Opinion ID: 754135
Heading Depth: 3
Heading Rank: 2

Heading: Plaintiff's Breach of the Consent Provisions

Text: 40 Section 3.03 of the Academy agreement states that any transaction by the Partnership with Affiliated Persons shall be subject to [defendants'] and the Local General Partner's approval. Section 3.09 of the Buckingham agreement includes substantially similar language. As noted earlier, on March 2, 1995 National Partnership wrote plaintiff that it was withdrawing its consent to use affiliated persons for contract services, and specifically withdrew consent for contracts with Noral Security Systems, Durable Painting, and Alpha Plumbing and Heating. Plaintiff admits it ignored this letter and instead continued to contract with these companies. Hence, transactions subsequent to the date of the letter not only quite plainly benefitted NCAS and its identity-of-interest companies, but also were done without defendants' consent. In breaching the partnership agreements, plaintiff thereby violated its fiduciary duty to defendants, as that duty is defined in § 43 of the New York Partnership Law. 41 With respect to transactions pre-dating the March 2 letter, plaintiff raises two defenses as to why those transactions should not form the basis for granting defendants an accounting. First, it insists that because defendants approved all prior contracts with identity-of-interest companies, they thereby approved all practices related to those contracts. It cites Gutwirth v. Carewell Trading Corp., 12 A.D.2d 920, 920, 211 N.Y.S.2d 732 (1st Dept.1961), for this proposition. In that case, the court denied an accounting to a partner because there was no diversion of funds on the part of defendants, and ... plaintiff had full knowledge of and consented to all of the acts of which he now complains. Yet Gutwirth is distinguishable from the case at hand. 42 The partners in Gutwirth were not guilty of wrongdoing, while here the trial court found that plaintiff engaged in improper transactions involving partnership funds. Moreover, any consent given by the National Partnership prior to March 2, 1995 was consent only for what it believed were legitimate transactions. Defendants lacked knowledge of plaintiff's improper use of partnership funds until after Deloitte conducted its review of the identity-of-interest companies' books and records in the spring of 1995. In fact, the trial court itself found that 43 [T]he level of detail in the financial statements and budgets prepared by the partnerships did not enable defendant ... to evaluate whether the partnerships properly accounted for items such as its management fee, bonuses, and charitable contributions, whether excess payments had been made, and whether services being obtained for the partnerships were competitively bid. 44 Without having either actual or constructive knowledge of the entire scope of plaintiff's use of partnership funds involving identity-of-interest companies--or any means by which to discover it--defendants' approval of past contracts cannot now be considered the equivalent of full knowledge as that phrase is used in Gutwirth. 45 The second defense plaintiff raises is that the remedy of an accounting is unavailable to defendants because the equitable doctrine of unclean hands applies. This argument is frivolous. New York courts have held that one partner's misconduct does not automatically deprive him of the right to an accounting. See Dwyer v. Nicholson, 109 A.D.2d 862, 863, 487 N.Y.S.2d 56 (2d Dept.1985) ([A]llegations of [a partner's] unclean hands will not relieve [the other partners] of their duty to account.); Bell v. Herzog, 39 A.D.2d 813, 814, 332 N.Y.S.2d 501 (3d Dept.1972) ([T]he misconduct of a partner does not necessarily deprive him of his right to demand an accounting.). Moreover, the district court found that the National Partnership engaged in no misconduct, hence the unclean hands doctrine had no application here. 46 Looking simply at the trial court's findings of facts reveals that plaintiff violated its fiduciary duty under Partnership Law § 43. As a consequence, defendants are entitled to an accounting with respect to all transactions, contracts and dealings, regardless of when entered into, between Academy and Buckingham, plaintiff, and any identity-of-interest companies. 47 III Defendants' Request to Remove Plaintiff As Local General Partner A. Standard of Review 48 One means by which National Partnership has the authority to remove NCAS as local general partner is via the terms of the partnership agreements. Since the facts are not in dispute, our review is limited to the magistrate judge's legal interpretation of those agreements. The construction of the text of an agreement is reviewed de novo. See Bellefonte Reinsurance Co. v. Aetna Cas. & Sur. Co., 903 F.2d 910, 912 (2d Cir.1990). 49 The trial court withheld authorization to remove NCAS as local general partner because it found plaintiff's misconduct was neither a material breach of the partnership agreements nor a breach of fiduciary duty as that duty is defined in those agreements. We reach a different conclusion, believing that NCAS's actions are grounds for its removal under the terms of the partnership agreements. 50 B. Terms of the Agreements as Controlling Authority 51 Under New York law, [t]he rights and obligations of the partners as between themselves arise from, and are fixed by, their agreement. Corr v. Hoffman, 256 N.Y. 254, 272, 176 N.E. 383 (1931). When a partnership agreement contains clear and unambiguous terms, New York courts enforce the plain meaning of those terms, without resorting to extrinsic aids of interpretation, see CCG Assocs. I v. Riverside Assocs., 157 A.D.2d 435, 440, 556 N.Y.S.2d 859 (1st Dept.1990), or rewriting those terms. See Curtin v. Glazier, 94 A.D.2d 434, 438, 464 N.Y.S.2d 899 (4th Dept.1983) (noting that a complete expression of the parties' intention set forth in writing may not be rewritten); CCG Assocs. I, 157 A.D.2d at 440, 556 N.Y.S.2d 859. Further, when a partnership agreement expressly provides terms for removal, the partners' purposes should not be frustrated, absent evidence of overreaching or some other violation of public policy. See Gelder Med. Group v. Webber, 41 N.Y.2d 680, 684, 394 N.Y.S.2d 867, 363 N.E.2d 573 (1977). The parties have no quarrel with the policy underlying the agreements, the terms of which the district court found clear and unambiguous, in conformance with state law, and which it further stated would be enforced according to their plain meaning.Defendants' third and fourth counterclaims, which seek removal of NCAS as local general partner, fault plaintiff for committing a material breach within the meaning of Section 8.08 of the Partnership Agreements. (emphasis added). Section 8.08 is virtually identical in both agreements and reads, in pertinent part 52 Any one or more of the following shall be grounds for the removal of the Local General Partner: 53 (i) violation of or failure to comply with a material provision of the Purchase Agreement, this Amended and Restated Limited Partnership Agreement ..., the Regulatory Agreement or any law or regulation applicable to the Project. 54 (emphasis added). Clearly then, if plaintiff is in noncompliance with a material provision of the partnership agreements, or any applicable law or regulation, this section empowers defendants to demand plaintiff's removal as local general partner. 55 C. Plaintiff's Breach of a Material Provision 56 Turning first to defendants' fourth counterclaim, the National Partnership alleges that NCAS acted in violation of § 3.03 of the Academy agreement and § 3.09 of the Buckingham agreement by contracting with its identity-of-interest companies after defendants withdrew their consent in their March 2, 1995 letter. As noted earlier, those sections of the agreements require defendants' approval over all contracts involving affiliated persons. The magistrate judge found plaintiff had violated these sections when it maintained those contracts after defendants' consent was rescinded. Even NCAS admits its continued employment of these companies after receiving the letter, pursuant to advice of counsel. Yet nothing in the language of the agreements permits a partner to act unilaterally in the event of litigation or upon advice of counsel. And, under New York law, a court may not read into the unambiguous language of § 8.08 any additional requirements. Having established that plaintiff is in breach of its agreements with defendants, the question then becomes whether this breach is of a material provision within those agreements. 57 Nothing in the agreements defines what constitutes a material provision. Considering however that the language requiring defendants' approval for contracts involving identity-of-interest companies is enumerated within the relevant sections--the only ones in the agreements to address business relations with affiliated persons--we hold that approval of contracts is a material provision. Accordingly, plaintiff's actions in continuing to deal with identity-of-interest companies violated a material provision of the partnership agreements. Thus, the National Partnership has the right to remove NCAS as local general partner. 58 The trial court's discussion took a different path from ours because it focused on the phrase material breach in a different context than that used in defendants' counterclaims. It required the breach itself to be material, instead of enquiring whether the breach was of a material provision. Yet, as quoted earlier, § 8.08 of the partnership agreements clearly states that any violation of a material provision is grounds for removal. New York law requires courts to enforce such an unambiguous term as written. 59 We are also not persuaded to follow the magistrate judge's analysis because it relied upon cases involving contracts negotiated at arm's-length, not partnership agreements. See Lanvin Inc. v. Colonia, Inc., 739 F.Supp. 182, 195 (S.D.N.Y.1990) (involving licensing agreement to sell perfumes); Miller v. Benjamin, 142 N.Y. 613, 617, 37 N.E. 631 (1894) (involving contract to sell slit steel). New York case law makes it evident that partners are held to a higher standard in their dealings with one another than parties involved in an ordinary garden-variety contract. As Chief Judge Cardozo announced 60 Joint adventurers, like copartners, owe to one another, while the enterprise continues, the duty of the finest loyalty. Many forms of conduct permissible in a workaday world for those acting at arm's length, are forbidden to those bound by fiduciary ties. 61 Meinhard, 249 N.Y. at 463-64, 164 N.E. 545. We find no authority that would permit the application of material breach contract principles to the express terms of NCAS's and the National Partnership's limited partnership agreements and thereby overcome application of the Meinhard standard in the instant case. 62 Having found that the National Partnership succeeds in its fourth counterclaim because NCAS breached a material provision of the partnership agreements by contracting with identity-of-interest companies absent defendants' consent, we need not reach defendants' other claims.