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Gladstone v. Ludsin

A-2432-04T2 (N.J. Super. App. Div. 2006) (Unpublished)

PARTNERSHIP; BREACH OF DUTY; RELEASE—The defenses of release, estoppel and waiver, and the entire controversy doctrine do not apply when a limited partner files an action for breach of fiduciary duty against a general partner for improper future acts not previously released in a settlement agreement.

A father created a limited partnership. It owned and rented real estate. He and his son were original general partners. His daughter was a limited partner. Both children held an equal initial ownership interest. Other ownership interests were held by the children’s mother and uncle. Under the partnership certificate, the general partners had exclusive control over the management of the partnership and owed a duty of loyalty to the business. All partners were to receive a share of net profits commensurate with their capital contributions. General partners also were to receive a management fee equal to 4% of gross rentals during each fiscal year. No partner could receive a salary or take a draw for services rendered, nor could any receive any interest on his or her capital contributions. In time, the partnership certificate was amended to prohibit the son, upon the father’s death, from encumbering, transferring or disposing of property without his sister’s consent, as she would then become a general partner.

The father also owned a manufacturing enterprise that operated a factory on the partnership’s property. This business was a co-guarantor of the partnership’s mortgage, and allowed the partnership to use its employees, space, office equipment, and supplies without charge. After the father’s death, the daughter and a cousin ultimately came to own and operate the manufacturing business. The cousin also came to manage the day-to-day operations of the partnership. The cousin alleged that the son was never involved with the family businesses during the father’s lifetime.

After the father died, the son, as sole general partner, removed the daughter as an authorized signatory on the partnership’s bank account. Despite the requirements of the partnership certificate, he failed to inform limited partners of his intention to continue the partnership, causing dissolution and likely the formation of a de facto partnership. It was he who hired his cousin to manage the partnership while he assumed exclusive control over the checkbook and finances. While the company books remained in New Jersey, the son authorized partnership payments from his home in New York. The son only occasionally visited the property, and made little effort to develop the property. However, he took yearly management fees in excess of the 4% permitted. He also began reimbursing himself for non-company related personal expenses, and authorized fraudulent invoices for maintenance and construction work that was never done, contributing to underreported income. He forgave rent monies owed by tenants without proper documentation.

The uncle and his family, as limited partners, sued the son for mismanagement and misappropriation of company funds. The uncle also sued the daughter for an improper partnership contribution. The uncle subsequently settled with the daughter and sold his and his family’s partnership interest to her, leaving the daughter with a controlling partnership interest. A release fashioned between all parties included a release of all claims by the daughter against her brother except for future acts. Several months after the signing of the release, the daughter realized that she had not received a yearly partnership distribution since her brother became the sole general partner, and she obtained clear evidence that her brother was taking partnership reimbursements for personal expenses. An accountant’s analysis cited numerous questionable management practices by her brother. After an attempt to negotiate a resolution, the daughter filed for legal relief and claimed that her brother breached his fiduciary duty. The lower court permanently removed her brother as general partner, directed the sale of his ownership interest to his sister, and awarded her compensatory damages and counsel fees.

On appeal, the brother argued that his sister’s claims were barred by the executed release and were waived or were barred by the entire controversy doctrine or by the doctrine of estoppel. The Appellate Division found that the breaches of duty directly relied upon by the lower court were all “improper future acts” that the sister had not released. Additionally, the Appellate Division concluded that the sister’s conduct prior to the execution of the release did not cause any good faith reliance by her brother to his detriment of position, thereby creating no estoppel. Likewise, there was no evidence that the sister intentionally waived her legal right to proceed in an action against her brother for future improper acts. Lastly, the entire controversy doctrine did not preclude this successive action by the sister against her brother for conduct that followed the execution of the settlement agreement that ended the earlier litigation filed by the uncle. Accordingly, the Court affirmed the lower court’s remedy in full, including the equitable remedy of compelling the brother’s ouster through buyout rather than by dissolving the partnership under the relevant statute.

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