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Appellate Division Holds that Arbitrator Has Power to Dissolve Partnership

In Matter of Capital Enterprises Co. v. Dworman,[1] the Appellate Division, the First Department held that an arbitrator has broad discretion to order the dissolution of a New York general partnership, so long as the issue of dissolution was within the scope of the arbitration clause and the question of whether to dissolve the partnership was properly before the arbitrator.  In so doing, the First Department affirmed an order issued by Commercial Division Justice Jennifer G. Schecter which confirmed an arbitration award that had ordered a dissolution of a partnership.

Capital Enterprises concerned a New York general partnership between two equal partners, Alvin Dworman and Michael Palin.  The partnership owned three residential buildings in Manhattan, and was governed by a partnership agreement that limited the circumstances under which dissolution of the partnership could occur.  The partnership agreement contained an arbitration clause requiring arbitration of “any controversy or dispute arising out of or relating to this Agreement.” 

In 2014, Dworman and Palin decided to dissolve the partnership, but could not agree on exactly how to do so.  Palin (acting through the entity Capital Enterprises) then served Dworman with a demand to arbitrate and filed a petition in New York Supreme Court to compel arbitration before former Commercial Division Justice Shirley Werner Kornreich, which was granted.[2]  Notably, Judge Kornreich ruled orally and again on reargument that the arbitrator would not have the power to dissolve the partnership, but this ruling was reversed by the First Department which granted the petition to arbitrate the dissolution request.[3] 

After over a year of arbitration, the arbitrator, retired Commercial Division Justice Bernard J. Fried, dissolved the partnership pursuant to section 63 of New York’s Partnership Law, and appointed a “Special Liquidator” to sell the Partnership’s properties.[4]  Interestingly, Judge Fried noted that the parties “disagree on just about everything” but “they do agree on the need for dissolution of the Partnership, although for different reasons and on different grounds.”[5]  Judge Fried granted dissolution based on Section 63 of the Partnership Law where, inter alia, “circumstances render a dissolution equitable.”[6]

In January 2019, the Commercial Division confirmed the award and denied Palin’s motion to vacate in May.[7]  Palin appealed to the First Department, which affirmed.

The First Department held that “[t]he arbitrator did not exceed his authority in ordering the dissolution of the parties' partnership or in the manner in which he ordered the dissolution.”[8]  The First Department reasoned that the issue of dissolving the partnership was “within the scope of the arbitration clause, and was before the arbitrator in the statement of claim and throughout the hearing, and the arbitrator had broad discretion to fashion the remedy.”[9]  The First Department also concluded that the remedy was appropriate because it “was not an improper punitive award” and was “fair to all parties.”[10]

Capital Enterprises shows that a broad arbitration clause in a partnership agreement can potentially vest the arbitrators with wide discretion to order the dissolution of a general partnership and to shape the remedies and procedures for doing so, including a liquidation of partnership assets, at least in arbitrations where dissolution of the partnership is at issue.

 

[1] No. 653961/16, 2019 BL 208447 (App. Div. 1st Dep’t June 6, 2019).

[2] See Matter of Capital Enters., Co. v. Dworman, No. 653961/16, NYSCEF Nos. 1-2, 82 (N.Y. Sup. Ct.).

[3] Id. Nos. 82, 85, 99, 105.

[4] Id. Nos. 164-65.

[5] Id. No. 164 at 11.

[6] N.Y. P’ship Law § 63(1)(f).  Judge Fried also awarded $31.4 million in damages plus prejudgment interest against the for “dishonest and wrongful conduct.”  Matter of Capital Enters., No. 653961/16, NYSCEF No. 164 at 17, 61, 63.

[7] Id. Nos. 220, 280.

[8] Matter of Capital Enters., 2019 BL 208447, at *1.

[9] Id.

[10] Id.  The First Department also rejected Palin’s and other nonparty appellants’ other attacks on the arbitration award.  Id. at *1-2.