Court Opinion

ID: 5754656
Source: CourtListenerOpinion
Date Created: 2022-01-12 17:04:19.159582+00
Date Added: 2024-06-11T08:41:23.233775
License: Public Domain

Rajbin, J. (dissenting in part).
Broadly stated, the question raised by this partial dissent is whether the courts will give limited partners the right to compel the general partners of a limited partnership to account to the partnership for wrongful acts resulting in detriment and loss to the partnership. Stated in a more limited way, the question is whether limited partners may maintain a derivative action on behalf of the partnership against the general partners for wrongdoing. The majority have held that they may not. I dissent because I believe that unless such right be given there will be a failure of an adequate remedy for the wrongs alleged to have been done. Of course, in discussing this issue I must, in the light of the manner in which the question was presented at Special Term, accept the allegations as pleaded.
Essentially, plaintiffs seek redress for two distinct wrongs. They bring a class action to recover for frauds perpetrated to induce them to buy limited partnership shares, and they also sue to hold the general partners and others to account to the partnership entity, as such, for subsequent wrongdoing—wrongs-resulting in injury to the partnership.
*341I concur in that part of the decision of the majority which holds that limited partners may not bring a class action to recover for frauds committed in inducing them to purchase shares in the partnership (Brenner v. Title Guar. & Trust Co., 276 N. Y. 230). However, I do think that limited partners should be permitted to sue derivatively for the benefit of the partnership where general partners have, through wrongdoing, injured the partnership.
It is well to describe the nature of the business association with which we are here concerned. Briefly stated, a syndication of certain real property was cast in the form of a limited partnership. A prospectus was issued, though not filed*, offering one hundred limited partnership shares, each in the amount of $12,000. It provided that the prospective limited partners were to receive a 12% return per annum, noncumulative, payable out of the net return. The plaintiffs are some of those who were induced to join the limited partnership.
Plaintiffs, charging wrongdoing on the part of the general partners, premise their quest for relief on their right to assert a claim against these defendants on behalf of the limited partnership. Defendants contend that such an action, derivative in nature, is not available to limited partners.
An important preliminary observation should here be made. Syndications of real property cast in the form of limited partnerships are of recent advent (Silverman, Real Estate Syndicates, 18 N. Y. U. Inst. on Fed. Taxation 1). Until quite recently, neither the courts nor the Legislature have been petitioned by limited partners for redress for wrongs done to the partnership by the general partners. But those courts that have recently passed upon the issue have sustained the actions brought by limited partners on behalf of the partnership. (See, e.g., Executive Hotel Assoc. v. Elm Hotel Corp., 41 Misc 2d 354, affd. 43 Misc 2d 153.) The fact that there is no high appellate pronouncement in New York State indicating that such action may be brought does not, of course, mean that it may not be brought. I can find no decision which expressly prohibits such action. Nor do I think that Mannaberg v. Herbst (45 N. Y. S. 2d 197, affd. 267 App. Div. 818, affd. 293 N. Y. 657) cited by the majority does so. That case, brought for wrongdoing, merely held that one partner may bring an action against another partner and a third person without joining the remaining partners. True, there was dictum at Special Term to the effect that a partner may not maintain a derivative action. How*342ever, it should be noted that no such action was there sought to be maintained. And, more important, there involved was not a limited partnership but rather a four-man general partnership. Of more than passing interest is the fact that the courts that have recently rendered decisions sustaining the right of a limited partner to bring a derivative action were not troubled by Mannaberg v. Herbst (supra). And, consequently, it was not discussed, nor even cited. I would hardly call that case an authority prohibiting a derivative action in a situation such as is here involved.
However, the majority holds that the only remedy available to a limited partner who claims wrongdoing on the part of the general partners is to institute suit on his own behalf for the damage that he individually has sustained. I think that such remedy is wholly inadequate. As indicated, the limited partners here involved are entitled only to a noncumulative 12% return out of profits. Were a limited partner to institute suit in his own name for the damage incurred by him as the result of the general partners’ wrongdoing, his action would have to be dismissed unless he could prove that proper restitution would result in a profit to the partnership, permitting him to receive all or part of his 12% return. Such result would mean that general partners may loot the partnership with impunity, the limited partner having no right to compel restitution unless he can show that such restitution would result in a distribution to him.
Quite above the limited partner’s expectation of a current return is his greater interest in the partnership maintaining a firm and sound fiscal position. If funds wrongfully withheld or taken from the partnership were returned, the limited partnership would be in a far better position to operate profitably in the years following. Indeed, the return of such funds might be essential for its survival. That interest could not be protected by relegating the limited partner to a suit solely on his own behalf for his own specific damage. Thus, I conclude that unless we allow a derivative suit the limited partner has no adequate remedy. The law will, and it should, provide an adequate remedy for every wrong. The necessity for such a remedy has been here demonstrated. As indicated, I know of no decision that prevents the courts from affording the only remedy adequate under the circumstances, i.e., a derivative suit.
That the law abhors sterility in circumstances such as are here present is evident from an examination of the origin of derivative actions in the law of corporations. In one of the earliest cases sustaining a derivative action it was stated: “ If a case should arise of injury to a corporation by some of its members, *343for which no adequate remedy remained, except that of a suit by individual corporators in their private characters, and asking in such character the protection of those rights to which in their corporate character they were entitled, I cannot but think that * * # the claims of justice would be found superior to any difficulties arising out of technical rules (Foss v. Harbottle, 2 Hare 461, 492, 67 Eng. Reprint 189, 203; emphasis added.) One commentator has stated that the 1 ‘ origin of the derivative suit, as indeed of any non-statutory type of action, lies in judicial recognition of a new wrong * * * for which pre-existing legal procedures proved more or less inadequate.” (Prunty, The Shareholders’ Derivativo Suit, 32 N. Y. U. L. Rev. 980, 992.) And, it should be noted that although corporations are creatures of statute, the courts in allowing derivative suits were not prevented by a lack of a statutory grant from supplying adequate relief. Acting on their historic inherent powers and adopting a progressive approach, the courts fashioned such relief. The courts in this State are beginning to look forward and indicate approval of a derivative action by a limited partner. Witness the following language of the Court of Appeals in Ruzicka v. Rager (305 N. Y. 191, 197-198) wherein it states: “It is to be remembered that we are here concerned with a limited partnership. There is good reason for regarding such a partnership as a distinct entity for the purposes of pleading. Limited partnerships were unknown to the common law and, like corporations, are ‘ creature[s] of statute ’ (Lanier v. Bowdoin, 282 N. Y. 32, 38). Statutes permitting limited partnerships are intended to encourage investment in business enterprise by affording to a limited partner a position analogous to that of a corporate shareholder.” (Last emphasis supplied.) Immediately following, the Court of Appeals characterized a limited partner as one having “quasi-shareholder status” and refers to the limited partnership as having “ quasi-corporate aspects.” The forward-looking statement of the Court of Appeals, above quoted, has been fully implemented in a particularly well-reasoned opinion by Judge Fbienouy (Klebanow v. New York Produce Exch., 344 F. 2d 294) construing the law of the State of New York and concluding that derivative actions may be maintained by limited partners. Of course, we are not bound by that decision; but we cannot, nor should we try to escape from its inherent logic.
Further, it may well be that this action may be supported on heretofore developed principles in the law of trusts. It was long ago stated by Chancellor Kent, with respect to corporations, that: “ The persons who, from time to time, exercise the *344corporate powers, may, in their character of trustees, be accountable * * * for a fraudulent breach of trust” (Attorney-General v. Utica Ins. Co., 2 Johns Ch. 371, 389).
But the majority asserts that the statutes do not permit the courts to so act. It states that section 115 of the Partnership Law precludes the maintenance of a derivative action. That provision was adopted by the Legislature in 1922 and it may not be urged that either the framers of the Uniform Limited Partnership Act or the Legislature ‘ ‘ focused on the problem here at issue.” (Klebanow v. New York Produce Exch., 344 F. 2d 294, 298.) But more to the point is the fact that the language clearly states no more than that a contributor, unless he is a general partner, is not a proper party to proceedings by or against a partnership. The action here sought to be maintained is not one by or against the partnership. Rather' it is one on behalf of the partnership with internal implications of wrongdoing or disability on the part of the general partners — certainly not contemplated by section 115.
Judge Friendly, in the Klebanow decision, sets forth the purpose of section 115, pointing out that it could hardly be read as going so far as to prohibit derivative suits. Perhaps it would be best to quote his language (p. 298): “ General partners need not join limited partners in an action by the partnership; ordinarily limited partners may not sue since this will interfere with the management by the general partners, Lieberman v. Atlantic Mutual Ins. Co., 62 Wash. 2d 922, 385 P. 2d 53 (1963); a suitor against the partnership need not join a limited partner; indeed, he may not do so if the partnership be solvent. See Fuhrman v. Von Pustau, 126 App. Div. 629, 111 N. Y. S. 34 (1908). The words say all this and say it well. But they do not have to be read as saying that a limited partner cannot bring an action on behalf of the partnership when the general partners have disabled themselves or wrongfully refused; and, although they could be so read, we see no sufficient reason for doing so when in quite similar situations the cestui que trust or the preferred stockholder is allowed to do exactly that. The predecessor New York statute would hardly be read as going so far; we see no basis for thinking that, in its effort to achieve uniformity with other states, the legislature thought it would be altering New York law in this respect.” That reasoning is very persuasive and I adopt it wholeheartedly.
The Court of Appeals in the Ruzicka case (supra) said that limited partnerships were created “ to encourage investment in business enterprise”. Investment in a business enterprise is not fully encouraged unless there be given to the investor an *345adequate remedy to enable him to protect that investment from wrongful acts which weaken the financial structure that supports it.
Accordingly, we should hold that the limited partners have a right to sue derivatively in the name of the partnership for and on behalf of the partnership to redress the wrongs committed against the partnership.
Breitel, J. P., and Valente, J., concur with Stevens, J.; Rabin, J., dissents in part, in opinion in which Eager, J., concurs.
Order entered on July 8, 1965 reversed, on the law, with $30 costs and disbursements to appellants, and the motion to dismiss the complaint granted, with $10 costs, with leave to replead.

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