New Jersey Court Enforces 'Buy-Sell' Provision, Allowing Surviving Partner To Buy Deceased Partner's 50 Percent Interest For 1 Percent Of Fair Market Value

A New Jersey Appellate court has upheld use of a buyout formula in a partnership agreement, despite the fact that it left the deceased partner's estate with a mere fraction of fair market value. In Estate of Cohen v. Booth Computers (Appellate Division, July 13, 2011), the estate of Claudia Cohen appealed a judgment awarding the estate $178,000 for Claudia's 50 percent share in the Booth Computers partnership, even though the partnership's fair market value had been estimated at approximately $23 million. Booth Computers, created in 1978, is a family-owned partnership originally comprised of three partners: Claudia, Michael and James Cohen. The partnership's assets consist of three real estate properties whose value has grown exponentially over time.

The Booth Computers partnership agreement provides that, in the event of the death of any one partner, the surviving partners must purchase the shares of the deceased partner according to a specific formula. The parties had also agreed that the value of a deceased partner's interest would equal his or her own proportionate share of the partnership's net worth plus $50,000. Net worth was defined as the net book value of the company as shown on the most recent partnership financial statement, which pegged the value of the company based on the costs of its assets and did not reflect increases or decreases in asset values. Thus, under the partnership agreement, a surviving partner would benefit from increases in asset value over time.

When Michael died in 1997, James and Claudia invoked the buyout provision and Michael's estate was paid $34,503.08 for his one-third interest in Booth Computers. When Claudia died in 2007, James once again attempted to rely on the buyout provision. Due to the large disparity between the net book value and fair market value of the partnership, Claudia's estate filed a lawsuit seeking to recover one-half of the partnership's fair market value. At trial, the trial court rejected the estate's arguments that fair market value was the proper methodology to utilize and awarded a judgment based on the partnership's book value.

The estate subsequently filed an appeal with the Appellate Division in which it contended that the trial court erred in enforcing the buyout provision because (1) the term "net book value" is sufficiently ambiguous to encompass fair market value, (2) the judge failed to utilize the gap filling provisions of the Uniform Partnership Act, and (3) the...

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