The Importance of Sharing Profits and Losses When Claiming Breach of an Oral Partnership and Pleading Fraud with Particularity

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Posted on: Dec 5 2022

A partnership is an association of two or more persons to carry on as co-owners of a business for profit.¹ The formation of a partnership requires a shared purpose and knowing mutual assent by all parties to the partnership. Indeed, “[n]o person can become a member of a partnership without the consent of all the partners.”²

When there is no written partnership agreement between the parties, as was the case in Velez v. Mitchell, 2022 N.Y. Slip Op. 06877 (1st Dept. Dec. 1, 2022) (here), the court must determine whether a partnership in fact existed from the conduct, intention, and relationship between the parties.³ To make this determination, the courts look at factors such as “the intent of the parties, whether the parties shared joint control in the management of the business, whether the parties shared profits and losses and the existence of capital contribution”.⁴ Of these factors, it is “[t]he requirement that the parties have agreed to share in the profits and losses,” that is “an indispensable essential of a contract of partnership ….”⁵ The party claiming the existence of an oral partnership “bears the burden of proving the indicia of such a relationship.”⁶

Velez arose out of an alleged oral agreement to form a partnership.

According to plaintiff, “[i]n 2009, Plaintiff was approached by Defendants … to form what would become the Ultimate Rap League” (“URL”). Plaintiff alleged that on October 26, 2009, URL began its operations as a New York general partnership with each of the parties as partners. The complaint did not allege a date or specific statement, or surrounding circumstances regarding the alleged oral agreement. Plaintiff did not have a written partnership agreement with defendants.

Plaintiff’s role in the partnership was to acquire the talent for URL events, including, but not limited, to recruiting rappers.

The complaint alleged that Plaintiff used out of pocket funds to cover URL expenses, such as a hotel room or a flight for talent, related to an event. Importantly, plaintiff alleged that he “would share profits with Defendants, when made available, from some of the URL events, more specifically, “Born Legacy” and “Proving Grounds” events. Plaintiff allegedly received profits in cash.

In addition to not having a partnership agreement, plaintiff “never received a contract, in writing, for the … services that he was providing to the Ultimate Rap League or a written employment agreement from the Ultimate Rap League.” Nevertheless, plaintiff maintained that the parties would not only help with the production but split all profits equally.

Plaintiff alleged that “after more than ten years” of being a partner, in April 2020, URL issued a press release on various social media platforms, saying that it was dissolving its relationship with plaintiff. Thereafter, plaintiff sent a formal demand for an inspection of URL’s books and records and a demand for an accounting of URL’s financial information from 2009 to the present. Plaintiff alleged that defendants, through their counsel, denied his request.

Plaintiff brought suit, alleging 16 causes of action, including misrepresentation, breach of fiduciary duty and breach of an oral partnership agreement. In essence, plaintiff alleged that he was a partner in URL and that URL ended its relationship with plaintiff without offering to buy out plaintiff’s membership interest. Plaintiff also alleged that he was cut out of a lucrative financial deal between URL and non-party Caffeine, Inc. to supply battle rap content on Caffeine’s social broadcasting platform.

Defendants moved to dismiss.

The motion court held that the complaint failed to allege the existence of a partnership agreement. Addressing the requirement that the parties share in the entity’s profits and losses, the motion court found that plaintiff failed to allege that he was responsible for URL’s losses.

The Complaint alleges that Plaintiff []would share profits, when made available, from some of the URL events, more specifically, “Born Legacy” and “Proving Grounds” events and received these alleged profits in cash. The Complaint also alleges that Plaintiff and Defendants “shared losses on an equal basis” but alleges no facts or specific instances that would support this allegation. As stated above, conclusory allegations need not be taken as true. The only expenses (which are distinct from “losses”) referenced in the Complaint were reimbursed. Additionally, the Complaint does not allege that Plaintiff ever contributed capital to URL.

The motion court sustained plaintiff’s breach of fiduciary duty claim.⁷ The motion court found that plaintiff “had a close relationship with the individual defendants and worked with them on what appears to be a near-daily basis for a decade.” That relationship, and the collaborative efforts between the parties “that went into planning, promoting and executing a decade’s worth of live events”, said the motion court, sufficed to state a claim.⁸

The motion court found that the facts before it were “very similar to the facts” it had “analyzed in Pai v. Blue Man Group Pub. LLC, 2016 WL 5468234, aff’d, 151 A.D.3d 456 (1st Dept. 2017).” In Pai, as in Velez, explained the motion court, the plaintiff “alleged that he had made significant creative contributions to an entertainment group, only to be left in the dark regarding the group’s finances and cut out of a more lucrative financial arrangement. This Court sustained Pai’s breach of fiduciary duty claims based on the nature of the close personal and professional relationship between plaintiff and defendants, at the pleading stage, except to the extent they were barred by the statute of limitations.” “The same result”, concluded the motion court, was “appropriate here”.

Finally, the motion court dismissed plaintiff’s misrepresentation and negligent misrepresentation claims because plaintiff failed to identify any false statement allegedly made by defendants and otherwise failed to satisfy the particularity requirement of CPLR § 3016(b). In the complaint, plaintiff alleged, inter alia, that “Defendants released false statements to third parties that Plaintiff was fired as an employee and no longer involved and doing business on behalf of the Ultimate Rap League”. Looking at the press release, however, the motion court found that the language used was not false:

The statement does not use the term “fired” or “employee” and instead states only that URL had decided to “discontinue [its] professional relationship” with Plaintiff at that time. This statement is not false. Regardless of the form of Plaintiff’s professional relationship with URL, it was not a false statement to say that it had been “discontinued” as of April 28, 2020.

As to the negligent misrepresentation claim, the motion court found that plaintiff never alleged any specific statement or the surrounding circumstances giving rise to this claim. “In fact”, noted the motion court, “the only statements that Plaintiff cites using the term ‘partner’ (and it appears in the colloquial rather than legal sense) are a question by a third party and a statement by Plaintiff”. “The Complaint does not include any statements by Defendants indicating that Defendants told or otherwise represented to Plaintiff they were involved in a partnership or joint venture”, said the motion court.

Shortly after the motion court issued its decision and order, plaintiff filed an amended complaint.⁹ The amended complaint largely incorporated the causes of action that were previously dismissed. Defendants moved to dismiss the amended complaint. The motion court granted the motion to “the extent of dismissing the replead[ed] causes of action and the new cause of action for a constructive trust”.

Plaintiff appealed.

The Appellate Division, First Department unanimously affirmed the motion court’s order.

The Court found that the “new allegations of an oral partnership agreement [were] effectively the same as the ones originally pleaded, and thus [did] not remedy the pleading deficiencies that Supreme Court identified in its March 23, 2021 order on the motion to dismiss the original complaint”.¹⁰ The Court explained that “Plaintiff’s failure to adequately plead that he and the individual defendants, his alleged partners, shared the burden of the losses from defendant Ultimate Rap League LLC (URL) [was] fatal to the claim of a partnership agreement, as a mutual promise to share profits and losses is an ‘indispensable’ element of that claim”.¹¹

The Court rejected plaintiff’s contentions that the amended complaint “adequately pleaded a partnership claim by alleging that he and defendants ‘not only agreed to share profits and losses equally, but did so,’ and by alleging ‘specific events whereby the parties shared in profits and losses’”.¹² The Court found that the paragraphs to which plaintiff cited were conclusory and fell “short” of showing an agreement to share in the entity’s profits and losses:

The paragraphs of the amended complaint he cites, to the extent they mention losses, do not allege an agreement for the sharing of losses. Rather, the amended complaint merely alleges, in a manner as conclusory as in the original complaint, that the parties shared profits and losses on an equal basis. These allegations fall short.¹³

The Court also held that “Defendants … established their entitlement to dismissal of the causes of action for misrepresentation (counts two and three), as plaintiff still has not pleaded with adequate specificity the statements from which those claims arise”.¹⁴

The claims arise from defendants’ alleged misrepresentations that plaintiff was a URL partner, yet a review of the amended complaint shows that plaintiff still has not shown what the precise statements were, or when and by whom they were made, but continues to include largely conclusory allegations as to that issue. To the extent specific instances are cited, they concern usage of the word “partner” or “partners” by third parties or by plaintiff himself.¹⁵

[Ed. Note: in prior articles, we discussed the need to plead the “who, what, where, when and how” of the alleged fraud. See, e.g., here, here and here.]

Footnotes

Partnership Law § 10.
Partnership Law § 40(7).
Fasolo v. Scarafile, 120 A.D.3d 929, 930 (4th Dept. 2014).
Moses v. Savedoff, 96 A.D.3d 466, 470 (1st Dept. 2012).
Kidz Cloz, Inc. v. Officially For Kids, Inc., 320 F. Supp. 2d 164, 171 (S.D.N.Y. 2004) (quoting, Steinbeck v. Gerosa, 4 N.Y.2d 302, 317 (1958)).
F & K Supply, Inc. v. Willowbrook Dev. Co., 304 A.D.2d 918, 920 (3d Dept. 2003).
A claim for breach of fiduciary exists when a plaintiff alleges (1) the existence of a fiduciary duty owed, (2) a breach of that duty, and (3) resulting damages. Jones v. Voskresenskaya, 125 A.D.3d 532, 533 (4th Dept. 2015). Whether a fiduciary duty exists is a fact-dependent analysis.
Citing, St. John’s Univ. v. Bolton, 757 F. Supp. 2d 144, 166 (E.D.N.Y., 2010) (“a fiduciary relationship embraces not only those the law has long adopted … but also more informal relationships where it can be readily seen that one party reasonably trusted another”).
Defendants maintained that plaintiff was required to seek leave of court in order to file the amended complaint.
Slip Op. at *1. The Court made a point of noting that plaintiff did not appeal the first order. Id. (citing, Draughn v. Roker, 193 A.D.3d 565, 566 (1st Dept. 2021)).
Id. (citing, Lebedev v. Blavatnik, 193 A.D.3d 175, 185-186 (1st Dept. 2021); Slabakis v. Schik, 164 A.D.3d 454, 455 (1st Dept. 2018), lv. denied, 32 N.Y.3d 912 (2018); and Moses v. Savedoff, 96 A.D.3d 466, 470 (1st Dept. 2012)).
Id.
Id. (citing, Slabakis, 164 A.D.3d at 455).
Id. at *1-*2 (citing, CPLR § 3016(b); CIFG Assur. N. Am., Inc. v. JP Morgan Sec. LLC, 146 A.D.3d 60, 63 (1st Dept. 2016); and Manda Intl. Corp. v. Yager, 139 A.D.3d 594, 594 (1st Dept. 2016)).
Id. at *2.

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.