General Partnerships, Joint Ventures, Limited Partnerships and Limited

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					CHAPTER 17

General Partnerships, Joint Ventures,
Limited Partnerships and Limited
Liability Companies
Kevin R. Shannon
Joseph B. Cicero
Joyce E. Wong

Corporate, Partnership and Commercial Litigation
Potter Anderson & Corroon LLP
Hercules Plaza
1313 North Market Street
Wilmington, DE 19801
302-984-6112 phone
302-778-6112 fax
kshannon@potteranderson.com
jcicero@potteranderson.com
jwong@potteranderson.com


Patricia L. Enerio

Corporate, Partnership and Commercial Litigation
The Bayard Firm
222 Delaware Avenue, Suite 900
Wilmington, DE 19899 (19801 for deliveries)
302-655-5000 phone
302-658-6395 fax
penerio@bayardfirm.com
CHAPTER 17

Contents

§ 17.1 General Partnerships and Joint Ventures .............................................................
       2        § 17.1.1............................................................... Existence of Partnership
       3        ............................................................................................Story v. Lanier
       4        ..................................................................................... Casey v. Chapman
       5        § 17.1.2............... Partnership Agreements: Language and Consequences
       6        ................................................... DePasquale v. Daniel Realty Associates
       7        ..............Honeywell International Inc. v. Air Products & Chemicals, Inc.
       8        § 17.1.3.................. General Partners: Fiduciary Duties and Management
       9        .............................................................. Schneider v. Wein & Malkin LLP
       10       ...........................................................................................Bardis v. Oates
       11       § 17.1.4..........................................................................Partner Liabilities
       12       .......................................................................Shar’s Cars, L.L.C. v. Elder
       13       § 17.1.5.................................................................................... Dissolution
       14       .......................................................................................Navarro v.Perron
       15       ...............................................................................Gorelick v. Montanaro
       16       ............ Gardner International, Inc. v. J.W. Townsend & Associates, Inc.
       17       ......................................................................................... Anastos v. Sable
       18       .................................................................................... Bloom v. Miklovich
       19       .................................................................................Laumann v. Laumann

          20           ................................................................................. McCormick v. Brevig
          21           .............................................................. Pankratz Farms, Inc. v. Pankratz
          22           ...................................................................................... Disotell v. Stiltner
          23           ................................................................................ Farnsworth v. Deaver
          24           ........................................................................................ Lucke v. Kimball
          25           § 17.1.6.......................................................................................Litigation
          26           ........................................................................................... Efron v. Milton

§ 17.2 Limited Partnerships ...............................................................................................
       27       § 17.2.1..Limited Partnership Agreements: Language and Consequences
       28       ..........................................................................................Black v. Arizala
       29       .................................................................................... Gale v. Rittenhouse
       30       § 17.2.2............................................... Fiduciary Duties and Management
       31       ............................................................ Gelfman v. Weeden Investors, L.P.
       32       ..................................................ProHealth Care Associates, LLP v. April
       33       .......................................................................................Carella v. Scholet
       34       ......................................................... Franz v. Calaco Development Corp.
          35            ......................... In Re LJM2 Co. Investment, L.P. Limited Partners Litig.
          36            § 17.2.3.................................................................................... Dissolution
          37            ..........................................................................In Re: Tufts Oil & Gas-III
          38            § 17.2.4............................................................................ Litigation Issues
          39            ...............................................Brandon Associates v. Castle Management
          40            ................................................................. Kenworthy v. Kenworthy Corp.

§ 17.3 Limited Liability Companies ..................................................................................
       41       § 17.3.1..................Operating Agreements: Language and Consequences
                42 ...................................................................................................WC
                B Props. for Affordable Senior Assisted Living & Cmty. Res. Ctr. LLC v.
                Anderson ....................................................................................................
       43       Senior Tour Players 207 Management Co. LLC v. Golftown 207 Holding
       Co. LLC
       44       .......................................... PAMI-LEMB 1, Inc. et al. v. EMB-NHC, LLC
       45       ............................................................................... Harbison v. Strickland
       46       ....................Milford Power Company, LLC v. PDC Milford Power, LLC
       47       § 17.3.2.............................. Breach of Fiduciary Duties and Management
       48       ............................................................................................... Shell v. King
       49       ............................................................................... Gottsacker v. Monnier
                50 ...................................................................................................Me
                tro Communications Corp. BVI v. Advanced Mobilecomm Technologies,
                Inc. .............................................................................................................
       51       ...........................................Lazard Debt Recovery GP, LLC v. Weinstock
       52       .................................................................................... Kronenberg v. Katz
       53       § 17.3.3.................................................................................... Dissolution
       54       .................................................................................... Spires v. Casterline
       55       ...................................................................Dunbar Group, LLC v. Tignor
       56       ........Beto Partners, L.L.C. v. Estate of Bender (In re Estate of Bebderm)
       57       ...................................................................................... Kogut v. Chicosky
       58       § 17.3.4............................................................................... Miscellaneous
       59       .............................................................................................Bell v. Walton
CHAPTER 17

General Partnerships, Joint Ventures,
Limited Partnerships and Limited
Liability Companies

1      § 17.1       General Partnerships and Joint Ventures

§ 17.1.1 Existence of Partnership
    Story v. Lanier1

    Plaintiff Story, and defendant Lanier, lived together for over 20 years but never formally
    married. Plaintiff filed a petition to, inter alia, establish marriage by implied partnership.
    Defendant had purchased a restaurant in 1974 and the parties conceded that no written
    partnership agreement existed concerning the restaurant. The court held that although a
    contract of partnership, either express or implied, is essential to the creation of partnership
    status, it was not essential that the parties actually intended to become partners, which was
    ascertainable from their acts. The court found that the intent to do the things that constitute
    a partnership—such as placing money, assets, labor, or skill in commerce with the
    understanding that profits will be shared—determines the existence of a partnership,
    whether or not the parties understood that it would be so.
        While plaintiff did not contribute money toward the restaurant, her activities were
    consistent with that of a co-owner—she worked at the restaurant without compensation,
    was regarded by employees as a co-owner, kept the books, had access to the cash drawer
    and was free to remove money at any time, and the children of both parties ate meals at the
    restaurant free of charge. This evidence brought the parties within the scope of a joint
    business undertaking for mutual profit. Thus, the court affirmed the lower court’s finding
    that the parties had an implied partnership in the restaurant.

§ 17.1.2 Partnership Agreements: Language and Consequences
    Casey v. Chapman2

    Casey and Chapman, along with others, formed a partnership for the purpose of acquiring,
    developing, and managing commercial real property. On February 10, 1993, Casey

         1
             2004 Tenn. App. LEXIS 761 (Tenn. Ct. App. Nov. 17, 2004)
         2   98 P.3d 1246 (Wash. Ct. App. 2004).
purchased Chapman’s partnership interest for $200,000. He put $15,000 down and signed
a promissory note for the remaining $185,000. Casey and Chapman concurrently entered
into a security agreement in which Casey pledged to Chapman his partnership interest as
collateral for his obligation to pay the note. Casey defaulted and Chapman commenced
foreclosure proceedings. Chapman conducted a foreclosure sale in which Bruno
Investments, LLC, was the successful bidder. After the sale, Chapman obtained a
declaratory judgment stating that the sale was valid and that Bruno acquired the
partnership interest Casey pledged, including “all voting rights, equity interests and
economic interests.”
    Construing the Washington Partnership Statute in effect at the time of the 1993
transaction, the appellate court held that absent agreement of all partners, the nature of an
assignment of a partner’s interest is limited to the right to profits. The court concluded that
neither the purchase agreement nor its attached assignment of the partnership interest
stated that all partners agreed “that management, administration, or voting rights” go with
the sale of Chapman’s partnership interest to Casey. Thus, the court affirmed the
declaratory judgment, but reversed the provision stating that Bruno was entitled to “all
voting rights, equity interests and economic interests” in the partnership.

DePasquale v. Daniel Realty Associates3

The issue in this case was whether the defendants had the right to terminate the plaintiff’s
partnership interest under the terms of the partnership agreement. The partnership owned
commercial property. The plaintiff did not make a capital contribution to the partnership.
The partnership agreement provided that the admission of the plaintiff as a partner was in
anticipation of the future construction of a building for the plaintiff or his company (Direct
Marketing Group Inc. (“DMG”)), or any of its affiliates or subsidiaries, in a transaction to
be negotiated between the parties. In the event that the defendants did not acquire an
ownership interest in the new building, the defendants had the right to purchase the
plaintiff’s partnership interest. DMG had also entered into a lease with the partnership.
        DMG later sold its assets and business to another entity (DIMAC Direct, Inc.
(“DIMAC”)), and DIMAC agreed to assume certain liabilities of DMG, including DMG’s
lease with the partnership. DIMAC later decided to construct its own building and vacated
the partnership’s building. The defendants argued that the partnership’s failure to obtain
equity interests in DIMAC’s newly constructed building triggered their rights under the
partnership agreement to buy-out the plaintiff’s interest for $0, the amount of his cash
investment. The court found that the sale of DMG to DIMAC was not a de facto merger or
other transaction by which DIMAC became a subsidiary or affiliate of DMG as set forth in
the partnership agreement. As a result, the court found that the buy-out provisions in the
partnership agreement were not triggered and that the defendants’ purported buy-out of the
plaintiffs’ partnership interest was wrongful.




     3
         2004 N.Y. Misc. LEXIS 1210 (N.Y. Sup. Ct. May 11, 2004).
Honeywell International Inc. v. Air Products & Chemicals, Inc4

This breach of contract action was commenced by Honeywell International Inc.
(“Honeywell”) and initially sought to enjoin an acquisition by Air Products & Chemicals,
Inc. (“Air Products “), which Honeywell claimed was in violation of a Strategic Alliance
Agreement entered into with Air Products in October 1998 (the “Alliance”). Under the
Alliance, Air Products contracted to fill orders for wet process chemicals (used in the
making of semiconductors) exclusively through Honeywell. In June 2003, however, Air
Products acquired a manufacturer of wet process chemicals and began selling those
chemicals to customers. The Court of Chancery had earlier denied Honeywell’s request for
injunctive relief, but subsequently held a trial on the contract and damages claims. In this
lengthy post-trial opinion, the Court held that Air Products breached its contractual
obligation to Honeywell and awarded damages.
    In defense of the contract claims, Air Products argued that the Alliance agreement was
unenforceable because: (1) it was indefinite in material respects; and (2) the parties never
reached agreement on which customers or products would be included within the Alliance.
The Court rejected these assertions. The agreement did not fail for lack of definiteness, as
it revealed no intent that it would terminate if the parties failed to come to agreement on
the customers and products to be included within the Alliance. Applying New York law,
the Court found that the parties’ course of dealings could serve as a baseline by which the
terms of the agreement could be ascertained. The Court further observed that, despite
deviations from the terms of agreement, neither party treated it as illusory, thereby
suggesting that they believed in its efficacy. The Court went on to find, however, that
through their conduct, the parties effectively modified the terms of the agreement, and
concluded that the products covered were those actually sold in the Alliance. Finally, the
Court held that an attempt by Air Products to terminate the agreement—allegedly by
reason of Honeywell’s breach thereof—was invalid. The Court’s reasoning was that Air
Products had failed to provide Honeywell the contractually required opportunity to cure.
As a remedy for a breach of the Alliance agreement, the Court awarded Honeywell
damages of approximately $8 million, based primarily on forecasted future Alliance sales.




     4
         858 A.2d 392 (Del. Ch. 2004).
§ 17.1.3 General Partners: Fiduciary Duties and Management
 Schneider v. Wien & Malkin LLP5

 Plaintiff Schneider brought suit individually and on behalf of three partnerships involved
 in real estate investments. He sought damages and injunctive relief removing the defendant
 as supervisor of the partnerships’ properties. Schneider claimed that defendant breached
 fiduciary duties owed to the partnerships by, among other things, disseminating false
 information to the partnership, taking improper fees, and failing to disclose a conflict of
 interest. The court rejected the improper fee claim, based on overwhelming evidence of an
 oral fee agreement, and concluded that all fees were authorized. The court also rejected the
 claim that the defendants had breached their fiduciary duties by disseminating false
 information because there was no showing that the unreliable information was material to
 any partnership decision, nor was there evidence that the partnership relied on any of the
 information.
         The court found in favor of the plaintiffs on the claim that defendant failed to
 disclose a conflict of interest that arose during a lease renewal process for one of the
 partnerships. The defendant represented both the partnership and the owner of the building
 in this process. A conflict arose during this process regarding whether the partnership was
 required to make capital improvements to the building, and whether the property should be
 sold or directly operated by the owner. The court determined that throughout this process,
 the defendant took positions contrary to the interest of the plaintiff. Defendants argued that
 plaintiff was aware of its dual role from the time of the partnership formation. The court
 rejected this argument, holding that defendant did not establish that the partners consented
 to the conflict of interest.
         On the issue of damages, the court then held that plaintiff failed to prove that
 defendant’s conflict caused the partnership any actual damages. The court also refused to
 award injunctive relief because there was no evidence that the breach of fiduciary duty
 would recur. The court did award damages based on the “faithless servant” doctrine
 whereby a principal can recover compensation paid to an agent during a period of
 disloyalty. The court awarded plaintiffs $60,000 solely for the period of defendant’s
 disloyalty. This decision thus adopted the calculation of fees in Musico v. Champion
 Credit Corp., 764 F.2d 102 (2d Cir. 1985), which allowed apportionment of fees under the
 “faithless servant” doctrine for particular tasks or periods.

 Bardis v. Oates6

 The plaintiffs brought this action for breach of fiduciary duty by the managing partner of a
 real estate partnership. Under the terms of the partnership agreement, all major decisions
 affecting the partnership were to be made by majority vote of the partners. The managing
 partner was responsible for day-to-day management of the partnership. The managing
 partner was permitted to receive cash disbursements that were approved by the unanimous


      5
          2004 N.Y. Misc. LEXIS 2044 (N.Y. Sup. Ct. Nov. 1, 2004).
      6
          119 Cal. App. 4th 1 (Cal. Ct. App. 2004).
 vote of all partners for reimbursement of any office and overhead expenses incurred by the
 managing partner.
     The managing partner charged the partnership management fees without the
 authorization or vote of the partners. The defendant claimed that the fees were disclosed
 on monthly financial reports issued to the partners, and that the partners ratified the fees.
 On appeal, the court found that the defendant had not introduced any evidence that the
 partners were personally aware of the management fees, and that the inclusion of the
 management fees in the partnership’s financial reports did not constitute a waiver of the
 partners’ contractual rights.
     The defendant also used a company that he controlled to mark up invoices for good and
 services, and as a result, the partnership was overcharged. The defendant claimed that the
 payments were for overhead costs and the partnership agreement allowed the managing
 partner to obtain reimbursement for office expenses. The court found that there was no
 evidence to support the defendant’s claim that the markups were reimbursement for
 overhead expenses. Moreover, the court found that the defendant’s argument did not
 address the fiduciary duties that he owed to the partnership. The defendant argued that the
 partners would have been required to reimburse him for these expenses under the
 partnership agreement because they were commercially reasonable. The court found that
 the defendant was prohibited from engaging in such self-dealing, and awarded damages.

§ 17.1.4 Partner Liabilities
 Shar’s Cars, L.L.C. v. Elder7

 In an action attempting to hold third-party defendant, Elder, partially liable for partnership
 debts that were incurred after his departure from the partnership, the court affirmed the
 trial court’s decision that Elder was released from liability. Elder and Rutherford operated
 a partnership that engaged in the business of wholesaling cars. Elder left the business and
 ended his partnership with Rutherford in August 1998. Rutherford notified their business
 associate, Birschbach of the dissolution of the partnership. Shortly thereafter, Rutherford
 and Birschbach agreed to carry on the car-wholesaling business together as partners.
     The court held that defendant’s departure from the partnership, although not following
 the normal dissolution and winding-up process, effectuated a dissolution which was
 defined as “the change in relation of the partners caused by any partner ceasing to be
 associated in the carrying on, as distinguished from the winding up, of the business.”
 UTAH CODE ANN. 48-1-26 (2004). The partnership bank account was closed and
 partnership assets were either used to pay debts or were transferred to a new account.
 Rutherford, the remaining partner, did not wind up the partnership, but rather brought in a
 new partner, Birschbach, and they carried on the business with no intention of Elder’s
 further involvement. Under general partnership principles, a withdrawing or outgoing
 partner is not liable for partnership debts arising after dissolution. The dissolution of the
 partnership, however, did not discharge existing liabilities, and under the Utah Uniform
 Partnership Act Elder remained jointly liable for all liabilities that were incurred while he
 was a partner. Accordingly, the trial court erred in concluding that he was liable for only
 half of such liabilities.

      7
          97 P.3d 724 (Utah Ct. App. 2004).
§ 17.1.5 Dissolution
 Navarro v. Perron8

 The parties formed a partnership to purchase a duplex located in Ventura, California.
 Navarro owned 50% of the partnership and Robert and Kim Perron owned the other 50%.
 The partners purchased the property and contributed equal amounts of capital. Because
 Navarro had credit problems, the Perrons signed the note and took title to the property.
 Eventually, the Perrons repudiated the partnership. In response, Navarro sued them for
 breach of contract and specific performance. The trial court found an enforceable
 partnership agreement and ultimately awarded Navarro $52,170 in damages.
    On appeal, the court held that a partner cannot receive a distribution in kind. The court
 held that the trial court’s judgment granting Navarro damages and leaving the Perrons in
 possession of the property is the equivalent of granting the Perrons a right to a distribution
 in kind. The court reversed the judgment of the trial court and instructed that the
 partnership be dissolved, and its property be sold and any surplus distributed to the
 partners in cash.

 Gorelick v. Montanaro9

 On July 31, 1979, the parties entered into a partnership agreement to form a partnership
 known as BAP. In 1977, Ellen Berty, the grandmother of Glenn and Dennis Gorelick, and
 Michael and Richard Montanaro, and the mother of Emily Montanaro, conveyed to each of
 the partners equal 1/5 shares of real property. The assets of the partnership consisted of
 each partner’s interest in the property. The property, however, was not owned by the
 partnership, but by its several partners and Berty was the property’s managing agent.
 Despite the fact that she conveyed away her title to the property, she was to be paid all the
 income from it. The partnership agreement provided that no transfer of partnership shares
 to non-partners could be made without an offer to the remaining partners to buy such
 interest for $22,000.
     In the mid 1990s Berty’s health began to fail and her daughter Emily began to care for
 her and manage her affairs. Previously, Berty’s affairs had been managed by Dennis and
 Glenn Gorelick. Emily discovered mismanagement in Berty’s financial affairs and Dennis
 was sued and adjudicated to have fraudulently misappropriated her money. A judgment of
 $147,000 was entered against him. In 1993, Dennis transferred a share of the partnership
 that he held in trust for Glenn to Glenn, as a trustee for Glenn’s child. Dennis also
 transferred his shares to himself, as trustee for his own two children. In 1996, Dennis as
 trustee transferred his interest to Glenn as trustee for Glenn’s child. Thus, the court found
 that Dennis was no longer a partner as a result of his conveyance of his partnership interest
 to Glenn as trustee for his daughter.
     Years of litigation ensued. One such lawsuit was commenced by Michael Montanaro
 against Glenn and Dennis Gorelick and Emily Montanaro for a dissolution of BAP and for
 a partition of the property. The court found, inter alia, that Glenn and Dennis transferred
 their shares in contravention of a provision of the partnership agreement, which required

      8
          19 Cal. Rptr. 3d 198 (Cal. Ct. App. 2004).
      9
          2004 Conn. Super. LEXIS 708 (Conn. Super. Ct. Mar. 22, 2004).
acceptance of the new partner by all of the remaining partners. The court held, however,
that Emily’s conveyance of her interest in the property to her daughter-in-law, Wendy, was
not a conveyance of her shares of the partnership. Thus, the plaintiffs had no right to seek
to purchase such shares for $22,000 pursuant to the partnership agreement. The court also
found that Glenn and Dennis lacked standing to bring suit as shareholders because, at the
time of the commencement of the suit, they held shares in the partnership as trustees and
not in their individual capacities. The court granted the defendants’ request to appoint a
receiver to wind up the partnership affairs and to propose to the court a plan of distribution
of partnership funds.

Gardiner International, Inc. v. J.W. Townsend & Associates, Inc.10

The issue presented this case was whether the plaintiffs breached the partnership
agreement when they withdrew from the partnership, which operated an executive search
firm, before the termination date. The partnership agreement provided for the dissolution
of the partnership on September 30, 2002. On June 13, 2002, the plaintiffs sent the
defendants a letter withdrawing from the partnership, declaring the partnership dissolved,
and accusing the defendants of breaching the partnership agreement by failing to
participate in searches. Around the time of the plaintiffs’ withdrawal, the defendants had
begun a new search, and subsequently were paid a fee in connection with that search. The
plaintiffs filed this action claiming a portion of the fee received by the defendants for the
June 2002 search and placement. The defendants claimed that the June 13 letter was a
repudiation and breach of the partnership agreement, and therefore, the plaintiffs were not
entitled to the fee. The court found that the plaintiffs wrongfully withdrew from the
partnership before the agreed upon dissolution date. In response to the defendants’ claims
of anticipatory breach and repudiation of the partnership agreement, the plaintiffs argued
that a partnership agreement cannot be anticipatorily breached. The court disagreed with
the plaintiffs’ argument, but found that there was an issue of fact as to whether the
plaintiffs had repudiated the partnership agreement by seeking to withdraw before the
agreed upon date, and remanded to the trial court.

Anastos v. Sable11

The plaintiff filed an action for dissolution of the partnership. The defendants sought a
declaration that the plaintiff’s request to dissolve the partnership was a violation of the
partnership agreement, and that the defendants, who elected to continue the partnership
business, were entitled to damages as a result of plaintiff’s wrongful dissolution. The
parties filed motions for summary judgment, and the trial court ruled that the plaintiff’s
request for dissolution violated the partnership agreement. The case proceeded to trial to
determine the value of the plaintiff’s interest and any damages caused by the plaintiff’s
wrongful dissolution. The trial court used a going concern methodology to determine the
value of the plaintiff’s partnership interest. The plaintiff appealed this valuation method
and argued that the valuation of his interest should be based on the liquidation value of the
partnership’s assets, not the going concern value.

     10
          2004 N.Y. App. Div. LEXIS 15484 (N.Y. App. Div. Dec. 21, 2004).
     11
          819 N.E.2d 587 (Mass. 2004)
    The issue on appeal was whether the court should use the liquidation or going concern
valuation method in determining the value of a departing partner’s interest when the
departing partner has wrongfully caused the dissolution of the partnership, and the
remaining partners have elected to continue the partnership’s business.
    The court found that the appropriate valuation methodology in this case was the going
concern method because the plaintiff cannot compel liquidation at the point of dissolution.
The court also found support for the going concern valuation in the dissolution statute
because it excluded goodwill from the valuation of the wrongfully dissolving partner’s
interest, and good will is an asset of a going concern entity. The court also agreed with the
trial court’s application of a minority discount. The court also affirmed the denial of
prejudgment interest because the plaintiff was not awarded damages, but the amount of his
interest in the partnership after the wrongful dissolution.

Bloom v. Miklovich12

Plaintiffs brought an action to dissolve a partnership, requesting the appointment of a
receiver, money damages, and an accounting. In the late 1950s, twin brothers Norman and
Hillard Bloom began a business venture resulting in the acquisition of considerable real
property, and the operation of numerous water-related businesses. One such business was
Bloom Brothers Marina. No property was owned by the Marina, but was held by Hillard
and Norman as joint tenants. After Norman’s death in 1989 and until 1993, one of his sons
served as executor of his estate. During that period, Hillard managed and controlled the
day-to-day affairs of the marina. Tax returns for that period indicated that Hillard treated
the enterprise as a partnership, with 50% owned by Hillard and 50% owned by the estate
of Norman. Beginning in 1994, the marina was treated differently, for tax purposes. The
tax returns show the 50% share once allocated to Norman’s estate, divided into three
trusts, each for the benefit of Norman’s three sons. The accounting change resulted from
an attempt in 1993, to assign the interest of Norman’s estate in the marina to the three
trusts. The assignment was subsequently disapproved by the probate court, although the
tax returns continued to reflect a 16.666% interest in the marina to each of the three trusts.
    The defendants, as executors of Hillard’s estate, claimed that the partnership was
dissolved upon Norman’s death. They claimed that the plaintiff was a creditor of the
marina, not a partner, because Hillard never established a partnership agreement with his
three nephews, or their trusts. The court disagreed and held that a partnership was created
between Hillard and his three nephews because they continued to run the marina as it had
operated prior to Norman’s death. The court, however, held that the plaintiffs failed to
show that they were injured in any way, based upon the operation of the marina, or the
actions of those charged with managing the marina. The court concluded that the
partnership was dissolved on March 8, 2002, thus triggering the wind up process. The
court held that the appointment of a receiver was not required, because the plaintiffs failed
to prove damages. Ultimately, the court ordered an accounting to determine cash flow,
expenditures, accounts receivable and distributions to be made to the partners.




     12
          2004 Conn. Super. LEXIS 1603 (Conn. Super. Ct. June 22, 2004).
Laumann v. Laumann13

In this dissolution action, the plaintiff sought partition of the partnership’s farmland. The
trial court denied plaintiff’s request for partition and ordered the sale of the farmland. On
appeal, the defendant challenged the court’s order for the sale of the farmland, and argued
that the Minnesota Partition of Real Estate Act applied. The court agreed and remanded
the case for a determination of whether the farmland should be subject to partition under
the Minnesota Partition of Real Estate Act. The defendant also appealed the trial court’s
ruling that he was required to pay damages (amounts he allegedly owed to the partnership)
to the plaintiff after the division of the partnership assets. The court agreed with the
defendant because the partnership agreement required such amounts to be collected by the
partnership before the partnership equity is divided.

McCormick v. Brevig14

The plaintiff sought an accounting and judicial dissolution of a ranching partnership. The
partnership agreement did not apply to situations involving a court ordered dissolution of a
partnership. As a result, the appellate court applied the terms of the Partnership Act,
reversed the decision of the trial court requiring one partner to sell to the other partner, and
held that the partnership assets had to be liquidated and the proceeds distributed between
the partners proportionately.
    The court also found that every partner is generally entitled to an accounting of the
partnership’s affairs, and that the purpose of an accounting is to determine the rights and
liabilities of the partners, and to ascertain the value of the partners’ interests in the
partnership at a particular date. In this case, the court remanded to the trial court to
perform a full accounting.
    The court also addressed whether certain cattle constituted partnership assets. The trial
court found that the cattle were partnership property because the defendant signed tax
returns that listed the cattle as partnership property and placed proceeds from the sale of
the cattle into the partnership accounts. On appeal, the court disagreed with this analysis
because there was nothing in the record to suggest that the cattle were purchased with
partnership assets or transferred to the defendant in his capacity as partner of the
partnership. Despite the fact that the cattle were listed on the partnership tax returns and
proceeds from the sale of cattle were placed in the partnership accounts, the cattle were not
partnership property.

Pankratz Farms, Inc. v. Pankratz15

The plaintiff filed this action against the defendant seeking possession of a farm house that
the defendant occupied as an employee of the corporation and a related partnership
(Pankratz Brothers). The defendant counterclaimed for wrongful discharge and
subsequently filed a separate action against the corporation and the partnership for breach
of the partnership agreement, breach of fiduciary duty and the duty of good faith and fair
dealing, and he also sought judicial dissolution of the partnership.
     13
          2004 Minn. App. LEXIS 390 (Minn. Ct. App. Apr. 19, 2004).
     14
          96 P.3d 697 (Mont. 2004).
     15
          95 P.3d 671 (Mont. 2004).
    The trial court determined that the partnership should be dissolved. Following the
completion of an accounting, the trial court issued an order finding that although grounds
existed for the dissolution of the partnership, liquidation of the partnership was not in the
best interests of the partners due to adverse tax consequences, and ordered the defendant to
sell his interest back to the partnership. The defendant appealed this order.
    On appeal, the defendant argued that the trial court’s order violated Montana’s
Partnership Act (the partnership agreement did not address judicial dissolution), which
provides for dissolution and winding up of the partnership business upon satisfaction of
certain conditions. The court agreed with the defendant’s argument, and ordered that the
partnership be dissolved.
    In addition, as a result of defendant’s refusal to sign certain documents necessary to
qualify for certain federal benefit programs, the majority partners formed a new
partnership to qualify for such benefits. The defendant appealed the trial court’s ruling that
the defendant was estopped from claiming damages due to the formation of the new
partnership to carry on the business of the partnership and lease partnership equipment.
The court found that the defendant was estopped from claiming any damages as a result of
the formation of the new partnership because it was formed due to the defendant’s refusal
to sign documents necessary to qualify the partnership for valuable federal agricultural
benefits.

Disotell v. Stiltner16

In 1997, the parties formed a partnership for the purpose of converting an existing building
into a hotel, but never memorialized this agreement in writing. Stiltner contributed the
parcel of land bearing the building that was to be converted. The partners agreed that
Disotell would purchase a one-half interest in the hotel property for $137,500, which was
one-half of Stiltner’s cost of the property. They also agreed that the funds from which
Disotell would purchase the one-half interest would come only from the profits of the
hotel. After Stiltner had recovered his original cost basis in the property and certain other
costs, he and Disotell were to share profits equally. On March 3, 1998, Stiltner quitclaimed
one-half of his interest in the hotel property to Disotell. The parties disputed who was
obligated to put up the cash for the project and the trial court found that the partners jointly
would fund the project. In May 1998, Disotell and Stiltner came to a disagreement as to
whether a sewer line was needed on the property. Stiltner denied Disotell the building
access needed to assess the mechanical, electrical, and other systems and refused to
remove his personal property from the building. The partnership never produced a profit
and Stiltner had exclusive possession of the hotel property after May 15, 1998.
        Disotell filed suit seeking dissolution of the partnership, judicially supervised
windup of partnership affairs, appointment of a receiver, and damages. Stiltner
counterclaimed seeking rescission of the partnership agreement. The trial court, following
a two-day bench trial, gave Stiltner the option to purchase Disotell’s partnership interest
for $73,213.50, the value of Disotell’s interest as calculated by the court. Disotell argued
that under the UPA, liquidation is a matter of right, that any partner who has not
wrongfully caused dissolution may demand liquidation, and because the partnership


     16
          100 P.3d 890 (Alaska 2004).
agreement did not address the consequences of dissolution, the statutory provisions govern
by default.
        On appeal, the Supreme Court of Alaska, in a case of first impression, declined to
require liquidation and upheld the ruling of the trial court to permit Stiltner to buy out
Disotell’s partnership interest. The court reasoned that the statute did not compel
liquidation and did not forbid buyouts. The court noted that, under appropriate
circumstances, a buyout is a justifiable way of winding up a partnership. The court
reasoned that a properly conducted buyout guaranteed Disotell a fair value for his
partnership interest, whereas liquidation exposed him to the risk that no buyer would offer
to pay fair market value for the property. According to the court, however, a buyout is only
appropriate if it is for fair market value, and because there was no admissible evidence of
fair market value the court remanded to determine the value of the assets before Stiltner
attempted to buy out Disotell. The trial court also erred when it classified Disotell’s
$137,500 obligation as a partnership liability, and deducted it from the net value of the
partnership. The court further held that it was error not to award Disotell damages for
Stiltner’s appropriation of the hotel property after the dissolution. In addition, the trial
court’s determination that the partnership terminated in May 1998 was erroneous because
dissolution does not terminate a partnership; it continues until the winding up of the
partnership affairs is complete. Thus, Stiltner was held to be accountable to the partnership
for any benefit he derived from his personal use of the partnership property. Therefore, the
court also remanded for a determination of the value of Stiltner’s personal use of the
property.

Farnsworth v. Deaver17

This action arose from a dispute surrounding the dissolution of a failed partnership
between two couples, the Farnsworths and the Deavers. Regarding the repayment of
capital accounts, the court held that in winding up the affairs of a partnership, the
partnership makes a distribution to each partner in an amount equal to the positive balance
in the partner’s capital account. Where there is a negative balance in a partner’s capital
account, the statute prescribes that generally, a partner is required to remove his account
from its negative position by reimbursing the partnership an amount equal to that partner’s
negative balance.
        The Farnsworth-Deaver partnership suffered a capital loss, i.e., the debts of the
partnership (including capital accounts) exceed its assets. In calculating the balance of the
capital accounts where a partnership suffered a capital loss, the court determined that the
debt must be satisfied by the partners in direct proportion to their share of the profits.
Thus, because the Farnsworths and Deavers had agreed to split profits 50/50, the partners
would also split the loss 50/50, and that sum would be offset against the capital due each
partner. The Deavers’ pro-rata share of the loss was greater than the proceeds in their
capital account, creating a negative balance. The court ordered the Deavers to reimburse
the partnership an amount equal to that negative balance.




     17
          147 S.W.3d 62 (Tex. Ct. App. 2004).
  Lucke v. Kimball18

  Withdrawing partner of an accounting partnership (Kimball) brought suit against the
  remaining partner, Lucke, when he refused to pay the full amount of Kimball’s demand for
  her percentage of the partnership’s net assets. Lucke tendered $600 to Kimball—the value
  of her initial investment, relying on a clause in the Agreement that recited, “Within thirty
  []days after the withdrawal, death, or retirement of Kimball, she or her beneficiary shall be
  paid $600 for her interest in the partnership.” Lucke maintained that, pursuant to terms of
  the Partnership Agreement, Kimball would only be entitled to a percentage of the
  partnership’s net assets upon a majority-approved dissolution. Thus, her unilateral
  withdrawal without his consent effected a dissolution of the Partnership by law, but did not
  dissolve the partnership pursuant to terms of the Partnership Agreement.
          The court disagreed and held for Kimball, finding that under the Uniform
  Partnership Act of Texas, every partner has the inherent power to dissolve a partnership
  even if the Partnership Agreement attempts to limit that right. Where a partner’s exercise
  of the right to dissolve breaches the Agreement, the dissolving partner is rendered liable
  for damages. The court found that in giving oral notice, Kimball exercised her right to
  dissolve the partnership, which entitled her to payment in cash of the net amount from any
  surplus after discharge of partnership’s liabilities, less damages for the breach.

§ 17.1.6 Litigation
  Efron v. Milton19

  Jose Efron and Jose Milton were equal partners in Joseph Enterprises, a townhouse
  construction project. Milton was the managing partner of the partnership. At some point,
  Jose Efron substituted his company, Paragon Investment Corp., as 50% partner of the
  partnership and a new partnership agreement was drawn up to reflect the change.
  Subsequently, Jose Efron passed away and his son, David Efron, as personal representative
  of his father’s estate, sued Milton alleging that Milton had skimmed the partnership
  revenues. The trial court determined that there was no evidence of any misconduct and
  determined that a jury trial was unnecessary and not supported by law because actions at
  law between partners must be abated until such time as the accounting was concluded and
  the partnership dissolved.
          On appeal, Efron argued that the Revised Uniform Partnership Act (“RUPA”)
  allowed him to pursue his legal claims against the defendants with or without an
  accounting to the partnership. The court held that RUPA did not apply because it became
  effective for partnerships formed on or after January 1, 1996. Efron noted, however, that
  beginning on January 1, 1998, RUPA retroactively applied to all partnerships regardless of
  when they were formed. The court held that because Efron filed his first claim for
  accounting in 1992 and his second amended complaint in 1996, RUPA’s retroactive
  application did not govern. Thus, UPA was still in effect and governed the partnership.
  The court held that, pursuant to UPA, a partner may not sue other partners or the

        18
            2004 Tex. App. LEXIS 604 (Tex. Ct. App. Jan. 22, 2004), petition for review den., 2004 Tex.
LEXIS 827 (Tex. Sept 10, 2004)
       19
            2004 Fla. App. LEXIS 8739 (Fla. Dist. Ct. App. June 23, 2004).
    partnership in an action at law regarding matters within the scope of the partnership until
    there has been an accounting of the affairs of the partnership. The court affirmed the
    rulings of the trial court.


2      § 17.2       Limited Partnerships

§ 17.2.1 Limited Partnership Agreements: Language and
         Consequences
    Black v. Arizala20

    In this action for damages alleging securities law violations and related torts, the Supreme
    Court of Oregon reviewed whether the trial court erred in dismissing the action on the
    ground that the court lacked jurisdiction because parties’ limited partnership agreement
    required plaintiffs to file their claims in San Juan, Puerto Rico. Plaintiffs invested in PCS,
    a Delaware limited partnership and as part of their purchase, became parties to the PCS
    Agreement of Limited Partnership. The focal point of the dispute was a clause of the
    Agreement that provided: “This Agreement shall be construed and enforced in accordance
    with and governed by the law of the State of Delaware. . . . Venue for any legal action
    arising from this Agreement, including enforcement of any arbitration award, shall be in
    San Juan, Puerto Rico.”
             The court affirmed in part, and reversed in part, finding that Oregon courts were
    authorized to dismiss an action for lack of subject matter jurisdiction when a motion is
    timely filed and the record demonstrates that the parties have an enforceable agreement to
    litigate the action in a different venue. In accordance with the parties’ agreement, the court
    relied on Delaware law, in particular, Parfi Holding AB v. Mirror Image Internet, Inc., 817
    A.2d 149 (Del. 2002), cert. denied, 538 U.S. 1032 (2003), to construe the venue provision.
    Addressing the principal question, whether plaintiffs’ action was one “arising from this
    Agreement,” the court held that the trial court erred in dismissing plaintiffs’ complaint
    because plaintiffs’ action did not seek to enforce the rights and duties that the parties’
    contract created, rather the alleged improper acts—misrepresentations made substantially
    prior to entering into a contract and various securities law violations—were of a
    noncontractual nature, pertaining to rights and duties created by sources of law external to
    the parties’ contract. Thus, the court recognized that the venue provision of the Agreement
    did not apply to plaintiffs’ claims, finding that plaintiffs could maintain an action based on
    noncontractual sources of their rights even though the claims arose from some or all of the
    same facts that related to the parties’ contractual transactions.

    Gale v. Rittenhouse21

    The plaintiff, the former general partner of the limited partnership, filed this dissolution
    action. Before bringing the action, the plaintiff was removed as a general partner pursuant

         20
              95 P.3d 1109 (Ore. 2004).
         21
              686 N.W.2d 50 (Minn. Ct. App. 2004).
 to the terms of the limited partnership agreement. On appeal, the plaintiff argued that she
 remained a limited partner after her removal as a general partner. The court found that this
 argument was not supported by Minnesota law and that, under the limited partnership
 agreement, the plaintiff was only entitled to a determination of the fair market value of her
 partnership interest in the event that she and the new general partner could not agree on the
 value within 90 days. Absent such an agreement, the Court ruled that the matter must be
 submitted to arbitration as set forth in the partnership agreement.

§ 17.2.2 Fiduciary Duties and Management
 Gelfman v. Weeden Investors, L.P.22

 Plaintiffs, a group of limited partners in Weeden Investors, L.P., sued defendants, a
 Limited Partnership, its corporate general partner and its board of directors, alleging that
 defendants breached their contractual and fiduciary duties by: (1) issuing an excessive
 number of new units during the late 1990s to employees, directors, and friends of
 management, that caused dilution of the shares of outside investors; and (2) amending the
 Partnership Agreement to implement a redemption plan that involved the immediate,
 involuntary squeeze-out of outside investors at book value (which was less than fair-
 market value), while it allowed inside employee-investors to cash out units over years.
         In addressing plaintiffs’ dilution claim, the court noted that the General Partner’s
 decision to issue a substantial number of additional callable units to employees, outside
 directors and “favorites of management,” was governed by a “sole discretion” standard in
 the Partnership Agreement. Under that agreement, the General Partner’s exercise of sole
 discretion gave rise to liability only where the actions constituted gross negligence, willful
 or wanton misconduct, or were reasonably believed to be inconsistent with the overall
 purposes of the partnership. The court concluded that the decisions were made with
 dispatch or in an ad hoc manner, but did not rise to the level of gross negligence, “which
 involves a devil-may-care attitude or indifference to duty amounting to recklessness.”
 There was a rational basis for the issuances in view of the market, a prior hiatus on
 issuances, and the General Partner’s business strategy of increasing employee loyalty
 through ownership. The court also found it relevant that employee-directors did not
 materially increase their profit share as a result. However, the court found the decision to
 permit the outside directors to reinvest their capital distributions in new units in 1997 and
 1998 arose from self-interested motives to secure the support of the outside directors for
 the large new unit issuances proposed for employees and to protect directors from the
 expected dilution caused by the issuance without corresponding consideration for the
 interests of outside investors who faced the same threat.
         Defendants conceded that the proposed amendments to the Partnership Agreement
 and the Redemption Schedule implicated a conflict of interest between the General Partner
 and its directors and outside investors. Therefore, the Agreement imposed a different
 contractual standard of duty that required the General Partner to satisfy a process
 requirement in view of a conflict of interest: to consider the interests of each party and the
 customary industry practices and standards. The court concluded that defendants’ failure to
 comply with the required process in developing the amendments and the Redemption

      22
           859 A.2d 89 (Del. Ch. 2004).
Schedule and their conscious choice to deprive outside investors of their units for less than
fair market value while at the same time benefiting themselves, amounted to a breach of
their fiduciary and contractual duties.

ProHealth Care Associates, LLP v. April23

The plaintiff was a limited liability partnership engaged in providing medical care and
services. The defendants were doctors who became partners in ProHealth. ProHealth
asserted several claims, including that defendants breached their fiduciary duties by
opening a competing medical office.
    The court found that the partnership agreement permitted defendants to open another
office so long as they did not use ProHealth’s time or facilities in establishing their
competing business, and therefore the complaint did not state a claim for breach of
fiduciary duty in connection with this claim. The court also found that the complaint failed
to state a claim for breach of fiduciary duty regarding the defendants’ solicitation of
ProHealth’s employees because ProHealth failed to set forth any case law or statutory
authority that would prevent the defendants from asking other employees of ProHealth to
join their competing business.
    The court found that the complaint stated a claim for breach of fiduciary duty and
breach of contract regarding ProHealth’s allegations that the defendants billed ProHealth
patients through their other medical office—not through ProHealth. The fact that the
factual allegations were the same for both the breach of fiduciary duty and breach of
contract claims did not require the dismissal of the breach of fiduciary duty claim. The
court found that the same conduct may constitute both a breach of contract and a breach of
fiduciary duty. The court also found that ProHealth’s allegations that the defendants
induced ProHealth to enter into a long-term lease while they were in the process of
opening a competing business stated a claim for breach of fiduciary duty.

Carella v. Scholet24

The plaintiffs were limited partners in a limited partnership that owned and operated a
furniture store. They brought this action for breach of fiduciary duty after the defendants
caused the partnership to sell a building to their son. The court found that partnership
agreements can provide for authorized self-dealing. In this case, the partnership agreement
contained a provision stating that the limited partners consented to any sale by the general
partners, on behalf of the partnership, of partnership assets on the terms and conditions
determined by the general partner, notwithstanding the fact that any party to the
partnership agreement may have an interest in such sale.
    The court found that the language of the partnership agreement permitted the sale of
the building, and any claim for breach of fiduciary duty was properly dismissed. The
plaintiffs also brought a claim, on behalf of the partnership, that the defendants wrongfully
failed to collect rents from their son that were due under with a lease with the limited
partnership. The trial court dismissed this claim. On appeal, the court found that this was a
derivative claim, and the trial court erred in dismissing it pending an accounting.

     23
          2004 N.Y. Misc. LEXIS 1253 (N.Y. Sup. Ct. Aug. 18, 2004).
     24
          773 N.Y.S.2d 763 (N.Y. App. Div. 2004).
Franz v. Calaco Development Corp.25

The plaintiff filed this action against the defendants (Calaco Development Corp.
(“Calaco”) and Nunzio Casalino (“Casalino”)) for breach of the partnership agreement
between Calaco and the plaintiff and breach of fiduciary duty. Casalino was the chief
operating officer and a 40% shareholder of Calaco, the general partner of the partnership.
The trial court dismissed plaintiff’s breach of fiduciary duty claims against Casalino.
    On appeal, the plaintiff argued that Casalino should be held personally liable due to his
involvement in the management of the partnership. The plaintiff argued that Casalino’s
involvement in the management of the partnership created a fiduciary relationship between
Casalino and the partners. The plaintiff did not argue that the court should pierce Calaco’s
veil to find Casalino personally liable. The court found that the partnership agreement did
not identify Casalino as a partner, that none of the parties intended Casalino to personally
enter into the partnership agreement, and that Casalino did not directly share in the profits
of the partnership. The court found that if it held Casalino liable for his involvement in the
partnership, it would be equivalent to allowing a third party to hold an officer or
shareholder of a corporation personally liable for his involvement in corporate acts without
establishing cause to pierce the corporate veil.

In Re LJM2 Co. Investment, L.P. Limited Partners Litig.26

LJM2 Co. Investment, L.P. (“LJM2”) was a Delaware limited partnership formed for the
purpose of making investments in businesses related to Enron. Shortly after the formation
of LJM2, its general partner executed a credit agreement with certain banks. After Enron
declared bankruptcy, the bank creditors, acting pursuant to a credit agreement, forced the
general partner to make a call (the “December 2001 Call”) upon the limited partners to
contribute additional capital within the limit of their original capital commitment under the
LJM2 partnership agreement.
    Before the capital call was due, the limited partners replaced the general partner and,
with the concurrence of the new general partner, amended the partnership agreement in an
effort to rescind the capital call and prevent further capital calls (the “January 2002
Amendments”). The partnership subsequently filed for bankruptcy, and the bankruptcy
trustee later made another capital call (the “September 2003 Call”) on the limited partners.
When the limited partners refused to honor that call, the trustee filed this action against the
limited partners to recover monies owed to the partnership on account of the unsatisfied
capital calls. The limited partners moved to dismiss the complaint for failure to state a
claim upon which relief could be granted.
    Although the Complaint included 11 separate counts, the main issue was whether
plaintiff had pled facts to support the claim that the limited partners were required to honor
either the December 2001 Call or the September 2003 Call. The limited partners first
argued that the banks did not receive personal guarantees from them and, therefore, the
banks could not demand payment from them under the credit agreement executed by
LJM2. The banks responded that they reasonably relied on the partnership agreement, in
which the limited partners were obligated to contribute a certain amount (the

     25
          818 N.E.2d 357 (Ill. App. Ct. 2004).
     26
          C.A. No. 300 (Del. Ch. Dec. 29, 2004).
 “Commitment”) if requested by the general partner. The banks further argued that, in
 connection with the credit agreement, LJM2 executed an “Undertaking,” which bound the
 general partner to make a capital call if LJM2 defaulted on the Credit Agreement.
     The Court first addressed the validity of the actions taken to avoid the capital calls
 (e.g., the January 2002 Amendments electing a new general partner, and amending the
 partnership agreement to rescind the December 2001 Call and allow the limited partners to
 compromise any future calls). The Court noted that, even though the liability of limited
 partners is limited, to the extent a partnership agreement requires a limited partner to make
 a contribution, that partner is so obligated. In holding that the limited partners had not
 validly compromised the December 2001 Call, the Court concluded that, under Delaware
 limited partnership law, the statutory default for compromising an obligation of a limited
 partner was unanimous consent. The partnership agreement did not have any provision
 contrary to the statutory default, and the amendment compromising the December 2001
 Call was not unanimously approved.
     The limited partners next argued that January 2002 Amendments eliminated the default
 rule, and instead required only a majority in interest to compromise a contribution
 obligation. The partnership agreement, however, provided that no amendment may change
 the percentage of interest required to approve an action unless such amendment is
 approved by a percentage in interest that is not less than the required interest at the time.
 Based on the statutory default provision, the Court determined that the required interest to
 compromise a contribution obligation was unanimous consent, which was not obtained.
 The Court also rejected the limited partners’ argument that the January 2002 Amendment
 was unanimously approved because it was executed by the new general partner, which
 possessed a power of attorney from the limited partners. The Court held that the limited
 power of attorney for procedural and ministerial functions was intended to give the general
 partner the power to execute, and not the power to authorize.
     Finally, the Court addressed whether the new general partner had validly rescinded the
 December 2001 Call. The Court held that the complaint fairly alleged that the action to
 rescind the December 2001 Call was “at once a breach of contract and breach of fiduciary
 duty.” The Court further noted that the limited partners elected the new general partner in
 an effort to avoid complying with the December 2001 Call and any future demands that
 they fulfill their Commitment to LJM2. Thus, the complaint adequately alleged that the
 rescission of the December 2001 Call was not effective. For the same reason, the limited
 partners potentially could not rely on the January 2002 Amendments to avoid their
 obligations with regard to the September 2003 Call. Finally, the Court noted that plaintiffs’
 claim was also supported by § 17-502(b)(1) of the Limited Partnership Act, which
 provides that a creditor may enforce an obligation of a limited partner if the creditor
 reasonably relied on the obligation of the partner to make a contribution.

§ 17.2.3 Dissolution
 In Re: Tufts Oil & Gas-III27

 Four siblings, Frederick Tufts, Linda Hebbler, Robert Tufts, and David Tufts were limited
 partners of Tufts Oil & Gas-III, L.P. (“TOG-III”). TOG-III was a Delaware limited

      27
           871 So. 2d 476 (La. Ct. App. 2004).
 partnership in which each of the four siblings was a limited partner owning 23.75% of the
 partnership interest. The general partner, Toraflid Corporation, owned the remaining five-
 percent partnership interest in TOG-III. Each of the siblings owned 25% of the Toraflid’s
 stock and served as a director on Toraflid’s four-member board and David Tufts was its
 president. Over the years a rift developed among the four siblings and divided them into
 equal factions. On March 10, 2003, Frederick Tufts and Linda Hebbler petitioned the trial
 court for involuntary dissolution of TOG-III. Robert Tufts and TOG-III (through David
 Tufts, as president of the general partner) answered the petition and opposed the
 dissolution. Following its answer, TOG-III asserted a reconventional demand for judicial
 dissolution of the four companies comprising the assets of TOG-III. Alleging that the four
 companies could no longer operate, TOG-III requested appointment of a judicial liquidator
 to dissolve the companies. In response to the reconventional demand, Frederick Tufts and
 Linda Hebbler filed exceptions alleging that neither TOG-III, nor Toraflid, nor David
 Tufts had any authority to seek involuntary dissolution of the four companies comprising
 TOG-III’s assets. The trial court signed a judgment maintaining the exceptions and
 dismissing the reconventional demand.
         On appeal, TOG-III and Robert Tufts argued that Toraflid, TOG-III’s general
 partner, authorized the filing of the reconventional demand. Frederick Tufts and Linda
 Hebbler argued that the trial court implicitly found that Toraflid and TOG-III were
 deadlocked and correctly concluded that David Tufts lacked authority to assert the
 reconventional demand on TOG-III’s behalf. Appellant argued that the partnership
 agreement contained no provision that expressly limited the authority of Toraflid, as
 general partner, from seeking liquidation of an entity in which TOG-III has an interest.
 Appellant also argued that it was unnecessary to obtain authority from Toraflid’s
 shareholders before filing the reconventional demand because none of Toraflid’s assets are
 to be liquidated, only assets belonging to TOG-III. Appellant finally argued that Toraflid’s
 bylaws did not require its president to have authority from the directors to file the
 reconventional demand. The court held that involuntary dissolution is a drastic remedy that
 applies in limited situations. The court further held that Toraflid’s bylaws did empower
 David Tufts to conduct day-to-day operations, but the filing of a reconventional demand
 seeking such a drastic remedy exceeded the scope of his authority as president. Thus, the
 court affirmed the trial court’s decision.

§ 17.2.4 Litigation Issues
 Brandon Associates v. Castle Management28

 This issue in this case was whether a limited partner had standing to assert a derivative
 action after the limited partner transferred its interest. The partnership agreement permitted
 a limited partner to transfer a beneficial interest with written consent of the managing
 general partner. In this case, the managing general partner consented to the transfer of the
 limited partner’s beneficial interest. As a result, the Court found that the plaintiff retained a
 legal interest in the limited partnership, and had standing to pursue this derivative action.



      28
           2004 Mich. App. LEXIS 3154 (Mich. Ct. App. Nov. 18, 2004).
    Kenworthy v. Kenworthy Corp.29

    Plaintiffs were limited partners of Kenworthy Tank Company, LP. and brought suit against
    defendants, including Kenworthy’s general partner, seeking dissolution of the limited
    partnership, Because more than 120 days had passed from the date that plaintiffs filed suit
    for dissolution, the trial court granted plaintiff’s motion for partial summary judgment
    pursuant to the Texas Revised Limited Partnership Act, which provides:
         A person ceases to be a general partner of a limited partnership on the occurrence of any of
         the following events of withdrawal:
         (a) Unless otherwise provided in a written partnership agreement [], 120 days expire after the
         date of the commencement of a proceeding against the general partner seeking reorganization,
         arrangement, composition, dissolution or similar relief . . . if the proceeding has not been
         previously dismissed.
    TEX. REV. CIV. STAT. ART. 6132a-1, § 4.02(a)(5) (Vernon Supp. 2004–05).
        The trial court held that an “event of withdrawal” had occurred and the limited
    partnership was dissolved.
            In this case of first impression, the appellate court reversed and remanded, finding
    that the pendency of the this suit for dissolution did not bring about an “event of
    withdrawal.” In view of the legislature’s intent (found in a comment to the prior Uniform
    Limited Partnership Act) to give the limited partners the power to rid themselves of a
    general partner in such dire financial straits that he is the subject of bankruptcy
    proceedings, the court interpreted TEX. REV. CIV. STAT. ART. 6132a-1, § 4.02(a)(5), to
    refer to lawsuits in which relief is sought against the general partner for the general
    partner’s reorganization, dissolution etc. Thus, the “event of withdrawal” contemplated by
    the statute is one where 120 days has expired in an action for the dissolution of the general
    partner, not the partnership itself. To hold otherwise would be contrary to the clear purpose
    of the statute.


3      § 17.3        Limited Liability Companies

§ 17.3.1 Operating Agreements: Language and Consequences
    WCB Props. for Affordable Senior Assisted Living & Cmty. Res. Ctr. LLC v.
    Anderson30

    In l996, Anderson, Marshall and Taylor discussed the possibility of forming a partnership
    to acquire, develop, and operate assisted living facilities. In October 1997, Anderson
    helped form a limited liability company (WCB) to purchase and develop a certain property
    as an assisted living facility. Initially, only Marshall was listed as a member of WCB.
    Anderson was a county project manager responsible for the sale of the county property that
    WCB was interested in developing. WCB submitted a bid and won. Shortly afterward,
    Anderson, Marshall and Taylor memorialized their partnership agreement. Thereafter,

         29
              149 S.W.3d 296 (Tex. Ct. App. 2004).
         30
              2002 Wash. App. LEXIS 570 (Wash. Ct. App. Mar. 29, 2004).
WCB and the county executed the purchase and sale agreement for the property. In order
to purchase the property, WCB joined with a group of investors to form Fairmont Terrace
LLC. Anderson, Marshall and Taylor agreed to assign 50% of their share in the project to
the other investors in exchange for additional financing. Anderson never disclosed his
interest in the WCB to his county supervisors. In fact, the WCB members agreed that
Anderson’s role with WCB should be kept secret from the county until the project was
functioning as an assisted living facility.
        Eventually Anderson and Marshall had a falling out. WCB and Marshall and
Taylor as individuals sued Anderson for a declaration that he had no interest in either LLC.
Anderson counterclaimed that he had an interest in the partnership and both LLCs. WCB,
Marshall, Taylor and Fairmont Terrace won summary judgment against all of Anderson’s
counterclaims. The trial court held that the counterclaims were derived from agreements
that were void for illegality, namely, the county employee code of ethics. The trial court
further held that the partnership agreement was not severable from the illegality, because it
was not remote from or collateral to Anderson’s illegal conduct. The trial court explained
that Anderson’s making of the agreement, combined with his failure to disclose it, is what
constituted the illegal conduct. On appeal, the trial court’s rulings were affirmed.

Senior Tour Players 207 Management Co. LLC v. Golftown 207 Holding Co.
LLC31

The plaintiffs were Senior Tour Players 207 Management Co. LLC (“Senior Tour”), a
Delaware LLC, and two of its principals. Senior Tour was a member and acted as the
manager of Golftown 207 Holding Company LLC (“Golftown”). After Senior Tour was
replaced as Golftown’s manager, the new manager (Paul Fireman) sued Plaintiffs for
alleged breach of fiduciary duty and gross negligence in the management of Golftown (the
“Fireman Action”). Plaintiffs requested advancement of their fees and costs in connection
with the Fireman Action pursuant to § 5.3 of Golftown’s operating agreement, and
Golftown rejected the request.
    In granting plaintiffs’ motion for summary judgment, the Court noted that § 18.108 of
the Delaware LLC Act grants LLCs “broad authority” to provide for indemnification in
their operating agreements. In accordance with the Act, § 5.3 of Golftown’s operating
agreement provided indemnification rights and also stated that “the Company shall
advance such Indemnified Person’s related expenses, as such expenses are incurred, to the
full extent permitted by law.” Based on that language, the Court rejected Golftown’s
argument that plaintiffs’ entitlement to advancement was dependent upon a determination
that plaintiffs will ultimately be entitled to indemnification. The Court also rejected
Golftown’s argument that plaintiffs were not entitled to advancement unless they first
submitted a written undertaking to repay, since their was no such requirement in the
Golftown operating agreement. Finally, the Court noted that plaintiffs were entitled to an
award of “fees for fees” for bringing this action to enforce their contractual right to
advancement.




     31
          853 A.2d 124 (Del. Ch. 2004).
PAMI-LEMB I, Inc. et al. v. EMB-NHC, LLC32

Plaintiffs were Delaware corporations, which were formed to serve as general partners of
certain Delaware limited partnerships. Each plaintiff was an affiliate of Lehman Brothers
and also owned 75% of the respective limited partnership. Defendant (“NHC”) owned
24% of each limited partnership. The action related to a dispute between partners over the
interpretation and enforcement of identical buy/sell provisions and related “waterfall”
calculations governing the distribution of partnership proceeds under the limited
partnership agreements.
    In January 2004, NHC invoked the buy/sell provisions and offered to buy plaintiffs’
interests in the partnerships. Pursuant to the buy/sell provision, “NHC’s offer was also, in
effect, an offer to sell its limited partnership interests to plaintiffs for $5.7 million.”
Plaintiffs responded by electing to purchase NHC, but at a price of only $1.5 million. That
lower price was based on the amounts reflected on the books kept by plaintiffs, which was
inconsistent with the partnerships’ accounting records (which were known to plaintiffs),
and assumed that the waterfall calculation would be done on a consolidated basis. NHC
treated plaintiffs’ response as a repudiation of NHC’s offer, and purported to close on its
purchase of plaintiffs’ interest in the partnerships, which it then sold to a third party.
    Following an expedited trial, the Court ruled in favor of NHC. The Court held that each
limited partnership agreement required the partnership to act as a “stand-alone entity,” and
that each partnership had been operated in that fashion. Therefore, the Court refused to
treat the partnerships as one consolidated entity for the purpose of the waterfall
calculations. The Court also rejected plaintiffs’ calculation of the $1.5 million buy/sell
price as inconsistent with the partnerships’ books and records. Significantly, the Court
found evidence that the plaintiffs were aware of and consented to the accounting treatment
used by the partnerships, which plaintiffs rejected in connection with determining the $1.5
million price. Despite knowing the correct amounts, the Court found that plaintiffs used
materially inaccurate accounting records to determine the buy/sell price. In fact, it
appeared that plaintiffs offered the lower amount in an attempt to reach a settlement at a
figure less than the contract demanded. This strategy did not work as the Court concluded
that plaintiffs’ response to NHC’s buy/sell notice was so inconsistent with the clear terms
of the partnership agreement that it constituted either a reputation of those contracts or an
improper counteroffer.

Harbison v. Strickland33

Strickland was a manager and 17% equity owner of Strickland Family Limited Liability
Company (the “LLC”). The LLC was formed by Strickland and her husband as a part of
their estate plan. As a part of that plan, 83% of the equity shares of the LLC were
transferred to their daughter, Harbison. After her husband’s death, Strickland conveyed to
her son, who was not a member of the LLC, three parcels of real property belonging to the
LLC. In response to the sale, Harbison sued Strickland for breach of fiduciary duty and
violation of the LLC operating agreement. Harbison alleged that Strickland had failed to
make managerial decisions based on the best interests of the LLC and its owners. The trial

     32
          857 A.2d 998 (Del. Ch. 2004).
     33
          2004 Ala. LEXIS 275 (Ala. Oct. 22, 2004).
court granted summary judgment in favor of Strickland. In doing so, the trial court looked
to the intent of the operating agreement and found that selling the property fell within that
intent. The court also noted that the LLC was not for profit and thus there was no
obligation to maximize financial gain and Strickland could distribute the LLC’s real
property as she saw fit.
        Harbison appealed to the Supreme Court of Alabama. As an issue of first
impression, the court analyzed whether the trial court committed reversible error by failing
to incorporate into the operating agreement the duties mandated by Alabama’s LLC statute
(the “ALLCA”). The court held that, like corporations and limited partnerships, LLC’s are
creatures of statute and in interpreting an LLC operating agreement, the court must look to
the ALLCA. The court noted that the ALLCA provided that members and managers owe a
duty of loyalty to the LLC. Also, the plain language of the ALLCA did not allow an
operating agreement to unreasonably restrict a member’s right to information, to eliminate
a manager’s duty of loyalty, or to unreasonably reduce the duty of care.
        The Supreme Court held that the trial court erred for failing to look past the “four
corners” of the operating agreement to determine Strickland’s fiduciary obligations, if any,
to the LLC and its members. The court also held that the trial court’s finding that
Strickland could dispose of property as she saw fit “is irreconcilable with the language of
the operating agreement that requires Strickland to consider the best interests of the LLC
and the other equity owner, Harbison, before making any business decisions regarding the
LLC.” The court noted that at trial Strickland produced no evidence that she considered
the interests of the LLC before selling the property. Thus, the court remanded so the trial
court could determine whether Strickland breached her duties as manager of the LLC.

Milford Power Company, LLC v. PDC Milford Power, LLC34

Plaintiffs Milford Power Company, LLC (“Milford Power”) and Milford Holdings, LLC
sought a declaration that defendant PDC Milford Power, LLC (“PDC”) lost its
membership interest in Milford Power as a result of filing a petition for bankruptcy.
Plaintiffs argued that, although the bankruptcy petition was dismissed, pursuant to the LLC
agreement, upon filing the petition, PDC was automatically divested of its interest and
assigned it to Milford Holdings as the sole remaining owner. PDC argued that the doctrine
of unclean hands prevented plaintiffs from relying on the ipso facto clause in the LLC
agreement because PDC filed the petition when the plaintiffs’ affiliates (the “Lenders”)
improperly sought foreclosure on PDC’s membership interest. PDC also argued that
certain provisions of the Federal Bankruptcy Code preempted the ipso facto clause. The
Court of Chancery concluded that PDC’s unclean hands defense did not bar plaintiffs from
relying upon the ipso facto clause, because the mere fact that the Lenders had taken steps
to foreclose on PDC’s membership interest did not create a triable issue of fact precluding
summary judgment for the plaintiffs. There was no evidence that would justify a rational
inference that the Lenders did not have a good faith basis to attempt to foreclose on PDC’s
interest in Milford Power.
        The court also concluded that the ipso facto clause was preempted to the extent that
it would deprive PDC of the economic rights available to an assignee of an LLC
membership interest under § 18-702(b)(2) of the Delaware LLC Act. The court held that

     34
          2004 Del. Ch. LEXIS 189.
 the clause was enforceable, however, insofar as it divested PDC of its right to participate
 as a member in the governance of Milford Power. Therefore, the court held that, after the
 dismissal of the bankruptcy filing, PDC possessed the same rights as an assignee under §
 18-702(b)(2).

§ 17.3.2 Breach of Fiduciary Duties and Management
 Shell v. King35

 Plaintiffs, husband and wife, sued defendant business partner after the failure of a limited
 liability company formed by the parties. Defendant was the chief manager of the LLC and
 was responsible for the LLC accounts, a responsibility that he delegated to a bookkeeper.
 An audit of the company’s records revealed that over $26,000 in company cash was
 missing. Under certain circumstances, a manager of an LLC is permitted to delegate his
 duties. However, a manager who delegates the duties or powers of an office remains
 subject to the standard of conduct for a manager with respect to all duties and powers so
 delegated. The Court held that a manager who was responsible for maintaining the
 company books, accounts, and handling cash could not completely delegate this
 responsibility in a wholesale manner without taking steps to verify that the person to
 whom this authority had been delegated was doing their job correctly. Therefore,
 defendant was found to be negligent and in breach of his fiduciary obligations to plaintiffs.

 Gottsacker v. Monnier36

 The Court of Appeals upheld an order of the lower court compelling defendants, a newly
 formed LLC, 2005 New Jersey LLC and its members Julie Monnier, owner of a 60%
 interest and Paul Gottsacker, owner of a 40% interest, to return commercial real estate to
 plaintiff, New Jersey LLC and to reimburse its member, Gregory Gottsacker for legal
 expenses. Julie, Paul and Gregory were members of New Jersey LLC, founded in 1998 as
 a vehicle to own investment real estate. Julie owned a 50% interest and Paul and Gregory
 collectively owned a 50% interest. Following a falling out between Paul and Gregory,
 Julie and Paul founded a new entity, 2005 New Jersey LLC, naming themselves as the
 only two members. Julie executed a warranty deed transferring the New Jersey LLC
 property to the new entity for the same price paid in the original transaction almost three
 years earlier, and sent a check to Gregory representing his 25% interest.
         The Wisconsin Limited Liability Company Law does not prevent a member who
 has a material conflict of interest from dealing with matters of a LLC. The statute does,
 however, prohibit that member from dealing unfairly with the company or its members.
 Members who have a conflict of interest are not precluded from voting, but must vote his
 or her ownership interest fairly, considering the interest of the LLC and the relationship
 with other members. The court held that defendants engaged in an unfair transaction in
 breach of their fiduciary duties to New Jersey LLC when voting to transfer the property to
 their new company. This action was not an arms-length transaction and antagonistic to
 New Jersey LLC because Julie and Paul increased their ownership interests in the property

      35
           2004 Tenn. App. LEXIS 507 (Tenn. Ct. App. Aug. 5, 2004).
      36
           676 N.W.2d 533 (Wis. Ct. App. 2004), r’hear’g granted, 684 N.W. 136 (Wis. 2004).
as a result, eliminated Gregory’s interest, and executed the transfer without notice to
Gregory and without an appraisal of the fair market value of the property. Unfair dealing
was further evidenced by the fact that the property in question was the sole company asset
and it sale compromised the purpose of New Jersey LLC.

Metro Communications Corp. BVI v. Advanced Mobilecomm Technologies,
Inc.37

Plaintiff Metro was a member of Fidelity Ventures Brazil, LLC (“Fidelity”). Certain
employees of Fidelity had obtained permits in Brazil through bribery in 1998. Metro
alleged that defendants (certain Fidelity members and managers) either participated in the
bribery or knew about it before it was disclosed to Metro, and that they were not candid
with Metro regarding the bribery or its effect on Fidelity. Metro asserted claims for breach
of the LLC agreement and breach of fiduciary duty by Fidelity’s former managers.
    Fidelity’s operating agreement required the LLC to deliver promptly to each member a
written notice of any event that could reasonably be expected to have an adverse affect on
the Company. Based on that provision, the Court found that Fidelity was obligated to
inform Metro of the bribery scheme. Defendants argued that the claim should nonetheless
be dismissed because Fidelity was dissolved in 2000. The Court, however, rejected that
argument because it found plaintiff had pled facts to support the inference that Fidelity was
“wound up in contravention of the LLC Act.” Specifically, plaintiff alleged that, in
connection with the dissolution, defendants failed to make a sufficient provision for
potential claims against Fidelity.
    The Court also held that plaintiff had pled a claim under the “Inspection Rights”
provision of the operating agreement because defendants’ failed to comply with plaintiff’s
requests for certain information regarding the LLC. The Court further held that plaintiff
had stated cognizable breach of contract claims against two of Fidelity’s managers (in
addition to Fidelity) because the operating agreement provided that “the Company and
each Member and Manager will comply with the covenants set forth” in the relevant
sections.
    The Court determined that plaintiff had stated a claim for common law fraud against
certain defendants because they made misleading statements to plaintiff that failed to
disclose the bribery of which they were aware. The Court, however, dismissed the fraud
claims as to certain other defendants because plaintiff failed to allege facts demonstrating
that such defendants knew of the bribery at the relevant time or intentionally made any
false statements.
    The Court next addressed plaintiff’s claim that defendants committed fraud by
remaining silent in the face of a duty to disclose the bribery. The Court noted that, in
addition to defendants’ disclosure obligations under the LLC agreement, defendants had a
fiduciary duty not to knowingly mislead plaintiff. In order to prove such claims (fraud or
fiduciary duty), however, the Court held that Metro must establish scienter on the part of
defendants and reasonable reliance by plaintiff. Therefore, the Court held that plaintiff had
not stated a claim against those defendants for which no facts were pled establishing
knowledge of the bribery scheme.


     37
          854 A.2d 121 (Del. Ch. 2004).
    The Court also held that plaintiff had stated a claim for breach of the fiduciary duty of
loyalty by those managers that participated in the bribery. Finally, the Court addressed
plaintiff’s statutory claims. The Court found that plaintiff had stated a claim under § 18-
804(c) of the LLC Act (creating liability for improper distributions) only with regard to
certain distributions made by Fidelity’s successor in connection with Fidelity’s dissolution,
but that such claim must be re-pled as a derivative claim. The Court, however, concluded
that plaintiff had not stated a fraudulent conveyance claim because it had not explained
how it was hindered, delayed, or defrauded by the challenged conduct.

Lazard Debt Recovery GP, LLC v. Weinstock38

Investment bank, Lazard Freres & Co. (“Lazard”) formed plaintiff Lazard Debt Recovery
Fund, L.P. and related Lazard-controlled entities, plaintiffs Lazard Debt Recovery GP,
LLC (the General Partner) and Lazard Debt Recovery Management, LLC (the Investment
Manager) to invest securities of distressed companies. This action arose from the abrupt
resignation and departure of key employees who held various positions in each plaintiff
entity and were entrusted with the investment decisions of the fund, defendants Weinstock
and Herenstein. Defendants had signed employment contracts to start a similar fund with
competitor, Quadrangle. Upon their resignation, Lazard had little choice but to transfer the
Fund and its assets to Quadrangle where they could be managed by defendants or to wind
up the partnership in order to avoid severe harm to the Fund’s partners. The General
Partner and Investment Manager chose the latter course of action.
        Allegations against defendants included breach of fiduciary duties to the Fund and
its partners, fraud, breach of contract, and breach of the Limited Partnership Agreement.
The court dismissed the fiduciary duty claim because defendants in their capacity as agents
for the Fund’s investors did not mismanage the Fund or abuse their discretion. Defendants
were not contractually forbidden from resigning without prior notice or competing with the
Fund after departure. The onus was on the employers, General Partner and Investment
Manager to institute protective measures to ensure that human capital could not depart
without prior notice without incurring liability for a breach of contract, and to establish a
transition plan to cope with the departure of key personnel. The court found that any harm
resulting from defendant’s departure was the result of Lazard’s decision to wind-up the
Fund.
        Plaintiffs’ fraud claim, based on statements made by defendants in the period
between the time they began discussions with Quadrangle and their resignation failed for
its lack of particularity in pleading. The court also dismissed Plaintiff’s breach of contract
and breach of Agreement claims, holding that (1) defendant’s signing of the Subscription
Agreement in connection with their personal investment in the Fund as limited partners
did not subject them to the same obligations of the General Partner, (2) Investment
Management Agreement whereby the Investment Manager agreed to be bound by the
Limited Partnership Agreement to the extent applicable to it as delegatee of the General
Partner, created obligations assumed by the Investment Manager as an entity and did not
bind mere employee defendants to the same contractual duties, (3) the good faith
requirement in the Limited Partnership Agreement required partners to inform the Fund of
investment opportunities or obtain consent to deal or invest in companies in which the

     38
          2004 Del. Ch. LEXIS 109 (Del. Ch. Aug. 6, 2004).
 Fund might have an interest, and was therefore not applicable in this situation. Despite
 dismissing the majority of plaintiff’s claims, the court permitted plaintiff to proceed with
 it’s claim that defendants breached the Limited Partnership Agreement by using the fund’s
 confidential information for their own benefit and to the detriment of the Fund.

 Kronenberg v. Katz39

 Plaintiffs in this action sought rescission of their investment in Community Sports Partners
 (“CSP”), a Delaware limited liability company, claiming that they were fraudulently
 induced to enter into the business. Defendant Samuel Katz, a former mayoral candidate for
 Philadelphia, formed CSP to develop and manage community skating rinks and other
 sports facilities. In April 2000, plaintiffs agreed to invest in CSP, having relied upon the
 feasibility studies allegedly prepared by independent consultants and upon the strength of
 the CSP management team. Unbeknownst to plaintiffs at the time of investing, one of the
 key members of the CSP management team (Robins) had a criminal record and had twice
 filed for personal bankruptcy.
     On cross-motions for summary judgment, the Court found that Katz had made material
 misstatements or omissions in inducing plaintiffs to invest in CSP, including failing to
 inform plaintiffs that the feasibility studies had not been prepared by an independent
 consultant. Although Katz was unaware of Robins’ dishonorable past, the Court reasoned
 that no rational person would have invested in CSP if knowledgeable about the feasibility
 studies and Robins’ past. Defendants argued, however, that an integration clause in the
 CSP agreement precluded plaintiffs from reasonably relying upon any statement not
 incorporated in the LLC agreement itself. The Court rejected this argument, holding that
 such a provision must contain clear language by which a plaintiff has agreed not to rely
 upon statements outside the four corners of the contract. Such “anti-reliance” language
 was not present here; the CSP integration clause did not contain unambiguous language to
 the effect that plaintiffs were not relying on statements outside the agreement. Finally, the
 Court rejected defendants’ assertion that plaintiffs had breached the confidentiality
 provision in the agreement by bringing the lawsuit. As a third-party to the agreement,
 defendant Katz had standing to pursue to a claim of breach of the agreement and, even if
 there were a breach, defendants could show no compensable injury. Accordingly, the
 Court determined that plaintiffs were entitled to summary judgment on their fraud in the
 inducement claim.

§ 17.3.3 Dissolution
 Spires v. Casterline40

 Petitioner, a member of Lighthouse Solutions, LLC, sought an order to dissolve the LLC
 and the appointment of a receiver. All three members wanted the business relationship to
 end, but they could not reach a consensus as to how to accomplish the withdrawal of
 petitioner. To determine whether judicial dissolution of the limited liability company was
 warranted, the court looked at whether or not it was reasonably practicable to carry on the

      39
           2004 Del. Ch. LEXIS 77, Strine, V.C. (Del. Ch. May 19, 2004).
      40
           778 N.Y.S.2d 259 (N.Y. Sup. Ct. 2004).
business in conformity with the articles of organization or operating agreement. The
articles of organization did not contain provisions for the operation of the business other
than to state that there were three members and that the limited liability company was to be
managed by one or more members. Because the members of the LLC failed to adopt an
Operating Agreement, the statutory default provisions became the terms, conditions, and
requirements for the conduct of the members and for the operation of the LLC. The statute
provided “a member may not withdraw from a limited liability company prior to the
dissolution and winding up of the limited liability company.” (LLCL § 606[a]).
        The court granted petitioner’s application for judicial dissolution as it was not
reasonably practicable for Lighthouse to carry on its business in conformity with the
statutory Operating Agreement that explicitly required Lighthouse to be dissolved and
wound-up prior to petitioner’s withdrawal.

Dunbar Group, LLC v. Tignor41

On appeal, the Virginia Supreme Court overruled the lower court’s judgment ordering the
dissolution of XpertCTI, LLC, after finding for the immediate expulsion of appellee
member, Tignor, as a result of his misconduct relating to the LLC’s funds. Although losing
his status as a member and manager, Tignor retained his 50% ownership in XpertCTI.
         Tignor’s expulsion was uncontested and the court considered the statutory standard
provided in Virginia Code Ann. § 13.1-1047 for the judicial dissolution of a limited
liability company. The court noted that the standard is strict, reflecting legislative
deference to the parties’ contractual agreement—only when a circuit court concludes that
present circumstances show that it is not reasonably practicable to carry on the company’s
business in accord with its articles of organization and any operating agreement, may the
court order a dissolution of the company. The court held that the evidence was insufficient
to support judicial dissolution of Xpert as the record failed to show that it would not be
reasonably practicable to carry on the company’s business after Tignor’s removal from the
daily management of the LLC. The court also noted that the order below that Xpert
continue its operations as a LLC for the duration of an existing contract indicated that the
trial judge found it reasonably practicable for Xpert to continue to operate for an extended
period of time after Tignor’s expulsion, in contradiction of his finding that dissolution was
warranted.

Beto Partners, L.L.C. v. Estate of Bender (In re Estate of Bebderm)42

This dispute arose from the sale of a commercial building to Beto Partners, LLC, by
Bender. The purchase agreement contained an option for the purchase of an adjacent
parking lot. Bender, however, died before the option was exercised and the LLC was
voluntarily dissolved approximately one and one half years after decedent’s death. After
its dissolution, Beto executed an agreement with a third party, Brick Street Partners, Inc.,
to sell the commercial building, to exercise its option, and upon doing so, to sell the
adjacent parking lot. As required by the option agreement, Beto sent written notice of its


     41
          593 S.E.2d 216 (Va. 2004).
     42
          806 N.E.2d 59 (Ind. Ct. App. 2004).
 intention to exercise the option to Bender’s Estate, which was rejected. Subsequently, Beto
 filed a petition to compel the Estate to comply with its exercise of the option.
         The court held that Beto’s post-dissolution exercise of the option to purchase
 land—an asset that was acquired, but not exercised prior to the dissolution—was
 permissible under the Indiana Business Flexibility Act as an activity appropriate to
 winding up and liquidating its business affairs. Indiana Code Ann. § 23-18-9-3 (2004), by
 its express terms, permits a dissolved LLC to collect assets, dispose of properties that will
 not be distributed in kind to members and to do every other act necessary to wind up and
 liquidate its business and affairs. The court found the sale agreement between Beto and
 Brick Street Partners required Beto to exercise the option as an inducement to Brick Street
 Partners to purchase the commercial building, thereby allowing Beto to dispose of
 property that would not be distributed in kind to its members. This act was therefore, not
 contrary to the winding up and liquidating of Beto’s business and affairs.

 Kogut v. Chicosky43

 Plaintiffs asserted claims for breach of fiduciary duties, theft and breach of the Connecticut
 Unfair Trade Practices Act against certain officers and members of Enfield Shade
 Tobacco, LLC. Plaintiffs also sought dissolution of Enfield, and the appointment of a
 receiver to run the company’s affairs. Plaintiff, Kogut, held a 50% membership interest in
 Enfield Shade and defendants each held a 25% interest. Plaintiffs alleged that defendants,
 in their capacities as members and officers of Enfield Shade engaged in numerous illegal
 and inappropriate actions, for example, paying themselves excessive salaries, usurping a
 corporate opportunity with regard to certain real estate, failing and refusing to pay rent
 owed by the LLC, and entering into agreements costing in excess of $5,000 without
 Kogut’s consent in violation of the Operating Agreement.
         The court found that the affairs of the company were not being conducted in
 compliance with its Operating Agreement and the company ceased to function in the
 manner provided in its governing documents as a result of dissension and animosity
 among the members. The court further held that the alleged unauthorized actions of
 defendants in violation of the Operating Agreement supported the prejudgment remedy of
 the appointment a receiver. The appointment of a receiver was also found to be necessary
 as the only certain means of ending defendants’ wrongful conduct and preventing further
 unauthorized expenditures of company funds.

§ 17.3.4 Miscellaneous
 Bell v. Walton44

 Bell and Walton were each managers and 50% interest owners in Bangor Metal Works,
 LLC, founded in April 2000. After several months of disagreement over the management
 of the company, Bell discontinued his full-time employment with the company in
 September 2001, and the parties were unable to negotiate a buyout of Bell’s interest. The
 underlying claims in this suit involve Bell’s allegations that Walton breached his fiduciary

      43
           2004 Conn. Super. LEXIS 3140 (Conn. Super. Oct. 29, 2004).
      44
           861 A.2d 687 (Me. 2004).
duties in failing to account for funds received by the company in March 2003, and
Walton’s counterclaim that Bell had effectively terminated his interest in the company as
of September 2001.
         The court determined that strict compliance with the statutory written notice
requirement was necessary to effectuate a member’s voluntary withdrawal from a limited
liability company. The notice requirement provides a bright line by which members can
determine their responsibilities toward one another. It protects members against false or
unfounded claims of withdrawal, leaves room for members to attempt to informally
resolve differences before resorting to the formal withdrawal process, and ensures that the
remaining members have the opportunity to notify creditors that the withdrawing member
can bind the company. The notice requirement cannot be waived, as it is not appropriate to
permit a person to waive a right that also benefits another. As Bell failed to give the
statutorily required written notice, he did not effect a voluntarily withdrawal from Bangor
Metal Works.