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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. 1. C H A P T E R 39 Partners Dissociation andPartnerships 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. 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. 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. 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. 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. 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. 7. Wrongful Dissociation1. Withdrawal of a partner that breaches an express provision of partnership agreement2. 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. 8. Wrongful Dissociation1. A partner’s filing a bankruptcy petition or being a debtor in bankruptcy2. 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. 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. 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. 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. 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. 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. 14. Dissolution & Apparent Authority1. Third party received dissolution notification by delivery of communication to third party’s place of business2. Dissolution has come to the attention of the third party3. A partner filed a Statement of Dissolution with the secretary of state limiting the partners’ authority during winding up 39-14
  15. 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. 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. 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. 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. 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. 20. Termination• After partnership assets have been distributed, termination of the partnership occurs automatically 39-20
  21. 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. 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. 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 Plaintiffs 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 ranchs value. 39-23
  24. 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. 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. 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. 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. 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. 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. 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. 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