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Whitman v. Herbert

SOM-C-12027-02 (N.J. Super. Ch. Div. 2004) (Unpublished)

PARTNERSHIPS; DISSOLUTION—Where a partnership buyout agreement is no longer viable, a court can order an appraisal and require that the buyout proceed on that basis.

Two partners agreed that one would buy the other out. The selling partner was to receive cash as well as real estate that would be purchased by the partnership for the purpose of the buy-out. The transaction was structured to be a tax-free exchange. When the selling partner refused to consummate the deal, the buying partner sued. The selling partner contended that the deal improperly became configured in a way that it was no longer a tax-free exchange.

The Court agreed with the selling partner, holding that the buying partner had structured the deal in a way that would have imposed significant taxes on the selling partner. The parties’ original letter-agreement stated that the deal was to be subject to confirmation that a tax-free exchange was possible. The parties subsequently prepared a written agreement that required the partnership to purchase the selected property and to hold it for at least thirty days before transferring it to the selling partner. The buying partner, however, obtained financing that would not have fulfilled the terms of the deal because he agreed with a lender to create a new entity to place certain partnership property in the new entity and then purchase the additional property. Such a change would have created significant tax consequences to the selling partner.

Additionally, even though the buying partner certified that the buyout would be completed within thirty to sixty days, five months had passed without a closing. For those reasons, the Court held that the selling partner had the right to refuse to go forward with the transaction.

The Court then held that the settlement agreement should be enforced, but in a modified form. Because the selling partner was no longer interested in pursuing the sale as a tax free transaction, the Court was not sure of the legality of this tax avoidance scheme. The purpose of the agreement was to have the buying partner obtain complete title to the subject real estate through the purchase of the selling partner’s share in the company at a fair price. Therefore, because the original agreement was no longer viable, the Court ordered that a third party appraiser value each partners’ interest in the company, and then the buying partner would purchase the selling partner’s interest based on the appraisal.

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