A limited partnership without a general partner cannot lawfully continue. That’s why it’s critical that the limited partnership agreement thoughtfully address general partner succession and, when triggered, the agreement’s succession provisions be faithfully followed. Otherwise, the limited partnership is subject to a court order declaring nonjudicial dissolution of the partnership at the behest of the limited partners.
In late 2020, we wrote about a court decision in the hotly contested Weinstein case ordering nonjudicial dissolution of a limited partnership following the involuntary withdrawal of the sole general partner. Weinstein involved a family-owned, realty-holding New York limited partnership. The general partner’s involuntary withdrawal was triggered not by a death event, but by the filing of a dissolution proceeding and the appointment of a receiver, without a subsequent election by the partners to replace the general partner and to continue the partnership.
Last week, in Verdone v Verdone, 2022 WL 454048 [N. Car. Ct. App. Feb. 15, 2022], the North Carolina Court of Appeals affirmed a trial court’s order granting summary judgment declaring nonjudicial dissolution of another family-owned, realty-holding limited partnership formed under Delaware law. The court in Verdone declared that the limited partnership automatically dissolved under the express terms of the partnership agreement when the sole general partner resigned and purported to name an LLC controlled by one of her four children — each of whom was a limited partner — as the new Managing General Partner. The appellate court’s opinion, finding that the purported succession without the consent of all the limited partners was invalid, also features the court’s rejection of the defendant siblings’ contention that the North Carolina court lacked subject matter jurisdiction to consider a claim for dissolution of a Delaware limited partnership.
The Verdone Limited Partnership
In 1997, members of the Verdone family formed the Verdone Limited Partnership (VLP) under the laws of Delaware, with mother Emily as sole general partner and her four adult children as limited partners. Emily, who also held a limited partner interest, contributed the family farm to VLP as its sole significant asset. VLP’s Limited Partnership Agreement (LPA) designated Emily the sole Managing General Partner.
Section 22.1(c) of the LPA (“Dissolution of the Partnership”) provides for dissolution and winding up of VLP upon the resignation of a general partner, among other trigger events. Section 22.2 (“Continuation of Partnership Business”) provides that, notwithstanding the provisions of Section 22.1, VLP’s business shall continue if, within 90 days after a dissolution event under Section 22.1, “all of the Limited Partners agree in writing to continue the business of the Partnership, and, if necessary, to the appointment of one or more persons or entities to be substituted as the general partner.”
In April 2014, at the age of 94, Emily resigned as general partner of VLP and purportedly appointed Tump, LLC — the sole member of which was her son George — the new Managing General Partner. The formal resignation and appointment was signed only by Emily and on Tump’s behalf by George. Shortly afterward, a majority interest of the partners (Emily, George, and Emily’s daughter Catherine) executed an amendment to the LPA with a backdated effective date of January 1, 2014, providing that, in the event Emily died, resigned, or became incompetent, a majority interest of limited partners could appoint a new Managing General Partner if Emily did not do so herself within 60 days.
The other two limited partners — Emily’s son James and daughter Elysa — did not sign the amendment, although it should be noted that Section 26 of the LPA permits amendment by a majority in interest of the limited partners subject to certain immaterial exceptions specified in Section 27.
James Sues for Nonjudicial Dissolution
Emily died in March 2018. In January 2019, James Verdone filed a complaint in North Carolina Superior Court seeking, along with other claims not discussed in this post, a declaratory judgment that VLP dissolved pursuant to LPA Section 22.1(c) upon Emily’s resignation in April 2014.
After discovery both sides moved for summary judgment. In July 2020, the trial court entered an order granting James’ summary judgment motion and commanding that VLP “be wound-up in a reasonable time and subsequently terminated in accordance with Sections 22 and 23 of the [LPA].” George, Tump, and Catherine appealed.
The Court of Appeals Affirms
Their appeal initially challenged the court’s subject matter jurisdiction, arguing that § 17-111 of Delaware’s Partnership Act confers upon the Delaware Chancy Court exclusive jurisdiction over the dissolution of Delaware limited partnerships. The Court of Appeals gave the argument short shrift, pointing out that § 17-111 merely provides that any action to enforce the provisions of a partnership agreement “may be brought in the Court of Chancery” — not must be brought. The appellants’ brief also argued that under North Carolina precedent involving judicial dissolution claims, the courts of that state lack subject matter jurisdiction over claims to dissolve foreign business entities. The Court of Appeals’ opinion does not address that argument but obviously rejected it, presumably because nonjudicial dissolution turns on enforcement of the partnership agreement, as James argued in his appellate brief.
On the merits, the appellants argued that Section 19.7 of the LPA, which gave Emily the ability to appoint appoint a new Managing General Partner if she “shall die, become incompetent . . ., resign as Managing General Partner or cease for any reason to be a General Partner, [she] shall have the right to appoint a new Managing General Partner,” contemplated VLP surviving her resignation as general partner, directly contradicting Section 21.1(c). “Were this true,” the Court speculated, “the Agreement’s terms would be rendered ambiguous.”
However, the Court did not find it true, emphasizing the LPA’s linkage of the succession of General Partner and Managing General Partner and finding fatal to the appeal Emily’s failure to comply with the LPA’s provision for appointment of a successor General Partner:
Defendants ignore that the Agreement provides for limited circumstances under which a general partner may transfer their interest. Section 16 provides means by which a general partner may wholly transfer their interest to a successor general partner. Read in conjunction with Section 16, Section 19.7 simply provided Emily, the original Managing General Partner of VLP, the ability to pass that mantle to a transferee general partner under Section 16. In other words, if Emily had transferred her general partner status to a new person or entity in compliance with Section 16, Section 19.7 would have also enabled her to appoint the transferee general partner the new Managing General Partner, as she would have “cease[d]. . . to be a [g]eneral [p]artner” under Section 19.7 in completing the Section 16 transfer. . . . .
Here, the plain, unambiguous command of Section 22.1(c) dictates that VLP dissolved upon Emily’s resignation as general partner, effective 1 April 2014, regardless of her purportedly appointing Tump the new Managing General Partner. There is no record of her properly transferring her general partner status to Tump pursuant to Section 16 of the Agreement; instead, she purported to “resign as [g]eneral [p]artner and appoint Tump. . . as the successor [g]eneral [p]artner” under Section 19.7. Section 19.7 granted Emily no such power, as general partner and Managing General Partner are separate offices under the Agreement.
The appellants’ alternatively argued that the default rules in Sections 17-801(3) and 17-806 of the Delaware Partnership Act control whether VLP had dissolved, either preventing or revoking dissolution. The Court of Appeals disagreed, finding that the default rules were displaced by the LPA and, even if applicable, that neither statute directs revocation of VLP’s dissolution under Section 22.1(c).
Finally, the Court of Appeals also rejected appellants’ several affirmative defenses including the argument that James waived the right to seek nonjudicial dissolution by waiting more than four years after Emily’s resignation as general partner before arguing VLP had dissolved. “Here,” the Court concluded, “Plaintiff could not have waived the dissolution of VLP, as the ongoing existence of VLP was not Plaintiff’s personal right, nor did the dissolution of VLP result from the invocation of Plaintiff’s right; rather, it occurred as a condition of the Agreement that formed VLP.”
All in the Family
We’ve seen cases like Verdone many times before, involving fights over control and money among next generation owners of the family business. More often than not, tensions can erupt into litigation as relations become more distant and interests diverge between those working in the business and those not. The Verdone opinion doesn’t tell us if that was the case with the Verdone siblings and the family farm owned by VLP.
Other aspects of Verdone fall into a familiar pattern. For one, as in Verdone where Emily resigned in 2014, died in 2018, and James sued in 2019, we often see the siblings keeping the gloves on until after the passing of one or the other or both parents. Whether that’s out of consideration for one’s elders, or because the living parent is siding with one or the other sibling faction, or something else, we outsiders can only guess.
The more consequential phenomenon we see in Verdone and in many other instances involving family-owned enterprises is the tendency on the part of the family faction that has de facto control to ignore the niceties of the governing company agreement, or with the help of lawyers to push those niceties to the outer limits and beyond, perhaps on the assumption that the disadvantaged family members will not convert their grievances to litigation. (Note that sibling Elysa Verdone, who along with James did not approve the Amendment to the LPA, nonetheless did not join her brother James as plaintiff in the lawsuit.)
Finally, for some years we’ve been experiencing more and more business divorce litigation involving family-owned businesses, which I expect to continue as aging baby boomers die, retire, or otherwise pass the business baton to the next generation.