Uniform Partnership Act Limits Remedy
If a partner dies after having allegedly misappropriated partnership funds, do the other partners have a right to pursue his estate? The answer appears to be no, according to a recent Chancery Court decision.
The decision in In re Genet, Docket No.: ESX-C-44-11 (Oct. 13, 2011) was decided under the now repealed Uniform Partnership Act – yet another warning to partnerships formed before December 2000 that if they want the newer law to apply, they should amend the partnership agreement to say so.
In granting a motion to dismiss the claim of the surviving partner seeking to require his nieces to account for the misappropriations of their father, Chancery Judge Walter Koprowski held that the statutory language that created an obligation of the partnership to account to the estate of a deceased partner was not reciprocal. It did not create a similar obligation of the estate to account to the partnership for the wrongful acts of the deceased partner.
Real Estate Partnership
Gerald and Leon Genet were brothers and equal business partners in Genet Realty from the early 1980s. Leon died in 2005 and his wife died a week later. All of Leon’s assets passed to his three daughters in equal shares. At that time, Leon Genet Realty was still earning commissions on lease transactions.
Gerald initially agreed that he would pay Leon’s share of the incoming commissions to his heirs “so that the partnership could be wound up and … [the] Estate closed in a timely fashion.” In the next two years, payments of $330,000 were made to each of the daughters and, in 2007, Leon’s estate was closed.
In March 2010, Gerald refused to make payments and claimed that he had discovered that Leon had misappropriated funds from the partnership. He also claimed that the estate owed him for numerous loans made to Leon over the years. The daughters filed suit in New York; Gerald filed suit in New Jersey. Motions to dismiss followed in both actions. Ultimately the New York action was dismissed for lack of standing because the claim, according to the New York Court, belonged to the estate.
Uniform Partnership Act Applied
Gerald’s suit against the estate alleged that his brother had misappropriated partnership assets and that he was entitled to a formal accounting as to the partnership affairs. As plaintiff, he alleged that the claim was governed by the Uniform Partnership Act (UPA), first adopted in 1919 and repealed in December 2000, because the law does not apply to partnerships formed before the current law – the Revised Uniform Partnership Act (RUPA) – became effective.
The Court noted that there was no specific authority advanced for the application of the older UPA and appeared to be skeptical that it would actually apply. The new statute provides that it does not “affect an action or proceeding or right accrued before this act takes effect.” Nonetheless, the court applied the older law to the claim, which it then found did not support the claims alleged by the plaintiff Gerald.
The warning sign here is that this decision is only the fourth published decision and other courts have seemed to assume that if a partnership agreement executed before December 2000 is at issue, then a right that accrued before the new law became effective is at stake. There are plenty of pre-2000 partnership agreements still in effect. (An example is Nadel v. Starkman, 2010 N.J. Super. Unpub (App. Div. Oct 20, 2010) in which the Court applied the older UPA to a partnership formed in 1988, even though the events at issue did not occur until 2004.)
Gerald argued that the partnership had dissolved as a matter of law when his brother died – which is correct under the old law – and that he had a right to an accounting. The Court, however, relied on the language of the statute that the right accrues to the legal representative of a partner “as against the winding up partners, or the surviving partners, or the person or partnership continuing the business.” N.J.S.A. 42:1-43. That language could not be construed to create a right to an accounting from the estate of a non-winding up partner.
The inability to obtain an accounting also meant failure for Gerald‘s claim for restitution of damages allegedly caused by the wrongful conduct of his late partner. Under the older UPA, such an accounting was a prerequisite to the availability of other remedies. With no accounting available, no other remedies were available.
Another warning about the lingering effect of the UPA – a claim against one of the partners for wrongful conduct could easily run up against a bar for failure to seek and accounting if it requires construction of a pre-RUPA agreement. Partnerships formed before 2000 can give themselves a greater degree of certainty in their affairs by affirmatively choosing the RUPA in an amendment to the pre-2000 agreements.