SW Legal studies in Business

Complaining Limited Partners Must Follow Appraisal Procedures, Not Sue for Damages
Description

New York high court held that limited partners who believed the general partner was cheating them had to follow the state’s Partnership Law by seeking an appraisal. They could not simply sue for damages and rescission of the original contract and investment. An appraisal was required before other claims could be raised.

Topic Business Organization
Key Words

Limited Partnership; Fair Market Value; Appraisal

C A S E   S U M M A R Y
Facts

Beautiful Village Associates (BVA) was a limited partnership that acquired and managed residential real estate. The general partner was NHP (owned by AIMCO). It sold 33 units of limited partnership interests in BVA to 26 individuals for $78,000 each. BVA became overloaded with debt and owed $1.5 million. NHP, rather than foreclose, merged BVA into a new limited partnership owned by AIMCO. BVA limited partners were offered $100 for their shares by AIMCO. NHP told the partners that if they did not accept the payment, BVA would likely go into bankruptcy. Appleton contested the move, contending the partners were being cheated of real value in BVA. Appleton claimed breach of fiduciary duty, breach of contract, and misrepresentation. NHP asked the district court to dismiss the suit, but it would not. That decision was appealed and reversed. The reversal was appealed by Appleton to the New York high court.

Decision

Affirmed. New York’s Partnership Law gives limited partners who object to an action such as this one, a merger of a partnership with another entity, the right to receive the fair market value of their partnership interests. It does not provide the right to demand that the partnership be abolished and funds returned, nor does it give grounds for money damages. The proper remedy is to seek an appraisal proceeding under the Partnership Law. There is no evidence that NHP violated the partnership agreement or improperly notified limited partners of the steps being taken. General partners have a fiduciary obligation to limited partners, but a breach of that would be established by an appraisal process, which could reveal improper actions.

Citation Appleton Acquisition, LLC v. National Housing Partnership, 886 N.E.2d 144 (Ct. App., NY, 2008)

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