Post-Romantic/Real Property Breakup Litigation: Did Incorporation Dissolve Partnership?

This was originally posted on the SGR Blog.

Recent posts on this blog have highlighted the various and complicated disputes arising over failed intimate relationships– after which the formerly loving partners became combative adversaries. And, as a recent case illustrates, the jurisprudential gymnastics are even more complex where an oral joint venture evolves into the corporate form of ownership.

According to the complaint in 1995 and 1996, Kristen Eikenberry and Joseph Lamson entered into a romantic relationship as well as an oral partnership together developing and renovating real estate in New York and New Jersey. The complaint refers to the partnership as EL Partnership. And asserts that Lamson provided all the investment and construction services and Eikenberry supplied “market intelligence” and interior and other designs for the properties.

The partnership proved successful and although the couple never married they had four children together. And, although some of the partnership assets were in the name of only one of the partners, the partnership owned 330 Atlantic Ave Development LLC a Wyoming corporation formed in 2019, Easy Wind LLC, a Delaware corporation formed in 2015, Fairmont Industries Supply, LLC, a Delaware corporation, Fairmont Industries Inc., also known as Fairmont Industries Corp., a New York corporation formed in 2007, HTHP Leasing Inc., a New Jersey corporation formed in 2010, Two Route 17 South LLC, a New Jersey corporation formed in 2013, Birdsong Farm located in Delhi, New York, 297 Pacific Street, Brooklyn, New York, 110 North Atlantic, Beach Haven, New Jersey, 28 Sidney Avenue, Rutherford, New Jersey, and numerous bank accounts held at various institutions.

The relationship between Eikenberry and Lamson deteriorated and, according to the complaint, Lamson essentially deprived Eikenberry of all partnership resources and sought to transfer partnership assets held jointly into accounts beyond the reach of Eikenberry. Attempts at reconciliation failed, and litigation ensued. Eikenberry asserted causes of action for an accounting, breach of fiduciary duty, breach of contract, unjust enrichment, constructive trust, fraudulent conveyance, and dissolution.

Lamson moved to dismiss the lawsuit on the grounds that no partnership ever existed and that, as a matter of law, no such partnership could have been created, even orally, in the manner described in the complaint.

A partnership or joint venture need not be in writing to be enforceable. An oral agreement to form a partnership or joint venture for an indefinite period creates a partnership or joint venture at will. And the existence of an oral agreement is generally a question of fact which cannot be summarily determined on a motion to dismiss.

But a partnership or a joint venture may not operate through a corporate form. And any fiduciary obligations that the partners’ owed one other ceased to exist once they agreed to conduct business as a corporation. The reasoning for the so-called “New York rule” is based upon public policy, namely, it is inconsistent for individuals to treat themselves as partners among themselves but as shareholders to the rest of the world.

But there is an exception to the New York rule where rights pursuant to the joint venture would survive the formation of any corporation by virtue of a covenant or agreement which was intended to survive the merger of the joint venture into the corporate entity. Thus, when the parties to a joint venture agreement, in forming a corporation to carry out one or more of its objectives, intended to reserve certain rights inter sese under their agreement, which do not interfere with or restrict the management of the affairs of the corporation, its exercise of corporate powers, or the rights of third parties doing business with it, those rights being extrinsic to the corporate entity and its operations, such joint venture agreement may be enforced.

A complete merger of a joint venture into corporate form, which legally supplants the venture, does not occur when the parties retain rights under the venture agreement that are not in conflict with the corporation’s functioning. And a partnership can survive a subsequent corporate formation as long as the rights of third parties, like creditors, are not involved and the parties’ rights under the partnership agreement are not in conflict with the corporation’s functioning. But the New York rule has not been qualified to the point of irrelevancy. Rather, a more nuanced analysis by the Court was necessary.

And, in examining the precise situations where the joint venture or partnership survived the corporate formation the following distinction emerged. Where the parties intended to reserve rights under the partnership or joint venture agreement, and such a reservation of rights did not interfere in any way with the management of the corporation or the rights of third parties the joint venture agreement may be enforced. Intent may be gleaned from the actions taken. Consequently, where the individual partners actually abandon the partnership and embrace a corporate structure then the partnership indeed dissolves.

Thus, when the partners themselves actually formed a corporation, or otherwise clearly intended to change the structure of the entity, the partnership necessarily dissolved into such corporation.

However, where the partnership existed and a corporation was created for some purpose, while the partnership remained intact, then the intent of the parties demonstrated that the partnership need not have been dissolved.

And there was nothing that prevented a joint venture from surviving the corporate formation in appropriate circumstances.

Turning to the facts of this case, Eikenberry argued that the corporations formed following the alleged joint venture all operated “under the venture’s umbrella”. According to the complaint, Eikenberry was the sole owner of 330 Atlantic LLC, Easy Wind LLC, and Fairmont Industries Inc. and was the sole managing member of HTHP Leasing LLC. Concerning those entities, the complaint alleged that “the EL Partnership holds its interest in the 330 Atlantic venture through 330 Atlantic LLC and funds the development with EL Partnership funds held in the 330 Atlantic Account”. The complaint did not allege any facts demonstrating the parties intended to maintain a partnership relationship following the incorporation of those entities. Indeed, the complaint did not allege any action taken by the partnership in any meaningful way permitting an allegation the venture survived the incorporation.

The Court could not glean any such intent from the complaint. On the contrary, the facts indicated the joint venture dissolved. First, once the corporations were formed there was nothing left for the partnership to do. Moreover, Eikenberry received shares and membership interests in the corporations evincing a dissolution of the prior joint venture. Essentially, Eikenberry was asserting that an all-encompassing oral agreement was reached which by its very nature survived any further corporate formation to do precisely what the oral agreement proposed to do. Those claims were clearly barred.

However, the complaint also alleged an oral partnership in numerous properties that were allegedly purchased as a partnership. Those included the residences of the couple as well as Bird Song Farm. While Lamson vigorously disputed those contentions, on a motion to dismiss all the allegations were accepted as true. None of those transactions took place in a corporate form. Thus, those claims were based upon an alleged oral partnership. Further discovery was required to explore the nature of the partnership, if any.

All allegations that were based upon any corporate activity were dismissed. And the motion to dismiss all allegations based upon non-corporate activities, namely the purchase, sale, and renovation of various homes including Bird Song Farm, was denied.

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