Chapter 39 – Partners’ Dissociation and Partnerships’ Dissolution and Winding Up
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Chapter 39 – Partners’ Dissociation and Partnerships’ Dissolution and Winding Up
- 1. C H A P T E R 39 Partners' Dissociation and Partnerships' Dissolution and Winding Up Change is inevitable, but it is in us to control its content and directions. Indira Ghandhi , Indian Prime Minister, speech (Jan. 8, 1967) 39-1
- 2. Learning Objectives • Define dissociation and identify actions that cause wrongful and nonwrongful dissociations • Understand the causes of dissolution and the process of winding up • Identify issues involved in adding new partners to existing partnerships 39-2
- 3. Overview • Sometimes even the best-laid plans go awry and a business fails • Sometimes, it is simply time to make a change by modifying a partnership business to re-emerge as another partnership form, such as a Limited Liability Company, or a corporation • Whether an ending or new beginning, this chapter is about controlling a change 39-3
- 4. Dissociation • The Revised Uniform Partnership Act (RUPA) defines dissociation as a change in the relation of partners caused by any partner ceasing to be associated in the carrying on of the business: – A partner’s retirement, death, or expulsion – A bankruptcy filing 39-4
- 5. Dissociation • Dissociation starts the process of dissolution, winding up (liquidation), and termination of a partnership • A partner has the power – but not necessarily the right – to dissociate from the partnership at any time, such as by withdrawing from the partnership – A partnership agreement may provide for a right of dissociation 39-5
- 6. Nonwrongful Dissociation • Nonwrongful dissociation does not violate a partnership agreement and includes events such as the death or retirement of a partner, or a partner’s withdrawal in accordance with the partnership agreement 39-6
- 7. Wrongful Dissociation 1. Withdrawal of a partner that breaches an express provision of partnership agreement 2. Withdrawal of a partner before the end of the partnership’s term or completion of its undertaking – Unless partner withdraws within 90 days after another partner’s death, adjudicated incapacity, appointment of custodian over his property, or wrongful dissociation 39-7
- 8. Wrongful Dissociation 1. A partner’s filing a bankruptcy petition or being a debtor in bankruptcy 2. Judicial expulsion of a partner by request of partnership or another partner for: – Partner’s wrongful conduct that adversely affects partnership business – Partner’s wilfull and persistent breach of fiduciary duties or the partnership agreement – Partner’s conduct makes it unreasonable to conduct partnership business with the partner 39-8
- 9. Other Events & The Agreement • Acts not causing dissociation include: – Partner’s transfer of transferable partnership interest – Creditor obtaining a charging order – Adding a partner – Disagreements between partners • Partners may limit or expand the definition of dissociation and events considered wrongful or nonwrongful 39-9
- 10. After Dissociation • When a partner dissociates, dissolution may be the next step, but RUPA allows the partnership business to continue after a partner’s dissociation – Thus dissolution is not automatic 39-10
- 11. Dissolution • RUPA provides a list of events that force a partnership to be dissolved and wound up • May be altered by agreement – Schwartz v. Family Dental Group, P.C. : court interpreted the partnership agreement to allow two dental partners to expel a third partner from partnership without cause 39-11
- 12. Dissolution • Dissolution begins the winding up process: – Orderly liquidation of partnership assets and the distribution of proceeds to those having claims against the partnership • Winding up partner has implied authority to do those acts appropriate for winding up the partnership business and apparent authority to conduct business as s/he did before dissolution 39-12
- 13. Dissolution & Apparent Authority • To eliminate apparent authority of winding up partner to conduct business in ordinary way, the partnership must ensure one or more of these occur: 2. Third party knows or has reason to know partnership has been dissolved 39-13
- 14. Dissolution & Apparent Authority 1. Third party received dissolution notification by delivery of communication to third party’s place of business 2. Dissolution has come to the attention of the third party 3. A partner filed a Statement of Dissolution with the secretary of state limiting the partners’ authority during winding up 39-14
- 15. Paciaroni v. Crane • Facts: – Partnership owned racehorse; disagreement arose related to veterinary care and training – Two partners (plaintiffs) notified partner Crane they were dissolving the partnership and directed Crane to deliver horse to a trainer – Crane refused to relinquish control and plaintiffs sued, requesting court to appoint a receiver to continue racing the horse and then sell the horse; Crane objected 39-15
- 16. Paciaroni v. Crane • Legal Reasoning & Conclusion: – Once dissolution occurs, the partnership continues only to extent necessary to complete transactions begun but not finished – The partnership’s business purpose was to race the horse, thus “the winding up of the partnership affairs should include the right to race” the horse – Court also established some conditions. 39-16
- 17. Winding Up and Distribution of Assets • After partnership assets have been sold during winding up, proceeds are distributed to those who have claims against the partnership – Includes partners, but creditor claims satisfied first 39-17
- 18. Distribution of Assets • Remaining proceeds from sale of assets will be distributed to the partners according to the net amounts in their capital accounts – Partner’s capital account is credited (increased) for capital contributions partner made to partnership plus partner’s share of profits – Partner’s capital account is charged (decreased) for partner’s share of partnership losses 39-18
- 19. Distribution of Assets For an LLP • Asset distribution rules modified for limited liability partnership since in an LLP most partners have no liability for partnership obligations • If a partner committed malpractice or another wrong for which LLP statutes do not provide liability protection, the partner must contribute funds to the partnership 39-19
- 20. Termination • After partnership assets have been distributed, termination of the partnership occurs automatically 39-20
- 21. If Business Continued • Partners may choose not to seek dissolution and winding up after dissociation • When the business of a partnership is continued, creditors of the partnership continue as creditors of the person or partnership continuing the business. • Original partners remain liable for obligations incurred prior to dissociation – Including dissociated partners 39-21
- 22. Buyout • When partnership continues, partnership is required to purchase dissociated partner’s partnership interest • RUPA governs the amount and timing of a buyout of dissociated partner’s interest, or the partnership agreement may specify how to value the partnership 39-22
- 23. Warnick v. Warnick • Facts and Procedural History: – A general partner in a family ranch business sued the partnership and the other two partners (his parents) on various contract, quasi-contract and partnership theories, seeking recovery of his partnership interest. On cross motions for summary judgment, the district court granted Plaintiff's motion, found that dissociation and buyout of the Plaintiff was the appropriate remedy and entered judgment in the amount of $230,819.14 for his share of the ranch's value. 39-23
- 24. Warnick v. Warnick • Appellate Opinion: – A partnership agreement governs relations among general partners and between partners and their partnership, but if an agreement is silent or ambiguous, RUPA provisions apply – Dissociation occurred, so buyout is necessary – Case remanded for a calculation of that price after repayment of partner advances as loans 39-24
- 25. Partners Joining Partnership • A partnership agreement generally states terms under which a new partner is admitted to a partnership • In absence of a partnership agreement, RUPA sets rules for partner’s admission and rights and duties upon admission: – New partner fully liable for all partnership obligations incurred after admission as partner, but no liability for obligations incurred before admission as partner 39-25
- 26. Partners Joining LLP • RUPA states that a new partner in an LLP incurs no liability for any LLP obligations, whether incurred before or after admission, beyond new partner’s capital contribution unless new partner committed malpractice or other wrong (and incurs personal liability) 39-26
- 27. Test Your Knowledge • True=A, False = B – Dissociation is the orderly liquidation of the partnership assets and the distribution of the proceeds to those having claims against the partnership. – When a partner dissociates, dissolution is the required next step. – Winding up is a change in the relation of partners caused by any partner ceasing to be associated in the carrying on of the business. 39-27
- 28. Test Your Knowledge • True=A, False = B – In winding up, remaining proceeds from the sale of assets will be distributed to the partners according to the net amounts in their capital accounts – Winding up partners have apparent authority to conduct business as they did before dissolution – When a partnership continues, the partnership must purchase the dissociated partner’s partnership interest 39-28
- 29. Test Your Knowledge • Multiple Choice – James was a partner in a three-person law partnership without a partnership agreement. Medical bills forced James to file for personal bankruptcy. James has: a) Engaged in wrongful dissociation b) Engaged in nonwrongful dissociation c) Engaged in wrongful dissolution d) Engaged in nonwrongful dissolution 39-29
- 30. Test Your Knowledge • Multiple Choice – Greg, Pat, and Oprah were partners in a music store. Greg transferred his transferable partnership interest to his nephew. Greg: a) Engaged in wrongful dissociation b) Has exercised a partnership right c) Engaged in nonwrongful dissociation d) None of the above 39-30
- 31. Thought Questions • How would you deal with a partner who was mismanaging the firm or committed malpractice? How would you deal with a partner who had a substance abuse problem? 39-31
Editor's Notes
- Nonwrongful dissociation: 1.Death of a partner. 2. Withdrawal of a partner at any time from a partnership at will. 3. In a partnership for a term or completion of an undertaking, withdrawal of a partner within 90 days after another partner’s death, adjudicated incapacity, appointment of a custodion over his property, or wrongful dissociation. 4. Withdrawal of a partner in accordance with the partnership agreement. 5. Automatic dissociation by the occurrence of an event agreed to in the partnership agreement. 6. Expulsion of a partner in accordance with the partnership Agreement. 7. Expulsion of a partner who has transferred his transferable partnership interest or suffered a charging order against his transferable interest. Under the RUPA, such an expulsion must be approved by all the other partners, absent a contrary partnership agreement. 8. Expulsion of a partner with whom it is unlawful for the partnership to carry on its business. Under the RUPA, this expulsion must be approved by all the other partners, absent a contrary agreement. 9. A partner’s assigning his assets for the benefit of creditors or consenting to the appointment of a custodian over his assets. 10. Appointment of a guardian over a partner or a judicial determination that a partner is incapable of performing as a partner.
- Hyperlink is to the case opinion on the state website. In 1996, Steven Schwartz, Ken Epstein, and Peter Munk entered into a partnership agreement. All were dentists by profession. Under the partnership agreement, they formed Family Dental Group-Clinton Associates in Bridgeport, Connecticut. Their partnership agreement provided the following: The partnership was to continue until the year 2051, unless the partners agreed to an early dissolution. The partners wanted the partnership to survive their deaths. The partners were to devote full professional time and attention to the partnership during the first five years of its inception. The two practicing partners, Schwartz and Munk, were to receive 35 percent of their collections from patients. Additionally, any profit beyond expenses would be put into a profit pool of which the first 20 percent would be divided equally between all three partners and the remaining, if any, would be divided equally between Schwartz and Munk. In 1997, Schwartz reduced his workload, decreasing his hours on Wednesdays and Thursdays, and eliminating Fridays. Munk, however, maintained a consistent, full-time work schedule. When Munk became aware of Schwartz’s schedule change, he became upset and ceased communicating with Schwartz. Munk was dissatisfied with Schwartz’s management style and the way he conducted his practice. Munk expressed his dissatisfaction to Epstein through letters he wrote to him over the course of several years; however, he did not approach Schwartz directly. Despite Munk’s unhappiness, Schwartz was able to function normally in the office and interact appropriately with the remaining staff. In 2002, Epstein and Munk offered to buy out Schwartz’s interest in the practice, or alternatively, to keep him as a partner while eliminating his management responsibilities and his share of the profits. Schwartz rejected the offer. In February 26, 2003, at a special meeting of the partners, Ken Epstein and Munk voted to terminate Schwartz from the practice “without cause” and provided him with 90 days notice pursuant to §12(a)(i) in the partnership agreement. Schwartz sued Munk and Epstein seeking restoration of his partnership status. The court concluded that Munk and Epstein did not provide a reasonable basis for Schwartz’s termination. Munk and Epstein appealed to the Court of Appeals of Connecticut. Appellate court: “In the present case, it is clear that the provision in §12(a)(i) does not violate public policy and is enforceable…. The language of §12(a)(i), specifically, that either party shall give the other ninety days notice, clearly indicates that this provision does not simply apply to voluntary withdrawal. The term used in the provision, “either party,” evidences the intent of the parties that this provision be a termination without cause provision…. Thus, we conclude that the provision is enforceable and that it permits the termination of Schwartz’s association with the partnership in the manner taken by Munk and Epstein. Accordingly, we disagree with the conclusion of the trial court.”
- Hyperlink is to the case on the McGraw-Hill Higher Education website. Black Ace, a harness racehorse of exceptional speed, was the fourth best pacer in the United States in 1979. He was owned by a partnership: Richard Paciaroni owned 50 percent; James Cassidy, 25 percent; and James Crane, 25 percent. Crane, a professional trainer, was in charge of the daily supervision of Black Ace, including training. It was understood that all of the partners would be consulted on the races in which Black Ace would be entered, the selection of drivers, and other major decisions; however, the recommendations of Crane were always followed by the other partners because of his superior knowledge of harness racing. In 1979, Black Ace won $96,969 through mid-August. Seven other races remained in 1979, including the prestigious Little Brown Jug and the Messenger at Roosevelt Raceway. The purse for these races was $600,000. A disagreement among the partners arose when Black Ace developed a ringbone condition and Crane followed the advice of a veterinarian not selected by Paciaroni and Cassidy. The ringbone condition disappeared, but later Black Ace became uncontrollable by his driver, and in a subsequent race he fell and failed to finish the race. Soon thereafter, Paciaroni and Cassidy sent a telegram to Crane dissolving the partnership and directing him to deliver Black Ace to another trainer they had selected. Crane refused to relinquish control of Black Ace, so Paciaroni and Cassidy sued him in August 1979, asking the court to appoint a receiver who would race Black Ace in the remaining 1979 stakes races and then sell the horse. Crane objected to allowing anyone other than himself to enter the horse in races. Before the trial court issued the following decision, Black Ace had entered three additional races and won $40,000.
- Court: “It is generally accepted that once dissolution occurs, the partnership continues only to the extent necessary to close out affairs and complete transactions begun but not then finished. It is not generally contemplated that new business will be generated or that new contractual commitments will be made. This, in principle, would work against permitting Black Ace to participate in the remaining few races for which he is eligible. However, in Delaware, there have been exceptions to this…The business purpose of the partnership was to own and race Black Ace for profit…. He is currently “racing fit” according to the evidence. He has at best only seven more races to go over a period of the next six weeks,…Under these circumstances, I conclude that the winding up of the partnership affairs should include the right to race Black Ace in some or all of the remaining 1979 stakes races for which he is now eligible. The final question, then, is who shall be in charge of racing him…. On this point, I rule in favor of Paciaroni and Cassidy. They may, on behalf of the partnership, continue to race the horse through their new trainer, subject, however, to the conditions hereafter set forth. Crane does have a monetary interest in the partnership assets that must be protected…” The Court set several conditions that effectively slapped the hands of all parties.
- Hyperlink is to the opinion on the Findlaw.com website. In the Warnick case between a son and his parents, we see again the risks of relying on the RUPA to resolve partnership issues. The case shows that the RUPA’s less than unambiguous provision for valuing a partner’s interest should be replaced in the partnership agreement by a concrete valuation method that covers every aspect of valuation the partners want to consider.
- Hyperlink is to the opinion on the Findlaw.com website. Court: “Where it is contemplated that a business will continue, it is not appropriate to assume an immediate liquidation with its attendant transactional costs and taxes. We therefore hold that, under Wyo. Stat. Ann. § 17-21-701(b), purely hypothetical costs of sale are not a required deduction in valuing partnership assets. We find no error in the district court rejecting the $50,000 deduction urged by Warnick Ranches in calculating the buyout price. Judgment for Randall Warnick affirmed.”
- False. The description refers to winding up. False. When a partner dissociates, dissolution may be the next step. False. The description refers to dissociation.
- True. True. However, this may be altered by taking particular actions. True.
- The correct answer is (a).
- The correct answer is (b).
- Opportunity to discuss choices about coping with partners.