Chapter 39: Partners’ Dissociation and Partnerships’ Dissolution and Winding Up
I.Dissociation
A.RUPA Definition: a change in the relationship of the partners caused by any partner’s ceasing to be associated in the carrying on of the business
B.May be caused by a partner’s
1.Retirement
2.Death
3.Expulsion
4.Bankruptcy filing
C.Right v. Power
1.A partner has the POWER to dissociate at any time
2.A partner only has the RIGHT to dissociate when
a.It does not violate the partnership agreement; and
b.Is otherwise nonwrongful
D.Nonwrongful v. Wrongful Dissociations
1.Nonwrongful dissociations
a.Death of a partner
b.Withdrawal of a partner at any time from a partnership at will
c.Withdrawal of a partner within 90 days after another partner’s death, adjudicated incapacity, appointment of a custodian over his property, or wrongful dissociation in a partnership for a term or completion of an undertaking
d.Withdrawal in accordance with the partnership agreement
e.Automatic dissociation by occurrence of an event listed in the agreement
f.Expulsion of a partner in accordance with the agreement
g.Expulsion of a partner who has transferred his transferable partnership interest or suffered a charging order against his interest (under the RUPA, must be approved by all other partners)
h.Expulsion of a partner with whom it is unlawful for the partnership to carry on business
i.A partner’s assigning his assets for the benefit of creditors or consenting to the appointment of a custodian over his assets
j.Appointment of a guardian over a partner or a judicial determination that a partner is incapable of performing
2.Wrongful dissociations
a.Include
i.Withdrawal of a partner that breaches the agreement
ii.Withdrawal of the partner before the end of the partnership’s term or completion of its undertaking, unless it occurs within 90 days of another partner’s death, adjudicated incapacity, appointment of a custodian of over his property, or wrongful dissociation
iii.A partner’s filing of bankruptcy petition or being a debtor in bankruptcy
iv.Expulsion of a partner by a court at the request of the partnership or another partner, when
a)Wrongful conduct adversely and materially effects business
b)Willful or persistent breach of agreement or fiduciary duties
c)Conduct makes it not reasonably practical to conduct business
b.Consequences
i.No right to demand that the partnership be dissolved and business wound up
ii.No right to perform the winding up
iii.Not entitled to receive buyout price until the term of the partnership has expired
E.Acts not causing dissociation
1.Transfer of transferable partnership interest
2.Creditor obtaining a charging order
3.Addition of a partner
4.Mere disagreements between partners
F.Effect of partnership agreement
1.The RUPA = default rules
2.May limit or expand the definition of dissociation and those that are wrongful
3.May change the effects of nonwrongful or wrongful dissociations
4.May reduce the number of partners that must approve the expulsion of a partner and expand the grounds
II.Dissolution and Winding Up the Partnership Business
A.Process
1.Involves the orderly liquidation, or sale, of the business assets
2.Distributions-in-kind
a.Partners may wish to receive the assets rather than the proceeds from their sale
b.Rarely permitted
3.Partners continue as fiduciaries to each other during winding up, unless the duties are unrelated to the winding up process
B.Events Causing Dissolution and Winding Up Per RUPA
1.Partnership’s term has expired
2.Partnership has completed its undertaking
3.Agreement by all partners
4.Event occurs as stated in the partnership agreement that will prompt a winding up
5.Any partner withdraws from the partnership, in a partnership at will, except a partner who
a.Is deceased
b.Was expelled
c.Is a debtor in bankruptcy
d.Assigned his assets for the benefit of creditors
e.Had a custodian appointed over his assets
f.Was automatically dissociated by the occurrence of an event listed in the agreement
6.For a partnership for a term or completion of an undertaking, if at least half of the remaining partners vote to dissolve and wind up the partnership within 90 days after a partner dies, wrongfully dissociates, assigns his property for the benefit of his creditors, or consents to the appointment of a custodian over his property
7.The business of the partnership is unlawful
8.The request of a partner when a court finds that the economic purpose is unreasonably frustrated
9.The request of a transferee of a partner’s interest when a court finds it is equitable
C.Effect of Partnership Agreement
1.All of the RUPA default rules may be altered by the partnership agreement, with the exception of 7-9 above
2.Any partner who has not wrongfully dissociated may force winding up
3.Horizon/CMS Healthcare Corp. v. Southern Oaks Health Care, Inc.:
a.A trial court’s finding that all parties are incapable of continuing to operate a business together is a finding of “irreconcilable differences” as listed in the agreement
b.Thus, since dissociation was not wrongful, the appellant was not entitled to damages for lost future profits
c.Although RUPA contains a provision for lost future profits as the result of wrongful dissociation, it does not contain the same provision for dissolutions
D.Joint Ventures and Mining Partnerships
1.Rules of dissociation and dissolution apply to joint ventures
2.As for mining partnerships,
a.The death of a mining partner does not cause a dissolution
b.A mining partner may sell his interest to another person and dissociate without causing a dissolution
E.Performing Winding Up
1.Any partner who has not wrongfully dissociated may perform the winding up
2.A winding up partner is entitled to reasonable compensation for the services as well as his or her usual share of the profits
F.Partner’s Authority During Winding Up
1.Express authority: what the partners have agreed
2.Implied authority: acts appropriate for winding up the business
a.Includes the power to perform contracts made before dissolution but not yet performed
b.May not enter into new contracts unless they aid in the liquidation of assets
c.Generally includes no power to borrow money
3.Apparent authority:
a.To conduct the business as they did before the dissolution, when notice is not given to those who knew of the partnership prior to the dissolution
b.Can eliminate by ensuring that
i.Third party knows or has reason to know of the dissolution
ii.Third party has received notification by delivery to place of business
iii.Dissolution has come to the attention of the third party
iv.Partner has filed a Statement of Dissolution with the secretary of state - third party is deemed to have notice 90 days later
G.Disputes
1.Decisions in the ordinary course of winding up are controlled by the majority of the partners
2.Extraordinary decisions are controlled by unanimous approval
3.Paciaroni v. Crane:
a.Generally new business will not be conducted and new contractual commitment will not be made during winding up
b.Exception: a better price upon final liquidation is likely to be obtained by the temporary continuation of business
H.Distribution of Dissolved Partnership’s Assets
1.Claims of creditors must be satisfied first, including a creditor partner
2.Remaining proceeds will be distributed to the partners according to the net amounts in their capital accounts
a.The capital account is credited for any capital contributions the partner made to the partnership plus the share of profits
b.The account is charged for the partner’s share of losses and any distributions made
3.If creditors cannot be paid from the partnership’s assets, they can proceed against the partners, including a creditor partner
I.Asset Distributions in a LLP
1.Each partner will receive the net amount in her capital account if the partnership has been profitable
2.An LLP partner is not ordinarily required to contribute an amount equal to the negative balance in her account and cannot be sued by creditors, unless the partner has committed malpractice or another wrong
J.Termination: Occurs automatically after the assets of a partnership have been distributed
III.When the Business Is Continued
A.Successor’s Liability for Predecessor’s Obligations
1.Creditors remain creditors of the person or partnership continuing the business
2.The original partners remain liable for obligations incurred prior to dissociation unless there is an agreement with the creditors to the contrary
B.Dissociated Partners’ Liability for Obligations Incurred While a Partner
1.Remain liable to partnership creditors for liabilities incurred while they were partners
2.May be eliminated by the process of a novation
a.The continuing partners release a dissociated partner from liability on partnership debt; and
b.A partnership creditor releases the dissociated partner from liability on the same obligation
i.An implied novation may be established by a creditor’s knowledge of the withdrawal and his or her continued extension of credit to the partnership
ii.Also, a material modification in the nature or time of payment functions as a novation with respect to the outgoing partner if the creditor knows of the dissociation
C.Dissociated Partner’s Liability for Obligations Incurred After Leaving the Partnership
1.Generally, a dissociated partner has no liability for obligations incurred after he or she leaves
2.Under RUPA, dissociated partners are liable to third parties who enter into a transaction with the continuing partnership, unless
a.The other party did not reasonably believe that the dissociated partner was still a partner
b.Other party knew or should have known or has received notification of the dissociation
c.Transaction was entered into more than 90 days after the filing of a Statement of Dissociation with the secretary of state; or
d.Transaction was entered into more than two years after the partner has dissociated
3.Retains apparent authority to bind the partnership on matters in the ordinary course of business
4.In Re Labrum & Doak, LLP: dissociated partners did not prove that notice was provided to creditors or that a novation occurred and therefore were held liable for debts incurred after their dissociation
D.Buyout of Dissociated Partners
1.Continuing partnership is required to purchase the dissociated partner’s interest
2.Buyout price is the greater of
a.The amount that would have been in the dissociated partner’s capital account had the partnership liquidated all assets on the dissociation date; or
b.The amount in the capital account had it sold the entire business as a going concern on that date
3.Price is reduced by any damages caused by the wrongfully dissociated partner
4.Partnership must pay the dissociated partner in cash within 120 days after he has demanded payment in writing
a.Must include interest from the date of dissociation
b.If no agreement on buyout price, must pay the partnership’s estimate of the price in cash
5.Partnership may wait to buyout wrongfully dissociated partners until the end of the partnership’s term, in the absence of undue hardship
6.Creel v. Lilly:
a.RUPA allows for the partnership to continue even with the departure of a member
b.A partnership no longer automatically dissolves due to a change in membership, and may be continued if the remaining partners elect to buy out the dissociated partner
c.The estate of the deceased partner no longer has to consent in order for the business to continue and does not have the right to compel liquidation
d.Intent of the parties, as evidenced by the partnership agreement, indicates that they did not intend a “fire sale,” and trial judge could have concluded that the parties exercised their buyout option
IV.Partners Joining an Existing Partnership
A.RUPA
1.Fully liable for all partnership obligations incurred after becoming a partner
2.No liability for partnership obligations incurred before becoming a partner
B.LLPs and RUPA: no liability for the obligations of the LLP beyond capital contribution, whether incurred before or after admission