Congel v. Malfitano

***278A 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 ***279their 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.

I.

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 *344**876Partnership, 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, ***280"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 **877*345ruling that defendant had wrongfully dissolved the Partnership, as well as damages. Plaintiffs also moved for an order canceling the notice ***281of 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 ***282showing 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 **878*346that 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.

Partnership Law § 69 (2) (c) (II) states that when a partner dissolves a partnership in contravention of the partnership agreement, and the remaining partners continue the business in the same name, the dissolving partner has

"the right as against his copartners ... to have the value of his interest in the partnership, less any damages caused to his copartners by the dissolution, ascertained and paid to him in cash, or the payment secured by bond approved by the court, and to be released from all existing liabilities of the partnership; but in ascertaining the value of the partner's interest the value of the good-will of the business shall not be considered."

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 damages, if any, that defendant owed to plaintiffs. At the outset of trial, the parties stipulated that the value of defendant's interest in the Partnership as of November 24, 2006 was $4,850,000.

***283Both parties offered expert witness testimony on the applicability and amounts of certain deductions in value, including whether the stipulated value of defendant's interest in the Partnership included a component of goodwill, for which a deduction would be required under Partnership Law § 69 (2) (c) (II), and whether defendant's interest should be reduced to account for lack of marketability, in light of the absence of a readily available market to sell the partnership interest, and to account for his status as a minority partner.

Plaintiffs' valuation expert testified that the value of the Partnership contained goodwill of 44%, by which amount the value of defendant's interest should be proportionately reduced, and that his interest should be further reduced by, successively, a marketability discount of 35% and a minority discount of 66%. In testifying that a minority discount was applicable, based upon defendant's lack of control in the Partnership, the expert witness emphasized what he described as "draconian" restrictions on transferability under the agreement, and in particular a provision, which the expert testified he had never before seen in his 40-year career, that if a partner sold his or her interest, then for five years after the date of sale, the partner would be jointly and severally liable, with the buyer, for any capital costs. The expert testified that this restriction was relevant not only to the marketability of defendant's interest, but also to the minority status of the interest, in that a minority owner has no say in whether there would be a capital call.

Defendant's valuation expert testified that the Partnership-as a real estate holding company-did not have goodwill, but conceded that he did not regularly value assets of that type. The expert witness further testified that he had been "advised, under the relevant statutes, that a minority discount was not applicable," adding that while a minority discount "would be applicable" if the court were determining "fair market value," it did not apply when determining "fair value." Because of this "advice," the expert witness did not argue, in the alternative, that the amount of the minority discount proposed by plaintiffs' expert, i.e., 66%, was unreasonable or in error.

*347**879Conversely, defendant's expert did not contest that a marketability discount would apply, but valued it at 25%, rather than 35%. Notably, in posttrial papers, defendant failed to preserve any general objection to the marketability discount as legally inapplicable, focusing instead on the amount of that discount.

***284A second plaintiffs' witness testified about plaintiffs' legal fees, insisting that the fees had been incurred as a direct result of defendant's wrongful dissolution, including time and labor required to prevent the consequences that would have ensued if the dissolution had not been deemed wrongful. Defendant himself testified, and challenged the inclusion of plaintiffs' legal fees as damages.

Supreme Court ruled that the stipulated value of $4,850,000 would be reduced by 15% or $727,500 to represent the value of the Partnership's goodwill. The trial court reasoned "that the partnership does indeed possess goodwill of its own," because the mall "and its tenants attract regular, loyal shoppers, which point towards the existence of some goodwill." The trial court explained that "[a] potential purchaser of the Poughkeepsie Galleria would more than likely pay more for an established going concern that already has tenant retail stores that attract a loyal customer base," and in this manner "would pay extra for the acquisition of goodwill." However, the court disagreed with plaintiffs' figure of 44% for the goodwill deduction, and concluded that "the 'premium' a buyer would likely pay for goodwill under the facts of this case is 15%."

Next, Supreme Court applied a 35% or $1,442,875 marketability discount, to the stipulated value as reduced by goodwill, to account for the limited marketability of defendant's interest, generating a discounted value of $2,679,625. The trial court explained that it had taken into consideration all factors inhibiting transfer of defendant's partnership interest "resulting from a limited market." However, the trial court declined to apply a minority discount, citing cases that have barred the use of a minority discount in evaluation of a minority shareholder's stock in a closely held corporation.

Finally, Supreme Court ruled that defendant owed damages in the amount of $1,516,452 in plaintiffs' attorneys' fees and $79,705.50 in plaintiffs' experts' fees. The trial court reasoned that the Partnership was required "to incur enormous legal fees" to avoid the "devastating consequence" of a forced liquidation, and wrote that, although "[b]oth parties contributed to the litigious nature of this case," defendant was "clearly much more responsible than the plaintiffs."

The net result was a judgment in favor of defendant and against plaintiffs in the amount of $1,083,467.50, to be reduced ***285by prejudgment interest of 9% in favor of plaintiffs on the fees award.3 Defendant appealed, and plaintiffs cross-appealed.

Defendant contended, among other things, that the Appellate Division should overturn its 2009 rulings holding that he had wrongfully dissolved the Partnership, in light of this Court's decision in Gelman v. Buehler, 20 N.Y.3d 534, 964 N.Y.S.2d 80, 986 N.E.2d 914 (2013), which provides a detailed analysis of the nature of an "at-will" partnership.4 For their part, plaintiffs *348**880contended, among other things, that a minority discount should have been applied to the valuation of defendant's interest in the Partnership.

In May 2016, the Appellate Division modified Supreme Court's judgment, by deleting the provision in favor of defendant and against plaintiffs, affirmed as modified, and remitted to the trial court for a new calculation incorporating a 66% minority discount, applied to the discounted value of defendant's interest in the partnership, and for entry of a new judgment ( 141 A.D.3d 64, 76, 32 N.Y.S.3d 264 [2d Dept. 2016] ).

The Appellate Division adhered to its earlier determination that defendant had wrongfully dissolved the Partnership, noting that

"[t]he facts of Gelman, involving an alleged oral partnership agreement which lacked a definite term of duration, are plainly distinguishable from the facts of this case. In contrast to Gelman, the written partnership agreement here specified that the partnership would continue until terminated by a majority vote of the partners, and was thus not dissolvable at will by a single partner" (141 A.D.3d at 70, 32 N.Y.S.3d 264 [citation omitted] ).5

With respect to the minority discount, the Appellate Division distinguished ***286Matter of Friedman v. Beway Realty Corp., 87 N.Y.2d 161, 638 N.Y.S.2d 399, 661 N.E.2d 972 (1995), because that case involved the determination of the "fair value" of stock held by a dissenting shareholder under the Business Corporation Law, whereas "this case ... involves the determination of the 'value' of the shares of a partner who has wrongfully caused the dissolution of a partnership pursuant to Partnership Law § 69 (2) (c) (II)" (141 A.D.3d at 73, 32 N.Y.S.3d 264). The Appellate Division relied instead on Anastos v. Sable, 443 Mass. 146, 819 N.E.2d 587 (2004), in which the Massachusetts Supreme Judicial Court analyzed that state's equivalent of the New York Partnership Law provisions implicated here.

"Here, as in Anastos, the partnership remains a going concern, and the defendant has no right to compel a liquidation sale of the partnership's shopping mall and receive a proportionate share of the liquidation value of that asset. Under these circumstances, a minority discount may properly be applied to account for the defendant's lack of control in the partnership as a going concern." (141 A.D.3d at 74-75, 32 N.Y.S.3d 264.)

With regard to the goodwill discount, the Appellate Division held that the evidence at trial supported Supreme Court's determination that the Partnership "had goodwill in connection with the operation of the shopping mall that it owned" (141 A.D.3d at 75, 32 N.Y.S.3d 264). The Appellate Division found the plaintiffs' expert's testimony that a 66% minority discount was appropriate to be credible and supported by the record ( id. ), and summarily rejected defendant's challenge to the marketability discount ( id. ). On the subject of attorneys' fees, the Appellate Division held *349**881that "the reasonable amount of certain legal expenses incurred by the plaintiffs" constituted "recoverable expenditures directly occasioned and made necessary by the defendant's breach of the partnership agreement, and were thus properly included as damages" ( id. ).

Upon remand, Supreme Court issued an amended judgment applying the minority discount and further reducing defendant's interest in the Partnership to $911,072.50; ruling that the plaintiffs were entitled to $1,822,460.25 in fees and statutory interest; and concluding that defendant owed plaintiffs $911,387.75.

We granted defendant leave to appeal, pursuant to CPLR 5602 (a) (1) (ii), from Supreme Court's amended judgment ***287(28 N.Y.3d 1129, 45 N.Y.S.3d 369, 68 N.E.3d 97 [2017] ). The appeal brings up for review the Appellate Division's 2009 and 2016 orders.

II.

The first issue, as framed by the parties, is whether defendant's unilateral dissolution of the Partnership violated the agreement. The trial court and the Appellate Division both ruled that the dissolution was wrongful, but focused on whether the agreement specified a "definite term" or "particular undertaking" under Partnership Law § 62 (1) (b). Defendant contends that the Partnership was "at will" because the agreement did not contain a "definite term" or "particular undertaking" under the statute. Plaintiffs urge us to affirm on an alternative ground, namely that because the agreement sets out the methods of dissolving the Partnership in accordance with the agreement, the wrongfulness of defendant's dissolution can be decided without recourse to the statute. We agree with plaintiffs on this issue.

The governing law of partnerships in New York is the Partnership Law of 1919, which enacted into law the original Uniform Partnership Act (UPA). It is well established, however, that "[t]he Partnership Law's provisions are, for the most part, default requirements that come into play in the absence of an agreement" ( Ederer v. Gursky, 9 N.Y.3d 514, 526, 851 N.Y.S.2d 108, 881 N.E.2d 204 [2007] ). The statutory scheme

"applies only when there is either no partnership agreement governing the partnership's affairs, the agreement is silent on a particular point, or the agreement contains provisions contrary to law. Where an agreement addresses a particular issue, the terms of the agreement control, and the rights and obligations of the parties are determined by reference to principles of contract law. Thus, an agreement specifying the circumstances under which a partnership may be dissolved is not at will." ( BPR Group Ltd. Partnership v. Bendetson, 453 Mass. 853, 863-864, 906 N.E.2d 956 [2009] [internal quotation marks and citations omitted]; accord e. g.Matter of Popkin & Stern, 340 F.3d 709, 714 [8th Cir. 2003] ).

Indeed, partners may, "absent prohibitory provisions of the statutes or of rules of the common law relating to partnerships, or considerations of public policy, ... include in the partnership ***288articles any agreement" the partners desire to include ( Cohen v. Lord, Day & Lord, 75 N.Y.2d 95, 102-03, 551 N.Y.S.2d 157, 550 N.E.2d 410 [1989] [internal quotation marks omitted] ). "[T]he partners of either a general or limited partnership, as between themselves, may include in the partnership articles any agreement they wish concerning the sharing of profits and losses, priorities of distribution on winding up of the partnership affairs and other matters. If complete, as between the partners, the agreement so *350**882made controls" ( Lanier v. Bowdoin, 282 N.Y. 32, 38, 24 N.E.2d 732 [1939] ).

In short, parties to a partnership agreement generally have the right to contract around a provision of the Partnership Law, provided of course they do so in language that is "clear, unequivocal and unambiguous" ( Springsteen v. Samson, 32 N.Y. 703, 706 [1865] ; see generally Vermont Teddy Bear Co. v. 538 Madison Realty Co., 1 N.Y.3d 470, 475, 775 N.Y.S.2d 765, 807 N.E.2d 876 [2004] ). No particular magic words need be recited, provided that the parties' intent is clear. With these principles in mind, we now summarize the Partnership Law provisions relied on by the lower courts, in order to assess whether they come into play or whether the agreement controls.

The Partnership Law provides that dissolution does not violate a partnership agreement if it occurs "[b]y the termination of the definite term or particular undertaking specified in the agreement" ( Partnership Law § 62 [1 ] [a] ). For example, if a partnership agreement provides that the agreement will terminate on a certain date, then the dissolution of the partnership on that date will be in accordance with the agreement. Moreover, if "no definite term or particular undertaking is specified" in the partnership agreement, then the partnership is said to be an "at-will" partnership, and a unilateral dissolution "[b]y the express will of any partner" does not violate the partnership agreement ( Partnership Law § 62 [1 ] [b] ). "[W]hen a partnership has no definite term or particular objective to be achieved, it may be dissolved at any time by the express will of one or more of the partners" ( Harshman v. Pantaleoni, 294 A.D.2d 687, 741 N.Y.S.2d 348 [3d Dept. 2002] ).

By contrast, the Partnership Law provides that a partnership is dissolved "[i]n contravention of the agreement between the partners, where the circumstances do not permit a dissolution under any other provision of this section, by the express will of any partner at any time" ( Partnership Law § 62 [2 ] ). In other words, "[w]hen the agreement specifies a durational term, or a defined project, an attempt unilaterally to dissolve the ***289partnership would violate the partnership agreement" ( Scholastic, Inc. v. Harris, 259 F.3d 73, 85 [2d Cir. 2001] ). While "partners are statutorily empowered to dissolve the partnership at any time, wrongfully dissolving partners may be liable to the expelled partner for breach of the partnership agreement" ( Dawson v. White & Case, 88 N.Y.2d 666, 670 n. 1, 649 N.Y.S.2d 364, 672 N.E.2d 589 [1996] [citation omitted]; accord Napoli v. Domnitch, 18 A.D.2d 707, 708, 236 N.Y.S.2d 549 [2d Dept. 1962], affd 14 N.Y.2d 508, 248 N.Y.S.2d 228, 197 N.E.2d 623 [1964] ).

Partnership Law § 62 (1) (b) codifies common-law doctrine that "a contract of partnership, containing no stipulation as to the time during which it shall continue in force ... may be dissolved by either partner at his own will, at any time" ( Karrick v. Hannaman, 168 U.S. 328, 333-334, 18 S.Ct. 135, 42 L.Ed. 484 [1897] ), unless the "partnership has for its object the completion of a specified piece of work, or the effecting of a specified result" ( Hardin v. Robinson, 178 App.Div. 724, 729, 162 N.Y.S. 531 [1st Dept. 1916] ; see Gelman, 20 N.Y.3d at 537, 964 N.Y.S.2d 80, 986 N.E.2d 914 ).

Here, the agreement stated that the Partnership "shall continue until it is terminated as hereinafter provided," and, in a subsequent provision, 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 **883*351of the Partnership to be carried on or for the Partners to carry it on in Partnership." The partners clearly intended that the methods provided in the agreement for dissolution were the only methods whereby the partnership would dissolve in accordance with the agreement, and by implication that unilateral dissolution would breach the agreement. In other words, the agreement contemplated dissolution only in two instances, leaving no room for other means of dissolution that would be in accordance with its terms.6

It follows that Partnership Law § 62 (1) (b) has no application here, because the parties to the agreement clearly specified under what terms it could be properly dissolved, i.e., what would constitute a dissolution under the agreement and what would constitute a dissolution in contravention of it. Accordingly, this was plainly not intended to be an "at-will" partnership.

***290Gelman, therefore, does not apply. In that case, which involved an oral partnership agreement, with "a flexible temporal framework" and a "sequence of anticipated partnership events" that we described as "amorphous" ( Gelman, 20 N.Y.3d at 538, 964 N.Y.S.2d 80, 986 N.E.2d 914 ), we applied the Partnership Law to conclude that the omission of an identifiable termination date and of a particular undertaking rendered the partnership "at will." We did so of necessity. An oral agreement generally does not "set forth the circumstances under which the partnership could be dissolved without breaching the partnership agreement" ( BPR Group Ltd. Partnership, 453 Mass. at 864 n. 15, 906 N.E.2d 956 ). Here, by contrast, we are not required to apply the pertinent Partnership Law provisions to determine whether the dissolution breached the agreement. The breach is clear from the agreement alone.7

Although the lower courts erred in applying Partnership Law § 62 (1) (b) to decide whether defendant violated the agreement, the conclusion they reached, i.e., that defendant's dissolution was wrongful, is correct.

III.

Plaintiffs contend that they are entitled to attorneys' and experts' fees, as part of their damages under Partnership Law § 69 (2) (a) (II). Defendant insists that, even assuming that this Court rules against him on the question of breach, he should not be required to pay plaintiffs' attorneys' or experts' fees. On this issue, we agree with defendant.

Under Partnership Law § 69 (2) (a) (II), "[w]hen dissolution is caused in contravention of the pa