## Facts

- A limited partnership formed in 1980 acquired and operated a building at 5008 Broadway in New York City; the two general partners were Alexander Frame and Kenneth Maynard.
- Frame later resigned as general partner and transferred his interest in the underlying land to the partnership.
- In exchange, Frame obtained a contractual right to receive 20% of the “net proceeds” of any future sale or refinancing of the partnership’s property; the remaining net proceeds were to be split 25% to the general partner and 75% to the limited partners.
- Maynard later sought to acquire the partnership’s property for himself or a wholly owned entity and solicited limited partners’ consent to a buyout.
- While pursuing the buyout, Maynard provided limited partners financial information consistent with a lower valuation, but did not disclose he was negotiating new mortgage financing that contemplated a substantially higher valuation.
- Frame and certain limited partners alleged Maynard’s nondisclosure induced limited partners to sell at an undervalued price and enabled Maynard to benefit personally.
- Frame also alleged Maynard breached the agreement by interpreting “net proceeds” to exclude Frame from any distribution after the sale; Maynard claimed deductions left no distributable net proceeds.

## Issues

1. Whether a general partner who seeks to acquire partnership property for himself breaches fiduciary duty and commits actual or constructive fraud by failing to disclose material refinancing negotiations and higher valuation information to limited partners.
2. Whether the agreement granting a former general partner 20% of “net proceeds” from a sale or refinancing was breached by construing “net proceeds” to eliminate any distribution to that party.

## Decision

- The Appellate Division affirmed the judgment for Frame and certain limited partners and left undisturbed the dismissal of other cross-claims.
- The court held Maynard breached fiduciary duties and committed actual and constructive fraud by withholding material information about ongoing mortgage negotiations and higher valuation while pursuing a self-interested acquisition.
- The court rejected Maynard’s construction of the “net proceeds” provision and upheld Frame’s entitlement to his contractual share; Maynard’s interpretation was “neither credible nor comprehensible.”
- The court upheld the trial court’s monetary damages awards to the prevailing plaintiff and cross-claimants.

## Legal Principles

- A general partner owes duties of loyalty and full disclosure to limited partners, heightened when the general partner stands on both sides of a transaction involving partnership property.
- In a self-dealing transaction, nondisclosure or concealment of material valuation-related information can support liability for breach of fiduciary duty, constructive fraud, and actual fraud.
- Limited partners may rely on a general partner’s representations and are not required to conduct an independent investigation where the general partner controls material information and actively conceals it.
- Contract terms allocating “net proceeds” from a sale or refinancing are construed to effectuate the bargain; an accounting method that nullifies a negotiated economic right will be rejected.

## Conclusion

The court affirmed findings that a general partner’s concealed refinancing negotiations and valuation information in connection with a self-interested buyout constituted breach of fiduciary duty and fraud, and it enforced the former partner’s contractual right to receive 20% of net sale or refinancing proceeds despite the general partner’s attempted redefinition of “net proceeds.”


Frame v. Maynard, 83 A.D.3d 599, 922 N.Y.S.2d 48 (N.Y. App. Div. 1st Dep’t 2011)