Rapoport v. 55 Perry Co.
1975 N.Y. App. Div. LEXIS 11436, 50 A.D.2d 54, 376 N.Y.S.2d 147 (1975)
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Rule of Law:
Unless a partnership agreement explicitly provides for the admission of a new partner, an assignment of a partner's interest to a third party, including a family member, transfers only the right to receive profits and does not confer partner status with management rights. The default statutory rule requiring unanimous consent of all partners to admit a new member remains controlling.
Facts:
- In 1969, the Rapoport family and the Parnés family entered into a partnership agreement to form 55 Perry Company, with each family owning a 50% interest.
- Paragraph 12 of the agreement stated that no partner could assign their share without majority consent, 'except for members of his immediate family who have attained majority, in which case no such consent shall be required.'
- In December 1974, Simon and Genia Rapoport assigned a 10% interest of their share to their adult children, Daniel and Kalia.
- The Rapoports informed the Parnéses of the assignment and filed an amended partnership certificate listing Daniel and Kalia as partners.
- The Rapoports then requested that the Parnéses execute a formal amended partnership agreement to reflect their children as new partners.
- The Parnéses refused, asserting that the agreement did not permit the admission of new partners without the unanimous consent of all existing partners.
Procedural Posture:
- The Rapoports (plaintiffs) initiated an action in the Supreme Court, New York County (trial court) against the Parnéses (defendants), seeking a declaratory judgment.
- The Parnéses filed an answer.
- The plaintiffs moved for summary judgment.
- The defendants requested summary judgment in their answering papers.
- The trial court denied both parties' motions for summary judgment, finding the agreement ambiguous and that a triable issue of fact existed regarding the parties' intent.
- The plaintiffs (as appellants) appealed the trial court's order to the Supreme Court, Appellate Division, First Department (intermediate appellate court).
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Issue:
Does a partnership agreement provision that allows a partner to assign their 'share in this firm' to an adult family member without the consent of other partners override the default statutory rule requiring unanimous consent to admit a new partner, thereby granting the assignee full partnership status?
Opinions:
Majority - Tilzer, J.
No. A provision allowing for the assignment of a partner's share does not override the default statutory rule requiring unanimous consent to admit a new partner. The agreement's language distinguishes between the assignment of an economic interest and the admission of a new partner with management rights. The court reasoned that New York Partnership Law makes a clear distinction between the rights of a partner (§ 50) and the rights of an assignee of a partner's interest (§ 53). An assignee is entitled only to receive profits, not to interfere in management, unless the partnership agreement states otherwise. The language in Paragraph 12 of the agreement—referring to an assignment of a 'share' and making someone 'interested with him in this firm'—mirrors the statutory language for assigning an economic interest, not for conferring full partnership status. The court contrasted this with Paragraph 15, which explicitly provides for a deceased partner's heir to 'succeed the deceased partner with the same rights and privileges,' demonstrating that the drafters knew how to confer full partnership status when intended. Therefore, the exception for family members in Paragraph 12 only waived the consent requirement for an assignment of profits, not for admission as a full partner.
Dissenting - Nunez, J.
This question cannot be determined on summary judgment. The provision in the partnership agreement is ambiguous regarding the parties' intent. When an agreement is ambiguous, its construction is a mixed question of law and fact that requires a trial to determine the parties' true intent. Therefore, the lower court's decision to deny summary judgment to both parties was correct and should be affirmed.
Analysis:
This case establishes a strong default rule favoring the protection of existing partners from the unilateral admission of new ones. It underscores the critical distinction between assigning an economic interest (the right to profits) and transferring full partnership status (the right to manage). The ruling serves as a crucial lesson in contractual drafting, emphasizing that any intention to override statutory defaults, such as the unanimous consent rule for new partners, must be stated with explicit and unambiguous language. In future cases involving similar clauses, courts will likely require clear language specifying the transfer of management rights, not just a 'share' or 'interest,' to find that a new partner has been admitted.
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