Transcript Chapter 23

P A R T
9
Partnerships
Introduction to Forms of Business
and Formation of Partnerships
Operation of Partnerships
Dissolution & Winding Up
Limited Liability Companies &
Limited Partnerships
McGraw-Hill/Irwin Business Law, 13/e
© 2007 The McGraw-Hill Companies, Inc. All rights reserved.
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)
Learning Objectives
 Dissociation
 Dissolution
and winding up the
partnership business
 When the business is continued
 Partners joining an existing partnership
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Overview
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 reemerge 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

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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
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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


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A partnership agreement may provide for a right
of dissociation
Nonwrongful v. Wrongful
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

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Nonwrongful v. Wrongful
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
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Nonwrongful v. Wrongful
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:
3.



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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
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
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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

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Thus dissolution is not
automatic
Dissolution
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

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Dissolution

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
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Dissolution & Apparent Authority
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

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Dissolution & Apparent Authority
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
2.
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Paciaroni v. Crane

Facts:


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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

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.

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Distribution of Assets

After partnership assets
have been sold during
winding up, proceeds
are distributed to those
who have claims against
the partnership

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Includes partners, but
creditor claims satisfied
first
Distribution of Assets

Remaining proceeds from sale of assets will
be distributed to the partners according to
the net amounts in their capital accounts

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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 For an LLP
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

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Termination

After partnership assets have been
distributed, termination of the partnership
occurs automatically
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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

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Buyout
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

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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:

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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 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)
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Test Your Knowledge

True=A, False = B


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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.
Test Your Knowledge

True=A, False = B



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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
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)
 (b)
 (c)
 (d)

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Engaged in wrongful dissociation
Engaged in nonwrongful dissociation
Engaged in wrongful dissolution
Engaged in nonwrongful dissolution
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)
 (b)
 (c)
 (d)

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Engaged in wrongful dissociation
Has exercised a partnership right
Engaged in nonwrongful dissociation
None of the above
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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