Case Law Summaries

Sebring Associates v. Coyle

• Opinion Date: February 6, 2002
• Business Law
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PARTNERSHIPS; DISSOLUTION— Even if a partnership agreement provides a mechanism for dealing with partners who do not respond to cash calls, where such a failure makes it reasonably impractical for a partnership to conduct its business, a court may dissolve the partnership and allow the business to be continued thereafter by the non-defaulting partners only.

Three individuals formed a partnership “for the purpose of acquiring land and erecting high rise apartments.” Two of the partners were experienced in high rise development. One of them was expected to manage development of the property and the other was to act as the general partner. The third partner was a physician, “but, as the owner of two large apartment complexes, was not a neophyte in the field of residential management.” His role was to “provide the financial strength necessary to obtain the requisite financing.” Friction developed between the doctor and the other two partners almost immediately. The project went through hard times and additional funds were needed. Capital calls were made, but the doctor refused to make the required contributions. Also, the doctor made it very difficult for the partnership to obtain alternate financing by substantially delaying, among other means, his approval to needed financing. Also, the doctor brought in a related tenant and convinced his partners to join in on the venture and to provide the “fit-up” expenses needed to accommodate the tenant’s business within the high rise project. In doing so, it appeared that he withheld critical information and had that information been known, the other two partners might not have gone forward with the support of this particular tenant. The personal relationship among the three partners was not very good and the doctor “began secretly to tape record his conversations” with his two other partners. Eventually, the doctor’s partners decided to terminate his interest in the partnership. At the time they made the determination, the property was worth less than the mortgage. Throughout the course of the lengthy court proceedings, however, “[t]he entire enterprise was turned from a losing venture to an extremely profitable one.”

The lower court, with the Appellate Division’s approval, entered an order terminating the partnership but allowing the doctor’s two partners to continue the business. In upholding the lower court, the Appellate Division found “ample evidence in the record” that: “(1) [the doctor’s role in the project] was to lend financial strength to the partnership for the purpose of obtaining financing, (2) [the doctor] failed to satisfy that partnership obligation by refusing to contribute necessary capital, (3) [the doctor], at least in the first instance, improperly placed obstacles in the way of the partnership’s obtaining a restructure of its [debt], (4) [the doctor] secretly tape recorded conversations with his partners, (5) [the doctor] failed to pay rent for the penthouse he occupied in [the high rise], and (6) dissolution of the partnership and termination of [the doctor’s] partnership interest constituted the only viable course to remedy these problems.”

The doctor argued that his refusal to make capital contributions to the partnership “did not constitute an appropriate basis for termination of his partnership interest.” In doing so, he pointed out that the partnership agreement specifically provided that upon “a partner’s lack of ability or desire to make ... contributions” the other partners could only choose between the remedy of making their own contributions as loans or by diluting the defaulting partner’s partnership interest. Consequently, according to the doctor, divestment was not an option. The lower court took testimony as to the value of the partnership and various partnership interests and determined that the doctor’s capital account was a negative one by virtue of his failure to make contributions and that his share could have been diluted to zero. Nonetheless, the lower court did not base its dissolution order on the dilution argument, but rather looked to the law in New Jersey at that time, the Uniform Partnership Law. Under the Uniform Partnership Law, a court can enter judgment of dissolution on application by or for a partner whenever, “[a] partner has been guilty of such conduct as tends to affect prejudiciously the carrying on of the business [or when a] partner willfully or persistently commits a breach of the partnership agreement, or otherwise so conducts himself in matters relating to the partnership business that is not reasonably practicable to carry on the business in partnership with him.” Specifically, the Appellate Division held that the doctor’s “failure to respond to cash calls ‘affect[ed] prejudiciously the carrying on of [the partnership’s] business,’ ... and made it ‘reasonably [im]practicable to carry on the [partnership] business’ with him remaining a partner.” Although the Court found no reported New Jersey opinion dealing with the precise issue, it did find support for its view in a number of out-of-state cases. Following the course of those cases, the Court believed that, “[w]hile dissolution of a partnership with the consequent expulsion of a partner is undoubtedly a harsh remedy, we find particularly compelling the fact that [the doctor] was invited to join the partnership in order to attract necessary financing and that his conduct as a partner was wholly inimical to accomplishing that objective. Perhaps a lesser remedy might be equitable under less egregious circumstances. Here, however, [the doctor’s] expulsion from the partnership was both fair and reasonable.”

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