LIMITED PARTNERSHIP INTEREST NOT INCLUDED IN EQUITABLE DISTRIBUTION BECAUSE PARTNER’S INTEREST WAS TERMINATED IF THAT PERSON DIVORCED
In this divorce proceeding, husband’s interest in a limited partnership was not included in the division of property, because the partnership agreement contained a valid provision stating that a partner’s interest was terminated if that person divorced.
Wife filed an action for dissolution of marriage. The parties were married in July 1999. They separated in December 2014. During the marriage, husband obtained a 33% interest in a limited partnership known as Barth Family Ltd. (“BFL”). BFL was created in December 1999, by husband’s parents. Husband and one of his brothers were named as limited partners of BFL from the beginning, but the initial capital contributions, totaling $653,000, were made solely by husband’s parents. Over the years, husband and his brother made gifts of partnership interests to a third brother, with all three brothers eventually owning an equal number of units in BFL. In 2012, the brothers and their parents entered into a settlement agreement and mutual release. Husband and his brothers bought out their parents’ entire interest in BFL in 2013 by paying them $1.3 million.
Husband sought a declaratory judgment for ancillary relief, asking the court to make a declaration regarding husband’s ownership interest in BFL and whether any such interest constituted marital property for purposes of equitable distribution in the divorce. At the hearing on the declaratory relief matter, wife testified that there was no discussion with husband during the marriage relating to the BFL limited partnership agreement. Wife was not involved in the drafting of the agreement and was never asked for her input. She only became aware of the limited partnership agreement three months after the parties separated. Wife acknowledged she did not know anything about the books of the partnership. With regard to the division of property in the divorce, wife made a claim for equitable distribution as to husband’s ownership interest in BFL.
The limited partnership agreement for BFL recited that all capital contributions were made by husband’s parents. Paragraph 15 of the limited partnership agreement specifically provided that if a limited partner died, divorced, became insane, or had a judgment entered against him in excess of $1,000, that partner’s interest was terminated immediately and his interest in BFL was to be distributed on a pro rata basis among the remaining limited partners.
The court held that paragraph 15 was enforceable, because it clearly, concisely and unambiguously provided that upon divorce, a partner’s interest was terminated and distributed among the other partners. Accordingly, the court determined it was required to give effect to the language contained in the limited partnership agreement. Husband received the property as a gift from his parents, so his ownership interest in BFL was non-marital property. However, the increase in value was marital property. The court directed the equitable master to first calculate the increase in value over the course of the marriage of husband’s ownership interest in BFL, then use this calculated increase as a factor in forming the equitable distribution recommendation. The court also indicated the master should not use the increase in value figure in husband’s ownership interest in BFL as a dollar-for-dollar offset, nor consider husband’s interest in BFL as an asset, because once the divorce decree was entered, husband would no longer own the interest in the partnership.
Reference: Digest of Recent Opinions, Pennsylvania Law Weekly, 40 PLW 103, October 31, 2017, Barth v. Barth, PICS Case No. 17-1576 (C.P. Lawrence Mar. 24, 2017) Hodge, J.
Kindly visit our Business Planning or Equitable Distribution websites or contact one of our Business Planning Attorneys, Philadelphia or Divorce Attorneys, Philadelphia at 215-977-8200 for more information on this topic.