KE Property Management Inc. v. 275 Madison Management Corp.

Facts

275 Madison Management Corp. (275 Madison Corp.) (Defendant) was the managing partner of 275 Madison Associates L.P., limited partnership (the “Partnership”). K.E. Property Management Inc. (KE Property) (Plaintiff) was a general partner, and its affiliate, KJ Capital Management, Inc. (KJ Capital), was a limited partner. The Partnership’s original managing general partner, Skydell, who served as the president and part owner of Defendant, misappropriated $2 million of Partnership funds by diverting them from the Partnership’s bank accounts. Skydell was able to divert the funds, as he was an authorized signatory on the accounts, in his capacity as a representative of Defendant. Prior to Skydell’s fraud, the Partnership had borrowed $70 million from Kawasaki Leasing International, Inc. (Kawasaki Lender). KJ Capital and KE Property were affiliated with the Kawasaki Lender. The Partnership experienced financial hardship following the fraud and its finances were restructured with the Kawasaki Lender. Afterwards, the Kawasaki Lender notified the Partnership that it was in default and risked foreclosure. Defendant urged the Partnership to seek bankruptcy protection, but Plaintiff refused. Defendant claimed Plaintiff was showing improper loyalty to the Kawasaki lender by their refusal, and therefore caused a breach of fiduciary duty to the other partners. Approximately one month later, KJ Capital claimed to remove Defendant as a managing general partner, claiming under the Partnership Agreement, which provided that limited partners, under certain circumstances (which were met) could dismiss any general partner if the general partner had damaged the partnership as a result of fraud or willful misconduct in the performance of his duties as a general partner. KJ Capital claimed that Skydell’s misappropriation of $2 million amounted to fraud or willful misconduct on the part of Defendant in its role as the managing general partner of the Partnership. However, Defendant claimed that this was a pretext, instituted at the Kawasaki Lender’s directive, to prevent Defendant from filing for bankruptcy for the Partnership. Nevertheless, two days after its alleged removal, Defendant proceeded to file. Plaintiff then brought suit for a declaratory judgment that the alleged removal of Defendant was effective, and for an injunction to stop Defendant from acting on behalf of the Partnership. Plaintiff sought summary judgment, which Defendant argued was improper because the Kawasaki affiliates had acted in bad faith to block the foreclosure of their loan by preventing the Partnership from entering bankruptcy.