Tropeano v. Dorman
2006 WL 744557, 441 F.3d 69, 2006 U.S. App. LEXIS 7775 (2006)
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Rule of Law:
In a partnership that transitions from a fixed term to an "at will" partnership under the Uniform Partnership Act, a retiring partner's statutory right to receive the liquidation value of their interest upon dissolution (Mass. Gen. Laws ch. 108A, § 42) is not displaced unless the partnership agreement contains an express and specific alternative valuation method for such an occurrence.
Facts:
- On January 8, 1964, Alfred Tropeano, Louis Tropeano, Joseph Tropeano, Philip Tropeano, and Wilbur Nylander created the Captain Parker Arms Partnership to acquire land, construct apartments, and operate for a term of thirty years.
- A nominal trust, T&N Realty Trust, was created to hold the real estate for the partners' benefit, and the Partnership Agreement incorporated Massachusetts General Laws Chapter 108A (the Uniform Partnership Act).
- After Joseph Tropeano died, the surviving partners executed a Modification to the Partnership Agreement on March 11, 1987, stating that Joseph's death did not dissolve the partnership, outlining how Joseph's interest would be paid, and modifying certain aspects like termination by a 60% vote and partner's rights to assign or sell interests.
- The Modification permitted partners to assign or sell interests to their wives, children, or grandchildren without consent, and to others with consent after offering refusal rights to the other partners.
- Several partners, including many of the current parties, subsequently transferred their interests to family members as permitted by the Modification.
- The Partnership continued to operate without interruption after its specified 30-year term ended on January 8, 1994, with new interests acceding after this date.
- On August 21, 2003, Philip, Peter, and Carolyn Tropeano, holding a 42.86% interest, served written notice of their intent to retire effective October 1, 2003, and sought to have the value of their interests ascertained as of that date under Mass. Gen. Laws ch. 108A, § 42.
- The defendants responded that the plaintiffs were not entitled to withdraw and receive the liquidation value, offering instead to purchase their minority interest for a reduced sum under paragraph 6 of the Modification.
Procedural Posture:
- Plaintiffs Philip L. Tropeano, Peter Tropeano, and Carolyn Patten filed a complaint against defendants Charlene Dorman, Bianca Dorman, Lydia Dorman, Todd Dorman, T&N Realty Trust, and Captain Parker Arms Partnership in the United States District Court for the District of Massachusetts, asserting a right to retire and seeking an accounting under Mass. Gen. Laws ch. 108A, § 42.
- Defendants moved to dismiss the initial complaint.
- Plaintiffs filed an amended complaint, requesting declaratory judgments that the Partnership was at will, had been lawfully terminated by plaintiffs, and required winding up, liquidation, and distribution according to their interests.
- Defendants moved to dismiss the amended complaint or, alternatively, for summary judgment.
- Plaintiffs filed a consolidated pleading opposing the motion to dismiss and cross-moved for summary judgment and declaratory judgments.
- The District Court granted the defendants' motion to dismiss and denied the plaintiffs' cross-motion for summary judgment.
- Plaintiffs, Philip L. Tropeano, Peter Tropeano, and Carolyn Patten, appealed the dismissal of their complaint and the denial of their motion for summary judgment to the United States Court of Appeals for the First Circuit.
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Issue:
Does a partnership agreement's modification, which includes provisions for termination by a super-majority vote and for limited sales or assignments of interests to third parties, constitute an "otherwise agreed" method of valuation that displaces a retiring partner's statutory right to receive liquidation value when the partnership has become one "at will" by operation of law?
Opinions:
Majority - Campbell, Senior Circuit Judge
No, the partnership agreement's modification did not "otherwise agree" to a different valuation method that displaces a retiring partner's statutory right to receive liquidation value in an "at will" partnership. The court first affirmed the district court's finding that the Partnership became an "at will" partnership after the original 30-year term expired on January 8, 1994. Massachusetts General Laws ch. 108A, § 23(1) dictates that when a partnership for a fixed term continues without express agreement after its term, it becomes a partnership at will. The Modification, executed seven years before the term expired, did not strike or modify the 30-year term; it explicitly affirmed the original agreement "except as herein modified," and the 60% termination vote provision (Paragraph 4) did not create a "particular undertaking" to prevent at-will status. Business activities that may continue indefinitely, like managing rental property, are not "particular undertakings." Since the Partnership was "at will," the plaintiffs, as partners, had an absolute right to dissolve it without violating the agreement under Mass. Gen. Laws ch. 108A, § 31(1) and § 38(1). Therefore, they were entitled to their full share of the partnership's net assets unless the partners had "otherwise agreed" to a different distribution method under § 42. The court found that the Modification's Paragraph 6, which outlines a partner's limited right to assign or sell interests to third parties subject to refusal and veto rights, does not constitute an "otherwise agreed" valuation method for a retiring at-will partner's share. Paragraph 6 is a restrictive provision for ongoing partnership operations, not a mechanism for the partnership to purchase a retiring partner's interest or to value shares upon a lawful dissolution. It makes no mention of retirement or dissolution. The only provision in the Modification pertaining to share valuation upon dissolution and termination is Paragraph 8, which calls for a pro-rata distribution to all partners after liquidation, a method substantially similar to § 42. The court distinguished cases where partnership agreements specifically provided for the valuation of a deceased or withdrawing partner's interest, emphasizing that no such clear provision existed here to displace the UPA's default rules for at-will partnerships. The court concluded that interpreting Paragraph 6 to cover at-will retirement valuation would vastly stretch its language and that § 23(1) implies that provisions inconsistent with an at-will partnership (like restrictions on withdrawal) may not apply in that context. The court also noted the Modification was not ambiguous, so no trial was needed to determine intent.
Analysis:
This case clarifies the interplay between default statutory rules for partnerships at will and specific provisions in partnership agreements, especially concerning "unless otherwise agreed" clauses. It emphasizes that for an agreement to displace a statutory right, such as a partner's right to liquidation value upon withdrawal from an at-will partnership, the agreement must contain a clear, express, and specifically applicable alternative method. The ruling suggests courts will not broadly interpret restrictive clauses designed for term partnerships or third-party sales to cover scenarios like at-will retirement, thus protecting a withdrawing partner's default UPA rights unless unequivocally contracted away. This case serves as a cautionary tale for partnership drafters to explicitly address valuation upon any type of dissolution or withdrawal to avoid reliance on statutory defaults.
