Tucker Anthony Realty Corp. v. Schlesinger

• Decision Date: 06 November 1989
• Docket Number: Docket No. 1138,89-7181
• Citation: 888 F.2d 969
• Court: U.S. Court of Appeals — Second Circuit
• Parties: TUCKER ANTHONY REALTY CORPORATION, Charles F. Hovey, Jr., Laura J. Vennard, Stephen Palmer, R. Park Palmer, John C. Dusel, George Crawford and Tucker Anthony & R.L. Day, Incorporation, Plaintiffs-Appellees, v. Richard SCHLESINGER, Adson Partners, a limited partnership, and Adson Realty Associates, a limited partnership, Defendants-Appellants.

Page 969

888 F.2d 969

TUCKER ANTHONY REALTY CORPORATION, Charles F. Hovey, Jr. Laura J. Vennard, Stephen Palmer, R. Park Palmer, John C Dusel, George Crawford and Tucker Anthony & R.L. Day Incorporation, Plaintiffs-Appellees, v. Richard SCHLESINGER, Adson Partners, a limited partnership and Adson Realty Associates, a limited partnership, Defendants-Appellants.

Docket No. 1138, 89-7181.

United States Court of Appeals, Second Circuit.

Argued May 12, 1989.

Decided Nov. 6, 1989.

Peter S. Herman, New York City (Richard Sussman, New York City, of counsel), for defendants-appellants.

Michael S. Gruen, New York City (David R. Gilliatt, Gruen, Gilliatt & Livingston, New York City of counsel), for plaintiffs-appellees.

Before KEARSE, CARDAMONE and PIERCE, Circuit Judges.

CARDAMONE, Circuit Judge:

Plaintiffs, individuals and corporations, participate as limited partners in two limited partnerships: defendant Adson Realty Associates (Associates) and defendant Adson Partners (Adson). Defendant Richard Schlesinger is the sole general partner of Adson. Believing the general partner was too enterprising a steward, plaintiffs obtained a preliminary injunction on January 27, 1989 in the United States District Court for the Eastern District of New York (Sifton, J.). The preliminary injunction enjoined defendants "from making payments, directly or indirectly, to or for the benefit of defendant Schlesinger [the general partner] and entities in which [he] has an interest, without leave of the Court."

This appeal presents three principal issues: (1) whether the district court applied the correct fiduciary standard to Schlesinger's conduct as a general partner in two limited partnerships; (2) whether there is sufficient evidence that the plaintiff limited partners consented to the self-interested transactions by the general partner to make it unlikely their claim will succeed on the merits; and (3) whether the plaintiffs established irreparable harm requisite to the issuance of a preliminary injunction in their favor.

I

A brief recitation of the background facts is necessary. Associates was formed in March 1980 to finance the purchase and conversion into cooperatives of a garden apartment complex in Hartsdale, New York. Under the financing agreements, Associates acquired an option to purchase the complex from the actual purchaser, Dalewood Associates. Prior to the conversion of the complex, Associates transferred the option to Adson in exchange for a $5 million promissory note. Today, Associates is largely dormant and the note is its sole asset.

Adson exercised the option, took title to the complex, and conveyed it to the Cooperative Corporation at the completion of the conversion in November 1984. Adson retained ownership of approximately 275 unsold apartments, having a book value of ten and a half million dollars.

Defendant Schlesinger, as the general partner of Adson, had the duty of renovating, maintaining, selling, and collecting rent on the units. In carrying out his duties, he engaged in extensive self-dealing, hiring companies he owned or controlled to manage, renovate, and sell the apartments. He also lent money to Adson with interest fixed several points above the prime rate. Presumably this money has been used to pay off Schlesinger-owned companies for the actual work they performed resulting in a double profit to him: first, on the work performed by his alter-ego companies, and second, on the above-prime-rate loans. In addition, Schlesinger has used in excess of $50,000 of Adson's funds to defend himself in this action.

Plaintiffs allege that the general partner breached his fiduciary duty of loyalty to the limited partners and the partnership by engaging in such self-dealing. Schlesinger admits engaging in the self-interested transactions, but claims that this did not constitute a breach of his fiduciary duty to the limited partners because the companies he employed were hired in good faith and on commercially reasonable terms.

Adson's financial situation is precarious. Although the book value of the complex is several million dollars, the remaining units cannot be sold and turned into cash until they are vacated by existing tenants. There has been little turnover in occupancy with a consequent low rate of vacancies. Further, Adson owes Chemical Bank $1,370,000 on a loan due on May 30, 1993 that contains an acceleration of principal clause activated upon, among other events, the declaration that Adson is insolvent. Adson also owes Mark David Associates, a general partnership in which Schlesinger and William Weinstein each own a one-half interest, $500,000 due on demand. It is further obligated to Schlesinger and Weinstein individually on a demand loan for $375,000. They loaned Adson this money out of a $500,000 loan they received from Citytrust. Their obligation to Citytrust is also due on demand. Thus, Adson is effectively insolvent with current liabilities $42,000 greater than current assets, excluding all the monies due and owed to Schlesinger and to Chemical Bank that are technically not current liabilities.

Plaintiffs sought damages, injunctive relief and judicial dissolution of the two Adson partnerships, and moved for a preliminary injunction and for the appointment of a receiver. In an opinion and order dated January 27, 1989 Judge Sifton issued the preliminary injunction. Plaintiffs' showing of the partnerships' danger of bankruptcy--caused, at least in part, by Schlesinger's self-dealing--had adequately demonstrated to the district court the required irreparable harm. The district judge also determined that plaintiffs would probably succeed on the merits of their claim that Schlesinger breached his fiduciary duty to the limited partners. Specifically, the district court held that a general partner of a limited partnership owes a duty of loyalty akin to a trustee's duty to beneficiaries, and believed that duty was higher than the duty owed by a corporate director to shareholders. Based upon this standard, it held that a general partner is prohibited from self-dealing, including doing business with companies he controls or owns, unless the partnership agreement permits it or the limited partners otherwise ratify the transactions. Because Schlesinger sought only to prove the self-interested transactions were fairly taken in good faith, and proved neither an agreement nor authorization, the plaintiffs were granted preliminary injunctive relief.

Although we do not adopt the duty of loyalty standard relied upon by the district court, we find that the district court's issuance of a preliminary injunction under the proper standard would not have been an abuse of discretion. Hence, we affirm.

II

A preliminary injunction will not issue unless the movant demonstrates both irreparable harm and a likelihood of success on the merits or a sufficiently serious question regarding the merits to make it a fair ground for litigation with the balance of hardship tipping decidedly in its favor. Fireman's Fund Ins. Co. v. Leslie & Elliott Co., Inc., 867 F.2d 150, 150 (2d Cir.1989) (per curiam); Jackson Dairy, Inc. v. H.P. Hood & Sons, Inc., 596 F.2d 70, 72 (2d Cir.1979) (per curiam). Because the purpose of a preliminary injunction is to preserve the status quo, its issuance will generally not be overturned on appeal unless the district court abused its discretion. See Thornburgh v. American College of Obstetricians and Gynecologists, 476 U.S. 747, 755, 106 S.Ct. 2169, 2175, 90 L.Ed.2d 779 (1986). We examine the likelihood of success first.

A. Likelihood of Success on the Merits

1. Fiduciary Duty

The seminal case on the fiduciary duty of partners under New York law, which governs this diversity case, is Meinhard v. Salmon, 249 N.Y. 458, 164 N.E. 545 (1928). In Meinhard, plaintiff and defendant entered into a joint venture that was found to be the equivalent of a partnership. Defendant converted the joint assets, without plaintiff's knowledge, by entering into a lease arrangement with a third-party that excluded plaintiff. Likening a managing partner to a trustee, Chief Judge Cardozo wrote

Many forms of conduct permissible in a workaday world for those acting at arm's length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.

Id. at 464, 164 N.E. 545.

New York's most recent pronouncement on a partner's duties is in Birnbaum v. Birnbaum, 73 N.Y.2d 461, 539 N.E.2d 574, 541 N.Y.S.2d 746 (1989). There, plaintiffs and defendant were partners engaged in operating and managing a shopping center. The issue was whether defendant could hire a woman--who later became his wife--to develop the partnership property without the consent of his copartners. New York's highest court held that the defendant violated his fiduciary duty to the plaintiffs in two ways: he was not entitled to compensate a third party for services he was obligated to provide as part of his partnership duties, and he wrongfully engaged in self-dealing by entering into a transaction in which he placed his spouse's interest ahead of the fiduciary duty owed his copartners. Id. at 466-467, 539 N.E.2d 574, 541 N.Y.S.2d 746. Thus, Birnbaum reaffirmed that a partner is bound by an "inflexible" rule of fidelity that excludes not only patent self-dealing, but insists on the avoidance of situations where the fiduciary's own interests bring into question the interests of those to whom he owes a duty of undiluted loyalty. Id. at 466, 539 N.E.2d 574, 541 N.Y.S.2d 746.

Defendants' attempt to distinguish the instant case from Birnbaum is unpersuasive. Concededly, Birnbaum involved a general partnership, not a limited partnership, a transaction with a partner's spouse not a company owned by a partner, and a general partner who was not authorized to hire employees, not a general partner...