Partnership Agreement: Who Reads Those Things Anyway?

Posted by William J. Piercy on

Kellett v. Kumar, 281 Ga. App. 120 (2006).  This case highlights the importance of complying with the express terms of a partnership agreement.  In 1980, Surender Kumar, Veeni Kumar, and Ellen Troup (collectively, the “Limited Partners”) invested and became limited partners in Westbury Associates, Limited Partnership (“Westbury”).  The Limited Partners together owned one third of Westbury.  The remaining two-thirds of Westbury were owned by its general partners, Samuel and Stiles Kellett, Jr. (collectively, the “General Partners”).

Pursuant to this enterprise, the General Partners and the Limited Partners entered into a limited partnership agreement (the “LP Agreement”) that spelled out the rights and obligations of all the Partners.  One of the provisions of the LP Agreement required the consent of the Limited Partners before the General Partners could sell or transfer their partnership interest to a third party.

For its part, Westbury owned and operated a nursing home in Texas.  Over the next fourteen years, Westbury was successful and highly profitable for all the Partners.

In an effort to consolidate their investment holdings into one entity, the General Partners incorporated Convalescent Services, Inc. (“CSI”).  In April 1994, the General Partners wrote to the Limited Partners as required by the LP Agreement and solicited their consent to the General Partners’ anticipated transfer of their interest in Westbury to CSI.  The Limited Partners did not respond to this request.

Undeterred, the General Partners transferred their two-thirds interests in Westbury to CSI in September 1994.  In December 1994, the General Partners again solicited the consent of the Limited Partners for this transfer.  This time, counsel for the Limited Partners wrote back advising that they would not consent to the transfer of the General Partners’ Westbury interest to CSI or to any other entity.  Notwithstanding this rebuke, CSI entered into a merger agreement with Mariner Health Group (“Mariner”) in January 1995.  Pursuant to this transaction, CSI transferred the two-thirds ownership of Westbury to Mariner.

Shortly thereafter, the Limited Partners filed suit against the General Partners and Mariner for breach of the LP Agreement, breach of fiduciary duty and tortious interference with contractual relations.  The General Partners moved for summary judgment alleging that the Limited Partners had not been damaged by the substitution of Mariner as the general partner of Westbury.  The Limited Partners also moved for partial summary judgment as to the fact that the partnership was terminated as of September 1994 when the Kelletts transferred their Westbury interest to CSI.  The trial court denied the General Partners’ motion but granted that of Limited Partners.

On the eve of trial, Mariner filed for bankruptcy protection and the case was stayed for three years.  Shortly after Mariner emerged from bankruptcy, it settled with the Limited Partners and was dismissed from the case.

The case was then tried before a jury, which awarded the Limited Partners $1.6 million dollars in damages from the General Partners for their breach of the LP Agreement.  The General Partners appealed on the grounds that the damages were excessive among other grounds.

In affirming the jury’s verdict and resulting judgment, the Court of Appeals found sufficient facts and law to support it.  First, the Court noted that, according to paragraph 23 of the LP Agreement,

[blockquote][u]pon the termination of the Partnership, its affairs shall be concluded in the following manner: (a) The general partner shall proceed to the liquidation of the Partnership and the proceeds of such liquidation shall be applied, and distributed in the following order or priority … (3) to the Partners as provided” elsewhere in the LP Agreement.[/blockquote]

Given the claim that the partnership should have been dissolved and liquidated at the time the General Partners withdrew, the Limited Partners’ expert testified that damages could be calculated by taking the value of their one-third interest in the partnership and estimating the increase in that value if invested in a manner similar to plaintiffs’ other investments. Using this method of calculation, the expert estimated Limited Partners’ damages to be approximately $4.1 million.  Based on this evidence alone, the $1.6 million jury award was well “within the range of damages established by the evidence …”