Levey v. Brownstone Asset Management, LP ( 2014 )

EFiled: Aug 01 2014 02:54PM EDT
Transaction ID 55822659
Case No. 5714-VCL
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
GORDON SCOTT LEVEY, )
)
Plaintiff, )
)
v. ) C.A. No. 5714-VCL
)
BROWNSTONE ASSET )
MANAGEMENT, LP, BROWNSTONE )
INVESTMENT PARTNERS, LLC, )
PINEBANK INVESTMENT )
PARTNERS, LLC, PINEBANK ASSET )
MANAGEMENT, LP, DOUGLAS )
LOWEY, OREN COHEN, and )
BARRETT NAYLOR, )
)
Defendants. )
MEMORANDUM OPINION
Date Submitted: June 5, 2014
Date Decided: August 1, 2014
James S. Green, Sr., Jared T. Green, SEITZ, VAN OGTROP & GREEN, P.A.,
Wilmington, Delaware; David T. Shulick, SHULICK LAW OFFICES, Bala Cynwyd,
Pennsylvania; Attorneys for Plaintiff.
Collins J. Seitz, Jr., David E. Ross, Eric D. Selden, SEITZ ROSS ARONSTAM &
MORITZ LLP, Wilmington, Delaware; Attorneys for Defendants.
LASTER, Vice Chancellor.
The plaintiff and the three individual defendants worked together as principals in a
financial services boutique. On January 26, 2006, the plaintiff quit. He claims he
resigned from his employment, but did not withdraw from certain entities through which
the boutique operated. In this action, he seeks a declaration that he continues to own
equity stakes in two of the entities—a limited liability company and a limited partnership.
If he remains an owner, then he demands his pro rata share of all distributions made by
those entities since January 2006, and he wants the defendants to account for any
undisclosed profits.
The evidence at trial established the plaintiff withdrew from the two entities as of
January 26, 2006. Under the applicable entity statutes, the plaintiff became entitled upon
withdrawal to the fair value of his interests in the entities. There were no written
agreements governing the entities at the time of the plaintiff‟s withdrawal, and this
decision need not resolve the defendants‟ argument that an unwritten agreement limited
the plaintiff to the value of his capital accounts. Because the plaintiff only presented
evidence at trial sufficient for the court to determine the value of his capital accounts and
did not present any evidence of the fair value of his interests, the most the plaintiff can
receive is the value of his capital accounts. The convergence of the parties‟ positions
renders unnecessary any ruling on the existence of an unwritten agreement.
This decision awards the plaintiff $35,042.67, representing the value of his capital
accounts on the date of his withdrawal. Pre- and post-judgment interest is due on this
amount at the legal rate, compounded quarterly, from January 26, 2006, until the date of
payment.
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I. FACTUAL BACKGROUND
The case was tried over three days. The plaintiff and the three defendants testified
live. Each has a personal interest in the outcome of the litigation, and none gave wholly
credible testimony. This decision finds that the following facts were proven by a
preponderance of the evidence.
A. The Broker/Dealer
The plaintiff, Gordon Levey, and two of the individual defendants, Douglas
Lowey and Barrett Naylor, met while working at Mabon Nugent & Co., a New York
investment firm. Lowey traded bonds, Naylor sold bonds, and Levey provided technical
support for the bond trading operation. Because Levey and Lowey have similar names,
this decision refers to Levey as Gordon. The parties frequently used first names in their
testimony, and no disrespect is intended.
In 1994, Lowey and Naylor moved to Bear Stearns. There they met the third
individual defendant, Oren Cohen, who was an analyst focusing on high-yield securities.
In 1997, Lowey decided to form a new firm that would specialize in trading high-
yield bonds. The firm eventually was named Brownstone Investment Group, LLC. The
parties refer to this non-party entity as “BIG,” and they refer to the four defendant entities
as “BIP,” “BAM,” “PIP,” and “PAM.” For those immersed in the case, these terms trip
poetically off the tongue. For those less intimately involved, like the author of this
decision and any readers other than the parties and their lawyers, the terms breed
confusion. This decision refers to Brownstone Investment Group as the “Broker/Dealer.”
The other entities are introduced later.
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Lowey testified that he initially formed the Broker/Dealer as a Delaware limited
liability company, then talked to Naylor and Gordon about joining him. In 1998, they
did. The three thought of themselves as partners. No one drafted formal documentation
for the firm.
Lowey explained at trial that the partners did not prepare formal documentation
because they were friends who trusted one another, and they prioritized their day-to-day
jobs over the less compelling details of entity-level paperwork. Their informal approach
largely continued until Gordon left and litigation ensued. Before then, what motivated
the partners to prepare any type of documentation appears to have been the need to make
tax filings or comply with regulatory requirements. When doing so, the partners treated
their internal relationships as sufficiently malleable to enable them to achieve the most
favorable economic result.
Everyone agrees that Naylor received a 20% equity interest in the Broker/Dealer
and Gordon received a 10% equity interest. Lowey owned the rest.
B. The Hedge Fund
In 2002, Cohen joined Trilogy Capital, LLC, where he managed a hedge fund.
Lowey had kept in touch with Cohen, and in late 2003, Lowey and Cohen began
discussing forming a hedge fund of their own.
In early 2004, Cohen left Trilogy and began working with Lowey to set up the
new fund. Lowey and Cohen hired a law firm and a prime broker, worked with counsel
to set up the necessary entities, and raised capital from investors.
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The resulting fund structure involved three entities. First, there was Brownstone
Partners Catalyst Fund, the actual hedge fund that owned securities and made trades.
This decision refers to this entity as the “Hedge Fund.” Second, there was Brownstone
Investment Partners LLC, which the parties call “BIP.” It technically managed the
Hedge Fund and owned a 20% carried interest in the fund. To ensure that amounts
generated by the carried interest would receive favorable tax treatment, it was essential
that BIP remain passive and hire an active manager to do the actual managing. This
decision therefore refers to BIP as the “Passive Manager.” Third, there was Brownstone
Asset Management, LP, which the parties call “BAM.” It was the entity that the Passive
Manager hired to do the active managing, so this decision refers to it as the “Active
Manager.” In return for its services, the Active Manager received a management fee
from the Hedge Fund, payable quarterly in advance, equal to 1.5% of assets under
management.
Lowey and Cohen decided to run the Hedge Fund out of the Broker/Dealer‟s
offices. This plan enabled Lowey to split his time easily between the Broker/Dealer and
the Hedge Fund, and it allowed the Hedge Fund to benefit from the Broker/Dealer‟s
resources, including its trading relationships and technology infrastructure.
In the first quarter of 2004, Lowey decided that he needed to offer interests in the
fund to Naylor and Gordon. Cohen resisted. After discussing matters, Lowey and Cohen
agreed that Naylor and Gordon would each receive a 2.5% interest.
The 2.5% offer failed to inspire gratitude. Naylor compared it to his 20% interest
in the Broker/Dealer and became upset with Lowey. Gordon did not like the idea of the
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Hedge Fund in the first place. He was the Chief Compliance Officer for the
Broker/Dealer, and he thought it was risky for a hedge fund and a broker/dealer to
operate out of the same office through a single trader. Given that Lowey is a human with
only one brain, Gordon worried that a regulator might think that Lowey had access in his
capacity as the principal trader of the Hedge Fund to non-public information in his head
about what he was trading in his capacity as the principal trader of the Broker/Dealer.
Gordon proposed to limit his own involvement to the Broker/Dealer, and he countered
that instead of giving him an interest in the new fund, Lowey should increase his share of
the equity in the Broker/Dealer to 33%. According to Gordon, when Lowey first enticed
Naylor and Gordon to join the Broker/Dealer, he promised them each one third of the
business, but he later reneged and forced Naylor and Gordon to take less. Gordon told
Lowey to give him what he believed he was originally promised.
Lowey went back to Cohen and told him they needed to sweeten their offer. After
some tense discussions, Lowey and Cohen agreed that Naylor and Gordon would each
receive a 5% interest.
At trial, the individual defendants testified that Lowey and Cohen extracted two
agreements from Naylor and Gordon in return for their 5% stakes. First, they claimed
that Naylor and Gordon had to perform work for the Hedge Fund and that to satisfy this
requirement, Naylor helped market and raise capital for the fund, and Gordon became
CFO and provided technical support. Second, they claimed that Naylor and Gordon
agreed to forfeit their equity interests in the Passive Manager and the Active Manager if
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they ever left the Broker/Dealer. Gordon disputed that there were any agreements
regarding his interests in the Passive Manager and the Active Manager.
C. Gordon Forgoes Income In The Active Manager For 2004.
In early 2005, as part of his administrative responsibilities, Gordon was working
with Brownstone‟s accountant to prepare the various tax filings necessary for 2004. In
March, the accountant provided Gordon with a draft tax return that allocated the Active
Manager‟s net income according to the members‟ equity interests.
The accountant‟s proposed tax treatment, however straightforward, risked inviting
regulatory scrutiny from the City of New York. Lowey, Naylor, and Gordon had
structured their affairs at the Broker/Dealer so that only Lowey filed taxes with the City.
Naylor and Gordon paid taxes on their respective shares of the income from the
Broker/Dealer in the jurisdictions where they lived. If the Active Manager‟s net income
were allocated as the accountant proposed, then each of its owners would receive a
Schedule K-1 reflecting income generated in the City of New York. Gordon was
concerned that Gotham tax authorities would question why he and Naylor were filing
returns for one Brownstone entity in the City, but not other returns for similarly named
entities.
To avoid attracting regulatory attention, Gordon proposed in an email that the
Active Manager‟s net income for 2004 not be allocated in accordance with the members‟
equity interests, which the accountant confirmed was permissible. For the partners, the
amounts were relatively small, and Gordon proposed to have all of the Active Manager‟s
2004 income allocated to Lowey, who was a resident of New York City and already
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paying city taxes, and to Cohen, who was not a member of the Broker/Dealer. Lowey
then would make it up to Naylor and Gordon by paying them slightly more through a
different Brownstone entity. Gordon‟s email reflects that this was a one-time fix and that
it would be necessary to address the issue in 2005. The Schedule K-1s reflect that the
Active Manager‟s 2004 income was allocated to Lowey and Cohen, as Gordon suggested.
At trial, the defendants attempted to expand Gordon‟s effort at regulatory
expediency into a decision to forfeit his interest in the Active Manager for no
consideration. That testimony was not credible and does not reflect what happened.
D. Gordon Resigns.
Gordon testified at trial that he became progressively more miserable at work and
that he came to dislike his partners. He spent much of 2005 reflecting on his situation,
and by December, he was thinking seriously about leaving.
On the morning of January 26, 2006, Gordon told Naylor that he was quitting.
Naylor was shocked, and they spoke about Gordon‟s decision at some length.
When Lowey arrived at the Brownstone offices, he joined Naylor and Gordon.
Gordon gave Lowey his resignation letter, which included a list of demands concerning
the Broker/Dealer. The parties did not introduce the resignation letter into evidence, but
the testimony indicates that Gordon demanded compensation in return for his equity
interest. No one appears to have focused on the Passive Manager or the Active Manager.
To emphasize that he was done working at Brownstone, Gordon cut up his
corporate charge card and building identification card. He also handed over his office
keys. Lowey accepted that Gordon was leaving.
7
On Wall Street, security typically escorts a departing employee out of the building.
For Gordon, Lowey gathered the Brownstone employees together and thanked Gordon
for his service. Gordon said goodbye to and shook hands with each of the individual
defendants, and everyone wished him well. Shortly after leaving, Gordon withdrew his
personal investment in the Hedge Fund, and he was sent this amount.
Days after Gordon resigned, Lowey caused the Broker/Dealer to sue him in the
United States District Court for the Southern District of New York (the “District Court
Action”). The complaint contended that Gordon misappropriated trade secrets and
sought an injunction to prevent Gordon from offering or disclosing Brownstone‟s trading
software to competitors. On February 17, 2006, Gordon‟s counsel deposed Lowey in the
District Court Action. In contrast to the certainty with which the defendants now
maintain that Gordon was no longer a member of any of the Brownstone entities—
including the Active Manager—after his departure on January 26, Lowey professed
during his February 17 deposition not to know whether Gordon was still a member of the
Active Manager. When asked by counsel to name the entity‟s members, Lowey
responded, “Good question.” See 1 Trial Tr. 110.
At some point after Lowey‟s deposition on February 17, 2006, the individual
defendants appear to have decided that Gordon no longer was a member of the
Broker/Dealer, the Passive Manager, or the Active Manager, because they stopped
making any distributions to him. They also stopped providing him with information
about the performance and profitability of the entities. On June 5, 2006, the defendants
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reported in a Form ADV filing that Gordon was no longer a partner in the Active
Manager.
The individual defendants also prepared a Schedule K-1 designed to show that
Gordon no longer had any interest in the Passive Manager, but the principal role of the
Schedule K-1 in this litigation has been to impeach the defendants‟ credibility. If Gordon
relinquished his equity in the Brownstone entities as of January 26, 2006, then at the end
of the 2006 tax year, he should have received Schedule K-1s for the Broker/Dealer, the
Passive Manager, and the Active Manager covering the partial-year period from January
1 to January 26. None of the Brownstone entities sent Gordon a Schedule K-1 for the
stub period in 2006.
After January 26, 2006, the only Schedule K-1 that Gordon received was from the
Passive Manager, and it covered the period ending December 31, 2005. Although the
individual defendants agree that Gordon remained a member of the Passive Manager after
this date, the Schedule K-1 was marked “Final.” Even more strange was how it depicted
the evolution of Gordon‟s interest in the Passive Manager over the course of 2005. The
Schedule K-1 listed Gordon‟s share of profits, losses, and capital at the beginning of the
2005 as 5.00%, consistent with what Gordon believes his interest to have been. As of
December 31, 2005, however, it listed Gordon‟s share of profits and losses at 2.29% and
his share of capital as “None.” The individual defendants could not explain why
Gordon‟s share of profits and losses declined during 2005. Nor could they explain why
his share of year-end capital declined more than his share of profits and losses.
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The Schedule K-1 for 2005 showed withdrawals and distributions of $13,289 for
the year from Gordon‟s capital account. Gordon‟s beginning capital account in the
Passive Manager was listed as $7,311, with $500 capital contributed during the year. His
current year increase was listed as $5,478. Gordon‟s withdrawals in 2005 supposedly left
an ending capital account balance of zero. At trial, Gordon testified that he had not
received any withdrawals or distributions from the Passive Manager for 2005.
To prove otherwise, Lowey cited two checks that Gordon received in 2005, one
for $3,284 dated April 1, 2005, and a second for $10,000 dated April 15, 2005. Leaving
aside that the two checks add up to $13,284, not $13,289, Gordon testified credibly that
the first check for $3,284 represented his share of the 2004 income for the Passive
Manager. That figure matches the income listed in the supporting schedules to the 2004
Schedule K-1 Gordon previously received for the Passive Manager. The 2004 Schedule
K-1 listed Gordon‟s end-of-year share of profit, loss, and capital as 5.00% and showed an
ending capital account balance of $7,311, which corresponded to the beginning capital
account balance on the 2005 Schedule K-1. Lowey issued the check for $3,284 to
Gordon in April 2005 because, at that point, the members‟ correct year-end taxable
income for 2004 had been determined as part of the tax preparation process for the tax
year ended December 31, 2004. It was paid out of the Active Manager‟s checking
account because the Passive Manager did not have a checkbook.
Gordon testified credibly that second check for $10,000 represented his 5% share
of the $200,000 quarterly management fee that the Active Manager earned for managing
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the Hedge Fund. A fee of this size would imply that the Hedge Fund had approximately
$54 million in assets under management at the time, which is consistent with the record.
Sadly, the defendants appear to have manufactured an erroneous Schedule K-1 for
the Passive Manager with the goal of reducing Gordon‟s capital account to zero at year
end. To that end, they latched onto the only two checks they could find. Gordon‟s
Schedule K-1 for 2005 should have shown him beginning the year and ending it with the
same 5% figure for profits, losses, and capital.
E. Gordon Gives Written Notice Of His Withdrawal.
On January 25, 2007, the day before the one year anniversary of his resignation,
Gordon gave written notice that he desired to withdraw from the Passive Manager and the
Active Manager. He contended that upon withdrawal he was entitled to receive payment
of his capital account and the cash value of his interests in the Passive Manager and the
Active Manager.
The defendants offered a perplexing response. Rather than stating their belief that
Gordon had withdrawn a year earlier, as they now maintain, their counsel sought
“additional information in order to assess [Gordon‟s] „demands.‟” JX 28; accord JX 29.
Their counsel then listed eleven different categories of information that he wanted
Gordon to provide. These categories included (i) Gordon‟s basis for believing he was a
partner, (ii) Gordon‟s basis for believing that, if he was a partner, he could withdraw from
the entity, (iii) Gordon‟s basis for believing that he was entitled to payment of his capital
account upon withdrawal, (iv) Gordon‟s basis for believing that he was entitled to the
11
cash value of his interest in the entities upon withdrawal, and (v) the valuation process
Gordon believed should be used to calculate the value of his interests.
F. Gordon Files An Arbitration Demand.
On February 28, 2007, Gordon filed a motion to stay the pending District Court
Action and to compel the defendants to submit to arbitration before the National
Association of Securities Dealers (“NASD”). The district court granted Gordon‟s motion
on September 17 and closed the case.
On February 15, 2008, Gordon filed an arbitration demand before FINRA, the
successor to NASD, against the Broker/Dealer, the Passive Manager, the Active
Manager, Lowey, and Naylor. Among other claims, Gordon contended that he had
withdrawn from the Broker/Dealer, the Passive Manager, and the Active Manager and
that the defendants had failed to pay him the value of his equity interests in those entities.
The arbitration panel held that neither the Passive Manager nor the Active
Manager was subject to FINRA jurisdiction. The panel dismissed both entities and
adjudicated only Gordon‟s claim for the value of his interest in the Broker/Dealer.
During the arbitration, Gordon claimed that the fair market value of his interest
was more than seven million dollars. In May 2009, however, the panel found that
Gordon only was entitled to an amount that is consistent with the return of his capital
account when he left the Broker/Dealer, plus interest. The panel did not explain the basis
for its finding.
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G. Gordon Files Suit In Delaware.
The same month that the arbitration panel issued its decision, Barron‟s ranked the
Hedge Fund as the 82nd best performing fund as a result of its strong returns over a
three-year span. The article indicated that the Hedge Fund had $370 million in assets
under management. In August 2010, Gordon filed this action in which he contends that
he continues to own an equity interest in the Passive Manager and the Active Manager
and that he is entitled to 5% of all past and future distributions from those entities.
This court dismissed Gordon‟s claims as barred by laches. On appeal, Delaware
Supreme Court agreed that the “specific claims actually advanced by [Gordon] lack
merit,” but in an exercise of its independent review, the Delaware Supreme Court
determined that the interests of justice required reversal and a remand for further
proceedings. Levey v. Brownstone Asset Mgmt., L.P., 76 A.3d 764, 766 (Del. 2013).
H. Lowey And Naylor Depart.
In 2010, Lowey and Cohen decided to go their separate ways. To effectuate their
separation, they agreed that Lowey would exit from the Passive Manager and the Active
Manager. As compensation for Lowey‟s interest, they agreed that he would receive a
three-year tail, meaning he would receive a certain percentage of distributions in the year
he left and lesser percentages in each of the two following years. Naylor left at the same
time and received the same treatment.
After Lowey and Naylor left, Cohen changed the names of the Passive Manager
and the Active Manager to Pinebank Investment Partners, LLC, which the parties call
“PIP,” and Pinebank Asset Management, LP, which the parties call “PAM.” Because
13
these entities were continuations of the Passive Manager and the Active Manager under
different names, this decision does not refer to them separately.
II. LEGAL ANALYSIS
Gordon seeks a declaration that he continues to hold a 5% interest in the Passive
Manager and the Active Manager. If he remains an owner of those interests, then he
demands his proportionate share of all past distributions made by those entities. He also
seeks an order requiring defendants to identify any undisclosed profits, presumably so
that he can receive his share of those.
The defendants contend that Gordon relinquished his interest in the Active
Manager in 2005 and, in any event, withdrew from both entities on January 26, 2006.
They claim he no longer had an ownership stake as of that time and was not entitled to
share in distributions after his withdrawal. The defendants assert that pursuant to an
unwritten agreement among the principals, Gordon was entitled to receive only the value
of his capital account upon withdrawal, which they say was negative.
Whether Gordon could withdraw, whether he did so effectively, and what the
implications of his withdrawal would be are matters determined by the agreements
governing the Passive Manager and the Active Manager. The Passive Manager is a
Delaware limited liability company, so the answer depends on its operating agreement.
The Active Manager is a Delaware limited partnership, so the answer depends on its
limited partnership agreement. An agreement may be “written, oral or implied.” 6 Del.
C. § 18-101(7) (including in the definition of operating agreement “any agreement . . . ,
written, oral or implied, of the member or members as to the affairs of a limited liability
14
company and the conduct of its business”); id. § 17-101(12) (same for partnership
agreement). If there is no agreement, or if the agreement is silent, then the answer
depends, respectively, on the default provisions of the Delaware Limited Liability
Company Act (the “LLC Act”) or the Delaware Limited Partnership Act (the “LP Act”
and, together with the LLC Act, the “Acts”). See Robert L. Symonds, Jr. & Matthew J.
O‟Toole, Delaware Limited Liability Companies § 1.03[A][2], at 1-15 (2012 Supp.);
Martin I. Lubaroff & Paul M. Altman, Delaware Limited Partnerships § 1.2, at 1-3 (2013
Supp.).
The default rule under the Acts is that in the absence of an agreement, a partner or
member may not withdraw “prior to the dissolution and winding up” of the entity. 6 Del.
C. § 18-603; id. § 17-603. Upon withdrawal, unless otherwise provided, a partner “is
entitled to receive, within a reasonable time after withdrawal, the fair value of such
partner‟s partnership interest in the limited partnership as of the date of withdrawal based
upon such partner‟s right to share in distributions from the limited partnership.” 6 Del. C.
§ 17-604; accord id. § 18-604 (same for resigning members of a limited liability
company).
This decision has rejected as a factual matter the defendants‟ claim that Gordon
relinquished his interest in the Active Manager in 2005. The defendants‟ position on that
score depended on an unreasonable reading of a single email and an unpersuasive,
retrospective re-imagining of Gordon‟s effort to minimize the partners‟ risk of attracting
attention from the City of New York. Gordon continued to hold his interest in the Active
Manager on January 26, 2006, when he resigned from Brownstone.
15
The defendants have advanced marginally more persuasive arguments about the
existence of an unwritten agreement among the principals pursuant to which Gordon
automatically would give up his interests in the Passive Manager and the Active Manager
if he resigned from the Broker/Dealer. According to the defendants, the unwritten
agreement called for Gordon to receive only the value of his capital account in each
entity. This decision need not delve into the details of the purported agreement, because
the evidence at trial established that on January 26, 2006, Gordon severed his relationship
with his partners and the Brownstone financial services boutique. That definitive
separation included withdrawing not only from the Broker/Dealer, but also from the
Passive Manager and the Active Manager.
The existence of the purported unwritten agreement and its terms might matter if
Gordon had introduced evidence at trial about the fair value of his interests in the Passive
Manager and the Active Manager on the date of withdrawal. The defendants maintain
that pursuant to the unwritten agreement, Gordon only was entitled to the value of his
capital account. Under the statutory default rule that otherwise would apply, Gordon
would be entitled to the fair value of his interests.
Because Gordon failed to introduce evidence of the fair value of his interests other
than evidence sufficient to determine the value of his capital account, it is not possible to
award him anything other than the value of his capital accounts. The outcome under the
defendants‟ purported unwritten agreement is the same as the outcome under the statutory
default rule that applies in the absence of the unwritten agreement.
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This decision therefore proceeds as follows: First, it explains why the trial record
established that Gordon severed his relationship with his partners and the Brownstone
financial services boutique on January 26, 2006, notwithstanding both sides‟ inconsistent
positions on that issue; and second, it determines the value of Gordon‟s capital accounts
in the Passive Manager and the Active Manager as of that date.
A. The Implied Agreement On Withdrawal
The critical factual issue in the case is whether Gordon withdrew from the Passive
Manager and the Active Manager on January 26, 2006. Gordon argues that (i) he did not
withdraw from the Passive Manager and the Active Manager, (ii) to the extent he
attempted to withdraw, his attempts were unsuccessful because they were contrary to the
default provisions of the Acts, (iii) his attempts were unsuccessful because the parties
never agreed on the amounts he was due for his interests, and (iv) to the extent the parties
established by their conduct an implied agreement that he could withdraw, that agreement
is invalid under the statute of frauds.
1. The Events Of January 26, 2006
The evidence established that Gordon withdrew from the Passive Manager and the
Active Manager on January 26, 2006. Both sides have taken inconsistent positions on
this issue. Until this litigation, Gordon maintained that he could withdraw and did; he
now says that he might have tried but failed in the attempt. The defendants acted
ambiguously early on, seemingly in an effort to obstruct whatever outcome Gordon
wanted. Now they maintain that Gordon could withdraw and did.
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Although there was conflicting evidence at trial about what occurred on January
26, 2006, an objective viewer would regard Gordon as having severed all of his ties with
the defendants and the Brownstone financial services boutique. He turned in his keys and
took the dramatic step of cutting up his corporate charge card and building identification
card. The other principals of the firm and its employees gathered together and said
goodbye. He walked out the door, never to return. Effectuating a complete separation
necessarily included withdrawing from all of the entities in which he was a member.
Consistent with an effort to sever all ties, Gordon withdrew his personal funds that were
invested in the Hedge Fund.
Gordon has claimed in this case that he intended to resign as an employee and to
withdraw from the Broker/Dealer, but not to withdraw from the Passive Manager and the
Active Manager. On January 26, 2006, Gordon understandably emphasized the most
pressing and prominent issues: his status as an employee and his interest in the entity
where he had the biggest stake. But the bottom line was that Gordon wanted to leave a
business that was making him unhappy. Given his professed antipathy towards the
business and his partners, it is not credible that he wanted to maintain a relationship with
them through the Passive Manager and the Active Manager.
The record indicates that Gordon demanded a significant monetary payment for
his interest in Brownstone. At trial, Gordon suggested that his demand focused on the
Broker/Dealer and did not encompass the Passive Manager and the Active Manager, but
he did not introduce his resignation letter, which might have provided more persuasive
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evidence of so specific a demand. Given the context, it makes more sense that Gordon
was demanding a substantial payment for his interests in all of the Brownstone entities.
Gordon‟s subsequent actions comported with his departure from Brownstone in all
capacities, including his withdrawal from all of the Brownstone entities. After he left on
January 26, 2006, Gordon did not ask for information about the Passive Manager or the
Active Manager, nor did he inquire about distributions. He did not follow up with the
defendants when he received a 2005 Schedule K-1 for the Passive Manager marked
“Final.” A year later, on January 25, 2007, he sent letters to the defendants seeking
compensation for his interests in the Passive Manager and the Active Manager. When he
filed his arbitration demand on February 15, 2008, he contended that he had withdrawn
from the Broker/Dealer, the Passive Manager, and the Active Manager and sought
compensation for the value of his equity interests in those entities. Only when he brought
this litigation did Gordon advance the position that although he might have tried to
withdraw, his attempts were ineffective.
The defendants‟ position about January 26, 2006, has been similarly inconsistent,
but here too the evidence as a whole suggests that they believed Gordon had left. It is
true that during the months immediately following Gordon‟s departure, they did not take
any immediate action to confirm his withdrawal. Although they now claim he was not
owed any capital, they did not send him a notice saying that. In February 2006, when
testifying in the District Court Action, Lowey professed not to know whether Gordon had
withdrawn. But soon thereafter, the defendants did take steps reflecting Gordon‟s
withdrawal. Most notably, on June 5, 2006, they reported that Gordon was no longer a
19
partner in the Active Manager in a Form ADV filing. They also stopped making
distributions to Gordon and providing him with information concerning the performance
and profitability of the entities.
Unfortunately, the defendants muddied the waters in October 2006, when they
prepared the erroneous Schedule K-1 for Gordon‟s interests in the Passive Manager and
failed to send him final Schedule K-1s for any other entity. And on February 15, 2007, in
response to Gordon‟s written demand for payment for his interests in the Passive
Manager and the Active Manager, the defendants muddied the waters further. Rather
than telling Gordon that he already withdrew a year before, they asked for additional
information about Gordon‟s status and why Gordon he believed he could withdraw from
the entities, if he was in fact a partner.
The parties have only themselves to blame for this factual murk. Having
considered the evidence, this decision concludes that Gordon withdrew from all of the
Brownstone entities, including the Passive Manager and the Active Manager, on January
26, 2006.
2. The Parties’ Implied Agreement Controls.
Gordon next contends that even if he attempted to withdraw, his attempts were
ineffective because the default provisions of the Acts do not permit a member or limited
partner to withdraw before dissolution and winding up and the defendants failed to prove
the existence of an unwritten agreement authorizing withdrawal. What the evidence
instead established is that the parties agreed by their conduct that Gordon could and did
withdraw. That “implied” agreement is permissible and effective under the Acts.
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An agreement governing a limited liability company or a limited partnership may
be written, oral or implied. 6 Del. C. § 18-101(7); id. § 17-101(12). An implied
agreement “is one inferred from the conduct of the parties, though not expressed in
words.” Capital Mgmt. Co. v. Brown, 813 A.2d 1094, 1098 (Del. 2002). “Just as assent
may be manifested by words, so intention to make a promise may be manifested in
language or by implication from other circumstances.” 1 Williston on Contracts § 1:5
(4th ed. 2014). “In determining whether the parties‟ conduct implies a contract in fact,
their conduct is evaluated from the perspective of a reasonable person, considering all of
the attendant circumstances . . . .” Id. A party‟s subjective intent or belief, does not
determine whether an implied contract exists. The failure to object may be treated as
acceptance. See Restatement (Second) of Contracts § 19(1) (1981) (“The manifestation
of assent may be made wholly or partly by written or spoken words or by other acts or by
failure to act.”); see also Beth Israel Med. Ctr. v. Horizon Blue Cross & Blue Shield of
N.J., Inc., 448 F.3d 573, 582 (2d Cir. 2006) (finding that acceptance sufficient to form an
implied contract may be inferred based upon failure to object to party‟s conduct).
In this case, the evidence established that Gordon withdrew from the entities on
January 26, 2006. Through his conduct, he manifested an intent to withdraw, and
through their conduct, the defendants manifested their acceptance of his withdrawal.
Their implied agreement that Gordon had withdrawn modified the default provisions in
the Acts that otherwise prevent a limited partner or member from withdrawing before
dissolution and winding up.
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3. The Failure To Agree Upon Payment
Gordon next contends that assuming he tried to withdraw, his withdrawal was
ineffective because he and the defendants never reached agreement on the fair value of
his interests. The parties‟ implied agreement did not encompass a requirement that
Gordon and the defendants first agree on the amount he would be paid. The Acts create a
baseline expectation in which the ability of a member or partner to withdraw is distinct
from the question of what the departing member or partner would receive in
compensation. Compare 6 Del. C. § 18-603 (resignation of member), and id. § 17-603
(withdrawal of limited partner), with id. § 18-604 (distribution upon resignation), and id.
§ 17-604 (distribution upon withdrawal).
The record indicates that Gordon recognized that distinction. He testified that in
his resignation letter, he demanded compensation for his interests in Brownstone,
notwithstanding that he was walking out that day. When he filed his arbitration demand
on February 15, 2008, he contended that he already had withdrawn from the
Broker/Dealer, the Passive Manager, and the Active Manager and was entitled to
compensation for the value of his equity interests. He did not claim that he was still a
member and limited partner of those entities.
4. The Statute Of Frauds
Gordon also contends that to the extent an implied agreement regarding his
withdrawal existed, its effectiveness is barred by Delaware‟s statute of frauds because it
would be impossible to calculate the value of his interests within a year. Gordon argues
that amendments to the Acts in 2010, which exempted operating and partnership
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agreements from the statute of frauds, do not apply retroactively. See 6 Del. C.
§ 18-101(7) (amended in 2010 to exempt operating agreements from the statute of
frauds); id. § 17-101(12) (same for partnership agreements).
This court need not reach the question of whether the amendments in 2010 were
intended to be retroactive because the implied agreement would not be barred by the
statute of frauds in any event. Delaware‟s statute of frauds bars the enforcement of an
agreement that is not to be performed within the space of a one year from its making,
unless it is (i) written and (ii) signed by the party against whom the agreement is to be
enforced. 6 Del. C. § 2714(a). “[T]he Statute of Frauds does not apply to a contract
which may, by any possibility, be performed within a year.” Haveg Corp. v. Guyer, 211
A.2d 910, 912 (Del. 1965). The act of withdrawing was certainly capable of being
performed within one year because it could be completed in a single day. Gordon
performed and completed it on January 26, 2006. The payment of whatever
compensation Gordon was due also could have been completed within one year. If the
defendants had wanted, they could have asked their accountants or hired valuation
professionals to make the necessary calculations promptly after January 26. The statute
of frauds therefore would not invalidate the parties‟ implied agreement on Gordon‟s
withdrawal, even if Gordon is right that the 2010 amendments did not operate
retroactively.
B. Gordon’s Remedy
Because Gordon held interests in the Passive Manager and the Active Manager
through January 26, 2006, he is entitled to his proportionate share of the distributions
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made by those entities before his withdrawal. By statute, he became entitled upon his
withdrawal to the fair value of his interests in those entities. The statutory calculation is
not limited to the value of his capital account, but rather should represent “the fair value
of [the interest] as of the date of withdrawal based upon [the] partner‟s right to share in
distributions from the [entity].” 6 Del. C. § 17-604 (limited partnership); accord id. § 18-
604 (same for resigning members of a limited liability company). Gordon did not present
any evidence of the fair value of his interests as of that date. He therefore failed to meet
his burden of proof and is not entitled to any amounts beyond the value of his capital
accounts.
For the Passive Manager, Gordon should have had a balance in his capital account
of $15,987.80 as of the end of 2005, taking into account the $3,284.00 distribution he
received in April 2005. The Passive Manager generated total income of $1,022,238 in
2006. Gordon is entitled to 5% of the 2006 income generated during the 26 days that he
held his interest during that year. Using the simplifying assumption that income was
steady over the course of the year, he is entitled to $3,641.85.
For the Active Manager, Gordon should have had a balance in his capital account
of $14,854.90 at the end of 2005, taking into account the $10,000.00 distribution he
received in April 2005, his $500.00 capital contribution, and his 5% share of the total
income generated that year. In 2006, the Active Manager generated total income of
$156,983. Gordon is entitled to $559.12 for the 26 days that he held his interest in the
Active Manager that year.
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III. CONCLUSION
Gordon withdrew from the Passive Manager and the Active Manager on January
26, 2006. He is entitled to the $35,042.67, plus pre- and post- judgment interest from
January 26, 2006, until the date of payment. Interest is set at the statutory rate,
compounded quarterly. Each side will bear its own costs. The parties will submit a form
of Order and Final Judgment to implement this decision.
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