3. Learning Objectives
v Dissociation
v Dissolution and winding up the
partnership business
v When the business is continued
v Partners joining an existing partnership
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4. Overview
v Sometimes even the best-laid plans go awry
and a business fails
v 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
v Whether an ending or new beginning, this
chapter is about controlling a change in
direction
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5. Dissociation
v 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:
w A partner’s retirement, death, or expulsion
w A bankruptcy filing
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6. Dissociation
v Dissociation starts the process of dissolution,
winding up (liquidation), and termination of a
partnership
v 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
w A partnership agreement may provide for a right
of dissociation
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7. Nonwrongful Dissociation
v Nonwrongful
dissociation does not
violate a partnership
agreement and includes
events such as the
death or retirement of a
partner, or partner’s
withdrawal in
accordance with
partnership agreement
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8. 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
w Unless partner withdraws within 90 days after
another partner’s death, adjudicated incapacity,
appointment of custodian over his property, or
wrongful dissociation
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9. 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
the partnership or another partner based on:
w Partner’s wrongful conduct that adversely affects
partnership business
w Partner’s wilfull and persistent breach of fiduciary
duties or the partnership agreement
w Partner’s conduct makes it unreasonable to conduct
partnership business with the partner
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10. Other Events & The Agreement
v Acts not causing dissociation include:
w Partner’s transfer of transferable partnership
interest
w Creditor obtaining a charging order
w Adding a partner
w Disagreements between partners
v Partners may limit or expand the definition
of dissociation and events considered
wrongful or nonwrongful
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11. After Dissociation
v When a partner
dissociates, dissolution
may be the next step, but
RUPA allows the
partnership business to
continue after a partner’s
dissociation
w Thus dissolution is not
automatic
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12. Dissolution
v RUPA provides a list of events
that force a partnership to be
dissolved and wound up
v May be altered by agreement
w 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
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13. Dissolution
v Dissolution begins the winding up process:
w Orderly liquidation of the partnership assets and
the distribution of the proceeds to those having
claims against the partnership
v 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
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14. Dissolution &
Apparent Authority
v 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
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15. 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
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16. Paciaroni v. Crane
v Facts:
w Partnership owned racehorse; a disagreement
arose related to veterinary care and training
w Two partners (plaintiffs) notified partner Crane
they were dissolving the partnership and
directed Crane to deliver horse to a trainer
w 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
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17. Paciaroni v. Crane
v Legal Reasoning and Conclusion:
w Once dissolution occurs, the partnership
continues only to the extent necessary to
complete transactions begun but not finished.
w 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
w The court also established some conditions.
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18. Winding Up and
Distribution of Assets
v After partnership assets
have been sold during
winding up, proceeds are
distributed to those who
have claims against the
partnership
w Includes partners, but
creditor claims satisfied
first
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19. Distribution of Assets
v Remaining proceeds from sale of assets
will be distributed to the partners according
to the net amounts in their capital accounts
w Partner’s capital account is credited (increased)
for capital contributions partner made to
partnership plus partner’s share of profits
w Partner’s capital account is charged
(decreased) for partner’s share of partnership
losses
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20. Distribution of Assets For an
LLP
v Asset distribution rules modified for limited
liability partnership since in an LLP most
partners have no liability for partnership
obligations
v 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
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21. Termination
v After partnership assets have been
distributed, termination of the partnership
occurs automatically
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22. If Business Continued
v Partners may choose not to seek
dissolution and winding up after
dissociation
v When the business of a partnership is
continued, creditors of the partnership
continue as creditors of the person or
partnership continuing the business.
v Original partners remain liable for
obligations incurred prior to dissociation
39 - 22 Including dissociated partners
w
23. In re Labrum & Doak
v In bankruptcy proceeding of partnership,
dissociated partners argued they were not
liable for partnership obligations
v Court considered UPA and RUPA rules and
concluded that dissociated partners had
neither notified creditors of dissociation nor
obtained by agreement with partnership any
discharge of liabilities
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24. Buyout
v When partnership continues, partnership is
required to purchase dissociated partner’s
partnership interest
v Partnership agreement may specify how to
value the partnership or RUPA rules the
amount and timing of a buyout of
dissociated partner’s interest
w See Warnick v. Warnick
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25. Partners Joining Partnership
v A partnership agreement generally states
terms under which a new partner is
admitted to a partnership
v In absence of a partnership agreement,
RUPA sets rules for partner’s admission
and rights and duties upon admission:
w New partner fully liable for all partnership
obligations incurred after admission as partner,
but no liability for obligations incurred before
admission as partner
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26. Partners Joining LLP
v 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)
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27. Test Your Knowledge
v True=A, False = B
w Dissociation is the orderly liquidation of the
partnership assets and the distribution of the
proceeds to those having claims against the
partnership.
w When a partner dissociates, dissolution is the
required next step.
w 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.
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28. Test Your Knowledge
v True=A, False = B
w 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
w Winding up partners have apparent authority
to conduct business as they did before
dissolution
w When a partnership continues, the
partnership must purchase the dissociated
partner’s partnership interest
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29. Test Your Knowledge
v Multiple Choice
w 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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30. Test Your Knowledge
v Multiple Choice
w 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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31. Thought Questions
v 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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Hinweis der Redaktion
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.”
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.
Another ranching family dispute. Photo is of Wyoming ranch. 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.
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.