GDB Trial Victory Clarifies Scope of New York State Partnership Law3/15/2018
On March 15, 2018, Gallet Dreyer & Berkey, LLP partners Adam M. Felsenstein and David N. Milner won a trial verdict in Commercial Division of the Supreme Court, New York County in the Le Bel v. Donovan, New York County Index No: 652200/10. The decision is expected to have important ramifications in the area of partnership law.
Noted intellectual property lawyer Marya Lenn Yee died in a plane crash in California in 2008, leaving defendant Mary Donovan as the only surviving partner in the law firm of Donovan & Yee, LLP. By law, a partnership dissolves upon the death of a partner unless the partnership agreement prescribes an alternate scheme. The partnership agreement here stated that if another partner was added within 90 days of Ms. Yee’s death, the firm would survive. Just days before the prescribed time period was to expire, Ms. Donovan hastily endeavored to add a new partner. Subsequently, Ms. Yee’s estate, represented by Gallet Dreyer & Berkey, LLP, sued to dissolve the partnership alleging that the new partner was nothing more than an employee who possessed none of the legal factors that make a true partner.
The facts elicited at trial indicated that the new partner was anything but an actual partner. Despite having a partnership agreement, the alleged new partner made no capital contribution, received no share of the profits, and had negligible managerial authority. Given the absence of these factors, the Court found that partnership agreement was a sham, that no new partner was added. Following trial, Ms. Yee’s estate was awarded a judgment of half of the value of the firm at the time of her death.
This decision has a number of notable facets that make it an important holding for partnership law in the State of New York. Chief among them is the holding that more than a mere agreement is required for a partnership. Even if the partnership agreement has all of the legal indicia of a partnership i.e. sharing in the profits, sharing in the losses, and managerial control, a court can and will look behind the agreement to ensure that the people treat one another as partners. Giving a negligible degree of control and failing to share the fruits of the business will not make for a true partner, no matter the title.
Additionally, this case reinforces the importance of making a capital contribution. In this case, Ms. Donovan had a positive capital account, while her alleged new partner made no capital contribution. Even though the agreement provided that the new partner could be called to make a capital contribution, the fact that no such call was made militated strongly against a finding that there was an actual partnership.
This verdict represents an important clarification for partnership law, especially for lawyers. If any of the lawyers out there face a similar circumstance, Mr. Felsenstein would be happy to discuss his experience in greater detail. Please contact Mr. Felsenstein at firstname.lastname@example.org.