Scott E. Mollen
Scott E. Mollen ()

Partnerships—Dissolution—In Determining the Value of a Partnership Interest, “a Minority Discount” May Be Applied “To Reflect the Lack of Control a Minority Partner Has in the Operations of the Partnership” and Such Discount “Should Have Been Applied Under the Facts of This Case”

A defendant appealed from a judgment that declared that he had wrongfully dissolved a partnership and had breached a partnership agreement (agreement). The defendant was awarded the sum of $857,164.75 (for his partnership interest), plus prejudgment interest on damages from Sept. 1, 2011.

“Partnership Law §69(2)(c)(II)” (§69[2][c](II]) “entitles a partner who has wrongfully caused the dissolution of a partnership to be paid the ‘value’ of his or her interest in the partnership less any damages caused to…copartners by the dissolution.” The Appellate Division, Second Department (court) considered, inter alia, whether, “in determining the value of a partnership interest for purposes of…§69(2) (c)(II), a ‘minority discount’ may be applied to reflect the lack of control a minority partner has in the operations of the partnership.” That issue was “one of first impression” in the court. The court held that “such a discount may be applied, and that it should have been applied under the facts of this case.”

The partnership owned and operated a regional shopping mall. The defendant-general partner owned a 3.08 percent interest in the partnership. The defendant had advised his partners that “he had unilaterally elected to dissolve the partnership, claiming that there had been a ‘fundamental breakdown in the relationship…among’” the partners.

In 2007, the plaintiffs, as members of the partnership’s executive committee, commenced the subject action against the defendant, claiming that “he had wrongfully elected to unilaterally dissolve the partnership in violation of the [agreement], and that he had done so in order to force the partnership ‘to buy out…his interest at a steep premium.’” The plaintiffs asserted claims for breach of contract and sought a judgment declaring that the defendant had wrongfully dissolved the partnership. The defendant counterclaimed pursuant to §69(2)(c)(II). That statute provided that “in the event of a wrongful dissolution, if the partners who have not caused the wrongful dissolution elect to continue the partnership’s business…, the partner who has caused the wrongful dissolution shall have ‘the value of his interest in the partnership, less any damages caused to his [copartners] by the dissolution, ascertained and paid to him…but in ascertaining the value of the partner’s interest the value of…good-will…shall not be considered.’”

The defendant argued that he was permitted “to dissolve the partnership…because the partnership was at-will and of indefinite duration.” The trial court rejected that argument and denied defendant’s motion to dismiss. The court had affirmed such decision. The court stated that “the partnership was not at-will since the [agreement], which indicated that the partnership shall dissolve upon an election of a majority of the partners, provided for a ‘definite term’ within the meaning of Partnership Law §62(1)(b)….”

The trial court found that the defendant had “dissolved the partnership in contravention of the [agreement]….” and had conducted a nonjury trial to determine the plaintiffs’ damages and “the value of the defendant’s interest in the partnership.” The parties had stipulated that “the unadjusted value of the defendant’s…interest in the partnership was $4.85 million as of Nov. 24, 2006, the date of the wrongful dissolution of the partnership.” Following the damage and valuation trial, the trial court held that the value of the defendant’s interest in the partnership, less the damages caused by the wrongful dissolution, was $857,164.75.

The trial court had applied “a 15 percent discount for goodwill, and a 35 percent discount to account for the limited marketability of the defendant’s interest.” However, the trial court refused “to apply a minority discount,” citing case law involving valuation of a minority shareholder’s stock in a close corporation.” The trial court also reduced the award by the amount of the plaintiffs’ legal fees incurred because of the defendant’s wrongful dissolution. The parties appealed and cross-appealed from a judgment in favor of the defendant and against the plaintiffs in the amount of $857,164.75. The court rejected the defendant’s request that the court overturn its prior determination that the defendant had wrongfully dissolved the partnership.

The plaintiffs’ valuation expert testified that the minority discount should be 66 percent. The defendant’s valuation expert asserted that a minority discount was inappropriate, because “under the relevant statutes,…a minority discount was not applicable.’” In dealing with valuation of corporate stock, “[t]he theory behind a minority discount is that non-controlling shares of stock are not worth their proportionate share of the [company's] value because they lack voting power to control corporate actions…. and like a corporate minority shareholder, a limited partner generally has no voice in the management of [a] partnership and cannot control investment policies or partnership distribution, so a minority discount may apply to the value of [a partnership] interest as well….” The New York Court of Appeals has acknowledged that although:

the “financial reality that minority shares in a close corporation are worth less because they represent only a minority” “may have validity when corporate stock is valued for other purposes, it overlooks the statutory objective here of achieving a fair appraisal remedy for dissenting minority shareholders”…. In Matter of Murphy, this court, citing Matter of Friedman, stated that “New York law does not permit a minority discount”….

However, the court explained that the New York Court of Appeals’ concerns with applying a minority discount to a dissenting shareholder’s stock were inapplicable to the present context. Unlike Matter of Friedman and Matter of Murphy, this case did not involve “a determination of the ‘fair value’ of a dissenting shareholder’s shares pursuant to Business Corporation Law §§623 and 1118….” Rather, this case “involves the determination of the ‘value’ of the shares of a partner who has wrongfully caused the dissolution of a partnership pursuant to…§69(2)(c)(II).”

The Appellate Division, First Department, had observed that:

applying a minority discount…valuing a partnership interest “would not contravene the distinctly corporate statutory proscription (Business Corporation Law §501[c]) against treating holders of the same class of stock differently, or undermine the…goal of the appraisal statutes to protect shareholders from being forced to sell at unfair values, or inevitably encourage oppressive majority conduct….”

The court reasoned that the Court of Appeals’ concern that applying a minority discount when valuing a dissenting shareholder’s stock might “encourage oppressive majority conduct is not relevant here, where the dissolution was caused not by any action on the part of the majority, but…, was caused by the ‘wrongful[ ]‘ conduct of a minority partner….”

The court noted that “the partnership remains a going concern, and the defendant has no right to compel a liquidation sale of the partnership’s shopping mall and receive a proportionate share of the liquidation value of that asset.” Under such circumstances, the court held that “a minority discount may properly be applied to account for the defendant’s lack of control in the partnership as a going concern.” Thus, the trial court “should have applied a minority discount” in valuing the defendant’s partnership interest to determine the amount that the defendant should recover on his counterclaim pursuant to Partnership Law §69.”

Additionally, the court held that “the plaintiffs’ expert’s testimony that a 66 percent minority discount was appropriate…and supported by the record” and the trial court had properly awarded, as damages, a “reasonable amount of…legal expenses incurred by the plaintiffs.” The court also held that the trial court had “properly applied a discount” for the “value of the partnership business’s goodwill….” Accordingly, the judgment was modified and the matter was remitted to the trial court for “a new calculation of damages,” that applied a 66 percent minority discount to the value of the defendant’s partnership interest.

Comment: The defendant’s expert expressed his belief that based on “relevant statutes,” a minority discount was not “applicable.” There are times when a party and its expert believes that part of a damage claim is not recoverable. Since a court may disagree as to whether some aspect of a damage claim is recoverable, it may be prudent, in certain cases, to challenge the adversary’s damage calculations, even if a party believes such damages are not recoverable. Absent an alternative calculation, a trial court may have only one party’s damage calculation in the record for its consideration.

Congel v. Malfitano, App. Div., 2d Dept., Index No. 220/07), decided May 18, 2016, Dillon, J.P., Hall and LaSalle, JJ. Decision by Dickerson, J. All concur.


Fair Housing Act—Land Use—Town’s Granting of Variances Allowing Plaintiffs to Build an Above the Ground Pool, Fence and Deck, May Have Violated the FHA by Requiring Removal When Disabled Child Left the Property—Retaliation Claim Dismissed

A trial court granted a defendant town’s motion to dismiss a complaint which asserted Fair Housing Act (FHA) claims. The salient issue was “whether the town’s resolutions” (resolutions) “granting variances allowing appellants [plaintiffs] to build…structures, e.g. an above-ground pool, fence, and deck” (structures), “violated the Act by requiring removal when their disabled child left the property.” The U.S. Court of Appeals for the Second Circuit (court) held that “the reasonableness of the town’s accommodations is in issue, but a valid claim for retaliation has not been alleged….”

The plaintiffs’ son had, inter alia, “cerebral palsy and global developmental delays. He is non-verbal and visually impaired.” The plaintiffs sought “to install a fence…to keep their son safely within their yard and to build an above-ground pool because of the benefits aquatic therapy affords to children with cerebral palsy.” The town granted a variance to permit the construction of the structures which was conditioned upon an agreement that “the fence and swimming pool must ‘be wholly removed’…’within 21 days’ of the disabled child ceasing to live on the property, of [plaintiffs] ceasing to own the property…or of anyone being added as an additional owner of the property.” The structures were to be removed at the expense of the plaintiffs or the new owners of the property. The resolutions provided that the plaintiffs had the right to bring a legal challenge to the foregoing provisions.

The plaintiffs installed the structures and related landscaping, at a cost of more than $27,000. The plaintiffs’ estimated cost to remove the structures and “repair the damage to the yard” was $6,630.

The plaintiffs thereafter filed the subject action challenging the restoration provisions. They alleged claims under the FHA for discrimination by reason of the town’s denial of “a reasonable modification pursuant to 42 U.S.C. Section 3604(f)(3)(A),” and “retaliation by the town ‘for asserting their rights under federal law in violation of 42 U.S.C. Section 3617.’”

The trial court dismissed the complaint, finding that the facts did not evince “a discriminatory intent.” The trial court also held that plaintiffs failed to support their argument that requiring them to bear the removal costs was based upon their son’s disability and that plaintiffs failed to state a claim under a “disparate-impact analysis.” There had been no showing that the restoration requirement was inapplicable to non-disabled individuals.

On appeal, the court observed that the FHA did not embody a “per se rule against land-use regulators including restoration provisions in zoning variances or other land-use accommodations.” The court explained that Section 3604(f)(3)(B), required denial of the motion to dismiss. The court noted that an unlawful act may be a “refusal to make a reasonable accommodation without regard to the state of mind underlying the refusal.”

The town did “not want the variance to ‘run with the land’” so that the variance could “be taken advantage of by later occupants without a disability.” The plaintiffs sought “to avoid the cost of removal and to capture any increase in the value of the property caused by the modifications and/or by permanently freeing the lot…from the restrictions applicable to the neighborhood in question.”

The court opined that although the resolutions “did not directly deprive the disabled child of his rights under the FHA,” “a trier of fact might find that a restoration requirement in some circumstances so burdens a party wanting to modify a property to accommodate a disabled person that it amounts to a refusal of a reasonable accommodation.” The court found that “[t]he issue of whether the failure of the town to allow the modifications to continue in place after the child left the property was reasonable…can neither be avoided nor decided as a matter of law on the pleadings.”

The court further stated that whether the resolutions were “reasonable in light of [plaintiffs'] needs requires a complex balancing of factors” and “[r]easonable analysis is ‘highly fact-specific, requiring a case-by-case determination.’” The court noted that “[a] requested accommodation is reasonable where the cost is modest and it does not pose an undue hardship or substantial burden on the rule maker.” The court also noted that “[a]pplied to the context of land-use regulations, relevant factors may include the purposes of the restriction, the strength of the town’s interest in the land-use regulation at issue, the need for uniformity, the effect of allowing later landowners without a disability to enjoy the lack of a restriction on pools, decks, and fences, while all their neighbors are subject to it, the likelihood that a permanent variance will cause other landowners subject to the regulation to seek similar variances, etc.”

The court declined to make “gratuitous statements that may seem to address other of the multitude of land-use regulations, e.g. historic landmarking, etc.” However, the court affirmed the dismissal of the retaliation claim. The plaintiffs cited “the lack of a proffered justification for the restoration provisions and the existence elsewhere in the town of lots smaller than [plaintiffs'] property without a prohibition on accessory structures.” However, the court noted that “town-wide differences in the applicability of various land-use regulations to various developments and lots preexisted [plaintiffs'] request for a variance,” and the subject regulations “apply to [plaintiffs'] neighbors as well as to them.” The court concluded that there were no supporting allegations as to “a retaliatory motive.” Thus, the judgment granting the town’s motion to dismiss was affirmed in part and vacated in part.

Colleen & John Austin v. Town of Farmington, 15-2238-cv, NYLJ 1202760644496, at *1 (2d Cir., Decided June 21, 2016) Before: Winter, C.J.; Raggi, and Droney, C.JJ. Opinion by Winter, C.J.

Partnerships—Dissolution—In Determining the Value of a Partnership Interest, “a Minority Discount” May Be Applied “To Reflect the Lack of Control a Minority Partner Has in the Operations of the Partnership” and Such Discount “Should Have Been Applied Under the Facts of This Case”

A defendant appealed from a judgment that declared that he had wrongfully dissolved a partnership and had breached a partnership agreement (agreement). The defendant was awarded the sum of $857,164.75 (for his partnership interest), plus prejudgment interest on damages from Sept. 1, 2011.

“Partnership Law §69(2)(c)(II)” (§69[2][c](II]) “entitles a partner who has wrongfully caused the dissolution of a partnership to be paid the ‘value’ of his or her interest in the partnership less any damages caused to…copartners by the dissolution.” The Appellate Division, Second Department (court) considered, inter alia, whether, “in determining the value of a partnership interest for purposes of…§69(2) (c)(II), a ‘minority discount’ may be applied to reflect the lack of control a minority partner has in the operations of the partnership.” That issue was “one of first impression” in the court. The court held that “such a discount may be applied, and that it should have been applied under the facts of this case.”

The partnership owned and operated a regional shopping mall. The defendant-general partner owned a 3.08 percent interest in the partnership. The defendant had advised his partners that “he had unilaterally elected to dissolve the partnership, claiming that there had been a ‘fundamental breakdown in the relationship…among’” the partners.

In 2007, the plaintiffs, as members of the partnership’s executive committee, commenced the subject action against the defendant, claiming that “he had wrongfully elected to unilaterally dissolve the partnership in violation of the [agreement], and that he had done so in order to force the partnership ‘to buy out…his interest at a steep premium.’” The plaintiffs asserted claims for breach of contract and sought a judgment declaring that the defendant had wrongfully dissolved the partnership. The defendant counterclaimed pursuant to §69(2)(c)(II). That statute provided that “in the event of a wrongful dissolution, if the partners who have not caused the wrongful dissolution elect to continue the partnership’s business…, the partner who has caused the wrongful dissolution shall have ‘the value of his interest in the partnership, less any damages caused to his [copartners] by the dissolution, ascertained and paid to him…but in ascertaining the value of the partner’s interest the value of…good-will…shall not be considered.’”

The defendant argued that he was permitted “to dissolve the partnership…because the partnership was at-will and of indefinite duration.” The trial court rejected that argument and denied defendant’s motion to dismiss. The court had affirmed such decision. The court stated that “the partnership was not at-will since the [agreement], which indicated that the partnership shall dissolve upon an election of a majority of the partners, provided for a ‘definite term’ within the meaning of Partnership Law §62(1)(b)….”

The trial court found that the defendant had “dissolved the partnership in contravention of the [agreement]….” and had conducted a nonjury trial to determine the plaintiffs’ damages and “the value of the defendant’s interest in the partnership.” The parties had stipulated that “the unadjusted value of the defendant’s…interest in the partnership was $4.85 million as of Nov. 24, 2006, the date of the wrongful dissolution of the partnership.” Following the damage and valuation trial, the trial court held that the value of the defendant’s interest in the partnership, less the damages caused by the wrongful dissolution, was $857,164.75.

The trial court had applied “a 15 percent discount for goodwill, and a 35 percent discount to account for the limited marketability of the defendant’s interest.” However, the trial court refused “to apply a minority discount,” citing case law involving valuation of a minority shareholder’s stock in a close corporation.” The trial court also reduced the award by the amount of the plaintiffs’ legal fees incurred because of the defendant’s wrongful dissolution. The parties appealed and cross-appealed from a judgment in favor of the defendant and against the plaintiffs in the amount of $857,164.75. The court rejected the defendant’s request that the court overturn its prior determination that the defendant had wrongfully dissolved the partnership.

The plaintiffs’ valuation expert testified that the minority discount should be 66 percent. The defendant’s valuation expert asserted that a minority discount was inappropriate, because “under the relevant statutes,…a minority discount was not applicable.’” In dealing with valuation of corporate stock, “[t]he theory behind a minority discount is that non-controlling shares of stock are not worth their proportionate share of the [company's] value because they lack voting power to control corporate actions…. and like a corporate minority shareholder, a limited partner generally has no voice in the management of [a] partnership and cannot control investment policies or partnership distribution, so a minority discount may apply to the value of [a partnership] interest as well….” The New York Court of Appeals has acknowledged that although:

the “financial reality that minority shares in a close corporation are worth less because they represent only a minority” “may have validity when corporate stock is valued for other purposes, it overlooks the statutory objective here of achieving a fair appraisal remedy for dissenting minority shareholders”…. In Matter of Murphy, this court, citing Matter of Friedman, stated that “ New York law does not permit a minority discount”….

However, the court explained that the New York Court of Appeals’ concerns with applying a minority discount to a dissenting shareholder’s stock were inapplicable to the present context. Unlike Matter of Friedman and Matter of Murphy, this case did not involve “a determination of the ‘fair value’ of a dissenting shareholder’s shares pursuant to Business Corporation Law §§623 and 1118….” Rather, this case “involves the determination of the ‘value’ of the shares of a partner who has wrongfully caused the dissolution of a partnership pursuant to…§69(2)(c)(II).”

The Appellate Division, First Department, had observed that:

applying a minority discount…valuing a partnership interest “would not contravene the distinctly corporate statutory proscription (Business Corporation Law §501[c]) against treating holders of the same class of stock differently, or undermine the…goal of the appraisal statutes to protect shareholders from being forced to sell at unfair values, or inevitably encourage oppressive majority conduct….”

The court reasoned that the Court of Appeals’ concern that applying a minority discount when valuing a dissenting shareholder’s stock might “encourage oppressive majority conduct is not relevant here, where the dissolution was caused not by any action on the part of the majority, but…, was caused by the ‘wrongful[ ]‘ conduct of a minority partner….”

The court noted that “the partnership remains a going concern, and the defendant has no right to compel a liquidation sale of the partnership’s shopping mall and receive a proportionate share of the liquidation value of that asset.” Under such circumstances, the court held that “a minority discount may properly be applied to account for the defendant’s lack of control in the partnership as a going concern.” Thus, the trial court “should have applied a minority discount” in valuing the defendant’s partnership interest to determine the amount that the defendant should recover on his counterclaim pursuant to Partnership Law §69.”

Additionally, the court held that “the plaintiffs’ expert’s testimony that a 66 percent minority discount was appropriate…and supported by the record” and the trial court had properly awarded, as damages, a “reasonable amount of…legal expenses incurred by the plaintiffs.” The court also held that the trial court had “properly applied a discount” for the “value of the partnership business’s goodwill….” Accordingly, the judgment was modified and the matter was remitted to the trial court for “a new calculation of damages,” that applied a 66 percent minority discount to the value of the defendant’s partnership interest.

Comment: The defendant’s expert expressed his belief that based on “relevant statutes,” a minority discount was not “applicable.” There are times when a party and its expert believes that part of a damage claim is not recoverable. Since a court may disagree as to whether some aspect of a damage claim is recoverable, it may be prudent, in certain cases, to challenge the adversary’s damage calculations, even if a party believes such damages are not recoverable. Absent an alternative calculation, a trial court may have only one party’s damage calculation in the record for its consideration.

Congel v. Malfitano, App. Div., 2d Dept., Index No. 220/07), decided May 18, 2016, Dillon, J.P., Hall and LaSalle, JJ. Decision by Dickerson, J. All concur.


Fair Housing Act—Land Use—Town’s Granting of Variances Allowing Plaintiffs to Build an Above the Ground Pool, Fence and Deck, May Have Violated the FHA by Requiring Removal When Disabled Child Left the Property—Retaliation Claim Dismissed

A trial court granted a defendant town’s motion to dismiss a complaint which asserted Fair Housing Act (FHA) claims. The salient issue was “whether the town’s resolutions” (resolutions) “granting variances allowing appellants [plaintiffs] to build…structures, e.g. an above-ground pool, fence, and deck” (structures), “violated the Act by requiring removal when their disabled child left the property.” The U.S. Court of Appeals for the Second Circuit (court) held that “the reasonableness of the town’s accommodations is in issue, but a valid claim for retaliation has not been alleged….”

The plaintiffs’ son had, inter alia, “cerebral palsy and global developmental delays. He is non-verbal and visually impaired.” The plaintiffs sought “to install a fence…to keep their son safely within their yard and to build an above-ground pool because of the benefits aquatic therapy affords to children with cerebral palsy.” The town granted a variance to permit the construction of the structures which was conditioned upon an agreement that “the fence and swimming pool must ‘be wholly removed’…’within 21 days’ of the disabled child ceasing to live on the property, of [plaintiffs] ceasing to own the property…or of anyone being added as an additional owner of the property.” The structures were to be removed at the expense of the plaintiffs or the new owners of the property. The resolutions provided that the plaintiffs had the right to bring a legal challenge to the foregoing provisions.

The plaintiffs installed the structures and related landscaping, at a cost of more than $27,000. The plaintiffs’ estimated cost to remove the structures and “repair the damage to the yard” was $6,630.

The plaintiffs thereafter filed the subject action challenging the restoration provisions. They alleged claims under the FHA for discrimination by reason of the town’s denial of “a reasonable modification pursuant to 42 U.S.C. Section 3604(f)(3)(A),” and “retaliation by the town ‘for asserting their rights under federal law in violation of 42 U.S.C. Section 3617.’”

The trial court dismissed the complaint, finding that the facts did not evince “a discriminatory intent.” The trial court also held that plaintiffs failed to support their argument that requiring them to bear the removal costs was based upon their son’s disability and that plaintiffs failed to state a claim under a “disparate-impact analysis.” There had been no showing that the restoration requirement was inapplicable to non-disabled individuals.

On appeal, the court observed that the FHA did not embody a “per se rule against land-use regulators including restoration provisions in zoning variances or other land-use accommodations.” The court explained that Section 3604(f)(3)(B), required denial of the motion to dismiss. The court noted that an unlawful act may be a “refusal to make a reasonable accommodation without regard to the state of mind underlying the refusal.”

The town did “not want the variance to ‘run with the land’” so that the variance could “be taken advantage of by later occupants without a disability.” The plaintiffs sought “to avoid the cost of removal and to capture any increase in the value of the property caused by the modifications and/or by permanently freeing the lot…from the restrictions applicable to the neighborhood in question.”

The court opined that although the resolutions “did not directly deprive the disabled child of his rights under the FHA,” “a trier of fact might find that a restoration requirement in some circumstances so burdens a party wanting to modify a property to accommodate a disabled person that it amounts to a refusal of a reasonable accommodation.” The court found that “[t]he issue of whether the failure of the town to allow the modifications to continue in place after the child left the property was reasonable…can neither be avoided nor decided as a matter of law on the pleadings.”

The court further stated that whether the resolutions were “reasonable in light of [plaintiffs'] needs requires a complex balancing of factors” and “[r]easonable analysis is ‘highly fact-specific, requiring a case-by-case determination.’” The court noted that “[a] requested accommodation is reasonable where the cost is modest and it does not pose an undue hardship or substantial burden on the rule maker.” The court also noted that “[a]pplied to the context of land-use regulations, relevant factors may include the purposes of the restriction, the strength of the town’s interest in the land-use regulation at issue, the need for uniformity, the effect of allowing later landowners without a disability to enjoy the lack of a restriction on pools, decks, and fences, while all their neighbors are subject to it, the likelihood that a permanent variance will cause other landowners subject to the regulation to seek similar variances, etc.”

The court declined to make “gratuitous statements that may seem to address other of the multitude of land-use regulations, e.g. historic landmarking, etc.” However, the court affirmed the dismissal of the retaliation claim. The plaintiffs cited “the lack of a proffered justification for the restoration provisions and the existence elsewhere in the town of lots smaller than [plaintiffs'] property without a prohibition on accessory structures.” However, the court noted that “town-wide differences in the applicability of various land-use regulations to various developments and lots preexisted [plaintiffs'] request for a variance,” and the subject regulations “apply to [plaintiffs'] neighbors as well as to them.” The court concluded that there were no supporting allegations as to “a retaliatory motive.” Thus, the judgment granting the town’s motion to dismiss was affirmed in part and vacated in part.

Colleen & John Austin v. Town of Farmington, 15-2238-cv, NYLJ 1202760644496, at *1 (2d Cir., Decided June 21, 2016) Before: Winter, C.J.; Raggi, and Droney, C.JJ. Opinion by Winter, C.J.