New York Court Rules That a Partner May Unilaterally Withdraw from Partnership That Lacks a Defined Duration or Objective

file551263252097.jpgA partner in a general partnership based on an oral agreement could unilaterally withdraw from the partnership, the New York Court of Appeals held, because the partnership agreement did not define a specific duration or objective for the business. Gelman v. Buehler, 2013 NY Slip Op. 01991 (N.Y. Sup. Ct., Mar. 26, 2013). New York law allows any individual partner to withdraw and trigger the dissolution of a partnership if the underlying partnership agreement does not identify a “definite term or particular undertaking.” N.Y. Pship L. § 62(1)(b). The court rejected the plaintiff’s argument that a general goal, defined in stages, was sufficient to meet this legal standard. Business lawyers often advise their clients to put agreements in writing, and this case demonstrates one possible outcome if business partners fail to do so.

According to the court’s opinion, the plaintiff and defendant agreed to form a partnership in 2007 shortly after graduating from business school. The plaintiff would later describe their business plan in seven stages:
1. Raise money to start the partnership’s operation;
2. Find a business to purchase;
3. Raise additional money to buy the business;
4. “Operate the business to increase its value”;
5. Reach the “liquidity event,” the point when they could sell the business at a profit;
6. Identify a buyer for the business; and 7. Sell it at a profit.
Gelman, slip op. at 4.

The two partners reportedly anticipated a four- to seven-year time frame for their business plan. They spent several months looking for investors, but the defendant withdrew from the partnership after a dispute with the plaintiff.

The plaintiff sued the defendant for breach of contract, arguing that he “could not unilaterally terminate his obligations under the [partnership] agreement.” Id. at 2. The defendant moved to dismiss the suit, arguing that § 62(1)(b) permitted dissolution of the partnership because their oral agreement did not provide a “definite term or particular undertaking.” The trial court granted the motion to dismiss, but the appellate court reinstated the breach of contract claim. It found that the “liquidity event” defined by the plaintiff was sufficient to establish a “definite term,” and that the goal of buying a business with the goal of growing it until they could sell it at a profit was a “particular undertaking” within the statute’s meaning. Id.

The plaintiff appealed to the Court of Appeals, which reversed the appellate court and dismissed the lawsuit. It held that the language of § 62(1)(b) referred to “identifiable termination date[s]” and “specific objective[s] or project[s].” Id. at 3. It cited multiple cases involving partnerships found to be dissolvable under § 62(1)(b), and held that the partnership agreement in the present case was “less definitive” than the ones in those cases. Id. at 4. It also cited a case that met the statute’s standard, which involved a partnership agreement that identified a specific piece of real estate and development project, with defined dates. St. Lawrence Factory Stores v. Ogdensburg Bridge & Port Auth., 202 A.D.2d 844, 845 (N.Y. App. Div. 3rd 1994).

The New York business partnership attorneys at Samuel C. Berger, PC offer fixed-fee legal-service packages to New York and New Jersey entrepreneurs and businesses. We represent businesses in a wide range of legal issues with a commitment to helping our clients grow and prosper. Contact us today online or at (212) 380-8117 to speak to a member of our legal team.

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The Basics of Mergers and Acquisitions for New Jersey and New York Small Businesses, New York & New Jersey Business Lawyer Blog, June 7, 2013
Winding Up and Dissolving a New Jersey Business, New York & New Jersey Business Lawyer Blog, April 11, 2013
Five Common Mistakes New York and New Jersey Startup Businesses Make, New York & New Jersey Business Lawyer Blog, July 12, 2012
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