Opinion
2004-207.
Decided May 5, 2010.
Richard A. Harlem, Esq., Oneonta, NY, Attorney for Plaintiff.
Michael B. Mendelson, Esq., Delhi, NY, Attorney for Defendants.
In a prior order in this matter, this Court directed a partition of the real property involved in this matter and that Arnold Banker, Jr. (hereafter Arnold) file an accounting as majority partner of Peaceful Valley Campground. The accounting was filed on May 8, 2009, and objections to the account were filed on or about June 16, 2009 by Carl, Glenn and Louis Banker, brothers of Arnold and the other partners in the partnership. A trial was held for three days on March 22 through 24, 2010. This decision is only on the partnership accounting.
FACTS
Peaceful Valley was originally owned and operated by the four Banker brothers' father and mother, Arnold Sr. and Walburga Banker. Peaceful Valley consists of approximately 330 acres with a mile of frontage on the Delaware River. It is operated as a campground, renting both cabins and RV sites with hook-ups and utilities and also as a gravel pit.
Arnold Sr. died without a will on March 29, 1997. In the administration proceedings of his estate, it was determined that Walburga's intestate share was 56.552% and each brother's share was 11.8612%. On February 25, 1999, Walburga sold her share by deed to Arnold Jr., in exchange for a self-cancelling installment note, giving him a 68.4164% interest in the real estate and business operated as Peaceful Valley. Even after the death of her husband and the transfer of her interest to Arnold Jr., Walburga continued to work at the campground greeting guests, cleaning bathrooms, and working in the camp store.
There is no written partnership agreement for Peaceful Valley. Nonetheless, partnership tax returns have been filed each year and each brother has received a schedule K-1 showing his share of distributable partnership income.
Since becoming majority partner in 1999, Arnold Jr. has operated Peaceful Valley and his brothers have not worked in its business. Arnold has paid himself a salary from the partnership, $24,000 for two years and $30,000 per year since. Arnold's three brothers, as minority partners, did not agree to this payment.
Arnold Jr. now resides in the house on the campground formerly occupied by his mother and father. Walburga occupied the house until April, 2003, when she entered a nursing home. She died May 22, 2005. The house contains an office for the campground and a basement garage used to store and maintain vehicles used about the campground.
During the camping season from April to October, Arnold Jr. is available 24 hours per day in the event of a breakdown of the water, sewer or electric facilities provided to campers or other accident or emergency, for campground security, and also to take phone calls for reservations and other camp business. From October to April, he does maintenance and repair work and also campground bookkeeping and other office work and takes reservations for the following season.
There are two telephone lines in the house used to receive reservations for camps, to contact employees, order supplies and other camp business and which Arnold also uses personally. The taxes, utility and telephone bills, insurance and fuel bills at the house are paid out of Peaceful Valley funds.
Before he died, Arnold Sr. intended to give each of his four sons a parcel of real property of about five acres from the campground's property. These parcels were staked out and surveyed before he died, but no deeds were given to the four sons by Arnold Sr and Walburga. In December, 2003, Louis, as administrator of Arnold Sr.'s estate did execute and deliver deeds, which were recorded by Louis, Carl Glenn. Arnold refused to record the deed given to him. This Court determined in its prior decision herein, dated January 26, 2009, that such action was a breach of fiduciary duty and voided the deeds. Nevertheless, the designated parcels for each brother have been given separate county tax map numbers and separate tax bills have been issued.
All the brothers have occupied and used their separate parcels. Carl, Louis and Glenn reside on their parcels in a house or trailer, they operate businesses and park and perform repairs on their vehicles on their designated parcels. Each of the brothers has paid the taxes on his separate parcel since about 2004, after the deeds were recorded in 2003 and separate tax map numbers were issued. Arnold Jr.'s parcel has about 15 camp sites on it. Arnold Jr. has collected personally the rent from the camp sites on his designated parcel since 2005.
Arnold Jr. also owns 100% of Shinhopple Sand Gravel, Inc. Previously he operated a similar business as a proprietorship in the name of Arnold L. Banker. Both entities took gravel from the gravel pit at Peaceful Valley for delivery to their customers. Before he died, Arnold Sr. established a price of $1.50 per cubic yard for gravel, which Arnold Jr.'s entities have continued to pay to the present.
There has been extensive flood damage to the Peaceful Valley property. Repairs were performed by Arnold either personally with campground equipment or with equipment and labor supplied by Shinhopple Sand Gravel. The total amount paid to Shinhopple for this work over the years has been $150,321.20.
DISCUSSION
The objections to the accounting raise five main issues: 1) payment of Arnold Banker's personal expenses from partnership funds, 2) payment of taxes, insurance, repairs, and utility bills on the house, office and garage occupied by Arnold, 3) payment of a salary to Arnold from the partnership, 4) payments to Arnold's Shinhopple business for work at the campground, and 5)Arnold keeping the rent from 15 campsites on the partnership property designated for him. It is claimed that these payments to Arnold are a breach of fiduciary duty owed to the partnership and a conflict of interest.
The personal expenses of Arnold alleged to have been paid from the partnership include meals and lodging, a cruise, a golf cart and truck, furniture and fixtures, and sunglasses. Arnold testified in detail as to each of these expenses. The meals and lodging were trips related to campground business. The golf cart was for use by Walburga to get around the campground to perform her work. The furniture and fixtures were actually two additional cabins for the campground. The truck was purchased for use at the campground hauling materials and supplies and also canoes the camp rents out. The sunglasses were for Arnold's use working around the camp. The cruise was Arnold's honeymoon, but was charged to him personally as part of his salary for the year 2000 (Account pp. 38 47). No evidence or testimony was introduced to contradict Arnold's testimony and explanation and thus the objection to these expenses is denied.
The commingled expenses for taxes, insurance, utilities and repairs covered both the house and trailer sites and cabins on the campground property. The house was occupied by Walburga until 2003 and thereafter by Arnold. The house also held the campground office and a basement garage used to store and repair campground vehicles and equipment. The telephones were used for camp business. It is entirely possible an allocation of these expenses should be made for Arnold's personal use of part of the house and telephones. No evidence or testimony was introduced as to the portion of the house or telephones used by Arnold, nor any evidence as to how to make such an apportionment. Absent such proof, the objection is denied.
The law is clear that a partner is not entitled to be paid a salary or compensation for services rendered in partnership business unless agreed to by the partners. Partnership Law § 40(6); Birnbaum v. Birnbaum, 73 NY2d 461 (1989); Levy v. Leavitt, 257 NY 461 (1931); Posner v. Posner, 280 AD2d 318 (1st Dept., 2001); Levy v. Keslow, 235 AD2d 293 (1st Dept., 1997). There is no written partnership agreement and no proof was introduced that the partners ever agreed to Arnold's salary. Arnold admitted he paid himself a salary.
Arnold argues that a decision by Judge Coccoma denying an injunction at an earlier stage of this matter is the law of the case. This injunction was sought under RPAPL § 211 on the grounds Arnold was committing waste on the real property, which would render ineffectual the judgment that was sought for partition. In particular, he cites a sentence in that decision which reads "a majority owner does not need the consent of a minority owner to act." That statement presumably is based upon Partnership Law § 40(8) which says:
Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners; but no act in contravention of any agreement between the partners may be done rightfully without the consent of all the partners.
The plain meaning of § 40(8) is that a majority partner may carry out transactions in the ordinary course of business of the partnership without the consent of minority partners. However, when there is no written partnership agreement, as is this case, the New York Partnership Law effectively becomes the partnership agreement. Partnership Law § 40(6) provides no partner may receive a salary or compensation. Thus, an act in contravention of § 40(6) requires the consent of all the partners. Partnership Law § 40(8).
Kantor v. Mesibov , 35 AD3d 543 (2d Dept., 2006) holds:
Under the Partnership Law of New York, consent by all the partners was needed to act in contravention of the provision of the partnership agreement which prohibited any partner from receiving compensation for services rendered to the partnership.
No such consent was given by the three minority partners in the Peaceful Valley partnership. No consent having been given, the payment of a salary violated the partnership agreement and the law and must be refunded.
Arnold also argues that Steinberg v. Goodman, 27 NY2d 304 (1970) limits Partnership Law § 40(6) to partnerships where the partners have equal interests. That case was a 4-3 decision by the Court of Appeals in regard to a limited partnership. It is distinguishable and inapplicable to a general partnership such as Peaceful Valley.
Arnold is surcharged for the salary taken without consent. According to the Account, beginning in 2000, he drew $24,000 for two years and $30,000 per year thereafter, each time charged to the partnership on December 31. However, each objecting partner has an interest of 11.8612% and is thus owed that percentage of the salary taken each year plus interest at the statutory rate of 9% per annum for each year since the salary was paid. CPLR § 5004.
For example, for the year ending December 31, 2000, each minority partner shall receive from Arnold 11.8612% x $24,000 = $2,846.69. Interest at 9% would be charged on $2,846.69 each year from December 31, 2000 until paid. For the year ending December 31, 2001, where salary of $30,000 was taken, each partner shall receive from Arnold 11.8612% x $30,000 = $3,567.36 plus interest at 9% per year from December 31, 2001 until paid. The same computation would apply to the salary taken for each year thereafter, plus 9% interest until paid.
In addition, Arnold paid his live-in girlfriend, Linda Romeo, for office work and cleaning $4,508 in 2006, $16,744 in 2007, and $9,660 in 2008. In Birnbaum v. Birnbaum, supra, it was held that a managing partner could not charge the partnership for work performed by his girlfriend (later wife) for work he could have done for the partnership. The work Ms. Romeo performed is the same type of work done by Arnold and could have been done by him. The other partners did not agree to hire Ms. Romeo, nor to the payments made to her. Donati v. Marinelli Const. Co., 247 AD2d 423 (2d Dept., 1998). The unauthorized payments to Ms. Romeo are a breach of fiduciary duty. Arnold is surcharged 11.8612% per partner for the amounts paid Ms. Romeo plus interest at 9% per year from the date of payment to her until payment is made to the partners.
Partnership Law § 43(1) states, "Every partner must account to the partnership for any benefit and hold as trustee for it any profits derived by him without the consent of the other partners from any transactions connected with . . . conduct . . . of the affairs of the partnership." Arnold used his 100% owned business, Shinhopple Sand Gravel, Inc., to perform work on the campground. Arnold testified he acted for both the partnership and Shinhopple in arranging for the work to be done. Such is self-dealing, "placing his personal interests in conflict with those of the partnership." Reiff v. Shifrel, 268 AD2d 514 (2d Dept., 2000).
When self-dealing is found, the other partners are entitled to their share of the profits derived from the transactions. Chipman v. Steinberg, 106 AD2d 343 (1st Dept., 1984); Gluck Co. v. Tankel, 24 Misc 2d 841 (Sup. Ct., New York Co., 1960); Reiff v. Shifrel, supra. Arnold testified that the total amount paid to Shinhopple for such work totaled $150,321.20. He also testified the percentage of profit made was 5%. No evidence was introduced to contradict his testimony in this regard. Arnold is surcharged a total of $7,516.06 ($150,321.20 x 5%). Again, he must pay each other partner 11.8612% of such amount or $891.50. Interest at 9% per annum shall be added from December 31, 2006, when the first payment was made to Shinhopple.
There was also testimony that Shinhopple took gravel from the campground property and sold it to its customers. The price paid for the gravel was $1.50 per cubic yard. Testimony was received from Louis, Glenn and Arnold Banker that this price was set by their father and used since. Arnold did admit on cross-examination Shinhopple received as much as $10 per cubic yard for the gravel delivered. The difference in price was explained as trucking costs to the place of delivery. No evidence was introduced that the $1.50 per cubic yard price was unfair and no evidence was produced as to the profit made on the gravel as opposed to trucking costs or profits. The objection on this ground is denied.
Arnold also testified that, since 2005, he has kept the rent of 15 camp sites located on the parcel of land designated for him by his father. There was testimony each of the other brothers also were designated a parcel and that they have residences on their parcels, operate their businesses on their parcels, store and repair their vehicles on their parcels and park R.V.'s on their parcels. Arnold testified the gross rents he kept were $20,800 for 2006, and $28,000 for 2007 and 2008. However, there was no testimony or proof as to the amount of profit he may have derived from such rentals. Inasmuch as all partners occupied and used the parcels designated for them by their father and absent any proof of the percentage of the rents received by Arnold that is profit, a surcharge for these rental transactions is denied.
Arnold admits that payments on his life insurance policy in the amount of $485 were made improperly from the partnership account. He is surcharged $485 x 11.8612% = $57.53 plus interest at 9% per annum from November 30, 2000 until paid to each other partner.
The issue of the conversion of the furniture and personal property is reserved for future inquest.
Any other objections not discussed herein are denied for lack of proof.
Submit Order on notice in accord with this Decision with costs to Defendants.