Ederer v. Gursky
9 N.Y.3d 514, 851 N.Y.S.2d 108, 881 N.E. 2d 204 (2007)
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Rule of Law:
New York Partnership Law § 26(b), which provides a liability shield for partners in a registered limited liability partnership (LLP), does not protect partners from personal liability for obligations owed to other partners, such as the fiduciary duty to account.
Facts:
- In 1998, Louis Ederer joined Steven R. Gursky's law firm, a professional corporation (PC), with an understanding he would become an equity partner.
- In May 2000, Gursky orally agreed to make Ederer a 30% shareholder in the PC for $600,000, to be paid in installments from Ederer's future distributions.
- In February 2001, the PC was converted into a registered limited liability partnership, Gursky & Ederer, LLP (the LLP), without a written partnership agreement.
- In July 2001, Mitchell B. Stern, Martin Feinberg, and Michael A. Levine were admitted as partners, collectively acquiring a 15% interest, leaving Gursky with 55% and Ederer with 30%.
- In July 2002, Gursky agreed to forgive the remaining $300,000 Ederer owed for his equity interest.
- In June 2003, following a dispute with Gursky, Ederer announced his decision to withdraw from the partnership.
- On June 26, 2003, Ederer signed a withdrawal agreement with the LLP and PC, which detailed the terms of his departure.
- On or about July 4, 2003, Ederer formally withdrew from the LLP.
Procedural Posture:
- Louis Ederer commenced an action in New York Supreme Court (the trial court) against his former firm, its successor entities, and his former partners individually.
- The individual defendants moved to dismiss the complaint against them personally, arguing that Partnership Law § 26(b) shielded them from liability.
- The Supreme Court denied the defendants' motion and granted Ederer's cross-motion for an accounting against all defendants, including the individuals.
- The defendants appealed to the Appellate Division of the Supreme Court, First Department (an intermediate appellate court).
- The Appellate Division affirmed the trial court's order.
- The Appellate Division granted the defendants leave to appeal to the Court of Appeals (New York's highest court) and certified a question for its review.
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Issue:
Does New York Partnership Law § 26(b) shield individual partners in a registered limited liability partnership (LLP) from personal liability for the partnership's obligations to a withdrawing partner, such as the duty to provide an accounting?
Opinions:
Majority - Read, J.
No. New York Partnership Law § 26(b) does not shield partners in an LLP from personal liability for their fiduciary obligations to one another. The statute was enacted to limit a partner's vicarious liability for partnership debts owed to third parties, not to abrogate the fundamental duties partners owe each other. The court reasoned that the legislative history and the statute's placement within the Partnership Law (in the article governing relations with third parties, not the article governing relations among partners) confirm this interpretation. Furthermore, long-standing fiduciary duties, such as the right to an accounting under Partnership Law § 74, were not explicitly made subject to § 26(b) and thus remain fully enforceable against individual partners. The absence of a written partnership agreement means these default statutory duties govern the partners' relationship.
Dissenting - Smith, J.
Yes. Partnership Law § 26(b) should shield the individual partners from personal liability. The plain text of the statute states that a partner is not liable for 'any debts, obligations or liabilities' of the partnership, without creating an exception for debts owed to former partners. A former partner is functionally a third-party creditor of the partnership, and there is no logical reason to treat them more favorably than other creditors. The majority's holding creates potentially perverse outcomes where innocent partners could be held personally liable for partnership shortfalls or for the misconduct of another partner, undermining the very liability protection the LLP structure was intended to provide, which is meant to be equivalent to that of a professional corporation's shareholders.
Analysis:
This decision clarifies the scope of the liability shield for partners in a New York LLP, establishing a critical distinction between external and internal liabilities. The ruling holds that the shield in Partnership Law § 26(b) protects against vicarious liability for third-party claims but does not abrogate the fundamental fiduciary duties partners owe to one another, such as the duty to account. This holding reinforces that the LLP structure is not an absolute shield against all personal liability. The decision underscores the importance of comprehensive written partnership agreements to define, and potentially limit, the scope of intra-partnership obligations, as their absence leaves the default rules of the Partnership Law in full effect.
