New York Law Review

Tag: Partnership Law

  • In re Thelen LLP, 24 N.Y.3d 16 (2014): Law Firm Dissolution and “Unfinished Business” Doctrine

    In re Thelen LLP, 24 N.Y.3d 16 (2014)

    Under New York law, a dissolved law firm’s pending hourly fee matters are not partnership property or unfinished business entitling the firm to profits earned on those matters after dissolution; a law firm only owns the right to be compensated for services already rendered.

    Summary

    The New York Court of Appeals addressed certified questions from the Second Circuit regarding whether a dissolved law firm has a property interest in hourly fee matters pending at the time of dissolution, such that the firm is entitled to profits earned on those matters as unfinished business. The court held that pending hourly fee matters are not partnership property under New York law. The court reasoned that clients have the unfettered right to choose their counsel and terminate the attorney-client relationship at any time. A law firm’s expectation of future business is too contingent to create a property interest. The court emphasized public policy considerations, including client autonomy and attorney mobility, which would be negatively impacted by treating pending hourly matters as firm property.

    Facts

    The law firm Thelen LLP dissolved in 2008 and filed for bankruptcy in 2009. Prior to dissolution, Thelen’s partners adopted an “Unfinished Business Waiver” intending to waive any rights to unfinished business of the partnership. After Thelen’s dissolution, several partners joined Seyfarth Shaw LLP, taking pending client matters with them. Seyfarth billed clients for their services on these matters. The bankruptcy trustee for Thelen’s estate sued Seyfarth, arguing that the unfinished business waiver was a fraudulent transfer and seeking to recover the profits earned by Seyfarth on the former Thelen matters.

    Procedural History

    The United States District Court for the Southern District of New York granted judgment on the pleadings to Seyfarth, holding that the unfinished business doctrine does not apply to pending hourly fee matters under New York law. The District Court certified its order for interlocutory appeal. The Second Circuit agreed that New York law governed the dispute and certified two questions to the New York Court of Appeals regarding the applicability and scope of the unfinished business doctrine under New York law.

    Issue(s)

    1. Under New York law, is a client matter that is billed on an hourly basis the property of a law firm, such that, upon dissolution and in related bankruptcy proceedings, the law firm is entitled to the profit earned on such matters as the ‘unfinished business’ of the firm?

    2. If so, how does New York law define a ‘client matter’ for purposes of the unfinished business doctrine and what proportion of the profit derived from an ongoing hourly matter may the new law firm retain?

    Holding

    1. No, because clients have the unqualified right to terminate the attorney-client relationship at any time, and a law firm’s expectation of future hourly legal fees is too contingent to create a property interest.

    2. This question was not answered because the first question was answered in the negative.

    Court’s Reasoning

    The court reasoned that the Partnership Law provides default rules for dividing property upon dissolution, but does not define what constitutes property. The court cited Verizon New England Inc. v Transcom Enhanced Servs., Inc., stating that the “expectation of any continued or future business is too contingent in nature and speculative to create a present or future property interest.” The court emphasized the client’s unfettered right to choose counsel and terminate the attorney-client relationship, citing Matter of Cooperman, which establishes that clients are only obligated to compensate the attorney for “the fair and reasonable value of the completed services.” The court distinguished cases involving contingency fee arrangements, noting that those cases involved disputes between a dissolved partnership and a departing partner, not outside third parties, and only entitled the partnership to an accounting for the value of the cases as of the date of dissolution. The Court distinguished Stem v. Warren, stating it was a breach of fiduciary duty case and not a case that defines what makes up partnership property. The court also considered public policy implications, noting that treating pending hourly fee matters as partnership property would create an “unjust windfall” and discourage partners from remaining to bolster a struggling firm. The court highlighted New York’s strong public policy encouraging client choice and attorney mobility, citing Cohen v Lord, Day & Lord. The court also noted that clients are not merchandise. Lawyers are not tradesmen. They have nothing to sell but personal service. The court concluded that the trustees’ theory does not comport with the legal profession’s traditions and commercial realities, and that a Jewel waiver could not cure this deficiency.

  • Gelman v. Buehler, 20 N.Y.3d 534 (2013): Unilateral Partnership Dissolution When Agreement Lacks Definite Term or Particular Undertaking

    Gelman v. Buehler, 20 N.Y.3d 534 (2013)

    Under New York Partnership Law § 62(1)(b), a partnership formed by oral agreement is dissolvable at will by any partner if the agreement does not specify a ‘definite term’ or a ‘particular undertaking’.

    Summary

    Gelman and Buehler, business school graduates, formed an oral partnership to create a search fund, solicit investments, acquire a business, increase its value, and eventually sell it for profit. Buehler later withdrew, and Gelman sued for breach of contract. The New York Court of Appeals held that Buehler’s withdrawal did not constitute a breach because the oral agreement lacked a ‘definite term’ or a ‘particular undertaking’ as required by Partnership Law § 62(1)(b), making the partnership dissolvable at will. The Court emphasized that the agreement’s objectives were too uncertain and lacked a specific termination date.

    Facts

    Geoffrey Gelman and Antonio Buehler, recent business school graduates, orally agreed to form a partnership in 2007. Buehler proposed raising $600,000 to establish a search fund to identify a business with growth potential. The plan involved soliciting further investment, acquiring the target business, and managing it to increase its value until a profitable sale (the “liquidity event”). Gelman agreed, and they anticipated the business plan would take four to seven years. Buehler later demanded majority ownership, which Gelman refused, leading to Buehler’s withdrawal.

    Procedural History

    Gelman sued Buehler for breach of contract. Supreme Court dismissed the complaint, finding no definite term or specific objective. The Appellate Division modified, reinstating the breach of contract claim, reasoning that the “liquidity event” constituted a definite term and the business acquisition and expansion was a specific undertaking. Two justices dissented. The Court of Appeals reversed the Appellate Division’s decision and dismissed the breach of contract claim.

    Issue(s)

    1. Whether the oral partnership agreement between Gelman and Buehler contained a “definite term” within the meaning of Partnership Law § 62(1)(b).
    2. Whether the oral partnership agreement between Gelman and Buehler specified a “particular undertaking” within the meaning of Partnership Law § 62(1)(b).

    Holding

    1. No, because the alleged temporal framework of the agreement was too flexible and lacked a specific or reasonably certain termination date.
    2. No, because the objectives of raising money, identifying a business, and increasing its value were too amorphous and uncertain to constitute a “particular undertaking.”

    Court’s Reasoning

    The Court of Appeals stated that Partnership Law § 62(1)(b) allows a partner to dissolve a partnership if the agreement lacks a “definite term or particular undertaking.” The Court found that a “definite term” requires an identifiable termination date, while a “particular undertaking” necessitates a specific objective achievable at a future time. Applying these standards, the Court determined that Gelman’s complaint lacked a fixed period for the partnership’s operation. The alleged sequence of events—raising money, identifying a business, raising more money, operating the business to increase its value, and selling it for profit—was deemed too uncertain to satisfy the statutory requirement. The Court distinguished the case from *St. Lawrence Factory Stores v Ogdensburg Bridge & Port Auth.*, where the agreement identified the specific purpose of developing a retail factory outlet center on a defined property. The Court quoted examples of objectives found to be inadequate, such as the “ ‘development, packaging, production and distribution of theatrical feature films . . . while also involved … in television development and production’ ” and partnerships to acquire, manage, and resell real estate. Because the agreement lacked a definite term or particular undertaking, the partnership was dissolvable at will, and Buehler’s withdrawal did not breach the contract. The Court emphasized that the “error in the Appellate Division’s rationale was that it equated “definite term” with the liquidity event—a possible future occurrence from which an identifiable termination date was not ascertainable at the outset of the partnership.”

  • Bailey v. Fish & Neave, 8 N.Y.3d 523 (2007): Enforceability of Partnership Agreement Amendments by Majority Vote

    8 N.Y.3d 523 (2007)

    Partnership agreements are interpreted according to general contract principles; if an agreement unambiguously permits amendments by a majority vote, such amendments are valid and enforceable.

    Summary

    This case concerns a dispute among partners over an amendment to a partnership agreement regarding compensation for withdrawing partners. The New York Court of Appeals held that the amendment, passed by a majority vote, was valid because the partnership agreement unambiguously permitted amendments in this manner. The court emphasized that partnership agreements are contracts interpreted according to their terms, and courts should not imply terms that contradict the parties’ express intent. The decision reinforces the principle that partners have broad latitude to structure their relationships through partnership agreements, and that majority rule provisions will be upheld absent specific prohibitory language.

    Facts

    Plaintiffs Bailey and Culligan were former equity partners at Fish & Neave, an intellectual property law firm. The firm’s partnership agreement (the “Agreement”) stated that decisions regarding partnership business, including dissolution, would be decided by a majority in interest of the partners. In December 2003, the firm decided to change its accounting system from accrual-based to cash-based, affecting how withdrawing partners were compensated. The firm adopted interim “standstill” amendments and then a permanent amendment to reflect this change, all passed by a majority vote. Bailey and Culligan withdrew from the firm in 2004 and subsequently sued, arguing that the amendment was invalid because it required unanimous consent.

    Procedural History

    The plaintiffs sued, alleging breach of contract and seeking to invalidate the amendment. The Supreme Court dismissed the complaint, holding that the agreement permitted the amendment by a majority vote. The Appellate Division affirmed. The New York Court of Appeals granted leave to appeal.

    Issue(s)

    Whether a partnership agreement provision allowing a majority vote on partnership matters permits amendment of the agreement regarding compensation to withdrawing partners by a majority vote, or whether such an amendment requires unanimous consent under New York Partnership Law § 40(8).

    Holding

    No, because the partnership agreement, by its terms, unambiguously permits amendments affecting compensation to withdrawing partners by a majority vote, and New York Partnership Law § 40(8) applies only in the absence of an agreement between the partners.

    Court’s Reasoning

    The Court of Appeals reasoned that partnership agreements are contracts and should be interpreted according to their plain terms. The agreement stated that “in all questions relating to the partnership business…the decision of a majority in interest of the partners…shall be conclusive upon and bind all the partners, except as otherwise provided herein.” Because the section regarding payments to withdrawing partners (section 11) did not include any language requiring more than a majority vote, the court concluded that a majority vote was sufficient to amend it. The court distinguished sections 9 and 16.7(a) of the agreement, which explicitly required more than a majority vote for certain actions, implying that the absence of such language in section 11 was intentional. The court stated, “[P]rovisions of [Partnership Law § 40] cannot be implied as part of the agreement so as to make a different contract from that which the parties intended nor override the agreement which the parties, in fact, made.” The court emphasized the anomaly of requiring unanimous consent for compensation amendments while allowing dissolution of the partnership by majority vote. The court concluded that it would not “add or excise terms, nor distort the meaning of those used and thereby make a new contract for the parties under the guise of interpreting the writing”.

  • Buchbinder Tunick & Co. v. Tax Appeals Tribunal, 1 N.Y.3d 382 (2004): Deductibility of Partnership Payments for Unrealized Receivables

    Buchbinder Tunick & Co. v. Tax Appeals Tribunal, 1 N.Y.3d 382 (2004)

    Payments to retiring partners representing their pro rata share of the partnership’s unrealized receivables are considered compensation for services and are therefore not deductible from the partnership’s unincorporated business gross income under New York City Administrative Code section 11-507(3).

    Summary

    This case concerns whether payments made to retiring partners, representing their share of unrealized receivables, are deductible from the partnership’s gross income for unincorporated business tax purposes. The New York Court of Appeals held that such payments are not deductible because they constitute compensation for the retiring partners’ services. The court reasoned that the payments represent money the partners earned for their services to the partnership and would have received had they remained active partners, thus falling under the prohibition of deducting payments for services under section 11-507(3) of the Administrative Code.

    Facts

    Buchbinder Tunick & Co. is a public accounting partnership in New York. The partnership agreement requires partners to contribute capital and devote their full time to the firm. Partners are compensated through profit-sharing, with income reported on a cash basis for tax purposes. Upon a partner’s retirement, the partnership pays out their cash basis capital account and a net balance representing their share of unrealized receivables (payments due but uncollected for services rendered). Buchbinder Tunick & Co. sought a refund for unincorporated business tax deductions related to these payments made to retiring partners.

    Procedural History

    The New York City Department of Finance disallowed Buchbinder Tunick & Co.’s refund claim. The Administrative Law Judge (ALJ) denied the petition, finding the payments were for services rendered. The New York City Tax Appeals Tribunal affirmed the ALJ’s determination. The Appellate Division reversed, citing New York Yankees Partnership v O’Cleireacain, holding the payments were not for services but for the partner’s share of unrealized receivables. The New York Court of Appeals granted leave to appeal.

    Issue(s)

    1. Whether payments made in liquidation of partnership interests, representing the retiring partners’ pro rata share of the partnership’s unrealized receivables, are payments “for services or for use of capital” under section 11-507(3) of the Administrative Code of the City of New York, and therefore not deductible from the partnership’s unincorporated business gross income.

    Holding

    1. Yes, because the payments represent compensation for the retiring partners’ services to the partnership, as they are derived from the partnership’s unrealized receivables for services rendered and would have been distributed as profits had the partners remained active.

    Court’s Reasoning

    The court emphasized the plain language of section 11-507(3) of the Administrative Code, which prohibits deductions for amounts paid to a partner for services. The court found that the payments in question directly correlated to the retiring partners’ share of the partnership’s unrealized receivables, which represented payments for services the partnership had already rendered. Therefore, the payments were inherently compensation for services rendered to the partnership. The Court stated that the payments were “simply the money to which the retiring partners were entitled for services they had rendered for the partnership. As correctly noted by the ALJ, the retiring partners would have been entitled to those payments had they remained active members in the partnership.”

    The court distinguished this case from New York Yankees Partnership, where payments were related to amortized player contracts, not services or use of capital. The court also rejected the argument that the payments were merely measured by the unrealized receivables, asserting that the underlying nature of the payments was compensation for services, regardless of how they were calculated or when they were distributed.

    The court noted that partners typically receive compensation through profit-sharing, not fixed wages, and that the failure of a partner to provide services could result in the loss of entitlement to profits under the partnership agreement. Thus, the court concluded that the payments were indeed remuneration for services, rendering them non-deductible under the statute.

  • Dawson v. White & Case, 88 N.Y.2d 666 (1996): Accounting for Goodwill and Unfunded Pension Plans in Law Firm Dissolution

    Dawson v. White & Case, 88 N.Y.2d 666 (1996)

    Partnership agreements govern the distribution of assets upon dissolution, and if the agreement explicitly states that goodwill is not to be considered an asset, or if such an understanding can be implied from the partners’ conduct, then goodwill is not a distributable asset.

    Summary

    This case concerns the dissolution of the White & Case law firm and the subsequent accounting of partner Evan Dawson’s interest. The key issues are whether the firm possessed distributable goodwill and whether its unfunded pension plan constituted a liability. The Court of Appeals held that, based on the specific facts and the partnership agreement, goodwill was not a distributable asset because the partners had agreed it was of no value. The court also found that the unfunded pension plan was not a liability of the dissolved firm, but rather an operating expense of the successor firm contingent upon profitability. This decision emphasizes the importance of partnership agreements in determining asset distribution upon dissolution.

    Facts

    Evan Dawson was a partner at White & Case. The firm negotiated to have him withdraw, and when negotiations failed, the firm dissolved and re-formed without him. Dawson sued, seeking an accounting of his partnership interest. A Special Referee included goodwill as an asset and excluded the unfunded pension plan as a liability. The Supreme Court confirmed the report, and the Appellate Division affirmed.

    Procedural History

    Dawson initially sued alleging wrongful termination and other claims. The Supreme Court ordered an accounting. The Special Referee’s report valued assets, including goodwill, and excluded the pension plan as a liability. The Supreme Court confirmed. The Appellate Division affirmed. The New York Court of Appeals granted leave to appeal.

    Issue(s)

    1. Whether the law firm of White & Case possessed distributable goodwill that should be included as an asset in the partnership accounting.

    2. Whether the law firm’s unfunded pension plan should be considered a liability of the firm for accounting purposes.

    Holding

    1. No, because the partnership agreement and the conduct of the partners indicated an intent that goodwill not be considered a distributable asset.

    2. No, because the pension payments were contingent operating expenses of the successor firm, not a liability of the dissolved firm.

    Court’s Reasoning

    Regarding goodwill, the Court relied on Partnership Law § 71(a)(I), which makes the distribution of assets “subject to any agreement to the contrary.” The Court emphasized that partners are free to exclude items from partnership property by agreement. The Court cited Matter of Brown, 242 N.Y. 1 (1926), and Siddall v. Keating, 8 A.D.2d 44 (1959), noting that a tacit understanding or course of dealing can indicate an agreement not to account for goodwill. Here, the White & Case partnership agreement explicitly stated that “no consideration has been or is to be paid for the Firm name or any good will of the partnership, as such items are deemed to be of no value.” The court rejected Dawson’s attempts to argue that these provisions were inapplicable. The court acknowledged evolving views on law firm goodwill, noting that “the ethical constraints against the sale of a law practice’s goodwill by a practicing attorney no longer warrant a blanket prohibition against the valuation of law firm goodwill when those ethical concerns are absent.”

    Regarding the pension plan, the Court deferred to the Appellate Division’s reasoning that the payments were operating expenses contingent on the successor firm’s profitability, not a liability of the dissolved firm. The firm had also never included the unfunded pension plan as a liability in its financial statements. The partnership agreement also specified that pension payments could only be made out of profits and could not exceed 15% of profits.

  • Denburg v. Flattau & Klimpl, 82 N.Y.2d 375 (1993): Enforceability of Financial Disincentives for Departing Law Partners

    82 N.Y.2d 375 (1993)

    A law firm partnership agreement that imposes significant financial disincentives on departing partners who compete with the firm is unenforceable as against public policy because it interferes with a client’s choice of counsel.

    Summary

    Denburg, a former partner at Parker Chapin Flattau & Klimpl, sued the firm, arguing that a provision in their partnership agreement requiring withdrawing partners to pay certain sums if they practiced law privately before July 1988 was an unenforceable restriction on his right to practice law. The New York Court of Appeals held that the provision was indeed an improper forfeiture-for-competition clause, akin to that in Cohen v. Lord, Day & Lord, and thus unenforceable. However, the court also found that there was a factual dispute regarding a potential settlement agreement between Denburg and the firm concerning his capital account, requiring a remit for further proceedings on that issue.

    Facts

    In 1983, the partners at Parker Chapin executed an amended partnership agreement that included subparagraph 18(a). This clause mandated that withdrawing partners practicing privately before July 1988 pay the firm the greater of 12.5% of their allocated firm profits from the prior two years, or 12.5% of billings to former Parker Chapin clients made by the partner’s new firm over the following two years. There was an exception for partners with profit allocations less than $85,000, but only if their new firm did no work for Parker Chapin clients. In early 1984, Denburg left Parker Chapin for a New Jersey firm, allegedly serving some former Parker Chapin clients. In 1986, a Parker Chapin member requested billing information from Denburg, and Rosenzweig claimed Denburg suggested Parker Chapin keep his capital account balance in satisfaction of any obligation, a claim Denburg disputed.

    Procedural History

    In 1990, Denburg sued Parker Chapin, seeking a declaration that subparagraph 18(a) was void. The Supreme Court initially upheld the clause as a potential recoupment of partnership liabilities, but the Appellate Division reversed, declaring it an invalid forfeiture-for-competition provision. The Appellate Division also ruled that even if Denburg had agreed to the set-off, it was repetitive of the original unenforceable clause. The Court of Appeals affirmed the unenforceability of the clause but remitted for further proceedings concerning the purported settlement agreement.

    Issue(s)

    1. Whether subparagraph 18(a) of the Parker Chapin partnership agreement constitutes an unenforceable restriction on the practice of law.
    2. Whether a purported settlement agreement between a withdrawing partner and the firm, concerning obligations arising under an unenforceable forfeiture-for-competition clause, is itself enforceable.

    Holding

    1. Yes, because the effect of the clause is to improperly deter competition and impinge upon clients’ choice of counsel.
    2. The court did not reach a final holding on the settlement agreement, but indicated that such agreements are not per se unenforceable merely because they relate to a potentially void agreement. Remand needed to determine whether a valid settlement was reached.

    Court’s Reasoning

    The Court of Appeals reasoned that subparagraph 18(a)’s effect was to deter competition, contravening public policy as articulated in Cohen v. Lord, Day & Lord. The Court emphasized that the focus should be on the *effect* of the clause, not merely the intent behind it. Several factors indicated that the clause was anticompetitive: it applied only to lawyers continuing in private practice, the computation of payment was based on billings to former clients, and the clause exempted lower-earning partners only if no Parker Chapin clients were served. The Court stated that a clause that is facially invalid cannot be saved merely because some partners chose to absorb the penalty imposed.

    Regarding the settlement agreement, the Court disagreed with the Appellate Division’s characterization that it was merely repetitive of the set-off provision. The Court noted that the agreement was not measured by the balance in the capital account, but rather a computation. The Court emphasized the importance of enforcing settlements, stating that settlement agreements avoid potentially costly litigation and preserve scarce judicial resources. It remanded the case to resolve factual disputes concerning the settlement, including whether the capital account was actually adjusted, and whether Denburg intended to conclude the matter without reserving a challenge to the clause’s validity. The Court held that settling a dispute involving a forfeiture-for-competition provision may be enforced, even though the clause itself is unenforceable stating that agreements involving financial disincentives are not per se illegal but depend on the particular terms and circumstances.

  • Royal Bank and Trust Co. v. Weintraub, Gold & Alper, 68 N.Y.2d 124 (1986): Partnership by Estoppel

    Royal Bank and Trust Co. v. Weintraub, Gold & Alper, 68 N.Y.2d 124 (1986)

    Partners who continue to conduct business under a firm name without publicly announcing its dissolution are estopped from denying liability to a third party who reasonably relies on the appearance of a continuing partnership, even if the partners privately agreed to dissolve the partnership.

    Summary

    Royal Bank and Trust Co. (plaintiff) sought to recover funds from the law firm of Weintraub, Gold & Alper (defendants) and its partners after the firm’s named partner, Weintraub, defaulted on a loan obtained under the firm’s name. The defendants claimed the partnership had dissolved prior to the loan. The court held that because the partners continued to use the firm name and letterhead without public notice of dissolution, they were estopped from denying the partnership’s existence to a third party who reasonably relied on it. The court affirmed summary judgment in favor of the plaintiff, finding no triable issue regarding the plaintiff’s alleged negligence in failing to investigate further.

    Facts

    Roger Allen sought a $60,000 loan from Royal Bank, claiming it was needed for a larger loan. Allen told the bank the funds would be held in escrow by his attorneys, Weintraub, Gold & Alper. Allen provided a letter on the firm’s stationery confirming the escrow arrangement, signed by Alfred Weintraub. The bank confirmed the firm’s listing in the Manhattan phone directory and verified the escrow arrangement with Weintraub. The bank issued a check payable to the law firm. The loan was not repaid. Although not known to the bank at the time, the partners shared office space, the receptionist answered the phone in the firm name, the loan check was deposited in a firm account, bank documents certified the partnership’s existence, and liability insurance was obtained for the firm. No certificate of dissolution was filed until Alper withdrew months later.

    Procedural History

    Royal Bank sued Allen, the firm, and the partners individually. Allen confessed judgment, and Weintraub defaulted, but neither could satisfy the judgment. Royal Bank moved for summary judgment against the firm, Gold, and Alper, arguing the firm continued to exist. The defendants opposed, claiming the partnership dissolved earlier by oral agreement. The lower courts granted summary judgment for the plaintiff, and the defendants appealed. The Court of Appeals affirmed.

    Issue(s)

    Whether partners who privately agree to dissolve a partnership but continue to operate under the firm’s name and public indicia of a partnership are estopped from denying the partnership’s existence to a third party who reasonably relies on the appearance of a continuing partnership.

    Holding

    Yes, because a partner who makes, and consents to, continued representations that a partnership in fact exists is estopped to deny that a partnership exists to defeat the claim of a creditor. The public indicia of the partnership remained undisturbed, creating the impression of an ongoing entity.

    Court’s Reasoning

    The court reasoned that under Partnership Law § 20(1), a partner’s acts apparently carrying on the partnership business in the usual way are binding on the partnership unless the partner lacks authority and the person dealing with them knows it. Weintraub’s actions appeared to be in furtherance of the partnership business, and the bank had no knowledge of any lack of authority. The court emphasized that a private agreement to dissolve the partnership did not alter the result. Under Partnership Law § 27, partners who make and consent to continued representations that a partnership exists are estopped from denying its existence against a creditor. Because the defendants continued to use the firm name, telephone number, and stationery without any public notice of dissolution, the court concluded that the partnership continued to be liable to a party reasonably relying on the impression of its continued existence. The court stated that “partnership by estoppel should not be lightly invoked and generally presents issues of fact, here the undisputed evidence submitted on the summary judgment motion leaves no question for trial”. The court also dismissed the defendant’s argument that the bank acted negligently by failing to investigate further, stating that the individual listings in the attorney directory were insufficient to create a genuine issue requiring trial.

  • Marine Midland Bank v. Greenfield, 486 N.E.2d 116 (N.Y. 1985): Authority Required for Partnership Guarantee

    Marine Midland Bank v. Greenfield, 486 N.E.2d 116 (N.Y. 1985)

    A general partner’s authority to guarantee the debts of others on behalf of a partnership must be either expressly granted in the partnership agreement or demonstrably apparent through the conduct of the partnership; neither implied authority nor an individual partner’s actions are sufficient to bind the partnership.

    Summary

    Marine Midland Bank sued to enforce a partnership’s guarantee of a loan to Lincoln Plaza, Inc. The New York Court of Appeals held that the guarantee was unenforceable because the partner who executed it lacked actual or apparent authority to bind the partnership. The partnership agreement didn’t authorize guarantees, and the partner acted alone without the required consent of the corporate general partner. The Court found no basis to imply authority or to establish apparent authority. The presence of another partner’s attorney at a closing where part of the loan was rolled over was insufficient to demonstrate ratification of the guarantee by the partnership.

    Facts

    A partnership guaranteed a loan to Lincoln Plaza, Inc. in 1973. The lawsuit arose when Marine Midland Bank sought to enforce this guarantee. The partnership agreement didn’t explicitly grant general partners the authority to guarantee debts of others. One partner, Greenfield, executed the guarantee without seeking consent from LPT Inc., the corporate general partner. Mr. Saiman, an attorney for the partnership and assistant secretary of LPT Inc., was present at a closing where a portion of the loan was rolled over.

    Procedural History

    The trial court initially denied the defendant’s motion to dismiss at the end of the trial. The Appellate Division reversed, concluding that the motion to dismiss should have been granted. Marine Midland Bank appealed to the New York Court of Appeals.

    Issue(s)

    1. Whether the partnership agreement granted the general partners authority to guarantee the debts of others.
    2. Whether Greenfield had authority to act alone without seeking the consent of LPT Inc., the corporate general partner.
    3. Whether the partnership’s conduct vested Greenfield with apparent authority to execute the guarantee.
    4. Whether there was sufficient evidence of ratification of the guarantee by the partnership to present the issue to a jury.

    Holding

    1. No, because the partnership agreement did not explicitly grant the general partners authority to guarantee the debts of others.
    2. No, because Greenfield didn’t seek the consent of LPT Inc., the corporate general partner, and therefore lacked authority to act alone.
    3. No, because there was no factual showing of conduct on the part of the partnership that would vest Greenfield with apparent authority.
    4. No, because the evidence of Saiman’s knowledge and the partnership’s receipt of loan proceeds was insufficient to present a jury issue of ratification.

    Court’s Reasoning

    The Court reasoned that authority to execute the guarantee could not be implied as a matter of law, citing First Nat. Bank v Farson, 226 NY 218, 223. It emphasized the absence of conduct by the partnership that would suggest Greenfield had apparent authority, referencing Greene v Hellman, 51 NY2d 197, 204, and Ford v Unity Hosp., 32 NY2d 464, 472-473. The Court found Saiman’s presence at the closing, in his capacity as the partnership’s attorney, insufficient to establish ratification. His simultaneous role as assistant secretary of LPT Inc. did not give him authority to ratify the guarantee on behalf of the partnership. The Court also noted the evidence of Saiman’s knowledge was “so equivocal as to be insufficient to present a jury issue of ratification,” citing Holm v C. M. P. Sheet Metal, 89 AD2d 229. The court in essence held that express authorization or a clear pattern of partnership conduct is needed to bind the entity to such guarantees.

  • Tillow v. Kreindler, Relkin & Goldberg, 51 N.Y.2d 936 (1980): Enforceability of Arbitration Clauses in Dissolved Partnership Agreements

    51 N.Y.2d 936 (1980)

    When a partnership dissolves and a successor partnership continues operating under the terms of the original partnership agreement, including a broad arbitration clause, the members of the successor partnership are bound by that clause, even without a new written agreement.

    Summary

    Tillow sought to stay arbitration of his claim against the successor law firm, arguing the original partnership agreement containing the arbitration clause dissolved when a partner withdrew. The Court of Appeals held that because the successor firm treated the original agreement as binding, the broad arbitration clause remained enforceable. This decision underscores the importance of parties’ conduct in determining the continued validity of agreements after organizational changes. It clarifies that implied consent to an agreement’s terms, particularly an arbitration clause, can be inferred from consistent behavior.

    Facts

    In December 1972, Tillow signed a partnership agreement with Kreindler, Relkin, Olick & Goldberg. This agreement contained a broad clause requiring arbitration of any controversies arising from the agreement. Olick withdrew from the partnership in 1974, dissolving the original partnership. The remaining partners continued operating as Kreindler, Relkin & Goldberg. No new written partnership agreement was executed. Tillow departed the firm in 1979 and subsequently sought an accounting and damages. The successor firm sought to compel arbitration based on the 1972 agreement. Tillow then sought to stay arbitration.

    Procedural History

    Tillow sought to stay arbitration. The Appellate Division found the members of the successor firm treated the 1972 agreement as binding and continuing in effect. The Court of Appeals affirmed the Appellate Division’s order, upholding the enforceability of the arbitration clause.

    Issue(s)

    Whether the arbitration clause in the original partnership agreement remained enforceable against Tillow and the successor partnership, even though the original partnership had dissolved and no new written agreement was executed.

    Holding

    Yes, because by treating the 1972 agreement as continuing in force after the dissolution of the original partnership, the members of the successor partnership demonstrated their intention to be governed by the agreement’s arbitration clause.

    Court’s Reasoning

    The court reasoned that although the original partnership dissolved upon Olick’s withdrawal in 1974, the successor firm’s conduct demonstrated an intent to be bound by the 1972 agreement, including the arbitration clause. The court noted the Appellate Division’s finding that the successor firm treated the 1972 agreement as binding and continuing in effect, a conclusion “amply supported by the record.”

    The court emphasized the broad and unequivocal nature of the arbitration provision in the 1972 agreement. By continuing to operate under the terms of the agreement, the successor firm implicitly consented to its provisions, including the arbitration clause. The court cited Matter of Levin-Townsend Computer Corp. v Holland, 29 AD2d 925 and Alpert v Bannon, 40 AD2d 988, supporting the principle that conduct can demonstrate an intention to be governed by an agreement’s arbitration clause.

    The court concluded that “[s]ince the parties agreed to arbitration, it follows that all further issues concerning plaintiff’s claim are for the arbitrator to resolve.” This highlights the strong presumption in favor of arbitration when a valid agreement to arbitrate exists.

  • Gelder Medical Group v. Webber, 41 N.Y.2d 680 (1977): Enforceability of Restrictive Covenants After Partner Expulsion

    Gelder Medical Group v. Webber, 41 N.Y.2d 680 (1977)

    A partner who has been expelled from a partnership pursuant to a valid partnership agreement containing a reasonable restrictive covenant may be held to that covenant, provided the expulsion was not unduly penal, an unjust forfeiture, overreaching, or a violation of public policy.

    Summary

    Gelder Medical Group sued to enforce a restrictive covenant against Dr. Webber, a former partner who was expelled from the group. The partnership agreement contained a clause allowing for expulsion without cause and a covenant barring any partner from practicing within 30 miles of Sidney, NY, for five years after leaving the group. The court affirmed the lower court’s decision to enforce the covenant, finding the agreement valid and the covenant reasonable, given the circumstances and the absence of bad faith or public harm. The court emphasized that partners have the right to choose their associates and that restrictive covenants are enforceable when reasonable in time and scope.

    Facts

    Dr. Webber, a surgeon, joined the Gelder Medical Group in Sidney, New York, after a one-year trial period. The partnership agreement included a provision for expulsion without cause and a restrictive covenant preventing partners from practicing within a 30-mile radius for five years after termination. Dr. Webber’s professional and personal conduct became problematic, causing embarrassment to the group and its patients. After attempts to address the issues failed, the partnership unanimously voted to terminate Dr. Webber’s association, paying him a settlement according to the agreement. Dr. Webber then resumed his practice in Sidney, violating the restrictive covenant.

    Procedural History

    The Gelder Medical Group sued Dr. Webber to enforce the restrictive covenant and obtained a temporary injunction. Dr. Webber filed a separate action for a declaratory judgment and damages, alleging wrongful expulsion. The two actions were consolidated. Special Term granted summary judgment to Gelder Medical Group, enforcing the covenant. The Appellate Division affirmed, and Dr. Webber appealed to the New York Court of Appeals.

    Issue(s)

    1. Whether a partner expelled from a partnership under an agreement allowing expulsion without cause can be held to a restrictive covenant included in the partnership agreement.
    2. Whether the restrictive covenant is reasonable under the circumstances.

    Holding

    1. Yes, because the partnership agreement provided for expulsion without cause, and the terms of the agreement were not oppressive, penalized, overreaching, or a violation of public policy.
    2. Yes, because the covenant was reasonable in time and geographic scope, necessary to protect the Gelder Medical Group’s legitimate interests, not harmful to the public, and not unduly burdensome to Dr. Webber.

    Court’s Reasoning

    The court reasoned that covenants restricting a physician’s right to compete are generally acceptable if reasonable in time and area, necessary to protect legitimate interests, not harmful to the public, and not unduly burdensome. The court found the Gelder Group’s restrictive covenant met these criteria, noting the group’s long-standing presence in Sidney and the investment made in its development. The court emphasized that partners have the right to choose with whom they associate. The court acknowledged that while bad faith on the part of the remaining partners might nullify the right to expel a partner, Dr. Webber failed to demonstrate any evil, malevolent, or predatory purpose in his expulsion. The court stated, “When, as here, the agreement provides for dismissal of one of their number on the majority vote of the partners, the court may not frustrate the intention of the parties at least so long as the provisions for dismissal work no undue penalty or unjust forfeiture, overreaching, or other violation of public policy.” The court also observed that enforcing the covenant would not harm the public, as other physicians and surgeons were available in the area. The court implicitly relied on the principle of freedom of contract, stating that there is an implied term of good faith in every contract.