Robert J. Congel, et al.,, Respondents,v.Marc A. Malfitano, Appellant.

Brief

N.Y.February 13, 2018

APL-2017-00005 Court ot Appeals! ot tlje ibtate of iÿeto j©ork 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, Respondents, -against- MARC A. MALFITANO Appellant. BRIEF OF THE AMERICAN COLLEGE OF REAL ESTATE LAWYERS AS AMICUS CURIAE IN SUPPORT OF RESPONDENTS. Dated: October 11, 2017 Martin P. Miner Stosh M. Silivos HOLLAND & KNIGHT LLP 31 West 52nd Street New York, New York 10019 Tel: (212) 513-3200 Fax: (212)385-9010 Barry B. Nekritz,* J. William Callison,* Melissa Economy,* FAEGRE BAKER DANIELS LLP 311 S. Wacker Drive, Ste. 4300 Chicago, IL 60606 Tel.: (312)212-6500 Fax: (312)212-6501 * Not admitted in New York; Admission pro hac vice to be requested Counsel for Amicus Curiae CORPORATE DISCLOSURE STATEMENT Pursuant to 22 N.Y.C.R.R. § 500.1(f), amicus curiae, The American College of Real Estate Lawyers (“ACREL”), by and through its undersigned counsel hereby states that it has no corporate parents, subsidiaries or affiliates. TABLE OF CONTENTS QUESTIONS PRESENTED STATEMENT OF INTEREST OF AMICUS CURIAE INTRODUCTION AND ARGUMENT I. Partnership Agreements Govern The Partnership Relationship And The Uniform Partnership Act Serves Only As A Gap Filler Which Is Inapplicable Here II. The Dissolution And Exit Provisions In The PGC Partnership Agreement Are Clear And Should Be Enforced Without The Use of Gap Fillers CONCLUSION 1 1 4 5 8 13 TABLE OF AUTHORITIES Page(s) STATE CASES BPR Group Ltd. Partnership v. Bendetson, 453 Mass. 853 (2009) Cole v. Macklowe, 99 A.D.3d 595 (1st Dep’t 2012) Creel v. Lilly, 354 Md. 77(1999) Dental Health Assoc, v. Zangeneh, 34 A.D.3d 622 (2d Dep’t 2006) Ederer v. Gursty, 9 N.Y.3d 514 (2007) Gelman v. Buehler, 20 N.Y.3d 534 (2013) Kantor v. Mesibov, 796 N.Y.S.2d 884 (Sup. Ct. 2005) Kaufman v. Cohen, 307 A.D.2d 113 (1st Dep’t 2003) Medimmune, LLCv. Bd. of Trustees ofUniv. of Mass., 223 Md. App. Ill (Ct. Special Appeals 2015) Osborne v. Workman, 273 Ark. 538 (1981) Pailthorpe v. Tallman, 72 N.Y.S.2d 784 (Sup. Ct. 1947) Silverman v. Caplin, 150 A.D.2d 673 (2d Dep’t 1989) .passim 5 7 6 7 8, 10 13 12 11 .passim 5 5 STATE STATUTES New York Uniform Partnership Act § 4.4 11 ii New York Uniform Partnership Act § 44 New York Uniform Partnership Act § 62 New York Uniform Partnership Act § 63 OTHER AUTHORITIES 12 .passim 12, 13 Uniform Law Commission, 2015-2016 Reference Book 7 iii QUESTIONS PRESENTED Whether the terms of a partnership agreement providing for dissolution may be disregarded and replaced by gap filling provisions of the Uniform Partnership Act? STATEMENT OF INTEREST OF AMICUS CURIAE Amicus curiae, the American College of Real Estate Lawyers (“ACREL”), is a renowned professional organization comprised of the country’s premier real estate attorneys from all 50 states and the U.S. Virgin Islands. ACREL’s mission includes promoting high standards of professional and ethical responsibility in the practice of real estate law and addressing issues of importance to real estate law by participating in law reform matters and legislative, administrative and judicial initiatives when appropriate. The lawyers that constitute ACREL’s membership represent the full range of parties to real estate transactions and projects, including lenders, equity investors, developers, contractors, commercial tenants, REITs, hotel companies, and property management companies. The nature of ACREL’s constituency provides the organization with a unique and useful perspective which may benefit the Court in deciding this case. ACREL’s members (“Fellows”) serve on various national committees including those that are involved in the drafting and promulgation of uniform laws, 1 including the Uniform Law Commission and others.1 ACREL and its Fellows are thus intimately involved with questions of partnership law, real estate finance, and commercial contracts. This case involves more than a private dispute between the parties. It raises larger issues concerning the ability of one partner to dissolve a partnership, despite an agreed-upon requirement for a “majority vote,” and thereby to disrupt and destroy the partnership. The notion that this was a partnership “at will,” thus lacking stability and continuity, is anathema to fundamental principles of real estate finance. The ruling affects an industry and a significant segment of the national economy, and not merely the parties who are before the Court. Thus, ACREL offers its perspective on this case because of the potential harm that would come to its membership, constituencies, and the public if the Court were to accept Appellant’s argument and permit dissolution of a partnership at the whim of a single partner in contravention of the partnership agreement. Core tenets of commercial real estate are at risk here: the freedom for partners to 1 For example, two authors of this brief, Barry B. Nekritz and J. William Callison, are members of ACREL. Mr. Nekritz has been an American Bar Association (“ABA”) Advisor to the Uniform Laws Commission in the drafting of the Revised Uniform Limited Partnership Act, the Revised Uniform Limited Liability Company Act, the Model Entity Transaction Act, the Uniform Merger and Conversion Act and the Uniform Mortgage Foreclosure Procedures Act. Mr. Callison also served as an ABA Advisor to the Revised Uniform Limited Liability Company Act and the Model Entity Transactions Act and is the co-author of a treatise on partnerships titled “Partnership Law and Practice: General and Limited Partnerships”. 2 contract for the terms of a partnership agreement and the stability provided by judicial enforcement of those terms. Indeed, if the Court were to find that a partner could contravene a partnership agreement without consequence, partnerships in the real estate industry would be thrown into untenable instability. Such a finding would damage the viability of countless real estate transactions and projects held in partnership form throughout the United States. ACREL’s Board of Governors has approved the filing of this amicus brief because this case is of major consequence to the real estate industry. Its outcome could have an immediate and serious impact on commercial real estate financing for the many entities that are organized as partnerships, and could cause market disruption across a broad spectrum of the real estate market, as well as other financial markets. To that end, ACREL submits this brief urging affirmance of the decision of the Appellate Division, Second Department, dated May 18, 2016, which unanimously held that the express terms of the Poughkeepsie Galleria Company (“PGC”) partnership agreement (the “PGC Partnership Agreement”) precluded a minority partner’s unilateral dissolution of the partnership-and that the dissolution was, therefore, wrongful. 3 INTRODUCTION AND ARGUMENT This Appeal raises highly consequential issues that concern two critical concepts which underlie much of commercial real estate financing. One is the freedom of contract among and between the parties. The second is the continuity and stability of the entity that owns real property. The question presented in this case is whether one partner, Appellant, can unilaterally compel dissolution of the PGC partnership (the “Partnership”) in contravention of the agreed-upon terms of the PGC Partnership Agreement. The Appellate Division below correctly held that Appellant could not do so, holding that the terms of the governing partnership control and required a “majority vote” for dissolution. No such vote occurred. Appellant asks this Court to disregard the partnership agreement. The notion advanced by Appellant that a partner may dissolve a partnership at will is contrary to settled law, and not permitted under the plain language of the governing partnership documents. ACREL is filing this amicus brief so that the experience and knowledge of its members may assist the Court. ACREL is acutely aware that entity structure, continuity and stability are at the core of any real estate transaction. The view expressed by Appellant would be disruptive and harmful to real estate finance and leasing, and would affect other commercial areas as well. ACREL urges this Court to affirm the decision below. Affirmance will protect the core concepts of freedom 4 to contract for the terms of a partnership agreement and the stability provided by knowing that those terms will be enforced. I. Partnership Agreements Govern The Partnership Relationship And The Uniform Partnership Act Serves Only As A Gap Filler Which Is Inapplicable Here. In the world of real estate enterprises, the decision as to what form of entity will own, manage, develop or operate real property is a critical factor in any deal structure. Real estate enterprises often use a general partnership form with the understanding that the terms of the partnership agreement will be tailored to the specific needs of that enterprise and that such terms will control the operation of the enterprise. Case law, developed over time, supports this right for parties to contract for the terms of their partnership agreement and to have those terms enforced by courts. See Pailthorpe v. Tallman, 11 N.Y.S.2d 784, 788 (Sup. Ct. 1947) (“An agreement by partners as to any matter relating to their partnership is completely controlling between them.”); Silverman v. Caplin, 150 A.D.2d 673, 674 (2d Dep’t 1989) (where “a written partnership agreement is a complete expression of the parties intention, the language of the partnership agreement controls and will not be questioned.”);.see also 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.”). 5 The terms governing dissolution are one of the most critical components of partnership agreements covering commercial enterprises, such as, in the present case, owning, managing and leasing a shopping center, and provide assurances of continuity that make the entity financeable and stable. See Dental Health Assoc, v. Zangeneh, 34 A.D.3d 622, 624 (2d Dep’t 2006) (“[T]he partners may include in their partnership agreements practically any terms they wish, including conditions which must be satisfied for termination of the partnership.”). The other components of a typical partnership agreement-e.g., profit and loss sharing, distributions, capital calls, financing, leasing, and sale and transfer provisions of individual interests, are dependent on the expected continuation of the partnership. Thus, there is nothing more central to the stability of a partnership than to have clearly defined parameters for its dissolution mechanisms. Such dissolution provisions can insure the longevity of a partnership, which provides stability for the partners, the enterprise and all parties who conduct business with the partnership-such as lenders and tenants. For example, a lender for a shopping center whose loan will be for ten years will insist that the partnership be stable. The lender is looking for a return on its investment and is not interested in accelerating a debt and foreclosing on the real estate because its borrower can be dissolved by a minority partner. An anchor tenant in a major shopping center relies on the center’s past history and center owner’s reputation for its long term 6 commitment to lease which could include significant investment by the anchor tenant in its premises. The tenant does not expect a new landlord to come in through a foreclosure or other transaction which is unrelated to the financial fortunes of the shopping center. As a complement to the common law and to provide uniformity across the states, the Uniform Law Commission crafted a uniform partnership act (the “UPA”) that in some form has been adopted by virtually every state and was adopted in its original form by New York (“NYPA”).2 It is well settled that where parties have entered into a partnership, the UPA works as a gap-filler - providing statutory terms where the parties’ partnership agreement is silent. See Ederer v. Gursky, 9 N.Y.3d 514, 526 (2007) (“The Partnership Law’s provisions are, for the most part, default requirements that come into play in the absence of an agreement.”); see also BPR Group Ltd. P’ship v. Bendetson, 453 Mass. 853, 863 (2009) (“The UPA applies only ‘when there is either no partnership agreement governing the partnership’s affairs, the agreement is silent on a particular point, or the agreement contains provisions contrary to law.’” (quoting Creel v. Lilly, 354 Md. 77, 99 (1999)); Osborne v. Workman, 273 Ark. 538, 541 (1981) (recognizing 2 See Uniform Law Commission, 2015-2016 Reference Book, prologue. The UPA has been revised since its initial incarnation and a majority of the states have now adopted the Revised Uniform Partnership Act, known as RUPA. New York has not adopted RUPA. 7 that the “clear intent” of the UPA is to defer to any existing partnership agreement). The number of “gaps filled” by the UPA is dependent on the level of detail provided for in the parties’ partnership agreement. Compare Gelman v. Buehler, 20 N.Y.3d 534, 537-539 (2013) (relying entirely on UPA provisions where partnership was an oral agreement) with BPR Group, 453 Mass, at 863-865 (refusing to import UPA terms of dissolution where contract contained specific terms under which the partnership could be dissolved). Where, as is the case here, the partnership agreement establishes agreed-upon terms of dissolution, there is no gap, and the UPA’s default rules are inapplicable. The Dissolution And Exit Provisions In The PGC Partnership Agreement Are Clear And Should Be Enforced Without The Use of Gap Fillers. II. While the range of issues raised in this long-running litigation have been many and varied, the crux of the first question presented on appeal revolves around the application of NYPA § 62, which sets forth “Causes of Dissolution.” Unless a partnership agreement specifies contrary terms, NYPA § 62(1)(b) provides a basic gap-filling term that every partnership without a definite term or particular undertaking is at will, which permits dissolution by the unilateral action of any partner. Although the trial court and appellate courts reached the correct result that the PGC Partnership Agreement did not create a partnership at will, the conclusion that the PGC Partnership Agreement had a definite term was unnecessary. 8 Because the PGC Partnership Agreement clearly specifies its terms of dissolution and individual partner exit, NYPA § 62 has no application as a default rule in the present case. See, e.g., BPR Group, 453 Mass, at 863; Osborne, 273 Ark. at 541- 543. Specifically, the PGC Partnership Agreement provided the following terms under which the partnership would and would not dissolve: 2.3 The partnership ... shall continue until it is terminated as hereinafter provided. Except as otherwise hereinafter provided, neither the death, incompetency, dissolution, bankruptcy or [sic] insolvency of any of the Partners shall cause termination of the partnership 12. 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. (B89; B140.) The “election by the Partners” is elsewhere defined in the PGC Partnership Agreement § 6 to mean a majority of the Partners. (B37-39.) It is undisputed that there was no such “election” by a majority of the partners to dissolve, nor was there any unlawful event requiring dissolution. Because the PGC Partnership Agreement dictates the terms for dissolution, such terms must be 9 enforced. Thus, the provision in NYPA § 62(1)(b) for unilateral partner dissolution are inapplicable. BPR Group, 453 Mass, at 863; Osborne, 273 Ark. at 541-543. Appellant’s notion that Gelman resolves the issue before this Court ( see Appellant’s Reply Br. at 14-16) is nothing more than a non sequitur. In Gelman, the parties had only a vague, oral agreement to undertake a business venture. Gelman, 20 N.Y.3d at 536-37. Given the absence of any written partnership agreement or otherwise explicit terms of dissolution or withdrawal, the Gelman courtly correctly used the NYPA to fill in those gaps. Id. at 538-39. Gelman's application of NYPA terms is simply irrelevant here, where the parties have explicitly and unambiguously set forth the terms under which the PGC Partnership could dissolve. Similarly off topic is Appellant’s assertion that exclusionary language is required to prevent the UPA from overriding explicit terms of a partnership agreement. (Appellant’s Reply Br. at 6-10.) Having to specifically identify which UPA provisions are excluded from application to a partnership agreement would be a pointless and lengthy exercise, and such a theory is contrary to the point of parties utilizing the UPA as a gap filler. The only “magic language” necessary to avoid application of the UPA is to set forth competing, unambiguous terms in the 10 partnership agreement, just as the PGC Partnership Agreement did with respect to terms of dissolution. Osborne and BPR Group are directly on point. In these cases, the highest courts of Arkansas and Massachusetts3 considered exactly the same question presented here: whether the UPA, and in particular the same language of NYPA § 62(1)(b), overrides specific and clearly articulated contractual terms of dissolution. BPR Group, 453 Mass, at 861-864; Osborne, 273 Ark. at 541-543. The courts uniformly held that the UPA was inapplicable where the parties had contracted for clear terms of dissolution and thus, the dissolving party’s attempt at dissolution was in contravention of the parties’ agreement. BPR Group, 453 Mass. at 863-5; Osborne, 273 Ark. at 541-543.4 Not only are the dissolution provisions in the PGC Partnership Agreement unambiguous, the PGC Partnership Agreement § 9.3 provides a straightforward 3 Case law from other states still applying the UPA is as relevant as case law decided by New York courts. NYPA § 4.4 (directing New York courts to interpret the UPA so as to “make uniform the law of those state which enact it”). 4 Contrary to Appellant’s assertion, the critical import of BPR Group has not been limited by Medimmune, LLC v. Board of Trustees of University of Massachusetts, 223 Md. App. Ill (unreported) (Ct. of Special Appeals 2015). Indeed, Medimmune is wholly inapposite to the issue presented here. In Medimmune, the trial court supplied its own durational term to enforce a “collaborative consortium” agreement in the absence of a clearly defined term limit. See id. at *3, 15-18. Whether specific terms of a partnership agreement superseded the application of the UPA was not at issue in Medimmune-, instead, the Court simply took to common law contract principles to hold that the trial court appropriately supplied a durational term in the absence of specific language to the contrary. Id. at *18. 11 process for an individual partner’s withdrawal from the PGC Partnership without causing disruption to the ongoing enterprise. (B129-131.) Thus, Appellant had the means to exit the Partnership but, instead, he impermissibly attempted to unilaterally dissolve it. (B151.) Appellant’s patent attempt to circumvent and replace the terms of the PGC Partnership Agreement by attempting unilateral dissolution should not be countenanced by the courts. See BPR Group, 453 Mass. at 864-5; Osborne, 273 Ark. at 541-543. Furthermore, a minority partner facing oppression, such as alleged by Appellant (see, e.g., Appellant’s Op. Brief at 28-29), may challenge fraud, breach of fiduciary duty or self-dealing on the part of the partnership’s management through a variety of means. Here, the PGC Partnership Agreement is silent on these issues and accordingly, the UPA gap-filling provisions come into play with respect to these important policy issues. For example, a partner may sue his or her partners for an accounting. NYPA § 44 provides that, “Any partner shall have the right to a formal account as to partnership affairs: (1) If he is wrongfully excluded from the partnership business or possession of its property by his copartners . . . [or] [w]henever other circumstances render it just and reasonable.” See, e.g., Kaufman v. Cohen, 307 A.D.2d 113 (1st Dep’t 2003). Additionally, NYPA § 63 authorizes a partner to seek judicial dissolution, in several enumerated circumstances, including when a partner “willfully or 12 persistently commits a breach of the partnership agreement, or otherwise so conducts himself in matters relating to the partnership business that it is not reasonably practicable to carry on the business in partnership with him” and when “[o]ther circumstances render a dissolution equitable.” NYPA § 63(l)(d), (f). Moreover, additional legal mechanisms under common law exist for an oppressed partner including a claim against his or her partners for breaches of fiduciary duties of loyalty, good faith and fair dealing and care, even if the partner is not seeking dissolution. See, e.g., Kantor v. Mesibov, 796 N.Y.S.2d 884 (Sup. Ct. 2005). Consistent with these constructs, Appellant recognized his rights under NYPA § 63 and originally sought such relief - i.e., requesting judicial dissolution, asserting breach of fiduciary duty, and seeking an accounting, each of which was unequivocally rejected by the trial court. (B62, RA5-6, 13-16, 20.) Now, after failing to convince the lower courts that Appellee engaged in any misconduct or oppression, Appellant asks the Court to assume no wrongdoing, but instead to undo the contractual terms of the PGC Partnership Agreement. As set forth above, such a request is without merit and should be denied. CONCLUSION For the foregoing reasons, the Court should affirm the decision of the Appellate Division, Second Department. 13 Dated: October )| , 2017 Respectfully submitted, HOLLAND & KNIGHT LLP / Martin P. Miner Stosh M. Silivos 31 West 52nd Street New York, New York 10019 Tel: (212) 513-3200 Fax: (212)385-9010 Barry B. Nekritz,* J. William Callison,* Melissa Economy,* FAEGRE BAKER DANIELS LLP 311 S. Wacker Drive, Ste. 4300 Chicago, IL 60606 Tel: (312) 212-6500 Fax: (312)212-6501 * Not admitted in New York; Admission pro hac vice to be requested 14 CERTIFICATE OF COMPLIANCE I hereby certify that the foregoing brief complies with the word count limitation of 22 N.Y.C.R.R. § 500.13(c) because it contains 3032 words, excluding the parts of the brief exempted by § 500.13(c). The foregoing brief complies with the typeface requirements of 22 N.Y.C.R.R. § 500.1(j) because it was prepared in a proportionally spaced typeface using Microsoft Office Word in Times New Roman 14-point font. Martin P. Miner 15