the partnership. That is precisely what could have been provided for in this Agreement, but was not. Similarly, in Burger, three partners continued to operate an accounting partnership for several years after the death of a former partner. Two of the partners notified the third that they were withdrawing from the partnership since the fixed term of the partnership had expired (id at 423). The partner seeking to prevent dissolution commenced an action to enforce the restrictive covenant in the agreement governing withdrawal (id). The other two partners claimed the terms of the partnership agreement were irrelevant because the partnership had dissolved upon the death of their former partner years earlier since their agreement failed to address what happened upon the death of a partner (id). The Appellate Division concluded that the partnership had dissolved upon the death of the former partner under PL § 62 (4) as the partnership agreement did 8 not contain a specific term negating the statutory clause which requires dissolution upon the death of a partner (id at 423-24). Unless a partnership agreement explicitly disavows a provision of the PL, the statute dictates the outcome. Just as partners can choose to alter the effect of the Partnership Law when dealing with the death of a partner, partners can change the effect of the statute as it relates to other forms of dissolution (see Prudential, 1996 WL 340002 at *5 [an example of how parties can “manifest[] a clear intention to contract out of NYPL § 62 (2)”]). In Prudential, the U.S. District Court for the Southern District of New York, applying New York law3, was asked whether a joint venture agreement – which is interpreted under the Partnership Law – escaped the consequences of PL § 62 (6), which allows for dissolution by judicial decree (see Prudential, 1996 WL 340002, at *4). Though the agreement listed several events that permitted dissolution, the court held that none of language was “exclusive” or signified a specific desire to “abrogate the explicit right to a court ordered dissolution conferred by NYPL §§ 62 (6) and 63” (id at *4). More specifically, the agreement contained a section entitled: “Negation of Right to Dissolve by Will of Venturer,” which precluded a venturer from terminating the agreement or dissolving the venture by “its express will or by withdrawal without the consent of the other venture” (id). The court 3 The District of Columbia adopted the 1914 UPA, just as New York did, but later adopted the 1997 UPA. 9 concluded that this language clearly established the intent of the parties “to contract out of” the PL provisions that allow for the unilateral withdrawal of a partner (id). There should be no dispute in this case that such an unequivocal expression of intent to circumvent PL §§ 62 (1) (b) or (2) is wholly absent from this Partnership Agreement. The Agreement provides for the Partnership to “continue until it is terminated as hereinafter provided” (R. at B98, at ¶ 2.3). Paragraph 12 of the Partnership Agreement, addresses “Dissolution of the Partnership”: 12.1 The Partnership shall dissolve upon the happening of any of the following events: (a) The election by the Partners to dissolve the Partnership; or (b) The 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 (R. at B140). This paragraph also provides that the Partnership shall not be dissolved by the occurrence of an “Event of Disability” (such as the bankruptcy, death or incompetency of a partner) (R. at B140). Clearly, the plain language of Paragraph 12 does not preclude a Partner’s statutory right to dissolve the Partnership by express will under PL §§ 62 (1) (b),4 nor does it provide that these triggering events are the exclusive means to dissolve 4 See Point II, infra, for further analysis regarding why the Partnership Agreement did not specify a definite term or state a particular undertaking. 10 the Partnership5 (compare Prudential, 1996 WL 340002, at *4 [finding list of events that can terminate the partnership did not negate PL § 62 (6) because it contained no exclusive language] with In re Century, 294 BR at 25-28 [finding that a list of events that can terminate the agreement did negate dissolution by bankruptcy under PL § 62 (5) because the list stated that the joint venture “shall be dissolved . . . only upon the occurrence of one of the following events”] [emphasis in original]). Similar to In Re Century, the Massachusetts Supreme Court has ruled that a joint venture agreement which provides that it “shall continue and not be dissolved or terminated except as hereinafter provided” expressly limited dissolution to the circumstances enumerated in the agreement (see BPR Grp. Ltd. Partnership v Bendetson, 453 Mass 853, 863-64 [2009] [emphasis added]). The absence of any such limiting language within Paragraphs 2 or 12 of the Partnership Agreement here distinguishes BPR from the facts of this case and renders the Executive Committee’s reliance misplaced (Respondents’ Brief at 24-25, 28). Another Massachusetts case similarly distinguished BPR when it concluded that an agreement containing language quite similar to the language found within this Agreement did not contain a definite term (see Medimmune, LLC v Board of Trustees of the University of Massachusetts, 2015 WL 5783381 [June 3, 2015] [the 5 In fact, the Executive Committee described Paragraph 12 as a mere “mechanism” to dissolve – not an exclusive device to dissolve (Respondents’ Brief at 31). 11 at-issue agreement contained the following provision: “‘Term’ shall mean the period beginning on the effective date of the Agreement and ending when this Agreement is terminated.”]). Since the Partnership Agreement did not limit the means by which a Partner could withdraw from the Partnership or dissolve the Partnership, Malfitano’s election pursuant to PL § 62 (1) (b) did not violate the Partnership Agreement. Should the Partners – whom the Executive Committee acknowledges are “sophisticated” businesspeople – have decided to renounce the self-help dissolution provisions of the PL, they certainly could have done so. This result is especially obvious considering the Partners were aware of the existence of PL § 62 when they drafted the Partnership Agreement, as is evidenced by the fact that the Partners expressly avoided, for example, § 62 (4), which provides for the dissolution of a partnership upon the death of a partner (see Prudential, 1996 WL 340002, at *5). If this Court interprets the terms of the Partnership Agreement as disavowing PL § 62 (1) (b), it would be “impliedly stating something which the parties . . . neglected to specifically include” (Vermont Teddy Bear Co, 1 NY3d at 475 [internal quotation marks and citations omitted]). Given that the Partnership Agreement was negotiated at “arm’s length” by “sophisticated, counseled, business people,” this Court should be extremely reluctant to read into the Agreement an 12 express waiver of PL §§ 62 (1) (b) (see id; Riverside S. Planning Corp. v CRP/Extell Riverside, L.P., 13 NY3d 398, 403-04 [2009]). Although partners have the right to contract around the dissolution provisions in the PL, the Partners of the Poughkeepsie Galleria Partnership did not explicitly negate PL § 62 (1) (b). Thus, Malfitano had every right to elect to dissolve this at-will Partnership without violating dissolution mechanism in Paragraph 12 of the Partnership Agreement. POINT II MALFITANO RIGHTFULLY ELECTED TO DISSOLVE THE AT-WILL PARTNERSHIP IN ACCORDANCE WITH PL § 62 (1) (b) A partnership is “at-will” if the governing agreement – whether oral or written – does not contain a definite term or state a particular undertaking (see PL § 62 [1] [b]. As stated in Gelman v Buehler (20 NY3d 534, 539 [2013]), “[i]n the absence of a definite term of duration or a particular undertaking to be achieved,” a partnership is “dissolvable at will” (see also Morris v Crawford, 304 AD2d 1018, 1019-20 [3d Dept 2003] [outlining the “clear” case law establishing that a partnership is at will if it “has no definite term or particular objective to be achieved”] [internal quotation marks and citations omitted]; Clapp v LeBoeuf, Lamb, Leiby & MacRae, 862 F Supp 1050,1057-58 [SDNY 1994] [“New York’s courts have unambiguously held that a partnership agreement of an indefinite term 13 is an at will partnership which may be terminated by any partner at any time”] [citations omitted]; Harshman v Pantaleoni, 294 AD2d 687, 687-88 [3d Dept 2002]). Partners can “freely elect to dissolve” at-will partnerships without “trigger[ing] the remedies for premature dissolution” (Bromberg and Ribstein on Partnership, § 7.02, Causes of Dissociation and Dissolution: Partner Act Not in Contravention of the Partnership Agreement, 2E [election to dissolve an at-will partnership is not “wrongful”]). To determine whether a partnership falls in the at-will category, courts must look to the terms of the governing agreement and determine whether the partnership incorporates a definite term or a particular undertaking.6 Courts should be reluctant to “imply” a definite term or particular undertaking because public policy “favor[s] freedom of individuals” and recognizes that partnership relationships are “essentially founded on mutual trust and confidence and terminable when such cease . . . so that construction favoring freedom to dissolve should be given as against one limited the right to do so, in the absence of specific 6 Contrary to the Executive Committee’s unsupported argument, a conclusion by this Court that the Partnership Agreement does not contain a definite term or particular undertaking will not “negate” the terms of the Partnership Agreement (Respondents’ Brief, at 26), such as a buy-out provision, by finding that the Partnership is an at-will entity (see e.g. Napoli v. Domnitch, 18 AD2d 707, 708 [2d Dept 1962] [recognizing that a partnership can be deemed at-will and terminated pursuant to PL § 62 (1) (b) even if the governing agreement contains a buy-out provision without subjecting the departing partner to breach of contract damages] [citation omitted]). 14 intent to the contrary” (Bromberg, § 7.02, citing Stone v Stone, 292 So 2d 686, 690 [La 1974]). A. The Partnership Agreement does not contain a “definite term” At the onset, it is important to recognize that the Executive Committee did not dispute that the statutory interpretation of the phrase “definite term” announced in Gelman can be applied retroactively in accordance with the mandates of Gurnee v. Aetna Life & Cas. Co. (55 NY2d 184, 191 [1982]) and People v Favor (82 NY2d 254, 263 [1993]) (Respondents’ Brief, at 29 n.15). Malfitano submits that the Executive Committee appears to have conceded that the Appellate Division’s failure to apply the definition of “definite term” from Gelman, relying instead on the “law of the case doctrine” (R. at B8), was an error. This Court should apply the definition of “definite term” announced in Gelman to correct the serious misapplication of the law in this case. On an issue of first impression, this Court in Gelman established the definition of the phrase “definite term” as it is used in PL § 62 (1) (b). Without limiting its holding to oral partnerships or to unsophisticated business partners, this Court stated that partnership agreements which do “not set forth a specific or even a reasonably certain termination date” do not contain a definite term within the meaning of PL § 62 (1) (b) (Gelman, 20 NY3d at 537-38). This result is consistent with several other state courts that interpreted UPA-rooted partnership dissolution 15 provisions (see Johnson v Kennedy, 350 Mass 294, 298 [1966]; Posner v Miller, 356 Mich 6, 9 [1959]; William v Behler, 499 SW2d 770, 775 [Mo 1973]; Fisher v Fischer, 83 Cal App 2d 357, 360 [1948]; see also Scholastic, Inc. v Harris, 259 F 3d 73, 85-86 [2d Cir. 2001]). Here, under the paragraph heading “Formation; Address; Purposes; Term,” the Partnership Agreement states that the “Partnership shall commence upon the effective date of this Partnership Agreement as set forth on the first page hereof and shall continue until it is terminated as hereinafter provided” (R. at B98, at ¶ 2.3). Although the Appellate Division correctly found that this term did “not specify a time limit,” it erred in holding that the Agreement nonetheless contained a definite term because of the “expressed . . . intention” that the Partnership should “dissolve upon an election of a majority of the partners,” even though that election may never occur (R. at B68 [emphasis added]). The lack of a definitive term means that minority partners have no indication how long it will be before the partnership will terminate – they are subject to the whim of the majority. Under Gelman, a partnership agreement should no longer be deemed to contain a specified or ascertainable termination date based on an inference or intention. Furthermore, Gelman did not limit its interpretation of the phrase “definite term” to oral partnership agreements. The rule applies, as it should, to any partnership agreement that “lacks a fixed, express period of time during which the 16 enterprise was expected to operate” and the absence of an express time period produces an at-will partnership unless the agreement otherwise specifies a particular undertaking (id). Clearly, the Appellate Division’s finding that the Partnership Agreement “did not specify a time limit” supports a conclusion post- Gelman that the Agreement here does not state a definite term. The Appellate Division’s refusal to correct and align its 2009 decision with Gelman should result in a reversal. The Executive Committee was only able to claim that the Partnership Agreement merely establishes “some endpoint” – not a definite or ascertainable termination event or date (Respondents’ Brief at 29). They did not refute Malfitano’s argument that the court relied on inapposite and distinguishable case law to determine that the vote provision within the dissolution paragraph of the Agreement stated a definite term (Appellant Brief at 25-26). The Executive Committee now presents a new theory not previously asserted, that because the Partnership had a mortgage with a maturity date of October 1, 2012, the partners “by implication” agreed to “continue the partnership” until this commitment ended (Respondents’ Brief at 37). This contention should be summarily dismissed as it contradicts logic7 and the longstanding precedent in 7 It contravenes logic that the presence of a mortgage with a term of five years beyond the date of Malfitano’s dissolution, coupled with the Executive Committee’s ability to refinance, creates a fixed duration. 17 New York that courts should not imply terms in partnership agreements that are not expressly stated (Vermont Teddy Bear Co., 1 NY3d at 475; Riverside S. Planning Corp., 13 NY3d at 403-04). This Court should enforce its precedent regarding the definition of “definite term” to ensure consistency in the availability of Section 62 (1) (b) of the Partnership Law and provide clear guidance to minority partners confronting recalcitrant majority partners who refuse to supply documents or information for valuation purposes to exiting partners seeking withdrawal and the recovery of the value of their interest. B. The Partnership Agreement does not state a “particular undertaking” The alternative is whether the Partnership Agreement contains a “particular undertaking” and this argument was abandoned by the Executive Committee in 2009 when the Appellate Division determined that the Agreement here did not state a particular undertaking (R. at B68). That holding was not appealed by the Executive Committee and should not be resurrected here more than eight years later. Should this Court decide that this issue is preserved for consideration, Malfitano contends that the Agreement did not state a particular undertaking. In New York and other jurisdictions following the UPA, partnerships whose only purpose is to “purchase, hold, operate, improve, lease and rent [ ] real property” are not viewed as having a particular objective and, therefore, absent a 18 definite term, are terminable at will (see Harshman, 294 AD2d 687 [holding that such objectives “are perpetual in nature, and place no time limitation on the duration of the partnership” and, since the partnership could “continue forever,” it was at will]). For instance, in Sanley Co. v Louis (197 AD2d 412, 413 [1st Dept 1993]), a partnership formed for the purpose of “acquiring, managing and reselling residential real estate” was designated a at will subject to dissolution (see also Alessi v Brozzetti, 228 AD2d 917, 918 [3d Dept 1996] [a partnership that developed and managed real property was terminable at will]; Canter’s Pharmacy, Inc. v Elizabeth Assoc., 396 Pa Super 505 [1990] [finding a partnership formed to “renovate, equip, and operate a personal care facility” had no particular undertaking]; Chandler Medical Bldg. Partners v Chandler Dental Group, 175 Ariz. 273, 277-78 [1993] [holding that a partnership, whose purpose was to “sponsor, for a profit, the promotion, development, and construction of a two-story medical office building . . . to own, hold for investment, improve, lease, manage, operate or sell such building” did not have a particular undertaking]). The Executive Committee’s contention that this entrenched precedent conflates the definitions of definite term and particular undertaking is without merit. Partnership agreements only operate pursuant to a particular undertaking if they serve a specific objective or require a specific project to be completed (see Gelman, 30 NY3d at 537, citing Tropeano v Dorman, 441 F3d 69, 77-78 [1st Cir. 19 2006]). Thus, unlike a definite term, the “precise date” for the partnership’s objective to be accomplished does not need to be known or ascertainable at the time the partnership is created (see id at 537-38). Instead, for a “purpose” to constitute a “particular undertaking” under PL § 62 (1) (b), the purpose must be able to be accomplished at some point in time as opposed to continuing indefinitely (id). Relying on this precedent, the Appellate Division reviewed the terms of the Partnership Agreement, including Paragraph 2, entitled “Formation; Address; Purposes; Term,” which states that the “purpose of this Partnership shall be to acquire and hold title to, and to lease, manage and operate the Property8 in accordance with this Partnership Agreement” (R. at B98, at ¶ 2.4), and concluded that this “stated purposes is not for a ‘particular undertaking’ (R. at B68). Such a result is consistent with the law of this State which has determined that the “purpose” of managing, leasing, and operating real property is “perpetual in nature” and, therefore, does not constitute a particular undertaking (see Harshman, 294 AD2d at 688). There is no valid reason to depart from that rule and if this Court elects to consider the issue, it should conclude that there is no particular undertaking expressed in this Agreement. 8 The term “Property” is defined as, the “Land, together with improvements situate or hereafter constructed thereon . . .” (R. at B97, ¶ 1.32). The “Land” is supposed to be described in “Exhibit C” to the Partnership Agreement; however, Exhibit C does not contain the legal description (R. at B148). 20 Since the Partnership Agreement does not contain a definite term or a particular undertaking, the Partnership is at will (Morris, 304 AD2d at 1019-20). Given this status, the Partnership was dissolvable by the express intent of any partner pursuant to PL § 62 (1) (b). This conclusion is especially true in light of the fact that the Agreement did not specifically eliminate the availability of PL § 62 (1) (b). As such, Malfitano’s election to dissolve the Partnership on November 24, 2007 was consistent with the PL and did not violate the Partnership Agreement. Malfitano’s rightful dissolution entitles him to the value of his interest in the Partnership at the time of dissolution without any discounts or reductions that may be applicable following the wrongful dissolution of a partnership. Any conclusions to the contrary by the courts below should be reversed in their entirety. POINT III THE RECOVERY OF ATTORNEYS’ FEES IS NOT PROVIDED BY LAW OR THE TERMS OF THE PARTNERSHIP AGREEMENT If this Court upholds the determination of wrongful dissolution, it should use this case as a vehicle to affirm the controlling nature of the “American Rule” and reverse the Appellate Division’s affirmance of the trial court’s award of $1,595,157.50 in counsel and expert fees to the Executive Committee. The perpetual rule in New York has been unequivocal: attorneys’ fees are only recoverable as damages by the prevailing party if such an award “is 21 authorized by agreement between the parties or by statute or court rule” (Mount Vernon City School Dist. v Nova Casualty Co., 19 NY3d 28, 39 [2012], quoting Matter of A.G. Ship Maintenance Corp. v Lezak, 69 NY2d 1, 5 [1986]; Flemming v Barnwell Nursing Home and Health Facilities, Inc., 15 NY3d 375, 379 [2010] [citation omitted]). As Malfitano has asserted, neither the Partnership Law nor the Partnership Agreement authorizes the recovery of attorneys’ fees in the event of a wrongful dissolution (Appellant Brief at 33-34). PL § 69 (2) (a) (II) grants partners who have not caused dissolution wrongfully the “right . . . to damages for breach of the agreement.” Since attorneys’ fees are not considered breach of contract damages, but instead are “incidents of litigation” (Montgomery-Otsego-Schoharie Solid Waste Management Authority v County of Otsego, 249 AD2d 702, 703-04 [3d Dept 1998] [citations omitted]), PL § 69 does not allow for the recovery of attorneys’ fees as permitted in other unrelated statutes (see e.g. CPLR 909 [allowing for the recovery of attorneys’ fees in class action litigation; CPLR 5031 [providing for the award of attorneys’ fees to a prevailing plaintiff in a dental, podiatric or medical malpractice action]; Gen. Bus. Law § 198-a [authorizing the award of reasonable attorneys’ fees]). Similarly, the Partnership Agreement does not award counsel fees to partners who are faced with another partner’s decision to dissolve the partnership (R. at B82–150). The Executive Committee does not contest either of these points 22 (Respondents’ Brief at 51–55) and, thus, the “American Rule” should preclude the Executive Committee from recovering attorneys’ fees in the event of a judgment of wrongful dissolution or breach of contract against Malfitano. Knowing that the Executive Committee cannot satisfy the criteria necessary to recover attorneys’ fees under to the “American Rule,” they disparage Malfitano’s reasons for dissolving the Partnership in an effort to displace the “American Rule” altogether. The Executive Committee goes so far as to state that Malfitano tried to “extort” an unjustifiable value for his partnership interest without any record evidence supporting such an outlandish accusation (Respondents’ Brief at 52). To adopt this conclusion, the Court would have to declare a new exception to the “American Rule” within the context of wrongful dissolution proceedings. Such an exception would undermine the foundational premise of the “American Rule,” which reflects the “legislative judgment regarding the allocation of legal fees that each side should bear its own litigation expenses (see Banks, New York Contract Law, Attorneys’ Fees § 27:20 [2006], citing Chapel v Mitchell, 84 NY2d 345, 349 [1994]). The facts of this case simply do not support a determination ignoring this long-standing principle of American and New York law. The Executive Committee further claims that they “needed” to obtain a declaration that Malfitano wrongfully dissolved the Partnership to complete their 23 efforts to refinance the Partnership (Respondents’ Brief at 53). This also is not true and the record does not support this claim. To the contrary, the refinancing transaction in question was entered into by “Poughkeepsie Galleria LLC,” the entity that the Executive Committee formed after Malfitano’s dissolution (id at 52), years before the trial in this case reached a conclusion (R. at RA68, 72-82). Thus, the Executive Committee did not need to obtain a declaration of wrongful dissolution to avoid the consequences it alleges following the dissolution of the Partnership. If this Court decides that Malfitano pursued a wrongful dissolution and that an exception to the “American Rule” should be carved out in such situations, the exception should only allow for the limited recovery of attorneys’ fees valued at $14,640.00 – the amount of fees the Executive Committee attributes to forming the new partnership (R. at B767) – and not the remaining $1,581,517.50 awarded the Executive Committee in the Judgment. As there is no legal basis to affirm the award of counsel fees to the Executive Committee, Malfitano requests the reversal of this portion of the Appellate Division’s Order. 24 POINT IV THE PARTNERSHIP IS A REAL ESTATE HOLDING COMPANY AND DOES NOT POSSESS GOODWILL If this Court determines that the Partnership Agreement does not specify a “definite term” in accordance with Gelman, and does not contain a “particular undertaking,” Section 69 (1) of the Partnership Law governs and Malfitano recovers the value of his interest in the Partnership – stipulated at $4,850,000.00 – without any reductions. Alternatively, should this Court find that Malfitano’s dissolution was “wrongful,” PL § 69 (2) (c) (II) applies and requires that Malfitano receive the “value of his interest in the partnership, less any damages caused to his copartners by the dissolution” and the value of goodwill, if applicable. Contrary to the Executive Committee’s representation, Section 69 does not sanction the deductions applied by the Appellate Division to the value of Malfitano’s financial interest as a minority partner, especially the reduction of $727,500.00 for the alleged goodwill value of the Partnership. Section 69 (2) (c) (II) states that the “value of the good-will of the business shall not be considered” when ascertaining the value of the partner’s interest. Prior to the Appellate Division’s decision here, it was well-settled that goodwill does not exist in a real estate holding company, like the Partnership here (see e.g., Cohen v 25 Cohen, 279 AD2d 599, 599-600 [2d Dept 2001] [holding there is no goodwill in real estate holdings]; In re Cinque v Largo Enters. of Suffolk Cty., 212 AD2d 608, 609-10 [2d Dept 1995] [holding a corporation whose value is attributable solely to “real property and cash” does not have goodwill]). Consistent with this precedent, Malfitano’s expert testified at trial that there should be no reduction of Malfitano’s value for goodwill because the Partnership “is a real estate holding company. It has no goodwill” (R. at B488-90). The Appellate Division’s rejection of Cohen and In re Cinque, notwithstanding Malfitano’s expert’s confirmation that real estate holding companies do not possess goodwill, was improper and should be invalidated. Even if this Court does not apply the precedent that real estate holding partnerships do not possess goodwill, it should nonetheless reverse the lower courts’ conclusions that the Partnership possessed goodwill. As this Court has recognized, “[g]oodwill, when it exists as incidental to the business of a partnership, is presumptively an asset to be accounted for” (Matter of Brown, 242 NY 1, 7 [1926]; Dawson v White & Case, 88 NY2d 666 [1996] [citation omitted]; Saltzstein v Payne, et al., 292 AD2d 585 [2d Dept 2002]; Siddall v Keating, 8 AD2d 44 [1st Dept 1959], aff’d 7 NY2d 846 [1959]). The Executive Committee did not even attempt to argue that the Partnership accounted for or considered goodwill as a portion of the value of the partnership. 26 First, both parties agreed during trial that there is no goodwill carried on the books or financial statements of the Partnership (B30).9 There was no document produced at trial – no tax returns, financial statements or other records – that revealed “a single business record showing goodwill value” (R. at B610-11, 629- 20, 1047-51). Second, the Partnership Agreement is silent regarding the valuation of goodwill (R. at B82-150), which is generally an indicator as to whether a partnership accrues goodwill value (see Kaplan v Schachter & Co., 261 AD2d 440 [2d Dept 1999]). And, the Agreement does not reference a goodwill factor in determining the “fair market value” of the Partnership (R. at B82-150). The absence of any evidence of goodwill in the Partnership’s financial records and the Partnership Agreement’s silence regarding the assessment of goodwill are determinative evidence that the Partners had an implied agreement that goodwill was not an asset of the Partnership (Saltzstein, 292 AD2d at 585 [affirming dismissal of an action by a partner for a share of the partnership’s goodwill value, in part, because “the partnership agreement at issue did not specify that goodwill was a firm asset”] [citations omitted]). Such an agreement should be 9 The Partnership Agreement defines the term “Accounting Method” and states that the “accounting records of the Partnership shall be prima facie [ ] deemed to properly reflect the proper account method [of the Partnership’s assets], absent a showing of gross error or fraud” (R. at B85). The accounting records of the Partnership do not reveal a single business record showing goodwill value (R. at B610-11, B629-30, B1047-51). The only contention regarding goodwill was a statement by the Executive Committee’s expert who lacked business valuation credentials and his testimony was contrary to the terms of the Partnership Agreement (R. at B317-31). 27 honored by this Court (see Dawson, 88 NY2d at 671 [holding that “even if a given partnership might be said to possess goodwill, the courts will honor an agreement among partners whether express or implied that goodwill not be considered and asset of the firm”], citing In re Brown, 242 NY at 6-7). There is no reason to deviate from the reasonable indications that would otherwise support the existence of goodwill in the valuation of a partnership interest. Simply put, there was no proof adduced that goodwill was ever considered an asset of this Partnership. Therefore, this Court should reaffirm the holding in In re Brown, which established that real estate holding companies do not possess goodwill, or reverse the goodwill offset since it was not proven to be a partnership asset in this case. Moreover, as was outlined in Malfitano’s main brief, the Appellate Division’s application of minority and marketability discounts were also improper and should be reversed by this Court (Appellant Brief at 46-50). Any other result will not only penalize Malfitano for doing something that the law allowed him to do, it would also permit the Executive Committee and other remaining partners to realize a windfall profit at Malfitano’s expense (id). This case presents the Court with an opportunity to prevent the chilling effect that the Appellate Division’s Decision and Order will have on anyone considering a partnership investment – especially a minority partnership investment – because of the possible risk of the substantial financial loss they could experience should they feel compelled to exit the business. CONCLUSION Appellant Marc Malfitano respectfully requests that the Order of the Appellate Division be reversed in all respects, and this matter be remanded to Supreme Court for the appropriate calculation of the value of his interest, and such other and further relief as this Court deems just and proper. Dated: May 25, 20 1 7 By: 28 Respectfully submitted, HARRIS BEACH PLLC Victoria A. Graffeo, Esq. Aubrey A. (Roman) Ohanian, Esq. 677 Broadway, Suite 1101 Albany, New York 12207 (518) 427-9700 NEW YORK STATE COURT OF APPEALS CERTIFICATE OF COMPLIANCE I hereby certify pursuant to 22 NYCRR Part 500.10) that the foregoing brief was prepared on a computer using Microsoft Word. Type. A proportionally spaced typeface was used, as follows: Name of typeface: Times New Roman Point size: 14 Line spacing: Double Word Count. The total number of words in this brief, inclusive of point headings and footnotes and exclusive of pages containing the table of contents, table of citations, proof of service, certificate of compliance, corporate disclosure statement, questions presented, statement of related cases, or any authorized addendum containing statutes, rules, regulations, etc., is 6,975 words. Dated: May 25, 2017 i±arn~J!/:1/~ Harris Beach PLLC Attorneys for Defendant-Appellant Marc Malfitano 677 Broadway, Suite 1101 Albany, New York 12207 (518) 427-9700