Partnerships Pt. 3 Dissociation

Partner's Power to Dissociate

A partner who dissociate in violation of an express provision of partnership agreement does so wrongfully. A partner who wrongfully dissociates is: liable to the partnership and to the other partners for damages caused by the dissociation. EXAM TIP:Even in the absence of an express provision, a partner who withdraws by express will from a partnership that is for a definite term or undertaking is generally going to be considered to have dissociated wrongfully.

Dissociation of a Partner in a Limited Partnership Gene and Lisa are two of the five partners in Five Friends, a California limited partnership. Gene is one of the general partners; Lisa is one of the limited partners. At a partner's meeting, Gene gets upset and, in a huff, tells the other partners, "I withdraw from this partnership effective immediately." Lisa—upon hearing Gene's announcement—makes a similar pronouncement. Has Gene rightfully or wrongfully dissociated from Five Friends? Has Lisa?

ANSWER: Both have wrongfully withdrawn.' RULES: When a general partner withdraws from a limited partnership by express will, the partner: dissociates wrongfully if it occurs before the termination of the limited partnership. A limited partner has: no right to dissociate before the termination of the limited partnership. Gene has effectively withdrawn and so has Lisa by given notice. A general partner in a limited partnership can NEVER terminate by express will rightfully before the termination of the limited partnership, they can only do so wrongfully so Gene will be liable for any damages that results. Lisa can only wrongfully dissociate as well so she too will be liable for any damages as well.

Causes applicable only to partnerships for a definite term or for a particular undertaking Hypothetical: Joan is one of six partners in Q-Re-S, a California general partnership for a term of five years. Joan wrongfully dissociates before the partnership's five-year term has expired. Does this event cause the partnership's dissolution?

ANSWER: It depends on the actions of the other partners. RULE: In a partnership for a definite term or particular undertaking, the partnership will dissolve 90 days after the wrongful dissociation of one of its partners UNLESS: before that time a majority of the partners agree to continue the partnership.

Causes applicable only to partnerships at will Hypothetical: John, Frank, and Kevin are three of the six partners in R-U-Serious, a California partnership at will. John has just been declared bankrupt, Frank has just died, and Kevin has just given the partnership notice of his express will that the partnership be dissolved and wound up. Do any of these events, singly or in combination, cause the partnership's dissolution?

ANSWER: No RULES: Generally, partnerships dissolve if a judicial determination is made upon application by a partner, if it becomes unlawful to carry on the partnership's business, or upon the occurrence of an event specified in the partnership agreement. In a partnership at will, dissolution will also occur when: the partnership has notice of the express will to dissolve from at least half of the general partners. In this case, there is a partnership at will, but dissociation by death or bankruptcy does not trigger dissolution. In order to trigger dissolution by express will, there needs to be notice from 50% of the partners and presently, there is only express notice from ¼ remaining partners and since the other criteria for dissolution are not applicable, the partnership does not dissolve.

Hypothetical: Similar facts as above. The value of Munchkinland's liquidated assets is still $150,000. But now no present partner has previously made a capital contribution to the partnership, and the partnership owes Flying Monkey, Inc. $200,000. Further, we learn that Munchkinland's partnership agreement entitles Dorothy to one-third of the partnership's profits while all other partners are entitled to equal shares of the remainder of the profits. Will Dorothy's share of the contributions required to be made (to pay off the outstanding debt to Flying Monkey, Inc.) be equal to that of the other three partners?

ANSWER: No RULES: In the winding up process, to the extent further contributions are required from the partners in order for the partnership to meet all its obligations, each partner will be: jointly and severally liable for the entire amount of the outstanding debt. To the extent partners pay more than their share of the outstanding debt, they may seek contribution from those partners who have not paid their share of the debt. Unless provided otherwise in the partnership agreement, in winding up a partnership, partners share: equally in the surplus, if any, or otherwise share the outstanding debt in the same proportion as they would share in the surplus. Application: Here, each partner is jointly and severally liable for the debt so Flying Monkey can recover from anyone. The partners can Dorothy's share of the debt is 1/3 not ¼ because that's how she shares profits because the partnership agreement entitles her to 1/3 of the profits. So you share this in the same way that you share profits. If there weren't an agreement to the contrary, she would share ¼. Because Dorothy's share of the losses is in proportion of the share of the surplus, her share will be 1/3—she shares more in the obligation to flying monkey. If that weren't the case, it would be divided equally.

Dissolution of a Limited Partnership Hypothetical: Gee-Whiz is a California limited partnership with one general partner, Gigi, and four limited partners, Wally, Xavier, Yvonne, and Zeke. Gigi withdraws, leaving the limited partnership without a general partner. Is the limited partnership automatically dissolved upon the withdrawal of its lone general partner?

ANSWER: No, not automatically. RULE: Upon the withdrawal of its lone general partner, a limited partnership dissolves unless: before 90 days passes, a majority of limited partners consent to continue the business and admit one or more general partners to replace the dissociating general partner. if 3 of the 4 agree to continue and they at admit at least 1 more general partner. They can continue.

Hypothetical: When Munchkinland dissolved, it owed $100,000 to Flying Monkeys, Inc., and Dorothy was the only remaining partner who had made a capital contribution to the partnership. Dorothy's capital contribution had been in the amount of $100,000. During the winding up process, it was determined that Munchkinland's total liquidated assets would only equal $150,000. Will Dorothy have her $100,000 capital contribution fully repaid out of the partnership's liquidated assets?

ANSWER: No, there is not enough money to pay her back. RULE: In the winding up process, the partnership's assets will be distributed according to the following priorities: 1. first, to discharge debts owed to outside creditors (that is, creditors who are not also partners in the partnership); 2. second, to discharge debts owed to inside creditors (that is, creditors who are also partners in the partnership), at least to the extent permitted by law; 3. third, return capital contribution to the partners. 4. fourth, allocate the balance if there is any money left over Dorothy will get 50,000 of the 100,000

Hypothetical: Similar facts as above. But now Gigi, Wally, Xavier, and Yvonne are Gee-Whiz's four general partners and Zeke is its lone limited partner. Zeke withdraws, leaving the limited partnership without a limited partner. Is the limited partnership automatically dissolved upon the withdrawal of its lone limited partner?

ANSWER: Not automatically. RULE: A limited partnership dissolves upon the withdrawal of its sole limited partner unless: another limited partner is admitted within 90 days. Here, Gee-Whiz can carry on if in within 90 days, a new limited partner is admitted.

Hypothetical: Let's return to Munchkinland, the California general partnership that dissolved after Dorothy notified the partnership of her express will that the partnership be dissolved and wound up. If you recall, less than three months prior to Dorothy's announcement, Ozzie and Glinda had dissociated from Munchkinland. During the winding up process, can Ozzie, Glinda, or Dorothy participate?

ANSWER: Only Dorothy can participate in the winding up process. RULE: Only general partners who have not dissociated can participate in the winding up process. Even though Ozzie and Glinda recently dissociated, they still cannot participate. Dorothy can participate because she expressed her desire to dissolve.

Hypothetical: Ozzie, Glinda, and Dorothy were three of the six partners in Munchkinland, a California partnership at will. But in the last three months, the partnership received notice that Ozzie and Glinda each wanted to withdraw from the partnership. Although neither Ozzie nor Glinda acted wrongfully in dissociating from the partnership, Dorothy has just given the partnership notice of her express will that the partnership be dissolved and wound up. Do any of these events, singly or in combination, cause the partnership's dissolution?

ANSWER: Yes RULE: In determining the portion of the general partners who have expressed a will to dissolve the partnership, include: any partner who, in the preceding 90 days, rightfully dissociated by express will. One person gave notice, and within 3 months 2 others expressed a desire to withdraw and 1 to dissolve, the former 2 count along with those who desire to dissolve so the partnership has dissolved.

Partnership Dissolution and Winding Up - Causes of a Partnership's Dissolution Hypothetical: ABC Company is a California general partnership and it has four partners: Denise, Eva, Francine, and Gordon. Recently, Denise, Eva, and Francine have discovered that Gordon has been sexually harassing an employee. Instead of seeking Gordon's expulsion, Eva files an application with a California court to have ABC dissolved. Can Eva file this application to dissolve the partnership independently of the other partners in ABC? If so, will the application be granted?

ANSWER: Yes, and most likely. RULES: An individual partner may file an application with the CA court to have a partnership dissolved. An application to dissolve a partnership will be granted if a court determines that: the economic purpose of the partnership is: likely to be unreasonably frustrated the carrying on of the business in conformity with the partnership agreementwould: not be reasonably practicable; OR the carrying on of the business in partnership with a particular partneris: no longer reasonably practicable in light of that partner's conduct in relation to he partnership's business. Application: The application might be granted if it shows that Gordon's conduct relates to the business and the likelihood of the being able to practice is compromised and to carry on the business is no longer reasonably practicable. Then, the court might grant the application.

Partner's Power to Dissociate Hypothetical: Matt, Norma, and Oscar are three of the five partners in MNO Company, a California general partnership. MNO's partnership agreement expressly provides that MNO is not a partnership at will but a partnership for a definite undertaking. This undertaking has not yet been completed and likely will not be completed for several years. Feeling trapped in this on-going commercial enterprise, Matt announced at a recent partner's meeting his decision to withdraw from the partnership effective in a week's time. Is Matt's dissociation effective? If so, is Matt's dissociation wrongful?

ANSWER:Yes, it is effective, and yes, it is wrongful. RULES: A partner who dissociate in violation of an express provision of partnership agreement does so wrongfully. A partner who wrongfully dissociates is: liable to the partnership and to the other partners for damages caused by theterm-3 dissociation. Matt still has the power to dissociate, but MNO is not a partnership at will, it is for a definite undertaking so he breached the agreement and that is wrongful. A partner who wrongfully dissociates is liable for any damages caused.

Partner Dissociation - Exam Tip

EXAM TIP: Rules for dissociation of a general partner in a general partnership are the same as the rules for dissociation of a general partner in a limited liability partnership. Remember, once formed, a limited liability partnership (LLP) is a general partnership for all purposes except for liability.

Consequences of a Partnership's Dissolution - Exam Tip and Note

EXAM TIP:A recent California bar exam essay focused on this aspect of partnership dissolution. NOTE: Once dissolved, a partnership continues its existence for the purpose only of winding up its business, that is, for the purpose of discharging its debts and distributing its assets. This may include preserving the partnership's business and property as a going concern for a reasonable time. When the winding up of its business is complete, the partnership terminates.

Dissociation of a Partner in a Limited Partnership

EXAM TIP:Rules for dissociation of a general partner in a limited partnership are similar to the rules for dissociation of a general partner in a general partnership. RULES: When a general partner withdraws from a limited partnership by express will, the partner: dissociates wrongfully if it occurs before the termination of the limited partnership. A limited partner has: no right to dissociate before the termination of the limited partnership.

Partnership Dissolution and Winding Up - Causes of a Partnership's Dissolution

EXAM TIP:Rules for dissolution of a general partnership are basically the same as the rules for dissolution of a limited liability partnership. Remember, once formed, a limited liability partnership is a general partnership for all purposes except for liability.

Note on Expulsion from a partnership

NOTE: Dissociation can also occur upon a partner's expulsion from the partnership. A partner may be expelled from a partnership pursuant to: (1) a provision in a partnership agreement, (2) a unanimous vote of the other partners, or (3) a judicial determination made upon application by another partner. For details about the circumstances and limitations of this power to dissociate another partner through expulsion, consult your outline materials.

Dissociation of a Partner in a Limited Partnership Note on Difference between dissociation in general vs. limited partnership

NOTE: General partners of a limited partnership do not have the same right to dissociate as general partners of a general partnership. In a general partnership, general partners can dissociate by express will prior to the termination of the general partnership. Specifically, they have a right to dissociate by express will when the general partnership is at will.

Dissolution of a Limited Partnership when the lone limited partner leaves

RULE: A limited partnership dissolves upon the withdrawal of its sole limited partner unless: another limited partner is admitted within 90 days. NOTE:Limited partnerships can also be dissolved upon: (1) the happening of an event specified in the partnership agreement, (2) the consent from all general partners and a majority of limited partners, or (3) court order granting the application of a partner that it is not reasonably practicable to carry on the business in conformity with the partnership agreement.

Causes applicable only to partnerships for a definite term or for a particular undertaking

RULE: In a partnership for a definite term or particular undertaking, the partnership will dissolve 90 days after the wrongful dissociation of one of its partners UNLESS: before that time a majority of the partners agree to continue the partnership. NOTE: In a partnership for a definite term or undertaking, if a partner dissociates by death or by bankruptcy, the analysis above would be unchanged. The partnership would dissolve after 90 days unless a majority of the remaining partners agree to continue the business. NOTE:A partnership for a definite term or undertaking also dissolves upon the expiration of the term or the completion of the undertaking or upon the unanimous consent of all the partners.

Dissolution of a Limited Partnership

RULE: Upon the withdrawal of its lone general partner, a limited partnership dissolves unless: before 90 days passes, a majority of limited partners consent to continue the business and admit one or more general partners to replace the dissociating general partner. NOTE: If one of multiplegeneral partners dissociates, the limited partnership will dissolve if, within 90 days of the dissociation, a majority of the remaining partners (general and limited) consent to its dissolution.

Partnership Dissolution and Winding Up - Causes of a Partnership's Dissolution

RULES: An individual partner may file an application with the CA court to have a partnership dissolved. An application to dissolve a partnership will be granted if a court determines that: the economic purpose of the partnership is: likely to be unreasonably frustrated *the carrying on of the business in conformity with the partnership agreementwould: not be reasonably practicable; OR *the carrying on of the business in partnership with a particular partneris: no longer reasonably practicable in light of that partner's conduct in relation to he partnership's business. NOTE: In addition to a partnership dissolving upon judicial determination, a partnership also dissolves if it becomes unlawful to carry on the partnership's business or upon the occurrence of an event agreed upon and specified in the partnership agreement.

Causes applicable only to partnerships at will

RULES: Generally, partnerships dissolve if a judicial determination is made upon application by a partner, if it becomes unlawful to carry on the partnership's business, or upon the occurrence of an event specified in the partnership agreement. In a partnership at will, dissolution will also occur when: the partnership has notice of the express will to dissolve from at least half of the general partners. In determining the portion of the general partners who have expressed a will to dissolve the partnership, include: any partner who, in the preceding 90 days, rightfully dissociated by express will.

Consequences of Dissociation

a. If a partner dissociates from a general partnership and the remaining partners do not elect to wind up the partnership business within 90 days of the dissociation, the partnership mustbuy out the interest of the dissociated partner. b. In general, dissociation terminates: a partner's right to co-manage and conduct partnership business. c. Except with respect to events or matters occurring before dissociation, dissociation also terminates: a partner's duty of loyalty and duty of care. d. A partner who has dissociated is permitted to: compete with the partnership business. e. A partner who dissociates does not: thereby discharge liability for partnership obligations incurred before the dissociation. *Any wrongful dissociation may impact a partner's ability to recover damages.

Partner's Power to Dissociate

a. Partnership is a voluntary relationship. b. Thus, a partner's power to dissociate—or withdraw—from a partnership is: exercisable at any time and is a non-waivable right for every partner whether general or limited c. For a partner to exercise this power, the partnership must: have notice of the partner's express will to withdraw. d. But while a partner always has the power to withdraw, a partner may not have the right to do so and may be liable for damages for breach.

Events Causing a Partner's Dissociation

a. partner's death b. partner's bankruptcy c. the appointment of a guardian for a partner d. a judicial determination that a partner is incapable of performing the duties of a partner e. the occurrence of an event specified in the partnership as triggering a partner's dissociation EXAM TIP: If the partnership is for a definite term or undertaking, dissociation by bankruptcy is deemed wrongful and a partner who becomes bankrupt is liable for damages caused by his subsequent dissociation.