The individual plaintiffs and defendants in this case are partners in a real estate project to develop three office condominium buildings. Plaintiffs instituted this action seeking, among other things, declaratory relief and rescission of the partnership agreement as it relates to defendant Dean Smith and the distribution of partnership profits owed to Smith.
The allegations against Smith include charges that he was given a partnership interest based upon false representations as to his qualifications and future contributions to the partnership. He is also charged with failing to deliver promised performance and various breaches of fiduciary duties.
Smith has filed a motion for partial summary judgment to compel release of his undistributed share of the partnership profits. His principal contention is that he breached no duty to the partnership and, in any event, plaintiffs should be estopped from seeking rescission because for nearly two years they purposefully delayed commencing this action despite knowledge of his alleged wrongdoing.
In the circumstances of this case, I conclude that plaintiffs are not entitled to rescission of the partnership agreement and defendant's motion to compel distribution of his partnership profits is granted.
These are the undisputed facts. In May of 1981 the individual plaintiffs formed a partnership under the name of A.D.S. Associates to develop approximately four acres of land in Clifton for office condominium buildings. In the following
September, A.D.S. joined with All American Life, a wholly-owned subsidiary of U.S. Life, to form Notch View Associates to further develop the property. The agreement was signed on behalf of U.S. Life by its then vice president, Dean Smith. The terms of the agreement required All American Life to provide financing for construction of three buildings. Each building was to have about 20 units. Construction of the first building began before Smith became involved with the partnership. During the construction and financing of this building, the partnership dealt with Smith on numerous occasions.
In 1983, Smith left U.S. Life to form a real estate consulting company. By 1985, U.S. Life was seeking to terminate its holdings in the development project and refused to provide further financing for the remaining two buildings. As a result, the project was completely stalled. Smith became aware of this dispute and offered to negotiate a resolution on behalf of the partnership. The partnership agreed to admit Smith as a partner provided that he negotiate with U.S. Life to secure subsequent construction loans and assist prospective buyers in obtaining purchase loans. To get additional financing for further construction, the partnership needed to sell out the last four units of the first building. Sale of these units would satisfy the deal A.D.S. struck with U.S. Life in 1981 for construction financing.
Accordingly, A.D.S. formed a new concern named SASSA Associates to purchase the remaining four units. Dean Smith was asked to locate financing for the acquisition of these partnership units. Smith located a willing lender for these units, and construction financing for the second building was thus obtained. During the same period, and before Smith became a partner, All-American Life sold its interest in the project to the partnership.
Shortly thereafter, by agreement dated January 1, 1986, Dean Smith became a partner in A.D.S. The agreement provided in part that:
1) For and in consideration of a capital contribution of $6,000.00 paid to A.D.S. Associates, receipt whereof is hereby acknowledged, Murray Abill, Fred Abill, Milton Scott and Albert Spring hereby covenant and agree that Dean M. Smith shall become a partner in A.D.S. Associates and shall have a 20% interest in the profits and losses of said partnership.
2) Dean Smith acknowledges that he has been provided with a copy of the original partnership Agreement, has endorsed the same and shall be bound by all terms and conditions of the Agreement as though he were an original party thereto.
From 1987 through 1989, A.D.S. made five separate partnership distributions to Smith totalling $238,200. Then, on April 17, 1989, plaintiffs commenced this action seeking a rescission of Smith's partnership interest and his subsequent profits which now amount to about $350,000. Plaintiffs' specific grounds for rescission rest on failure of consideration, misrepresentation as to future performance, and fraud.
Under principles of contract law, rescission is an equitable remedy and only available in limited circumstances. Hilton Hotels Corp. v. Piper Co., 214 N.J. Super. 328, 336, 519 A.2d 368 (Ch.Div.1986). Ordinarily, contracts may only be rescinded where there is original invalidity, fraud, failure of consideration or a material breach. 17A Am.Jur. 2d, Contracts § 539, 567. See Herbtstman v. Eastman Kodak Co., 68 N.J. 1, 9, 342 A.2d 181 (1975); Merchants Indem. Corp. v. Eggleston, 37 N.J. 114, 130, 179 A.2d 505 (1962); Giumarra v. Harrington Heights, 33 N.J. Super. 178, 190, 109 A.2d 695 (App.Div.1955), aff'd 18 N.J. 548, 114 A.2d 720. And even where the grounds for rescission exist, the remedy is discretionary and will not be granted where the claimant has not acted within a reasonable time or where there has been substantial performance. Hilton Hotels Corp. v. Piper Co, supra, 214 N.J. Super. at 336, 519 A.2d 368. Jones v. Gabrielan, 52 N.J. Super. 563, 576, 146 A.2d 495 (App.Div.1958). Moreover, to grant rescission, the court must be able to return the parties to their original position. Ibid; Driscoll v. Burlington Bridge Co., 28 N.J. Super. 1, 4, 99
A.2d 829 (App.Div.1953). Although this is not an absolute requirement, it should be done in so far as practicable. Amer. Container Corp. v. Hanley Trucking Corp., 111 N.J. Super. 322, 334, 268 A.2d 313 (App.Div.1970) (citing Doughten v. Camden Building and Loan Association, 41 N.J. Eq. 556, 561, 7 A. 479 (E. & A. 1886).
Under principles of partnership law the remedy of rescission is even more circumscribed. Generally, the relationship of co-partners as fiduciaries is "one of trust and confidence, calling for the utmost good faith, permitting of no secret advantages or benefits." Stark v. Reingold, 18 N.J. 251, 261, 113 A.2d 679 (1955); Latta v. Kilbourn, 150 U.S. 524, 14 S. Ct. 201, 37 L. Ed. 1169 (1893) Fortugno v. Hudson Manure Co., 51 N.J. Super. 482, 499, 144 A.2d 207 (App.Div.1958); Neustadter v. United Exposition Service Co., 14 N.J. Super. 484, 493, 82 A.2d 476 (Ch.Div.1952). Ordinarily, one partner may not sue another at law unless there is a prior accounting or settlement of partnership affairs. O'Toole v. O'Toole, 10 N.J.Misc. 159, 165, 158 A. 337 (Sup.Ct.1932); Newburger, Loeb & Co., Inc. v. Gross, 563 F. 2d 1057, 1075 n. 23 (2d Cir.1977), cert. denied., 434 U.S. 1035, 98 S. Ct. 769, 54 L. Ed. 2d 782 (1978); 59A Am.Jur. 2d Partnership § 542 (1987); See Annotation, Actions at Law Between Partner and Partnership, 168 A.L.R. 1088 (1947).
Exceptions to this rule arise in cases where one partner sues another based on wrongful dissolution, breach of independent covenants in the partnership agreement or where the facts are such that no complex accounting of partnership transactions is necessary. Id. at 1098; 59A Am.Jur. 2d Partnership § 560 (1987); Stodd v. Goldberger, 73 Cal.App. 3d 827, 838, 141 Cal.Rptr. 67, 74, (1977); Burnstine v. Geist, 257 A.D. 792, 793, 15 N.Y.S. 2d 48, 50 (App.Div.1939). This rule is based on the recognition that equitable relief may be necessary to protect the rights of the parties and court intervention may not be appropriate until the relative rights of the parties are established. Bassett v. American Meter Co., 20 A.D. 2d 956, 957,
249 N.Y.S. 2d 815, 816 (App.Div.1964); Crane & Bromberg, Law of Partnership § 69 (1968). If partners are unable to settle their own affairs, an action in equity for an accounting may be appropriate, and sometimes it represents the exclusive remedy to adjust and settle the affairs of a partnership. Condon v. Moran, 11 N.J. Super. 221, 78 A.2d 295 (App.Div.1951); Watts v. Adler, 130 N.Y. 646, 648, 29 N.E. 131 (1891). Thus, while breaches of the partnership agreement may give rise to damages, they are ordinarily insufficient to warrant rescission ...