BLAW 441 3/20/17 Termination of partnerships
Partnership buy-sell agreements
- Agreement entered into at the formation of the partnership to address dissolution issues - provides that one partner may purchase the other's partnership interest under certain circumstances - often determines the value of the interest being sold and gives other partner or 3rd parties option to purchase interest
1. creditors: 2000+4000=6000 2. partners: 1000 3. return of capital: 4000+2000=6000 4. remainder to partners (agreement) A. 6000 each B. 8000 to Amy; 4000 to Sue 5. Remainder to Partners (no agreement) 6000 --> equally distributed
- Amy and Sue form a partnership (Flower Power) to sell flowers - Amy contributes $4000, Sue gives $2000 - Flower Power has $2000 in bank loans. - Amy lent Flower Power $1000 - Flower Power owes flower broker $4000 - Sue commits bank robbery; the partnership is dissolved - Flower Power has assets of $25000 How are the assets distributed?
He is liable because the bank was not given notice
- Emil and Milton have general partnership (E&M) - E&M borrowed money from bank - Emil and wife execute personal guarantee in bank's favor for any existing or future debt - Emil & Milton dissolve partnership; do not inform bank that partnership is dissolved - 1 year later, Milton obtains loan from bank for E&M. Milton does not pay loan back. - Bank sued Emil to recover debt. - Is Emil liable?
Liability to 3rd parties apparent
- For 2 years after a partner dissociates from a continuing partnership, the partnership may be bound by the acts of the dissociated partner based on ___ authority. - in other words, if a 3rd partner was still a partner, the partnership may be liable - in addition, a dissociated partner may be liable for partnership obligations entered into during a 2 year period following dissociation
D'Artagnan Dissolution and Exercise of Buy-Sell agreement
- In 1985, Ariane Daguin and George Faison started foie gras distributor to sell local delicacies to chefs. - $2 million sales in 1986 - 1993: Consultants urged dividing business into 2 groups. AD (sales and marketing); GF (finance and operations) - buy sell agreement: If partner dies, survivor offered shares at predetermined price. Life insurance on each other to fund purchase. - shot-gun clause: fair price to one partner to buy out other; lawsuit free way for the business to survive - 1999: $20 million in annual revenue - 2004: disagreements began - 2005: GF exercised shotgun clause - 2006: 46 million in annual revenue * she got loan from french bank and bought him out - he couldn't counter due to shot gun clause
wrongful dissociation
- a partner always has the power to dissociate from the firm, but he or she may not have the right to do so - if the partner lacks the right to dissociate, then the dissociation is considered wrongful under the law - a partner who ____ is liable to the partnership and to the other partners for damages caused by the dissociation
Good faith
- each partner must exercise good faith during the dissolution of a partnership - some state statutes allow partners injured by another partner's bad faith to file a tort claim for wrongful dissolution
Duties and compensation
- winding up includes collecting and preserving the partnership assets, discharging liabilities, and accounting to each partner for the value of her or his interest in the partnership - partners continue to have fiduciary duties to one another and to the firm during this process - UPA 401(h) provides that a partner is entitled to compensation for services in winding up partnership affairs above and apart from his or her share in the partnership profits
- has his/her interest bought back by partnership - ends his/her authority to act for partnership - no longer participates in running business with partners
After dissociation, the partner: - - -
Example of being liable for not acting in good faith during dissolution
Attorneys Randall Jordan and Mary Helen Moses formed a 2 member partnership for an indefinite term. Jordan ended the partnership 3 years later and asked the court for declarations concerning the partners' financial obligations. Moses, who had objected to ending the partnership, filed a claim against Jordan for wrongful dissolution and for appropriating $180,000 in fees that should have gone to the partnership. Ultimately, the court held in favor of Moses. A claim for wrongful dissolution of a partnership may be based on damages arising from the excluded partner's loss of "an existing, or continuing, business opportunity" or of income and material assets. Because Jordan had attempted to appropriate partnership assets through dissolution, Moses could sue for wrongful dissolution.
Estate of Webster v. Thomas - Example of dissolution by operation of law - death of partner - No. A state intermediate appellate court affirmed the lower court's ruling in favor of Webster's estate. The trial court had properly determined that Theis and Thomas had failed to liquidate and distribute the company's assets in accord with the partnership agreement and the court order. "The partnership agreement clearly provided that upon Clyde's death and the partners' failure to vote to continue the partnership, the partnership dissolved. Pursuant to the plain language of the partnership agreement, the assets upon dissolution were to liquidated and distributed by paying the partners in proportion to their capital accounts. Yet, the defendants failed to do so." The reviewing court pointed out that despite the agreement's language and despite the circuit court's order, the defendants did nothing. The defendants therefore violated the partnership agreement and were liable for the plaintiff's attorney fees pursuant to the same agreement.
Can a partnership business continue after one partner dies when the partnership agreement specified that the death of one partner would terminate the business? Case?
Example of duty of care continuing after dissociation
Debbie Pearson, a partner who leaves an accounting firm, Bubb & Ferngold, can immediately compete with that firm for new clients. She must exercise care in completing ongoing client transactions, however, and must account to Bubb & Ferngold for any fees received from the former clients based on those transactions.
1. stated time or purpose 2. partner's withdrawal - partnership for term - breach - no term - no breach 3. at least 50% of partners decide in favor of dissolution if certain events occur
How does dissolution by acts of the partners occur?
-apply for a court order that dissolves the partnership
How does dissolution by judicial decree occur?
illegality Ex: illegal light bulbs
How does dissolution by operation of law occur?
To avoid this possible liability, a partnership should notify its creditors, customers, and clients of a partner's dissociation Either the partnership or the dissociated partner can file a statement of dissociation in the appropriate state office to limit the dissociated partner's authority to 90 days after filing if do nothing, 2 year liability.
How does the partnership avoid liability from acts of dissociated partner?
1. debts owed to non-partner creditors and partner-creditors 2. return of capital contribution and distribution of profits to partners *If the partnership's liabilities are greater than its assets, the partners bear the losses - in the absence of a contrary agreement - in the same proportion in which they shared the profits
In what order are partnership obligations paid?
No - the partnership normally may continue to do business without the dissociating partner - if the partners no longer wish to continue the business, the partnership may be terminated
Is the partnership dissolved when a partner leaves?
Example of wrongful dissociation
Jensen & Whalen's partnership agreement states that it is a breach of the agreement for any partner to assign partnership property to a creditor without the consent of the other partners. If Janis, a partner, makes such an assignment, she not only has breached the agreement but also has wrongfully dissociated the partnership.
Example of dissolution by judicial decree Russell Realty Association v. Russell
Members of the Russell family began operating Russell Realty Associates (RRA) as a partnership. Eddie Russell had decision-making authority over the partnership's business, which involved buying, holding, leasing, and selling investment properties. After several years, Eddie and his sister, Nina Russell, became involved in disputes, and Nina began to routinely question Eddie's business decisions. Because of their disagreements, RRA experienced 2 years of delays before it could sell one piece of property. Although the firm continued to profit, Eddie filed a compliant seeking a judicial dissolution of the partnership, which the court granted. Nina appealed. The VA supreme court affirmed the lower court's decision that Russell Realty must be judicially dissolved. The partners' relationship had deteriorated to the point where the partnership was unable to function effectively. As a result, the firm had incurred substantial and unnecessary added costs, which frustrated the partnership's economic purpose and made it impracticable to continue.
1. business impracticality - not profitable 2. improper conduct - breaches of fiduciary duties 3. other circumstances - parties not getting along
Reasons supporting a judicial decree: 1. 2. 3.
1. dissolution 2. winding up
The termination of a partnership occurs in 2 stages: 1. - when any partner stops being associated with carrying on the partnership business - 4 methods: acts of partners, operation of law, judicial decree, expiration of time period - is the legal death of a partnership 2. - collecting and distributing partnership assets -partnership's legal existence ends when winding up is complete
1. terminates the right of the leaving partner to participate in partnership business - duty of loyalty ends - duty of care continues for events before dissociation 2. requires partnership to purchase his/her interest 3. alters third party liability
What are 3 consequences of dissociation?
1. voluntarily notice of withdrawal 2. occurrence of an event 3. unanimous vote of partners 4. judicial decree 5. bankruptcy; assignment of interest to creditors; incapacity; or death
What are 5 events that trigger dissociation?
- partners have no authority to create new partnership obligations after dissolution occurs except to: 1. complete transactions already begun 2. wind up by: - collecting and preserving partnership assets - discharging liabilities - accounting to each partner for the value of his or her share
What is winding up?
duty of care -continues only with respect to events that occurred before dissociation, unless the partner participates in the winding up the partnership's business
Which duties are still owed to the partnership after dissociation?
Example of buyout price
Wilbur and Dee Warnick and their son, Randall, bought a ranch for $335,000 and formed a partnership to operate it. The partners' initial capital contributions totaled $60,000 of which Randall paid 34%. Over the next 20 years, each partner contributed funds to the operation and received cash distributions from the partnership. In 1999, Randall dissociated from the partnership. When the parties could not agree on a buyout price, Randall filed a lawsuit. The court awarded Randall $115,783.13 - the amount of his cash contributions, plus 34% of the increase in the value of the partnership's assets above all partners' cash contributions. Randall's parents appealed, arguing that $50,000 should be deducted from the appraised value of the assets for the estimated expenses of selling them. The court affirmed the buyout price, however, because "purely hypothetical costs of sale are not a required deduction in valuing partnership assets" to determine a buyout price.
1. leaving the partnership would be a breach of the agreement 2. a partner refuses to perform duties required by the partnership agreement
Wrongful dissociation occurs when: 1. - a partner leaves before the expiration of a term in a partnership for term. - a partner leaves before the completion of a project in a partnership at will 2.
illegality or impracticality
o Any event that makes it unlawful for the partnership to continue its business will result in dissolution o Under the UPA, a court may order dissolution when it becomes obviously impractical for the firm to continue. o Even when one partner has brought a court action seeking to dissolve a partnership, the partnership continues to exist until it is legally dissolved by the court or by the parties' agreement
Dissociation
severance of the relationship between a partner and a partnership
buyout price
the amount payable to a partner on his or her dissociation from a partnership, based on the amount distributable to that partner if the firm were wound up on that date, and offset by any damages for wrongful dissociation
Dissolution
the formal disbanding of a partnership or a corporation partnerships can be dissolved by acts of the partners, by operation of law, or by judicial decree
Winding up
the second of 2 stages in the termination of a partnership or corporation, in which the firm's assets are collected, liquidated, and distributed, and liabilities are discharged
