Congel v. Malfitano
101 N.E.3d 341, 76 N.Y.S.3d 873, 31 N.Y.3d 272 (2018)
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Rule of Law:
A partnership agreement that specifies the exclusive methods for dissolution governs over statutory default rules, rendering any unilateral dissolution outside those methods wrongful. In valuing the interest of a wrongfully dissolving partner where the business continues, the value is subject to deductions for goodwill and for the partner's minority status, but the non-breaching partners may not recover their litigation-related attorneys' fees as damages.
Facts:
- In 1985, Marc A. Malfitano and seven others formed the Poughkeepsie Galleria Company, a general partnership, to own and operate a shopping mall.
- The partnership agreement stipulated that the partnership would continue until terminated by either a majority vote of the partners (at least 51%) or by the business becoming unlawful.
- Management was vested in a three-member Executive Committee composed of Robert J. Congel, Bruce A. Kenan, and James A. Tuozzolo.
- In the mid-2000s, Malfitano, a minority partner, became dissatisfied with the partnership and was unsuccessful in negotiating a buyout of his interest.
- On November 24, 2006, Malfitano sent a letter to the other partners unilaterally declaring the partnership dissolved, citing a provision of New York's Partnership Law.
- Malfitano then recorded a notice of pendency against the mall property, which interfered with the partnership's efforts to refinance a mortgage.
- The remaining partners, led by the Executive Committee, contended that Malfitano's act constituted a wrongful dissolution and continued to operate the business.
Procedural Posture:
- The Partnership's Executive Committee (Congel, et al.) sued Malfitano in New York Supreme Court (the trial court of first instance) for breach of contract, seeking a declaratory judgment that the dissolution was wrongful.
- The trial court granted summary judgment to Congel, et al., finding the dissolution was wrongful, and the Appellate Division (an intermediate appellate court) affirmed.
- The case was remitted to the Supreme Court for a bench trial to determine the value of Malfitano's interest and damages.
- Following trial, the Supreme Court applied discounts for goodwill and marketability but rejected a minority discount, and awarded over $1.5 million in attorneys' fees to Congel, et al. as damages.
- Both parties appealed to the Appellate Division.
- The Appellate Division modified the judgment, holding that a 66% minority discount must be applied, while affirming the other discounts and the award of attorneys' fees.
- An amended judgment was entered by the Supreme Court, from which Malfitano was granted leave to appeal to the Court of Appeals of New York (the state's highest court).
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Issue:
Does New York Partnership Law permit the application of a minority discount to the interest of a partner who wrongfully dissolves a partnership and an award of attorneys' fees as damages to the remaining partners?
Opinions:
Majority - Fahey, J.
No as to attorneys' fees, but Yes as to the minority discount. A minority discount may be applied when valuing the interest of a wrongfully dissolving partner, but attorneys' fees from the resulting litigation are not recoverable as damages under the American Rule. The court first determined that Malfitano's dissolution was wrongful because the partnership agreement specified the exclusive means of dissolution, which Malfitano did not follow; the agreement's terms control over the statutory defaults. Regarding damages, the court held that awarding attorneys' fees would violate New York’s well-established American Rule, which requires each party to pay its own litigation costs unless a statute or contract provides otherwise. Partnership Law § 69 does not authorize such a fee award. However, the court affirmed the application of a minority discount to the value of Malfitano's interest. It distinguished this case from corporate shareholder appraisal proceedings where 'fair value' is the standard and minority discounts are rejected. Here, the statute requires valuation of the partner's specific 'interest' in a continuing concern, not a pro-rata share of the entire business as if it were being liquidated. Therefore, a discount reflecting the lack of control and reduced market value inherent in a minority interest is appropriate.
Dissenting - Feinman, J.
No, a minority discount should not be applied to the value of the wrongfully dissolving partner's interest. The dissent agrees with the majority on all points except for the application of a minority discount. Applying such a discount unfairly penalizes the exiting partner and provides a windfall to the remaining partners, who are not acquiring a new minority position but are consolidating their existing control. The term 'value' in the Partnership Law should be interpreted as the partner's pro-rata share of the partnership's value as a going concern, which is incompatible with a minority discount. This approach would align with the majority rule in corporate law, which rejects such discounts to prevent the controlling parties from enriching themselves at the expense of the minority party. Applying the discount inflicts a 'double penalty' on a minority partner, who already suffers from a lack of control.
Analysis:
This decision solidifies the principle of freedom of contract in partnerships, confirming that specific dissolution clauses in a partnership agreement will override the default statutory rules. The most significant impact of the case lies in its valuation analysis, where it creates a clear distinction between partnership dissolutions and corporate 'fair value' appraisals. By permitting a minority discount in the partnership context, the court increases the financial risk for minority partners who wrongfully dissolve an entity, potentially deterring such actions but also reducing the payout for those who exit. Lastly, the court's strict application of the American Rule on attorneys' fees reinforces a high bar for recovering litigation costs in breach of contract cases, limiting 'damages' to those directly and causally linked to the breach itself, not the subsequent lawsuit.
