Source: https://www.nybusinessdivorce.com/2018/04/articles/valuation-discounts/new-yorks-high-court-takes-fresh-approach-wrongful-dissolution-sustains-valuation-discounts-limits-damages-partnership-case/
Timestamp: 2019-04-21 14:56:28+00:00

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There’s a lot to digest in last week’s decision by the Court of Appeals — New York’s highest court — affirming and modifying in part the intermediate appellate court’s ruling in Congel v Malfitano, a “wrongful dissolution” case I previously covered here and here, in which a minority partner in a general partnership that owns a shopping mall, whose former 3% interest had a stipulated top-line, pro rata value of $4.85 million, after massive valuation discounts and a seven-figure damages award for the majority’s legal fees, ended up with a judgment against him for about $1 million.
Instead of focusing, as did the lower courts, on whether the partnership met Partnership Law § 62 (1) (b)’s durational criteria of “definite term” or “particular undertaking,” the court decided the wrongfulness of the minority partner’s unilateral dissolution without recourse to the statute, and instead employed a purely contractual approach in affirming the lower courts’ finding of wrongful dissolution based on the partnership agreement’s “clear and unequivocal terms” providing the exclusive means by which the partnership could be dissolved.
The court affirmed the lower courts’ application of 35% marketability, 66% minority, and 15% goodwill discounts, which collectively erased around 80% of the stipulated top-line valuation. As to the minority discount, based on the objectives and policies underlying the “terminological difference” between the statutes, the court refused to read into Partnership Law § 69 (2) (c) (II) — which requires the court to determine the “value” of the partner’s interest when the remaining partners elect to continue the business following a wrongful dissolution — the case law disallowing any minority discount under the “fair value” standard found in sections 1118 and 623 of the Business Corporation Law governing buyouts in shareholder oppression and dissenting shareholder cases. Two of the panel’s seven judges dissented from this part of the court’s decision and would have disallowed the minority discount as a matter of law.
The court remitted the case to the trial court to recalculate damages (I’ll explain below). As best as I can tell, the likely net effect of the rulings will be to swing the judgment from around $1 million against the minority partner to around $1 million in his favor — still a jaw-dropping reduction from the pro rata value of the partnership interest he gave up.
The minority partner in Congel precipitated the ensuing litigation onslaught by giving a unilateral notice of dissolution in which he took the position that the partnership was at-will under Partnership Law § 62 (1) (b) because the partnership agreement did not specify a “definite term” or “particular undertaking.” The majority elected to continue the partnership’s business, reconstituted the partnership without the former minority partner, and then sued him for wrongful dissolution.
The trial judge held that the minority partner’s dissolution was wrongful because the partnership agreement specified a “particular undertaking.” The intermediate appellate court agreed with that outcome, but substituted its finding that the partnership agreement specified a “definite term” based on the provision allowing the partners to hold an election to dissolve.
The partners clearly intended that the methods provided in the Agreement for dissolution were the only methods whereby the partnership would dissolve in accordance with the Agreement, and by implication that unilateral dissolution would breach the Agreement. In other words, the Agreement contemplated dissolution only in two instances, leaving no room for other means of dissolution that would be in accordance with its terms.
It follows that Partnership Law § 62 (1) (b) has no application here, because the parties to the Agreement clearly specified under what terms it could be properly dissolved, i.e., what would constitute a dissolution under the Agreement and what would constitute a dissolution in contravention of it. Accordingly, this was plainly not intended to be an “at-will” partnership.
The high court’s contract-based analysis of the partnership’s at-will status, wholly detached from Partnership Law § 62 (1) (b), represents a new and interesting development in New York’s partnership dissolution jurisprudence, in which the threshold issue will be whether the partners in their partnership agreement have contracted around and thus supplanted the Partnership Law’s at-will criteria provided, as Judge Fahey clarified, “they do so in language that is clear, unequivocal and unambiguous” (internal quotation marks and citations omitted).
Tis a shame. What with the seemingly disparate views of the First and Second Departments when it comes to marketability discounts for real estate holding companies, it would have been a great opportunity for the high court to settle the issue.
In Congel, the trial court looked to “fair value” jurisprudence in rejecting any minority discount, a ruling that faltered when the intermediate appellate court held that the fair value cases are irrelevant to partnership “value” under Partnership Law § 69, and adopted a whopping 66% minority discount based on the unrebutted testimony of the majority’s expert.
The only preserved issue before the Court of Appeals was whether minority discounts apply in the valuation of a minority partner’s interest after the partner exits the business that remains a going concern, i.e., the gargantuan size of the minority discount was not before the court.
the statute [Partnership Law § 69] does not contemplate a valuation of the entire business as if it were being sold on the open market, but rather a determination of the fair market value of the wrongfully dissolving partner’s interest as if that interest were being sold piecemeal and the rest of the business continuing as a going concern. Given that the focus is on one partner’s interest in a persisting concern, we agree with the Massachusetts high court that a minority discount is applicable, because a minority interest is worth less to anyone buying that interest alone.
Partnership Law § 69 (2) (II) provides that in ascertaining the value of the interest of a partner who has caused dissolution wrongfully, “the value of the good-will of the business shall not be considered.” In Congel, the lower courts ruled, and the Court of Appeals agreed, that the realty-holding partnership had goodwill value justifying a 15% reduction in value.
Partnership Law § 69 (2) (a) II) also allows a deduction from value when the business is continued by the other partners for “damages caused to his copartners by the [wrongful] dissolution.” The lower courts accepted the majority partners’ argument that their recoverable damages included approximately $1.8 million in attorney and expert fees (including interest) incurred in litigating their wrongful dissolution lawsuit.
would mean that fees could be awarded to the victorious party in any breach of contract litigation, as long as that party persuaded a court that it had to litigate the issue in order to avoid the consequences of defendant’s breach. Indeed, this purported exception would be so large as to swallow the American Rule.
The court nonetheless remanded the case to the trial court for recalculation of damages, stating that the majority partners, “if they so choose, may argue on remand that certain attorneys’ fees, not related to their lawsuit, were incurred as a direct result of [the minority partner’s] breach and should be included as damages,” such as fees incurred prior to the litigation totaling around $15,000 for legal advice and representation at partner meetings relating to giving assurances to the partnership’s lender as to the continuation of the business.
The Court of Appeals’ Congel decision ends (or almost ends, subject to the damages recalculation) an amazing 11-year litigation saga that has taken multiple zigs and zags through the trial and appellate process. Its contract-centric approach to the question of wrongful dissolution offers a new mode of analysis and suggests new drafting solutions for transactional lawyers who, however infrequently in this era dominated by LLCs and other limited liability business entities, opt to use the general partnership form.
The court’s approval of marketability and minority discounts clearly brands Partnership Law § 69’s use of the term “value” as meaning fair market value, not fair value, but without compelling application of either discount, much less giving guidance as to the size of the discount in any particular case, which also can be said of the court’s approval of a goodwill discount for realty holding partnerships. In that sense, Congel did not materialize as the change agent it might have been for more frequent fair value appraisal litigation under Business Corporation Law sections 1118 and 623.
Finally, the court’s unsurprising disallowance of litigation expenses as recoverable damages under Partnership Law § 69 takes away significant incentive for commencing legal proceedings, and reduces negotiating leverage, that otherwise would exist for majority partners who continue the business following a wrongful dissolution.

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