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Oral Partnership Agreements Can Lead to Problems

Oral Partnership Agreements Can Lead to Problems

Many peopleform partnershipsto invest in other businesses. Such investment partnerships may include family and friends. While you may be tempted to rely on a handshake or familial goodwill in such circumstances, it is always advisable to get a partnership agreement in writing. Among other reasons, a written agreement can specify the process for winding up the partnership in the event anyone wants to leave.

Oral Partnership Descends into Family Lawsuit

To illustrate what can go wrong with a family partnership, consider this ongoing litigation from New York City. This case involves a family who formed a partnership for the sole purpose of purchasing a 10% interest in a Manhattan office building. Initially, a husband and wife together with their three daughters formed a general partnership without a written agreement. This partnership automatically dissolved upon the mother's death. The surviving family members then formed a new oral partnership, with each daughter holding a 20% stake and the father retaining 36%. The father sold the remaining 4% interest to another person.

The father managed the family partnership, which eventually purchased the 10% interest in the aforementioned office building. This required the family partnership to join the limited partnership which owned and operated the building. As a limited partner, the family partnership had no right to participate in the management of the limited partnership. Nor would the family partnership's dissolution affect the limited partnership. Rather, the limited partnership agreement set forth a process to assign a transfer a limited partner's interest to a “successor limited partner.”

In 2014, one of the daughters sued her father and sisters seeking to dissolve the family partnership. She demanded to see the family partnership's books held by her father, as well as a declaration nullifying the 4% interest sold to the non-family partner (who happened to be the daughter's ex-boyfriend). She also claimed there was a “breach of fiduciary duty” arising from a “shortfall” in her capital account.

In an October 16opinion, Manhattan Supreme Court addressed the other family members' motion to dismiss. The court said the daughter's request for judicial dissolution of the partnership was not justified, as there was no accusation of wrongdoing by any of the other partners. As the court explained, the family partnership is “not an active business; it is merely an investment vehicle.”

Furthermore, the family partnership cannot be dissolved merely because the daughter demands it. While a general partnership of this type can normally be dissolved at will, that rule does not apply when the partnership is formed for a “particular undertaking.” In this case, the partnership was formed to “serve as an investment vehicle for a 10% interest” in the limited partnership. The family partnership therefore cannot be dissolved unless and until it complies with the limited partnership agreement's provision regarding substitution of a new limited partner.

Need to Speak With a Business Attorney?

The judge in the case above lamented “this is yet another unfortunate example of a family business dispute that has devolved into needless litigation.” Indeed, the lack of a written partnership agreement among the family members may have contributed to their present situation. That is why if you are considering any type of business partnership with another person, even a relative, you should consult with an experienced New York business attorney. Contact the offices of Waldhauser & Nisar, LLP, to speak with someone today.
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