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Jacob v. Jacob

A-663-01T5 (N.J. Super. App. Div. 2002) (Unpublished)

PARTNERSHIPS; AGREEMENTS— Family related partners of a small business can’t be assumed to have made irrevocable buy/sell elections in the context of a family gathering, especially when the monetary effect is large compared to the assets of the relatives involved.

Two brothers (and their wives) were the only members of a partnership that owned a piece of real property. The partnership agreement provided that if either of the partnership pairs wished to withdraw from the partnership, the remaining partnership pair would continue the business and would have the right to purchase the interest of the withdrawing partnership pair for fair market value. The agreement went on to provide that the fair market value would be that established by having two certified appraisers. If the appraisals were close enough, the average of the two would be the fair market value; otherwise a third appraisal was to be obtained and the middle of the three appraisals would establish the fair market value. Sixteen years after the partnership began, one brother and his wife informed the other that they wanted to own the entire partnership interest. A discussion took place “in the second floor living room” and the second brother and his sister eventually agreed to be bought out. Appraisals were commissioned and they were too far apart. The brothers could not reach a further agreement on determining the value of the property. The selling brother contended that the appraisals were too low and proposed that the property be listed for sale with the right of either party to bid higher and then purchase the other party’s interest. In fact, after the two appraisals were received, an offer was received for considerably more than the higher of the two original appraisals. The brother that originally wanted to buy the entire partnership interest, insisted that a third appraisal was needed and that the partnership agreement’s provision for was the only way to determine the value. The matter went to court and the Chancery Division ordered another appraisal. That appraisal was significantly higher than either of the first two appraisals, leaving the middle appraisal as being determinative of the property’s market value for buy-out purposes. The brother that initially wanted to buy the property took the position that his own brother had exercised his rights under the partnership agreement and bound to accept the middle appraisal as the market value of the partnership property. That brother now resisted sale of his partnership interest, contending “the appraisals obtained did not represent the fair market value and that he [was] prepared to buy-out [the other brother’s] share based upon a value slightly higher than the highest of the three appraisals or, in the alternative, to resume the partnership.

The lower court noted that the agreement was “silent as to whether a party’s oral statement to invoke [the appraisal and sale provision was] irrevocable” and would not “impose the dire consequence” of enforcing the sale against the brother that now didn’t want to sell. The Court’s feeling was that “[i]t is unrealistic to expect people of moderate means to make irrevocable, oral, one-half million dollar decisions in a living room on a Labor Day weekend. No reasonable person [of] ordinary means would expect an intention to sell absent price to be irrevocable. [The brother’s] offer to sell was subject to implied conditions, just as [the other brother’s] intention to purchase was subject to implied conditions concerning price, timing, and financing.” The Chancery Division felt that it was “obvious that the result of the formula adopted by the partners did not produce a reliable result.” Also, the lower court criticized the methodology of the only appraiser who testified in court and for all of those reasons, held that the brother who originally agreed to sell was not obligated to sell his partnership interest and could retract his invocation of the “split-up” provisions of the partnership agreement. The Appellate Division agreed.

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