Opinion ID: 296717
Heading Depth: 1
Heading Rank: 3

Heading: Counterclaim for an Accounting

Text: 82 Golden Arrow, through its first counterclaim (Answer, ¶¶ 3-7; 6(a)) and a motion (263-264) sought a declaration that it was entitled to a partnership accounting. In this manner, the appellant sought to receive credit for its alleged past contributions to the partnership. Furthermore, Golden Arrow contended that since it was not liable for fraud or breach of contract, Friedman and Fagerberg were liable for the wrongful dissolution of the partnership. 83 Both litigants appear to agree with the general principle of partnership law that partners cannot sue each other at law for a breach of a partnership agreement or with reference to partnership affairs before there has been a final accounting of the partnership assets. See, for example, Arnold v. Arnold, 90 N.Y. 580, 23 Hun 293 (1882); 43 N.Y. Jur., Partnership, § 110, p. 120. 84 The trial court also recognized this principle of law but refused to apply it to the facts; this conclusion was predicated upon the distinction drawn in Crownshield Trading Corp. v. Earle, 200 App.Div. 10, 192 N.Y.S. 304 (1922). The court therein held that an action at law was maintainable without a prior accounting due to the fact that only an agreement to form a partnership had been consummated. Here, Judge Palmieri similarly concluded that there was at most an agreement to form a joint venture. (Opinion of Judge Palmieri, p. 14.) 85 We believe that the application of the Crownshield case, supra, is not warranted here. The evidence indicates that Friedman and Fagerberg and Golden Arrow intended to consummate a binding partnership agreement upon the execution of the memorandum of August 26, 1966. Specifically, paragraph First of that document states, in pertinent part, that the parties hereby form a partnership to be known as Fairy Tale Productions Company    (Ex. 2; 276). 86 This statement appears to be unequivocal; the manifest intention of the parties was to be obligated immediately upon execution of that document. Goldberg v. Goldberg, 276 App.Div. 1084, 95 N.Y.S.2d 777, reargument denied 277 App.Div. 782, 97 N.Y.S.2d 398 (1950). Had Golden Arrow done nothing to implement the contract, the partnership would nonetheless have existed as a legal entity. 87 The fact that these parties engaged in a going partnership necessitates an accounting. Rights and duties which are a part of a partner's relations to the partnership are not to be litigated until dissolution and winding up of all affairs of the partnership. As one writer has stated: 88    [F]or the breach of the undertaking of a partner to pay in to the partnership his agreed capital contribution, or to perform any other duty to the partnership, there is no remedy in the other partner, except in the course of partnership accounting [citations omitted]. (Crane, Partnership, p. 375.) 89 Since Golden Arrow breached its obligation, it may not share in whatever profit the partnership would have derived if the venture had succeeded, assuming that a profit is demonstrable. Nevertheless, defendant is entitled to attempt to prove what contributions it has made and obtain an equitable adjustment between its copartner, subject to damages for the breach of contract. Schnitzer v. Josephthal, supra 122 Misc. at 16, 202 N.Y.S. 77. We summarize our determination as follows: 90 1. The cause of action based upon defendant's alleged fraud is not sufficiently supported by the record and therefore the judgment is reversed and this cause of action should be dismissed. 91 2. With respect to the cause of action based upon breach of contract, we hold that plaintiffs did not irrevocably elect to rescind the partnership agreement; thus, they are not precluded from recovering upon principles of contract law. 92 3. Plaintiffs are entitled to recover damages for defendant's breach of contract subject to adequate evidence and a finding that plaintiffs substantially performed their obligations. Reduction, if any, for immaterial breaches by plaintiffs must be reflected in the ultimate award. 93 4. With respect to the amount of damages recoverable by plaintiffs, the trial court is directed to award damages pursuant to Section 69(1), (2) (c) of the New York Partnership Law. Damages for the time and effort expended by plaintiffs are dependent upon evidence and a finding that defendant agreed to compensate plaintiffs for their services. Recovery for loss of expected profit is dependent upon evidence and a finding that the partnership venture would have been financially successful as heretofore delineated. 94 5. Lastly, the trial court is instructed to direct and determine a partnership accounting; although defendant is entitled to be credited for past contributions made to the partnership, it may not share in any expected profit, assuming that proof of the likelihood of such profit is forthcoming.