Opinion
99 Civ. 4226 (NRB)
June 11, 2001
Robert J.A. Zito, Esq., Caryn L. Marcus, Esq., Fischbein, Badillo, Wagner Harding, New York, N.Y. 10022.
Kurt H. Dunkle, Esq., Rogers, Towers, Bailey, Jones Gay, Jacksonville, FL 32207-9020.
Steven Michael Rabinowitz, Esq., Pryor Cashman, New York, N.Y. 10022.
Richard B. Feldman, Esq., Feldman Gany, L.L.P., New York, N.Y. 1001.
OPINION AND ORDER
This is a declaratory judgment action brought by plaintiff Rosewood Apartments Corp., (hereinafter "Rosewood" or "plaintiff") against Peter Robert Perpignano, Leonard Eisenberg, Irving Eisenberg, Anthony Alizio, and Joseph Alizio (collectively, "defendants") Plaintiff seeks a declaration that its transfer of a piece of real property from a partnership it maintained with defendants was authorized and proper. Now pending are crossmotions for summary judgment. For the following reasons, we find the transfer to be unauthorized and award summary judgment to defendants.
BACKGROUND
The factual history of this case is tortuous and litigious. The instant dispute grows out of the long-standing struggle between the general and limited partners of New Haven Plaza Associates ("NHPA" or "the Partnership"), a New York State Partnership that was formed in 1978 to develop and operate a low-income and senior citizen housing development in Far Rockaway, Queens, known as New Haven Plaza Apartments ("the property"). See PTO, ¶¶ 9, 13
Unless otherwise indicated, all factual assertions are derived either from the parties' stipulated statement of facts contained in an August 9, 2000 Joint Pre-Trial Order (hereinafter "PTO"), or from the parties' Statement of Undisputed Facts submitted in connection with this motion, pursuant to Local Civil Rule 56.1 (hereinafter "SOUDF").
The partnership was formed on November 14, 1978 by several of the defendants in this case and several other high net-worth individuals. See PTO, ¶ 9. A principal purpose of investing in the partnership was to shelter income from taxation, as then permitted by the federal tax laws and Department of Housing and Urban Development regulations. See Marcus Aff., Exh. A ("Complaint"), ¶ 10; Dunkle Aff., Exh. 2 ("Brucia Op."), at 4-5.
The general partners at formation were Peter Perpignano, Robert Perpignano, Joseph Macagnone, Leonard Eisenberg, Irving Eisenberg, Anthony Alizio, and Joseph Alizio; the sole initial limited partner was Norma Perpignano. PTO, ¶ 9. The Eisenbergs, Alizios, and Peter Perpignano remain as partners today (and are the defendants in this lawsuit). PTO, ¶¶ 4-8.
In 1980, a California corporation, Real Estate Associates Limited II ("REAL II") replaced Norma Perpignano as the limited partner in NHPA, and purchased an 80% interest in the partnership's profits and losses. See PTO, ¶¶ 10-11; Brucia Op., at 5. After this transaction took place, an Amended and Restated Agreement of Limited Partnership ("the Agreement") was concluded on October 7, 1980; that Agreement is still in effect and is thus the crux of the instant litigation.
Almost as soon as the construction of the apartment complex was completed, and its operation as a Section 8 subsidized housing project began, see PTO, ¶ 17, the legal wrangling that lasts to the present day ensued. In 1982, several of the partners, including the Eisenbergs and Alizios, filed suit in Supreme Court, Nassau County, against Peter Perpignano and Joseph Macagnone, the operating general partners, alleging mismanagement of the property. See PTO, ¶ 20; Brucia Op., at 2. The plaintiffs in that case sought the dissolution of the partnership as a remedy for the alleged mismanagement.
Justice James J. Brucia of the Supreme Court, in a lengthy decision after a bench trial, found that there was in fact mismanagement on the part of several of the general partners of NHPA, including both the plaintiffs and defendants in that litigation (many of whom are defendants here). See Brucia Op., at 28-29 ("With the exception of respondents REAL II and Macagnone, this court is not overly impressed by the conduct of any of the partners which resulted in the within proceeding . . . ."). Thus, at least in part because REAL II sought to prevent the dissolution of the partnership, Justice Brucia invoked the mandatory retirement provisions of § 8.3 of the Agreement, and consequently switched the positions of the general and limited partners. See Marcus Aff., Exh. F ("Judgment"), at 1-2; SOUDF, ¶ 9. After this exercise of the court's equitable powers, Real II became the general partner and designated its affiliate, Rosewood, a California corporation, as the replacement general operating partner. See SOUDF, ¶ 3. All the former general individual partners subsequently became limited partners.
The instant litigation grew out of a transaction that took place on December 30, 1998. Through a three-step process, Rosewood caused the transfer of title to the New Haven Plaza apartments from the partnership to a Real Estate Investment Trust (REIT) known as Casden Properties Operating Partnership ("the REIT"). See PTO, ¶ 18.
After the ouster of the individual partners from their role as general partners, any number of lengthy and apparently bitter litigations were spawned, none of which are relevant to the case at bar. See. e.g., Joseph Alizio v. Peter Robert Perpignano et al., 245 A.D.2d 477 (2d Dep't. 1997); Joseph Alizio v. Perpignano et al., 225 A.D.2d 723 (2d Dep't. 1996); Anthony Alizio v. Peter Perpignano, 176 A.D.2d 279 (2d Dep't. 1994)
The first step consisted of an option agreement between Real II and Casden Properties Sub LLC ("Casden"), which granted Casden the right to acquire REAL II's interest in NHPA. Casden immediately exercised this option, thereby replacing REAL II as the 85% shareholder in the partnership. See SOUDF, ¶ 15; Dunkle Aff., Exh. 5. Immediately thereafter, Rosewood, as NHPA's operating general partner, allowed Casden to redeem the 85% partnership interest that it had just obtained for an 85% share in the title of the property. See SOUDF, ¶ 15; Dunkle Aff., Exh. 6. As a result of this second step, the partnership retained the remaining 15% share in the property's title. After Casden redeemed its partnership interest for a share of the title, the individual partners retained approximately 85% of the partnership as a whole. (Rosewood, the operating general partner, thus owned a 15% interest in the partnership at this stage.)
The third and final step of the transaction consisted of a "Contribution Agreement" between Rosewood and the REIT. See Dunkle Aff., Exh. 7. Through that agreement, Rosewood transferred the remaining 15% interest in the title of the apartment complex (owned by the partnership) to the Casden entities, in return for 55, 556 operating partnership units ("OPU's") in the REIT. See PTO, ¶ 18. Thus, at the conclusion of this process the partnership's sole assets were the OPU's in the REIT, which owned many real properties across the nation, including New Haven Plaza. It is this transaction, in its entirety, that plaintiffs seek to have declared valid through this action, and that defendants seek to have unwound.
DISCUSSION
Now pending are cross-motions for summary judgment on the question of whether Rosewood maintained the authority to transfer the New Haven Plaza apartment complex from NHPA to the REIT. Both parties agreed at oral argument that this question of authority might be disposed of solely on the materials submitted in connection with this motion, and that no sufficiently material fact question remained to prevent its resolution.
1. Interpretation of the Partnership Agreement
The threshold dispute between the parties is over the effect of two apparently contradictory clauses of the Agreement. Section 13.3 of the Agreement provides that the contract law of the State of New York applies to any disputes arising about its interpretation, and our analysis proceeds accordingly. The first set of provisions in contention, §§ 7.1, 7.1.1, state that:
Except for the Mortgage Loan, the General Partner may not, without the prior written consent of the Limited Partner, sell or lease (except to individual tenants in the ordinary course of business) or otherwise pledge, encumber or dispose of the Project or the Property . . . .
(emphasis added). Defendants thus argue that because plaintiffs did not seek prior written consent prior to the conveyance of the real property to the REIT, the transfer is invalid under these terms of the Agreement. Plaintiffs do not contest that they failed to seek written consent before the transfer. Rather, they respond that the requirement of prior written consent is superceded by another set of provisions of the Agreement, §§ 8.3 et seq., which govern the mandatory retirement of a general partner. These mandatory retirement provisions are those invoked by Justice Brucia in his 1985 decision reversing the status of the general and limited partners.
Critically, § 8.3.4 states in relevant part that, "If all persons and entities comprising the Operating General Partner are required to resign . . . thereafter, such resigning persons and entities shall be limited partners of the Partnership, but with no vote or control . . . ." (emphasis added). Plaintiffs contend that the "no vote or control" language means precisely that, and that once ousted from being general partners, the newly-limited partners had lost the right to exercise control over the disposition of partnership assets. This appears to us the most sensible and coherent reading of the Agreement as a whole, for several reasons.
First, a close inspection of the entire document renders it apparent that the "no vote or control" provision could not logically withdraw any power other than that outlined in § 7.1.1. The rights and powers of the limited partner were so carefully restricted in the definitional section of the partnership agreement, see Agreement § 5.3.1, that the "no vote or control" language of § 8.3.4 must apply to the veto power contained in § 7.1.1, otherwise § 7.1.1 would be rendered a nullity. See Muzak Corp. v. Hotel Taft, 1 N.Y.2d 42, 46 (1956) ("The rules of construction of contracts require us to adopt an interpretation which gives meaning to every provision of a contract or, in the negative, no provision of a contract should be left without force and effect.") Defendants' argument that the "no vote or control" language is merely clarificatory strains credulity, as the status of a limited partner hardly requires additional explication beyond that contained in § 5.3.4, given the detail of that provision.
That section, which defines the role of the limited partner, states that "The Limited Partner shall not take part in the management of the Partnership's business or transact any business for the Partnership, nor have any power to sign for or to bind the Partnership or to subject the Partnership to any liability or obligation."
Moreover, it seems likely that if a general partner was ousted — as defendants were — for mismanagement, that the drafters of the agreement would reasonably contemplate some kind of penalty provision limiting the ousted partners' rights subsequent to ouster. Defendants assert, despite the obvious logic behind such a clause, that a penalty provision would be contrary to the public policy of the New York State Partnership Law. However, the single case defendants can cite for this proposition turns solely on the unique features of the law governing partnerships in the practice of law, in which penalty provisions are disfavored so as not to restrict individuals' ability to retain counsel of their choice. See Peroff v. Liddy, Sullivan, Galway, Begler Peroff, 852 F. Supp. 239, 241-42 (S.D.N.Y. 1994) (citing Cohen v. Lord, Day Lord, 75 N.Y.2d 95, 551 N.Y.S.2d 157 (1989)).
Additionally, a fundamental canon of contract interpretation supports our reading of the agreement. That is, "[i]f there is an inconsistency between a general provision and a specific provision of a contract, the specific provision controls." See Flack v. Friends of Queen Catherine, Inc., No. 99 Civ. 9930, 2001 WL 396436, at *10 (S.D.N.Y. Apr. 19, 2001) (quoting Bank of Tokyo-Mitsubishi, Ltd. v. Kvaerner a.s., 243 A.D.2d 1, 8, 671 N.Y.S.2d 905 (1st Dep't 1998)). Here, the general condition is found in § 7.1.1, which requires prior written consent of a limited partner to convey the partnership assets. However, the much more unusual (and therefore specific) eventuality of a mandatorily retired general partner is contemplated by § 8.3.4, and we read that provision to modify § 7.1.1 should the unlikely event of mandatory retirement actually occur. Cf. East End Trust Co. v. Otten, 255 N.Y. 283, 286 (1931) (Cardozo, C.J.) (reciting the rule of construction that a specific provision of a statute should take precedence over a general provision when an apparent conflict exists).
2. Purposes of the Partnership
Even though Rosewood had the authority to convey the property without the prior written consent of the defendants, that conveyance must nonetheless be consistent with the New York State Partnership Law. We find, for the following reasons, that the conveyance of New Haven Plaza Apartments to the REIT violated that law and that the conveyance is therefore invalid.
New York Partnership Law § 98 provides in relevant part that:
[W]ithout the written consent or ratification of the specific act by all the limited partners, a general partner or all of the general partners have no authority to
(a) Do any act in contravention of the certificate.
(b) Do any act which would make it impossible to carry on the ordinary business of the partnership.
Plaintiff's sale of New Haven Plaza Apartments contravened the certificate and thereby made it "impossible to carry on the ordinary business of the partnership," which was the operation of that specific apartment complex.
The purpose of the partnership was set forth in § 2.4 of the Agreement, entitled "Purpose of Business":
The purpose and business of the Partnership shall be to hold title to the Property; to develop and construct thereon the Project; to operate the Project; and to undertake such other activities related to the foregoing as may be necessary, advisable, or convenient to the promotion or conduct of the business of the Partnership.
It is thus apparent that the transfer of the New Haven Plaza property in exchange for OPU's in the REIT violated the clear terms of the purpose of the partnership. The partnership purpose is not in the least ambiguous; section 2.4 provides that among the purposes shall be to "hold title" and "to operate" the property, and the transfer of the property therefore clearly rendered the purposes in § 2.4 impracticable.
Although the final clause of § 2.4 might at first glance be read to provide the latitude to permit alienation of the property by the partnership, that clause begins with the conjunctive "and" rather than the disjunctive "or", thereby implying the partnership may take activitiesonly so far as they support the prior purposes, namely to own and operate the property. No semantic gymnastics, no matter how agile, could successfully convert ownership of OPU's into an activity covered under § 2.4. By causing NHPA to no longer hold title to the property, Rosewood violated the fundamental purposes of the Agreement, and therefore exceeded its authority.
Our holding in this regard is at least somewhat contingent upon our interpretation of the Agreement in section 1, supra. Although defendants fail to raise the argument, it is possible, under New York law, that the parties might specifically contract to allow the general partner to dispose of partnership assets for purposes other than the principal partnership purpose. See Mist Properties, Inc. v. Fitzsimmons Realty Co., 228 N.Y.S.2d 406, 410 (N.Y.Sup.Ct. 1962) ("The receiver urges that if the partnership agreement 'purports to convey the property of the limited partnership for other than a corporate purpose it is illegal an in violation of Section 98 of the Partnership law.' This contention lacks merit.") (citing Lanier v. Bowdoin, 282 N.Y. 32, 38 (1941)). There is no evidence here, however, that the parties intended the partnership agreement to allow such exceptional activity.
This conclusion is also supported by the case law. For example, inShlomchik v. Richmond 103 Equities Co., 662 F. Supp. 365 (S.D.N.Y. 1986), a case with facts nearly identical to those in the case at bar, a general partner in a real estate venture exchanged the principal asset of the partnership for some other piece of real estate (arguably, a more similar asset than OPU's). See id., at 368-70. In that case, the court held that by exchanging one specific piece of real property for another, the general partner "made it impossible for [the partnership] to carry out its sole-stated purpose, and the exchange destroyed the character of [the partnership]'s business, as expressed by paragraph II of the partnership's certificate." Id., at 371. The same holds true here.
Although this paragraph of the partnership agreement is not quoted by the Shlomchik court, it is of some note that there, as here, the certificate expressly (and solely) mentioned the ownership and operation of one specific piece of real property as the partnership's purpose. This fact was of considerable significance in that court's analysis, as it is in ours. See Shlomchick, 622 F. Supp. at 371 (quoting paragraph 3 of the partnership certificate).
In fact, to the extent Shlomchik is distinguishable, it presents aless egregious violation of the partnership's purpose, because in that transaction one piece of real property was exchanged for another. In contrast, here a piece of real property that produced a steady stream of income (albeit a stream that is the subject of dispute) was exchanged for an equity interest that does not apparently produce a stream of income. This so fundamentally changes the character of the limited partners' investment that it cannot be considered in furtherance of the partnership's stated purposes.
Another aspect of the instant litigation is the counterclaim by defendants that distributions from the partnership were improperly withheld from them. Marcus Aff., Exh. B, at ¶¶ 51-56.
3. Self-Dealing Transaction
In light of our finding that the transaction was unauthorized, we decline to reach the question of whether the self-dealing nature of the transaction renders it invalid. On the one hand, § 5.2.5 of the Agreement would appear to permit related-party transactions, so long as such transactions were disclosed within thirty days after the end of the calendar year. However, defendants maintain that the exchange between Rosewood and the REIT was a self-dealing transaction that improperly denied them the full value of their investment, and left them saddled with allegedly unmarketable OPU's. If true, this could possible violate the high fiduciary duty owed by general partners to limited partners. Plaintiffs respond, however, that the transaction was in fact to defendants' economic benefit, because of changes to the federal housing and income tax laws that made the property a less desirable investment. We believe that in light of conflicting property appraisals and divergent views of the effects of federal housing reform laws, this issue would present a question of fact unresolvable on the instant motion papers. However, because we find that the transaction violated § 2.4 of the Agreement, as well as New York Partnership Law § 98, these arguments need not be resolved.
There is no dispute that Rosewood, Casden, and the REIT are all affiliated entities for the purpose of this discussion.
CONCLUSION
For the foregoing reasons, summary judgment on the issue of authority to alienate the property is awarded to defendants. A conference is scheduled in this case for June 28, 2001 at 10:00
a.m. Counsel should appear prepared to discuss how to proceed in light of this opinion.