Riviera Congress Associates v. Yassky, 18 N.Y.2d 540 (1966)
Limited partners may bring a derivative suit on behalf of the partnership when those in control of the business (the general partners) wrongfully decline to enforce a claim belonging to the partnership, particularly when the general partners’ self-dealing creates a conflict of interest.
Summary
Five limited partners in a real estate syndicate (Riviera Congress Associates) sued the general partners, alleging breach of fiduciary duty and seeking to recover unpaid rent from another entity controlled by the general partners (Mid-Manhattan Associates). The New York Court of Appeals held that the limited partners had the right to bring a derivative suit on behalf of the partnership because the general partners, due to their conflict of interest, wrongfully declined to pursue the claim for unpaid rent. However, the court also found that there were triable issues of fact regarding whether the general partners’ self-dealing was authorized by the partnership agreement, precluding summary judgment for the limited partners.
Facts
A real estate syndicate (Riviera Congress Associates) was formed to own a motel, with the individual defendants as general partners. The prospectus indicated the motel would be leased to Yassky Corporation, whose principals were also the general partners of the Syndicate. Yassky Corporation was thinly capitalized. The lease was assigned to Riviera Corporation of Manhattan, then to Mid-Manhattan Associates (another limited partnership controlled by the same general partners), and ultimately back to a subsidiary of the Syndicate, Riviera Congress Associates, Inc. The general partners later advised the limited partners that they accepted surrender of the operating lease due to financial losses, ceasing rental income. The limited partners alleged the general partners breached their fiduciary duty.
Procedural History
The limited partners sued in the name of the partnership, alleging three causes of action, including a claim for unpaid rent. The defendants asserted a release as a defense. The Supreme Court, Special Term granted summary judgment to the plaintiffs. The Appellate Division modified, finding issues of fact regarding the defendants’ good faith because the agreement permitted self-dealing, and stated the plaintiffs could sue individually for an accounting, but not derivatively. The case was appealed to the New York Court of Appeals.
Issue(s)
1. Whether limited partners can bring a derivative suit on behalf of the partnership to enforce a partnership claim when the general partners, who control the business, wrongfully decline to do so?
2. Whether the plaintiffs are entitled to summary judgment on their claim for unpaid rent, given the defendants’ defense of release and the potential for authorized self-dealing?
Holding
1. Yes, because the general partners were in a conflict of interest and therefore the limited partners, as beneficiaries of a trust, have the right to sue on behalf of the partnership.
2. No, because there are disputed issues of fact regarding whether the general partners’ self-dealing was authorized by the partnership agreement and whether they acted in good faith.
Court’s Reasoning
The court reasoned that while Section 115 of the Partnership Law generally prevents limited partners from interfering with the general partners’ management, this does not apply when the general partners wrongfully refuse to enforce a partnership claim. The court emphasized the fiduciary duty owed by general partners to limited partners, making the latter cestuis que trustent. As such, they have the right to sue for the benefit of the trust (the partnership) if the trustees (the general partners) refuse to perform their duty. The court characterized the suit as a derivative action, a combination of a claim against the trustees for refusing to sue and a claim against the party liable to the trust.
Regarding the summary judgment issue, the court acknowledged the apparent self-dealing but noted that partnership agreements can authorize such conduct. The prospectus disclosed the general partners’ intention to lease the premises to their own corporation, which, according to the court, “has the effect of ‘exonerating’ the defendants, at least in part, ‘from adverse inferences which might otherwise be drawn against them’ simply from the fact that they dealt with themselves.” The court concluded that the lower court incorrectly granted summary judgement because a trial was required to determine whether the defendants acted honestly and in good faith.
The Court quoted Everett v. Phillips, 288 N.Y. 227, 237 stating the disclosure of the general partners’ intent to lease the premises to their own corporation “has the effect of ‘exonerating’ the defendants, at least in part, ‘from adverse inferences which might otherwise be drawn against them’ simply from the fact that they dealt with themselves.”