Congel v. Malfitano
| Decision Date | 27 March 2018 |
| Docket Number | No. 30,30 |
| Citation | 31 N.Y.3d 272,76 N.Y.S.3d 873,101 N.E.3d 341 |
| Parties | Robert J. CONGEL, et al., as Members of the Executive Committee of, and on Behalf of, Poughkeepsie Galleria Company, Respondents, v. Marc A. MALFITANO, Appellant. |
| Court | New York Court of Appeals Court of Appeals |
Harris Beach PLLC, Albany (Victoria A. Graffeo and Aubrey A. Ohanian of counsel), for appellant.
Gibson, Dunn & Crutcher LLP, New York City (Caitlin J. Halligan and Lee R. Crain of counsel), and Goodwin Procter LLP, New York City (Anthony A. Fiotto and Emily Unger of counsel), for respondents.
Stroock & Stroock & Lavan LLP, New York City (Claude G. Szyfer and Michele L. Pahmer of counsel), for The Real Estate Roundtable and others, amici curiae.
Holland & Knight LLP, New York City (Martin P. Miner and Stosh M. Silivos of counsel), and Faegre Baker Daniels LLP, Chicago, Illinois (Barry B. Nekritz, J. William Callison and Melissa Economy of counsel), for American College of Real Estate Lawyers, amicus curiae.
Whiteman Osterman & Hanna LLP, Albany (John R. Dunne of counsel), for Daniel Kleinberger and others, amici curiae.
A partnership is a voluntary, contractual association in which persons carry on a business for profit as co-owners. In the agreement establishing a partnership, the partners can chart their own course. New York's Partnership Law creates default provisions that fill gaps in partnership agreements, but where the agreement clearly states the means by which a partnership will dissolve, or other aspects of partnership dissolution, it is the agreement that governs the change in relations between partners and the future of the business. We hold that the partnership agreement in this case dictates the conclusion that defendant Marc A. Malfitano, a partner, wrongfully dissolved the partnership, but we conclude that it was error to include the legal fees incurred by the remaining partners in the damages owed to them by defendant. In other respects, we uphold the Appellate Division's valuation of defendant's interest in the partnership.
In 1985, defendant and seven others entered into a written agreement (the agreement) to form a general partnership known as "Poughkeepsie Galleria Company" (the Partnership), for the ownership, operation, and management of a shopping mall. The mall opened in 1987 and continues to operate today. Defendant initially had a 2.25% ownership interest in the Partnership, which increased to 3.08% by the mid–2000s. In addition to the minority partners, the Partnership had a majority owner, Moselle Associates, which controlled a little over 56% of the Partnership.
The agreement provided that the Partnership "shall continue until it is terminated as hereinafter provided." In a subsequent provision, the agreement stated that the Partnership would dissolve upon "[t]he election by the Partners to dissolve the Partnership" or "[t]he 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."
The agreement further stated that "[a]ll decisions to be made by the Partners shall be made by the casting of votes at a meeting of such Partners" and that "[t]he affirmative vote of no less than fifty-one percent (51%)" of the partners "shall be required to approve any matter presented for decision." Day-to-day control of the Partnership was vested in a three-member Executive Committee, comprised of Robert J. Congel, Bruce A. Kenan, and James A. Tuozzolo, the plaintiffs in this case. The Executive Committee had "the exclusive right to manage the business of the Partnership," although a majority of partners had the authority to "overrule or modify" the Committee's decisions, "withdraw or modify" any power granted to the Committee, or remove its members.
In the mid–2000s, defendant decided to withdraw from the Partnership. Defendant asserts that certain conduct by plaintiffs related to the Partnership troubled him, and that when he challenged plaintiffs, they did not address his concerns. He explored the option of a buyout of his interest, but negotiations failed.
On November 24, 2006, defendant wrote to his partners: "[I]n accordance with Section 62 (1) (b) of the Partnership Law, and as a general partner of the Partnership I hereby elect to dissolve the Partnership and by this notice the Partnership is hereby dissolved."
Partnership Law § 62 (1) (b) states that a partner may unilaterally dissolve a partnership, without violating the partnership agreement, if "no definite term or particular undertaking is specified" in the agreement and the partnership is therefore "at will." Defendant insisted that his partners were compelled to liquidate. The Partnership was in the process of negotiating a mortgage refinancing, and defendant recorded a notice of pendency on the Poughkeepsie Galleria property.
The partners took the position that defendant had wrongfully dissolved the Partnership,1 and they continued the business, in the same name as before, pursuant to Partnership Law § 69 (2) (b). That provision states, with certain conditions, that when dissolution is caused in violation of a partnership agreement, "[t]he partners who have not caused the dissolution wrongfully, if they all desire to continue the business in the same name ... may do so, during the agreed term for the partnership and for that purpose may possess the partnership property."
In January 2007, plaintiffs, as the Partnership's Executive Committee and on behalf of the Partnership, commenced this breach of contract action, seeking a declaratory ruling that defendant had wrongfully dissolved the Partnership, as well as damages. Plaintiffs also moved for an order canceling the notice of pendency. It was only after the lawsuit was commenced that a mortgage lender was willing to proceed with refinancing of the mall.
Defendant answered and interposed several counterclaims, including the allegation that the dissolution precluded the Partnership from refinancing or taking any business actions other than winding up, and a claim for judicial dissolution under Partnership Law § 63 (1).2 Defendant also cross-moved to dismiss the complaint under CPLR 3211 (a) (7) for failure to state a cause of action, insisting that the Partnership qualified as an "at-will" partnership, which can be dissolved without violation of the partnership agreement, under Partnership Law § 62 (1) (b).
After Supreme Court denied defendant's cross motion to dismiss and canceled the notice of pendency, plaintiffs moved for summary judgment on their wrongful dissolution and breach of contract claims, asserting that the agreement provided for only two methods whereby the Partnership would dissolve without violation of the agreement, and that defendant's unilateral dissolution breached the agreement. Defendant cross-moved for summary judgment.
Supreme Court granted summary judgment to plaintiffs, holding that the Partnership was not an "at-will" partnership, because it specified a "particular undertaking" within the meaning of Partnership Law § 62 (1) (b), and that defendant's dissolution of the Partnership breached the agreement. Supreme Court dismissed defendant's counterclaims, including his claim for judicial dissolution, and denied his cross motion for summary judgment.
In April 2009, the Appellate Division upheld Supreme Court's ruling on the wrongfulness of the dissolution, albeit on different grounds, finding that the agreement specified a "definite term" or temporal limit under Partnership Law § 62 (1) (b) ( 61 A.D.3d 807, 808–809, 877 N.Y.S.2d 443 [2d Dept. 2009] ). In a separate order issued on the same date, the Appellate Division affirmed Supreme Court's order granting summary judgment to plaintiffs, holding that plaintiffs had satisfied their prima facie burden of showing that defendant had dissolved the Partnership in contravention of the agreement, and that defendant had failed to raise a triable issue of fact ( 61 A.D.3d 810, 811, 877 N.Y.S.2d 441 [2d Dept. 2009] ). The Appellate Division also affirmed dismissal of defendant's counterclaims, including his judicial dissolution claim ( 61 A.D.3d at 812, 877 N.Y.S.2d 441 ). The Appellate Division remitted for further proceedings on, among other things, the issue of damages for breach of contract ( id. ).
On remittal in Supreme Court, defendant moved for partial summary judgment, seeking a declaration that plaintiffs were not entitled to attorneys' fees related to their lawsuit. In response, plaintiffs contended that they were entitled to fees on any actions they were compelled to take so as to avoid liquidation. They sought $2,717,314.50 in attorneys' fees and $79,705.50 in experts' fees.
Supreme Court ruled that plaintiffs were entitled to attorneys' fees and experts' fees, as part of their damages, reasoning that those costs "are not incidental to the litigation" but instead are "damages caused by the defendant's breach" of the agreement. However, Supreme Court did not award the full amount of attorneys' fees sought, awarding $1,516,452 in attorneys' fees, as well as experts' fees in the requested amount.
Consequently, in November 2011, Supreme Court conducted a bench trial to establish the value of defendant's interest in the Partnership, taking into account the value of goodwill, and the amount of...
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