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Valerio v. Isaak

A-4729-01T2 (N.J. Super. App. Div. 2003) (Unpublished)

PARTNERSHIPS; DISSOLUTION—If a fraudulent transfer made by a partner causes continuing conduct of the partnership’s business to be unlawful, it constitutes grounds for dissolution and prompt liquidation even if the partnership agreement would have provided for notice of termination and for an extended time period for liquidation.

A dentist arranged with a dental plan organization to handle a capitation contract for certain municipal and union employees. Because of the economics of handling the patients, the dentist joined together with a second dentist, at the second dentist’s office, to provide the required services. They had a written joint venture agreement. That agreement allowed either party to terminate the arrangement on 120 days’ written notice. Payments from the municipalities and the union were made directly to the dental plan organization, which in turn, deducted ten percent and remitted the balance jointly to the two dentists. There were numerous difficulties in the arrangement between the dentists. A monetary judgment was issued against the original dentist for a matter unrelated to the joint venture. In response, the dental plan organization and the two dentists agreed that future payments from the organization would be made directly to the second dentist. About a month later, the second dentist became concerned about the propriety of this arrangement and, after considering the other problems in the joint venture, sent a letter terminating the joint venture agreement, effectively as of the day the letter was sent. Although the joint venture agreement provided that the original dentist could have his patients back, many of the patients chose to remain with the second dentist. The first dentist sued for breach of the joint venture agreement, asserting that he was entitled to 120 days’ notice and that the second dentist should not have so readily accepted a majority of the joint venture practice’s patients.

The lower court dismissed the complaint finding that, under the circumstances, no notice was needed, let alone a 120 day notice period. It concluded that the terms of the Uniform Fraudulent Transfer Act (UFTA) were applicable because the original dentist arranged to put his assets (i.e., his right to payment from the dental plan organization) “beyond the reach of creditors which would have been available to them at some point in time but for the conveyance.” It also found that this transfer by the original dentist was “with an intent to defraud, delay, or hinder [his] creditor[s]... .” Under the New Jersey Uniform Partnership Act, “a partnership is dissolved, and its business shall be wound up” upon: “An event that makes it unlawful for all or substantially all of the business of the partnership to be continued… .” If the second dentist had remained in the partnership, the partnership would have been required to continue the fraud. The Court found that “the business of the partnership could not have been continued because a majority of the monies from the [dental plan organization] now were going to be placed fraudulently into one of the members of the joint venture, instead of both of them.” This fraud dissolved the partnership. Once it was dissolved, there could not be a breach of contract for failure to give 120 days’ notice and there could be “no damages for the breach of the contract.”

On appeal, the original dentist contended that the lower court could not apply the UFTA “because the intent of the statute is to provide protection to a judgment creditor ‘not to provide a refuge for a partner who at least initially is complicit in the act.’” The Court disagreed, holding that the lower court did not determine that the first dentist committed a fraud upon the second dentist “but instead applied [the provisions of the UFTA] to determine whether the concededly illicit transfer was one of the events that constitutes a dissolution of a partnership… .”

The first dentist then contended that even if dissolution pursuant to the Uniform Partnership Act was appropriate, “he was still entitled to a period to accomplish the winding-up of the partnership,” arguing that the 120 day provision should have been used to measure that period. In response, the Court held that “courts may refuse to enforce contracts that are unconscionable or violate public policy,” and in cases where “illegality is alleged as a reason for a dissolution, the winding-up required by the UPA should be strictly limited to the ‘satisfaction of the partnership obligations and bringing illegal actions to that end.’”

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