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Commercial Division Holds that Representatives of a Deceased Limited Partner’s Estate Do Not Have Standing to Maintain a Derivative Lawsuit

A recent Commercial Division decision demonstrates the ability of partnership agreement provisions to limit the executors of the plaintiff-limited-partner from continuing a derivative lawsuit after that partner’s death.  In Weinstein v. RAS Prop. Mgmt. LLC, 2020 NY Slip Op 30311(U) (Sup. Ct., N.Y. Cnty. Feb.5, 2020), Justice Andrew Borrok denied a motion to substitute a deceased plaintiff with the plaintiff’s executors  The court reasoned that the plaintiff’s executors lacked standing under the applicable partnership agreement.

The case involved the Ninety-Five Madison Company LP (“NFMC”), a New York limited partnership that owns the Emmett Building, located at 95 Madison Avenue in New York City. RAS Property Management LLC was the general partner and Lois Weinstein was the limited partner.  The sole manager of RAS was Rita A. Sklar, who was also Ms. Weinstein’s half-sister.

On June 26, 2019, Ms. Weinstein brought suit in the Commercial Division seeking, inter alia, judicial dissolution of the partnership, the appointment of a receiver, and the sale of the Emmett Building.  Ms. Weinstein passed away a few months later on November 25, 2019. 

On January 23, 2020, Ms. Weinstein’s counsel moved to substitute the deceased with her executors as parties in the case.  Counsel for the defendants[1] opposed the motion, arguing that: 1) the substitution was barred under the Ninety-Five Madison Partnership Agreement (“Partnership Agreement”), 2) the executors lacked standing under Section 121-1002 of the New York Revised Limited Partnership Act, and/or 3) the executors were “not acting in the best interest of the estate or the residuary beneficiaries.”  The Court denied the motion for substitution, agreeing with the defendants’ arguments on the first and, to a degree, second points.

The Court began by walking through the relevant provisions of the Partnership Agreement.  Under Section 8.2 of the Partnership Agreement, in the event of the death of a partner, “the executor. . . shall have the rights of such Partner subject to the provisions of this Agreement. Such successor in interest shall not become a Substitute Partner except upon compliance with the provisions of Section 8.3 and 8.4 hereof.”  Section 8.3 in turn provided that “[n]o Partner shall have any right to substitute an Assignee as a Partner in his place without the prior written permission of the other Partner.  Any purported substitution of an Assignee as a Partner shall be void ab initio and shall not bind the Partnership.”  Given that the defendants stated in their opposition to the substitution motion that the executors “do not have and will not get” written consent from the relevant parties (NYSCEF Doc. No. 109), the executors were not substitute partners under the Partnership Agreement—even though they had received the equity interests associated with being a partner through their appointment as executors under Section 8.2 the Partnership Agreement.

After going through the relevant provisions in the Partnership Agreement, the Commercial Division then analyzed two cases cited by the defendants, Pappas v. 38-40 LLC, 2018 NY Slip Op 30329(U) (Sup. Ct. N.Y. Cnty. Feb. 22, 2018) and Salter v. Columbia Concerts, Inc., 77 N.Y.S.2d 703 (Sup. Ct. 1948), as well as a case cited in Pappas, i.e., Estate of Calderwood v. ACE Grp. Int'l LLC, 67 N.Y.S.3d 589 (1st Dep’t 2017). 

The Court found that the facts at hand were similar to those in Pappas and Calderwood—cases where the courts declined to allow representatives of estates to step into the shoes of the deceased members.  In Pappas, Commercial Division Justice Saliann Scarpulla denied a preliminary injunction motion and dismissed the derivative claims brought by the personal representative of a deceased member of the defendant, 38-40 LLC, a New York LLC.  The LLC agreement in Pappas gave the representative of the estate some rights—i.e., to allocations and distributions—but it did not automatically make the representative a member of the LLC.  The representative failed to provide any evidence that she had been admitted as a member of the LLC.  Therefore, the representative could not comply with the New York LLC law governing derivative claims, which requires that the plaintiff be a member of the LLC at the time of the alleged wrong, commencement of the lawsuit, and through the litigation. 

In Calderwood, the First Department affirmed a ruling by Commercial Division Justice Shirley Werner Kornreich (ret.), dismissing claims by the representative of a deceased member of the ACE Group International LLC, a Delaware LLC.  The estate argued that it stepped into the shoes of the deceased member upon his death; however, the relevant LLC agreement only gave the estate the rights to distributions and not a position as a member of the LLC. 

Justice Borrok also found that the facts at issue were meaningfully different from those in Salter—where the court allowed the executor of an estate to continue a shareholder derivative suit initiated by the decedent.  Both New York Business Corporation Law and New York Partnership Law provide standing in derivative suits for individuals whose corporate shares, N.Y. Bus. Corp. Law § 626, or status as a limited partner, N.Y. P'ship Law § 121-1002, “devolved upon him by operation of law.”  In Salter, the court found that the executor of the estate—to whom the decedent plaintiff had bequeathed her shares via her will—had standing to continue the suit, as the shares devolved upon her by operation of law.  The Court noted that while the executor in Salter obtained the economic rights of a shareholder and a successor shareholder by operation of law—without further action by the other shareholders or corporation—the executrixes in Weinstein only obtained equity interests in the limited partnership by operation of law “without becoming a substitute limited partner” due to the terms of the Partnership Agreement.

Triangulating between the three cases discussed above, the Commercial Division reasoned that “the principles underlying the distinction between Salter, on the one hand, and Pappas and Estate of Calderwood, on the other, compel the result” that the executors lacked standing to maintain the lawsuit.

 

[1] RAS Property Management, LLC, Rita A. Sklar—individually and as Trustee for trusts that contained 49% of the shares in the partnership—and NFMC LP. See NYSCEF Doc. No. 109.