PART

PART

Partnerships

9

McGraw-Hill/Irwin Business Law, 13/e

© 2007 The McGraw-Hill Companies, Inc. All rights reserved.

Introduction to Forms of Business and Formation of Partnerships

Operation of PartnershipsDissolution & Winding Up

Limited Liability Companies & Limited Partnerships

PARTNERS’ DISSOCIATION AND PARTNERSHIPS’ DISSOLUTION AND

WINDING UP

PA ET RHC 39

“Change is inevitable, but it is in us to control its

content and directions.”

Indira Ghandhi , Indian Prime Minister, speech (Jan. 8, 1967)

Learning Objectives

DissociationDissolution and winding up the

partnership business When the business is continuedPartners joining an existing

partnership

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Sometimes even the best-laid plans go awry and a business fails

Sometimes, it’s just time to make a change, modifying a partnership business to re-emerge as another partnership form, a Limited Liability Company, or a corporation

Whether an ending or new beginning, this chapter is about controlling a change in direction

Overview

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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

Dissociation

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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

Dissociation

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Nonwrongful dissociation does not violate a partnership agreement and includes events such as the death of a partner and partner’s withdrawal in accordance with partnership agreement

Wrongful dissociation includes:1. Withdrawal of a partner that breaches

an express provision of partnership agreement

Nonwrongful v. Wrongful

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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 a custodian over his property, or wrongful dissociation

Nonwrongful v. Wrongful

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3. A partner’s filing a bankruptcy petition or being a debtor in bankruptcy

4. Judicial expulsion of a partner by request of the partnership or another partner based on: 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

Nonwrongful v. Wrongful

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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

Other Events & The Agreement

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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

After Dissociation

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RUPA provides a list of events that force a partnership to be dissolved and wound up List may be altered by agreement

In Horizon/CMS Healthcare Corp. v. Southern Oaks Health Care, Inc., the court considered grounds for dissolution contained in RUPA and a partnership agreement

Dissolution

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Dissolution begins the winding up process: Orderly liquidation of the partnership

assets and the distribution of the proceeds to those having claims against the partnership

The implied authority of a winding up partner is the power to do those acts appropriate for winding up the partnership business

Dissolution

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Winding up partners have apparent authority to conduct business as they did before dissolution

To eliminate apparent authority of winding up partner to conduct business in ordinary way, the partnership must ensure that one of the following occurs:

1. A third party knows or has reason to know the partnership has been dissolved

Dissolution & Apparent Authority

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2. A third party received notification of dissolution by delivery of a communication to third party’s place of business

3. Dissolution has come to the attention of the third party

4. A partner filed a Statement of Dissolution with the secretary of state limiting the partners’ authority during winding up

Dissolution & Apparent Authority

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Facts: Partnership owned racehorse; a 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

Paciaroni v. Crane

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Legal Reasoning and Conclusion: Once dissolution occurs, the partnership

continues only to the 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

The court also established some conditions.

Paciaroni v. Crane

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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

Distribution of Assets

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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

Distribution of Assets

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Asset distribution rules modified for a 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

Distribution of Assets For an LLP

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After partnership assets have been distributed, termination of the partnership occurs automatically

Termination

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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

If Business Continued

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When partnership continues, partnership is required to purchase dissociated partner’s partnership interest

Partnership agreement may specify how to value the partnership or RUPA spells outs the amount and timing of the buyout of a dissociated partner’s interest See Creel v. Lilly

Buyout

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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

Partners Joining Partnership

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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)

Partners Joining LLP

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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

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 interest39 - 28

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

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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

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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?

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