Chapter 31 - Operation and Dissolution General Partnerships
Effects of Dissolution
A partnership continues after dissolution only for the purpose of winding up its business. The partnership is terminated when the winding up of its business is completed. - The remaining partners have the right, however, to continue the business after dissolution if all of the partners, including any dissociating partner other than a wrongfully dissociating partner, waive the right to have the partnership's business wound up and the partnership terminated.
Wrongful Dissociations
a partner's dissociation is wrongful if it breaches an express provision of the partnership agreement -Dissociation is wrongful in a term partnership if before the expiration of the term or the completion of the undertaking 1. the partner voluntarily withdraws by express will unless the withdrawal follows within ninety days after another partner's dissociation by death, bankruptcy, or wrongful dissociation (2) the partner is expelled for misconduct by judicial determination; (3) the partner becomes a debtor in bankruptcy; or 4) the partner is an entity (other than a trust or estate) and is expelled or otherwise dissociated because its dissolution or termination was willful
Partnership at Will
as a partnership in which the partners have not agreed to remain partners until the expiration of a definite term or the completion of a particular undertaking.
UPA Dissolution
as the change in the relation of the partners caused by any partner's ceasing to be associated in the carrying on, as distinguished from the winding up, of the business
Cause of Dissolution
be brought about by (1) an act of the partners, (2) operation of law, or (3) court order
RUPA - Dissociation
dissociation of a partner results in dissolution only in limited circumstances, discussed previously - in many instances, dissociation will result merely in a buyout of the withdrawing partner's interest rather than a winding up of the partnership
Revised Uniform Partnership Act - partnership agency
each partner is an agent of the partnership for the purpose of its business
Dissolution Produces one of two outcome:
either the partnership is liquidated or the remaining partners continue the partnership -Whereas liquidation sacrifices the value of a going concern, continuation of the partnership after dissolution avoids this loss
A partner who does not have actual authority
from all of her partners may not bind the partnership by any act that does not apparently carry on in the ordinary course the partnership business.
Term Partnership
if within ninety days after any specified causes of dissolution occurs, fewer than half of the remaining partners express their will to wind up the partnership business, then the partnership will not dissolve. -include the following: a partner's dissociation by death, bankruptcy or incapacity
Actual Authority
the actual authority of a partner to act for the partnership terminates, except so far as is appropriate to wind up partnership business. -actual authority to wind up includes the authority to complete existing contracts, to collect debts, to sell partnership assets, and to pay partnership obligations
Apparent Authroity
the partnership is bound in a transaction not appropriate for winding up only if the partner's act would have bound the partnership before dissolution and the other party to the transaction did not have notice of the dissolution. A person has notice of a fact if the person (1) knows of it, (2) has received a notification of it, or (3) has reason to know it exists from all of the facts known to the person at the time in question
right to continue the partnership after dissolution
the remaining partners have the right to continue the partnership when 1. the partnership has been dissolved in contravention of the partnership agreement 2. a partner has been expelled in accordance with the partnership agreement 3. all the partners agree to continue the business
Partners' Creditors
the revised act provides that unsatisfied partnership creditors may recover any deficiency out of the individually owned assets of the partners on equal footing
Dissolution
to those situations in which the Revised Act requires a partnership to wind up and terminate -only a limited subset of dissociations requires the dissolution of a partnership -some events other than dissociation can bring about the dissolution of a partnership under the RUPA
Participating in Winding Up
Any partner wind-ing up the partnership is entitled to reasonable compensation for services rendered in the winding up. -partners who haven't wrongfully dissociated has the right to participate in winding up
Distribution of Assets - UPA
It states that the liabilities of a partnership are to be paid out of partnership assets in the following order: (1) amounts owing to nonpartner creditors, (2) amounts owing to partners other than for capital and profits (loans or advances), (3) amounts owing to partners for capital, and (4) amounts owing to partners for profits.
Continuation After Dissociation
If a partner is dissociated from a partnership without resulting in dissolution, the remaining partners have the right to continue the business -creditors of the partnership remain creditors of the continued partnership -the dissociated partner remains liable for partnership obligations incurred before dissociation
Dissolution by Court Order
On application by a partner, a court may order dissolution on grounds of another partner's misconduct or upon a finding that (1) the economic purpose of the partnership is likely to be unreasonably frustrated, (2) another partner has engaged in conduct relating to the partnership business that makes it not reasonably practicable to carry on the business in partnership with that partner (3) it is not otherwise reasonably practicable to carry on the partnership business in conformity with the partner-ship agreement.
Marshaling of Assets
The Revised Act abolishes the marshaling of assets doctrine—which segregates and considers separately the assets and liabilities of the partnership and the respective assets and liabilities of the individual partners—and the dual priority rule -partnership creditors are entitled to be satisfied first out of partnership assets
Dissociated Partner's Power to Bind the Partnership
The partnership is bound by an act of the dissociated partner which would have bound the partnership before dissociation but only if at the time of entering into the transaction the other party 1. reasonably believed that the dissociated partner was then a partner; 2. did not have notice of the partner's dissociation; 3. is not deemed to have had constructive notice from a filed statement of dissociation
Winding UP
Whenever a dissolved partnership is not to be continued, the partnership must be liquidated. -completing unfinished business, collecting debts, taking inventory, reducing assets to cash, auditing the partnership books, paying creditors, and distributing the remaining assets to the partners. During this period, the fiduciary duties of the partners continue in effect
Partnership at Will
a partner will be dissociated from the partnership without dissolution upon specified causes, including that partner's death, bankruptcy, or incapacity; the expulsion of that partner; or, in the case of an entity-partner, its termination.
Extinguishment of a partnership consists of 3 stages:
1. Dissolution - the partnership is not terminated but rather it continues until the winding up of its affairs is complete 2. Winding up or Liquidation 3. Termination - occurs when the winding up is finished
The UPA provides that the following acts do not bind the partnership unless authorized by all of the partners:
(1) assignment of partnership property for the benefit of its creditors, (2) disposal of the goodwill of the business, (3) any act which would make it impossible to carry on the ordinary business of the partnership, (4) confession of a judgment, or (5) submission of a partnership claim or liability to arbitration or reference
Assets of an insolvent partner are distributed in the following order:
(1) debts and liabilities owing to her non-partnership creditors, (2) debts and liabilities owing to partnership creditors, and (3) contributions owing to other partners who have paid more than their respective share of the firm's liabilities to partnership creditors.
Acts outside the ordinary course of the partnership business would include the following
(1) execution of contracts of guaranty or suretyship in the firm name, (2) sale of partnership property not held for sale in the usual course of business, and (3) payment of an individual partner's debts out of partnership assets
Apparent Authority
(which may or may not be actual) is authority that a third person—in view of the circumstances, the conduct of the parties, and a lack of knowledge or notification to the contrary—may reasonably believe to exist. Ex: a partner has apparent authority to indorse checks and notes, to make representations and warranties in selling goods, and to enter into contracts for advertising. A third person, however, may not rely upon apparent authority in any situation in which he already knows, or has received notification, that the partner does not have actual authority
Dissociated Partner's Liability to Third Persons
-A partner's dissociation does not of itself discharge the partner's liability for a partnership obligation incurred before dissociation. A dissociated partner is not liable for a partnership obligation incurred more than two years after dissociation -Obligations incurred within two years after partner dissociates without resulting in a dissolution of the partnership business, a dissociated partner is liable for a partnership business, a dissociated partner is liable for partnership obligation if at the time of entering into the transaction the other party 1. reasonably believed that the dissociated partner was then a partner 2. did not have notice of the partner's dissociation 3. is not deemed to have had constructive notice from a filed statement of dissociation
Dissolution by Operation of Law
-A partnership is dissolved by operation of law if an event occurs that makes it unlawful to continue all or substantially all of the partnership's business Ex: a law prohibiting the production and sale of alcoholic beverages would dissolve a partnership formed to manufacture liquor.
Right of Creditors
-Any change in membership dissolves a partnership and forms a new one, despite the fact that the new combination may include a majority of the old partners. - the creditors of the old partnership may pursue their claims against the new partnership and may proceed to hold all of the members of the dissolved partnership personally liable
Dissolution by Act of the Partners
-In a partnership at will, a partner's giving notice of intent to withdraw will result in dissolution of a partnership 1. The term of the partnership expires or the undertaking is complete. If the partners continue a term partner-ship after the expiration of the term or completion of the undertaking, the partnership will be treated as a partnership at will. 2. All of the partners expressly agree to dissolve. This reflects the principle that the partners can unanimously amend the partnership agreement. 3. A partner's dissociation caused by a partner's death or incapacity, bankruptcy or similar financial impairment, or wrongful dissociation will bring on a dissolution if within ninety days after dissociation at least half of the remaining partners express their will to wind up the partnership business. Thus, if a term partnership has eight partners and one of the partners wrongfully dissociates before the end of the term, the partnership will be dissolved only if four of the remaining seven partners vote in favor of liquidation - all partnerships dissolution occurs upon the happening of an event that was specified in the partnership agreement as resulting in dissolution
Effects of Dissolution - UPA
-On dissolution, the partnership is not terminated but rather it continues until the winding up of its affairs is complete existing liability of any partner, though it does restrict her authority to act for the partnership.
Effect of Dissociation
-Upon a partner's dissociation, the partner's right to participate in the management and conduct of the partnership business terminates -the dissociation results in a dissolution and winding up of the business, all of the partners who have not wrongfully dissociated may participate in winding up the business. - duty not to compete terminates upon dissociation and the dissociated partner may immediately engage in a competitive business, without further consent -The partner's other fiduciary duties and duty of care continue only with regard to matters arising and events occurring before the partner's dissociation, unless the partner participates in winding up the partnership's business. Ex: a partner who leaves a partnership providing consulting services may immediately compete with the firm for new clients but must exercise care in completing current transactions with clients and must account to the firm for any fees received from the old clients on account of those transactions.
Robertson v. Jacobs Cattle Co.
-is an at-will family partnership whose current partners are Ardith, Duane, Carolyn, Patricia, James, and Dennis. -Under the terms of the partnership agreement, Ardith has general management authority (1) to conduct day-to-day business and (2) to bind the partnership. However, a vote of six partners has authority to override a decision made by Ardith. - Dennis and Ardith each have two votes; Patricia, James, Duane, and Carolyn each have one vote. Ardith and Dennis together have a capital interest in the partnership of approximately 78 percent. -The partnership owns approximately 1,525 acres of agricultural land in Valley County, Nebraska. A real estate appraiser valued the land as of September 20, 2011, at $5,135,000. The partnership rented its land to individuals including Patricia, James, Dennis, Duane, and Carolyn, although James did not sign a lease. At least some of the land was rented for less than its fair rental value. -Judgment dissociating appellants from the partnership by judicial expulsion and declining to dissolve the partnership affirmed. -The district court concluded that none of these circumstances existed because (1) nothing had occurred which would frustrate the partnership's ability to buy, sell, or own land, and (2) Ardith, as managing partner, had authority on behalf of the partnership to take the actions with which appellants disagreed. -Where the conduct of one or more partners constitutes grounds for both dissociation by judicial expulsion and dissolution, and there are no other grounds for dissolution, the court may in its discretion order either dissociation by expulsion of one or more part-ners or dissolution of the partnership.
Conklin Farm v. Leibowitz
-liability of incoming partner -Paula Hertzberg, Elliot Leibowitz, and Joel Leibowitz formed a general partnership, LongView Estates, to acquire from plaintiff Conklin Farm approximately one hundred acres of land in Montville, New Jersey. - They intended to build a residential condominium complex on the property. On the same day that the partners formed the partnership, it executed a promissory note in favor of Conklin for $9 million. - Joel Leibowitz assigned his 30 percent interest in LongView to his wife, defendant Doris Leibowitz, who agreed to be bound by all the terms and conditions of the partnership agreement. Seventeen months later, Doris assigned the interest back to her husband. During those seventeen months, the entire principal of the Conklin note of $9 million was outstanding, and interest accrued at an annual rate of nine percent. -Conklin sued Doris Leibowitz in November 1991, claiming that she was personally liable for $547,000: 30 percent of the interest on the Conklin note that accrued dur-ing the seventeen months during which she had held her husband's partnership interest, plus interest since then and costs. Conklin asserted that, although the principal of the note was preexisting debt, the interest that accrued while Doris Leibowitz had been a partner was new debt. Doris Leibowitz filed a motion for summary judgment arguing that as an incoming partner she was not personally liable for LongView's preexisting debt, including interest. The trial court found in favor of Doris Leibowitz. Conklin appealed, and the Appellate Division reversed, -Issue: Was it new debt or pre-exisiting debt or is preexisting debt new debt to new partners -We find that contractual interest is not new debt *** and Doris Leibowitz is not personally liable for its payment. -A new partner is not personally liable for preexisting debt including interest on a preexist-ing note even though the interest accrues after the partner's admission
Causes of Dissolution
-under RUPA is that a partnership is dissolved and its business must be wound up only if one of the events listed in section 801 occurs by (1) an act of the partners (i.e., some dissociations), (2) operation of law, or (3) court order
Liable to a 3rd party
-when a partnership becomes liable to a third party, each partner has unlimited, personal liability for that partnership obligation
3 Exceptions of the partners may by agreement modify or eliminate any of the grounds for dissolution
1. Carrying on an illegal business 2. A court-ordered dissolution on application of a partner 3. a court-ordered dissolution on application of a transferee of a partner's interest
Partnership is dissolved by operation of law upon:
1. The death of a partner 2. The bankruptcy of a partner or of the partnership 3. the subsequent illegality of the partnership
Crime
A partner is not criminally liable for the crimes of her partners unless she authorized or participated in them. Nor is a partnership criminally liable for the crimes of individual partners or employees unless a statute imposes vicarious liability
Authority to Bind Partnership
A partner may bind the partnership by her act if (1) she has actual authority, express or implied, to perform the act or (2) she has apparent authority to perform the act.
breach of trust
A partnership is also liable if a partner in the course of the partnership's business or while acting with authority of the partnership commits a breach of trust by receiving money or property of a person not a partner, and the partner misapplies the money or property
Liability of Incoming Partners
A person admitted as a partner into an existing partner-ship is not personally liable for any partnership obligations incurred before the person's admission as a partner. - This means that the liability of an incoming partner for antecedent debts and obligations of the firm is limited to his capital contribution. This restriction does not apply, of course, to subsequent debts Ex: Nash is admitted to Higgins, Cooke, and Jackson Co., a partnership. Nash's capital contribution is $7,500, which she paid in cash upon her admission to the partnership. A year later, when liabilities of the firm exceed its assets by $40,000, the partnership is dissolved. Porter had lent the firm $15,000 eight months before Nash was admitted; Skinner lent the firm $20,000 two months after Nash was admitted. Nash has no liability to Porter except to the extent of her capital contribution, but she is personally liable to Skinner
notice to a partner
A person has notice of a fact if the person (1) knows of it, (2) has received a notification of it, or (3) has reason to know it exists from all of the facts known to the person at the time in question
Distribution of Assets
After all the partnership assets have been collected and reduced to cash, they are distributed to creditors and the partners -RUPA provides that the partnership must apply its assets 1. to discharge the obligations of partners who are creditors on parity with other creditors, subject to any other laws, such as fraudulent conveyance laws and voidable transfers under the Bankruptcy Act. 2. any surplus must be applied to pay a liquidating distribution equal to the net amount distributable to partners in accordance with their right to distributions -
Marshaling of Assets - UPA
segregating and considering separately the assets and liabilities of the partnership and the respective assets and liabilities of the individual partners.
Liability
Dissolution does not in itself discharge the existing liability of any partner. Partners are liable to the other partners for their share of partnership liabilities incurred after dissolution - A partner, however, who, with knowledge of the dissolution, nevertheless incurs a liability binding on the partnership by an act that is not appropriate for wind-ing up the partnership business, is liable to the partnership for any damage caused to the partnership by the liability
RNR Investments Limited PartnershIp v. Peoples First Community Bank
RNR Investments Limited Partnership (RNR) is a Florida limited partnership formed to purchase vacant land in Destin, Florida, and to construct a house on the land for resale. The agreement of limited partnership provided for various restrictions on the authority of the general partner, including restrictions on his ability to borrow, spend partnership funds and encumber partnership assets, if not specifically provided for in the Approved Budget. RNR, through its general partner entered into a into a construction loan agreement, note and mortgage with the Peoples First Community Bank (the Bank) in the principal amount of $ 990,000. The bank disbursed the aggregate sum of $ 952,699, by transfers into RNR's bank account. RNR defaulted under the terms of the note and mortgage. The Bank filed a complaint seeking foreclosure. RNR in its answer, alleged that the general partner had no authority to borrow funds for the limited partnership. On motion, the trial court entered summary judgment in favor of the Bank. RNR appealed the summary judgment of insisting on the general partner's lack of authority to bind the limited partnership. Under section 620.8301(1), Florida Statutes (2000), however, the Bank could rely upon the general partner's apparent authority to bind RNR, unless the Bank had actual knowledge or notice of his restricted authority. In opposing summary judgment, RNR produced no evidence showing that the Bank had actual knowledge or notice of restrictions imposed on the authority of RNR's general partner. -ISSUE: Are the agreements binding against RNR despite the general partner's lack of authority to borrow for the partnership? Answer: Yes CONCLUSION: The appellate court found that under Fla. Stat. ch. 620.8301(a), the bank could rely upon a general partner's apparent authority to bind the partnership, unless it had actual knowledge or notice of his restricted authority. In opposing summary judgment, the partnership produced no evidence showing the bank had actual knowledge or notice of such restrictions on the partnership's general partner. Accordingly, no issues of material fact were in dispute. While the partners may have agreed upon restrictions that would limit the general partner to borrowing no more than $ 650,000 on behalf of the partnership, the partnership did not contend, and nothing before the court showed, that the bank had actual knowledge or notice of any restrictions on the general partner's authority. The partnership could have protected itself by filing a statement pursuant to Fla. Stat. ch. 620.8303 or by providing notice to the bank of the specific restrictions on the authority of the general partner. Because there was no disputed issue of fact concerning whether the bank had actual knowledge or notice of restrictions on the general partner's authority to borrow, summary judgment was proper
Warnick v. Warnick
Wibur & Dee Warnick and son Randall purchased a ranch in Sheridan County, Wyoming for 335k with 90k down plus 245 installments over ten years at 8 percent interest -general partnership, Warnick Ranches, to operate the ranch and to pay off the purchase price -Randall wanted to get out of the partnership and was wondering what his interest in the partnership, including a buyout price if he is determined to be dissociated from the partnership - As a result of that calculation, $230,819.14, or 25.24 percent, of the undisputed value of the partnership was awarded to Randall. -the date of the letter is the date of dissociation -The buyout price is equal to the amount that would have been distributable to the dissociating partner under [citation] if, on the date of the dissociation, the partnership's assets had been sold -Randall won the case because teh judge affirmed the summary judgment -he wanted to sell his interest in the partnership they made him a weak offer that he didn't like so he sued them. At the trial court level, Randall won 250k bc the court found the partnership was disassociated and calculated damages improperly. The Supreme Court said that Randall won because he was entitled to sell his interest in the partnership but remanded the case (sent it back down to the trial court) to calculate the proper amount of Randall's interest he was owed The court found that the dad's 24k he payed + interest needed to be taken into consideration before calculating the money owed to Randall -Judgment affirmed in part and reversed in part; case is remanded -A partnership must purchase a dissociated partner's interest in the partnership for a buyout price equal to the amount that would have been distributable to the dissociating partner under RUPA if, on the date of the dissociation, the partnership's assets had been sold and first applied to discharge partner-ship liabilities to creditors, including partners who are creditors
Tort
With respect to a partner's conduct, the RUPA provides that a partnership is liable in tort for the loss or injury any partner causes by any wrongful act or omission, or other actionable conduct, while acting within the ordinary course of the partnership business or with the authority of the partnership.
Partnership by Estoppel
imposes partnership duties and liabilities upon a nonpartner who has either represented himself or consented to be represented as a partner. It extends to a third person to whom such a representation is made and who justifiably relies upon the representation Ex: Marks and Saunders are partners doing business as Marks and Company. Marks introduces Patterson to Taylor, describing Patterson as a member of the partnership. Patterson verbally confirms the statement made by Marks. Believing that Patterson is a member of the partnership and relying upon Patterson's good credit standing, Taylor sells goods on credit to Marks and Company. In an action by Taylor against Marks, Saunders, and Patterson as partners to recover the price of the goods, Patterson is liable although he is not a partner in Marks and Company. Taylor had justifiably relied upon the representation that Patterson was a partner in Marks and Company, to which Patterson actually consented. Ex: Patterson falsely tells Dillon that he is a member of the partnership Marks and Company. Dillon casually relays this statement to Taylor, who in reliance sells goods on credit to Marks and Company. Taylor cannot hold Patterson liable, as he was not justified in relying on the representation made privately by Patterson to Dillon, which Patterson did not consent to have repeated to Taylor
Winding up
involves completing unfinished business, collecting debts, taking inventory, reducing assets to cash, auditing the partnership books, paying creditors, and distributing the remaining assets to the partners -the fiduciary duties of the partners continue in effect except the duty not to compete
Actual Implied Authority
is neither expressly granted nor expressly denied but is reasonably deduced from the nature of the partnership, the terms of the partnership agreement, or the relations of the partners Ex: a partner has implied authority to hire and fire employees whose services are necessary to carry on the partnership business
Tort liability of the partnership
may include not only the negligence of the partners but also trespass, fraud, defamation, and breach of fiduciary duty, so long as the tort is committed in the course of partnership business
Joint and Several Liability
means that all of the partners may be sued jointly in one action or that separate actions, leading to separate judgments, may be maintained against each of them.
Dissociation
occurs when a partner ceases to be associated in the carrying on of the partnership business -will result merely in a buyout of the withdrawing partner's interest rather than a winding up of the partnership - a partner has the power to dissociate at any time, rightfully or wrongfully, by expressing an intent to withdraw - a partner who wrongfully dissociates is liable to the partnership for damages caused by the dissociation
actual express authority
of partners may be written or oral; it may be specifically set forth in the partnership agreement or in an additional agreement between the partners. - In addition, it may arise from decisions made by a majority of the partners regarding ordinary matters connected with the partnership business.
Under Uniform Partnership Act
provides that partners are jointly liable on all debts and contract obligations of the partnership -joint liability, a creditor must bring suit against all of the partners as a group, and the judgment must be against all of the obligors
