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Canger v. Dorine Industrial Park Partnership

A-6484-04T2 (N.J. Super. App. Div. 2006) (Unpublished)

PARTNERSHIPS; VALUATION — Where a partnership lacks sufficient information at the time of a partner’s death to make a reasonable estimate of its future environmental expenses, such expenses cannot be charged against the deceased party’s interest when valuing that interest upon liquidation.

A successor in interest purchased a deceased partner’s interest in a certain commercial partnership. The partnership agreement stated that a partner’s interest would be liquidated upon his death, but it did not set out a standard for valuing that interest. After the partner’s death, no prompt valuation of his share of the partnership’s equity took place, and the other two partners continued receiving management fees from the partnership.

The lower court was given the task of determining the value of the partner’s equity interest on the date of his death, as well as the damages owed to the partner’s successor in interest for the conversion of management fees. After hearing the valuations of each side’s accountant, the lower court adopted the testimony of the successor’s accountant as to the amount to which the successor was entitled. The main difference between the valuations of the two accountants was their treatment of certain environmental liabilities of the partnership’s properties. The partnership was required by the Department of Environmental Protection to pay certain amounts towards environmental renovations. The partnership then pursued environmental cost recoveries against third parties and recovered a large sum.

According to the partnership’s accounting expert, the past and future anticipated environmental costs exceeded the amount recovered from third parties, and the deceased partner’s interest in the partnership therefore had a negative value. The successor’s accounting expert stated that it was unreasonable to include subsequently-posted contingency funds in a valuation of the partner’s interest at his death. The lower court found the successor’s case more compelling. On appeal, the Appellate Division agreed with the lower court’s determination.

The Court affirmed the judgment because it was satisfied that the successor’s evidence was substantial and credible. Additionally, the Court agreed that the successor’s accountant’s logic was superior to that of the partnership’s accountant. It found that the successor’s accountant’s exclusion of environmental expenses post-dating the partner’s death was reasonable, and was consistent with the Financial Accounting Standards. Since the partnership lacked sufficient information at the time of the partner’s death to make a reasonable estimate of its future environmental expenses, the loss could not be charged. To further strengthen the successor’s case, the Court pointed to the fact that the surviving partners continued to pay themselves management fees after the partner’s death, which would have been highly imprudent if the partnership’s value was truly negative. For these reasons, the Court affirmed the lower court’s valuation of the successor’s equity interest in the partnership.


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