590 Madison Avenue
590 Madison Avenue (NYLJ/Rick Kopstein)

Editors’ Note: This article is an updated and corrected version of a story about this decision that appeared on Aug. 22.

Partially reversing a lower court, a state appeals panel has ruled that dissolved law firm Arkin Kaplan Rice is still responsible for its office sublease.

The Appellate Division, First Department, ruling partially supports arguments of plaintiffs Stanley Arkin and Lisa Solbakken in their litigation against Howard Kaplan and Michelle Rice, their former partners.

The panel also said Kaplan and Rice are not jointly and severally liable for remaining obligations under the sublease in their individual capacities.

Arkin Kaplan Rice split up in 2012 after disagreements about the firm’s structure. Arkin and Solbakken sued Kaplan and Rice and their new firm, Kaplan Rice LLP, the same year, Arkin Kaplan Rice v. Kaplan, 652316/12, claiming they used the dissolved firm’s assets to secretly form Kaplan Rice LLP.

In a separate action, Rice and Kaplan are seeking an accounting for their share of the partnership assets.

One major issue in the litigation has been who is responsible for the dissolved firm’s liabilities, including its sublease payments.

Arkin and Solbakken have argued that the dissolved firm’s obligation to pay rent continued after dissolution. Kaplan and Rice have claimed their prior firm has no obligation for rent payments after dissolution.

A prior iteration of the law firm entered into the sublease in 1999 with sublandlord, Ladenburg Thalmann & Co., for an office at 590 Madison Ave.

A section of the sublease provides that a new partner shall be jointly and severally liable for the subtenant’s obligations. It also provides that upon the withdrawal of any partner, other than Arkin, the withdrawing partner be deemed released from the sublease as of the withdrawal date and shall have no further rights or obligations under the sublease.

Over the years, the firm that signed the 1999 sublease changed its name when partners joined or withdrew. One of Arkin and Kaplan’s prior firms, Arkin Kaplan LLP, last amended the sublease in 2004 and partners Arkin, Kaplan and Rice, among others, signed the amendment, according to the appellate panel.

When Rice became a named partner in 2006 and the firm changed its name to Arkin Kaplan Rice, the sublease was never amended to replace Arkin Kaplan Rice as a signatory.

In 2009, Arkin Kaplan Rice informed the sublandlord that it wished to extend the sublease to June 2015.

Manhattan Acting Supreme Court Justice O. Peter Sherwood (See Profile) in 2013 found that, “Since AKR never signed the sublease, its liability ended as of the date of dissolution” and AKR has no obligation to pay rent to the sublandlord following its dissolution (NYLJ, June 10, 2013).

Sherwood also said Kaplan and Rice are released from personal liability for sublease obligations, including rent payments after leaving the space.

Arkin and Solbakken appealed, claiming Sherwood improperly determined that the sublease, “which solely concerns Kaplan and Rice’s personal liability, also operated to release Kaplan and Rice’s partnership interest in AKR’s assets.”

While the appellate panel said Kaplan and Rice are not jointly and severally liable in their individual capacities, the panel further addresses the issue in another part of the ruling.

It said Sherwood properly rejected Arkin and Solbakken’s argument that the sublease “referred only to Kaplan and Rice’s personal liability, and therefore, that Kaplan and Rice’s share of the partnership assets should be used to pay rent or other obligations to the sublandlord under the sublease after they withdrew from the firm.”

“On the contrary,” the panel said, the sublease “does not contain any limitations or qualifications, and there is no basis to interpret the parties’ agreement as impliedly stating something that they did not specifically include.”

Accordingly, the panel said, Kaplan and Rice were released from any further obligations, including the requirement to pay rent, under the sublease when they withdrew.

But the appeals panel said it disagreed with Sherwood’s finding that because Arkin Kaplan Rice never signed the sublease, its liability ended when the firm dissolved.

The panel noted that, “from 2006 until its dissolution in 2012, AKR’s payment of rent while in possession of the premises created a presumption of an assignment of the sublease.”

The appeals court said it found sufficient evidence that Arkin Kaplan Rice assumed Arkin Kaplan’s obligations under the sublease.

“On this basis, among others, we find that AKR is liable for any obligations under the sublease” until the expiration of the sublease, the panel said.

It also said evidence does not support Sherwood’s finding that Arkin and Solbakken’s new firm, Arkin Solbakken LLP, is the successor to Arkin Kaplan Rice.

The appeals panel was composed of Justices Rolando Acosta (See Profile), Richard Andrias (See Profile), Karla Moskowitz (See Profile) and Sallie Manzanet-Daniels (See Profile).

The two sides have characterized the panel decision differently.

In a letter to Manhattan Supreme Court Justice Jeffrey Oing (See Profile), who is now presiding over the case, Arkin and Solbakken’s attorney, Michael Bowe, said the appeals panel modified Sherwood’s conclusion to instead provide that Kaplan and Rice only escaped liability under the sublease in their individual capacities, and not as partners of Arkin Kaplan Rice. He said their liability as partners remains.

He said the dissolved firm’s financial obligations, including its sublease, exceeds its account balance. “There are no AKR monies to be distributed, and Kaplan and Rice’s claims for a distribution necessarily fail,” said Bowe, a partner at Kasowitz, Benson, Torres & Friedman

But Kaplan and Rice’s attorney, Christopher Allegaert, told Justice Oing in a letter that they “adamantly disagree” with the plaintiffs’ interpretation of the appellate decision.

Allegaert, partner of Allegaert Berger & Vogel, said the panel declared that Arkin Kaplan Rice remained liable under the sublease after its dissolution and that its assets, after subtracting Kaplan and Rice’s share, could be used to pay the remaining sublease obligation.

“The First Department affirmed Justice Sherwood’s ruling that Kaplan and Rice were released from personal liability, including application of their partnership interest in AKR to the rental obligation, under the sublease after the date of their withdrawal from AKR,” he said.