Dissociation and Dissolution

Question 1

What are the events of dissociation?

Answer 1

A partner is dissociated from a PS upon the occurrence of any of the following:

1. the PS having notice of the partner’s express intention to withdraw as a partner;
2. an event delineated in the PS agreement;
3. the partner’s expulsion pursuant to the PS agreement (the PS agreement may provide for automatic or by vote expulsion; there is no default power of expulsion);
4. the partner’s expulsion by a unanimous vote of the other partners if, among other things:
   a. it is unlawful to carry on the PS business with the partner;
   b. a partner transfers all, or substantially all, of his transferable interest other than a transfer of security or a court order charging the partner’s interest that has not been foreclosed;
   c. within 90 days after the PS notifies a corporate partner that it will be expelled because it has filed a certificate of dissolution or equivalent, the corporate partner’s charter has been revoked, or its right to conduct business has been suspended by the jurisdiction of its incorporation, there is no revocation of the certificate of dissolution or no reinstatement of its charter or right to conduct business; or
   d. a PS that is a partner has been dissolved and its business wound up.
5. a judicial determination, after application to the court by the PS or another partner because:
   a. the partner engaged in wrongful conduct that adversely and materially affected the PS business;
   b. the partner willfully or persistently committed a material breach of the PS agreement or of a duty owed to the PS or other partners; or
   c. the partner engaged in conduct relating to PS business that makes it impracticable to reasonably carry on the business in PS with the partner.
6. the partner’s bankruptcy or other financial insolvency;
7. the partner’s incapacity or death;
8. in the case of a partner that is a trust or trustee, the trust’s entire transferable interest in the PS has been distributed;
9. in the case of a partner that is an estate or representative of an estate, the entire transferable interest in the PS has been distributed; or
10. the termination of a partner who is not an individual, PS, corporation, trust, or estate.

Question 2

What is the partner’s right to dissociate?

Answer 2

A partner has the power to dissociate at any time, rightfully or wrongfully, by expressly stating the intention to do so.

Question 3

What is wrongful dissociation?

Answer 3

In the event of a willful dissociation, a partner’s action is wrongful only if:

1. it is in breach of an express provision of the PS agreement; or
2. in the case of a PS for a definite term or particular undertaking, it occurs before the expiration of the term or the completion of the undertaking by virtue of:
   a. a partner’s express will to withdraw, unless the withdrawal follows within 90 days after another partner’s dissociation by death, bankruptcy, or insolvency, incapacity, distribution by a trust or estate that is a partner of such trust or estate’s entire transferable interest in the PS, or termination of a partner who is not an individual, PS, corporation, trust, or estate;
   b. the partner’s expulsion following judicial determination;
   c. the partner’s dissociation by becoming a debtor in bankruptcy; or
   d. in the case of a partner who is not an individual, trust, or estate, the partner is expelled or otherwise dissociated because the PS willfully dissolved or terminated.

A partner who wrongfully dissociates is liable to the PS and the other partners for damages caused by the dissociation. This liability is in addition to any other obligation the partner has to the PS or to the other partners.

Question 4

What is the effect of dissociation on the rights and duties of the partner?

Answer 4

Upon a partner’s dissociation, that partner’s:

1. right to participate in the management and conduct of the PS business terminates;
2. duty of loyalty for future events terminates; and
3. duty of loyalty and duty of care continue only with regard to matter that arose before the partner’s dissociation.

Question 5

When is there a buyout and what rules govern the buyout?

Answer 5

If a partner is dissociated from a PS without a dissolution and winding up of the PS business, the PS shall cause the dissociated partner’s interest in the PS to be purchased for a buyout price.

The buyout price must be equal to the greater of either the following amounts plus interest from the date of dissociation:

1. the liquidation value of the PS’s assets; or
2. the value of the PS’s assets based on a sale of the entire business as a going concern.

Damages for wrongful dissociation must be offset with the buyout price.

A partner whose interest is being purchased must be indemnified by the PS against all PS liabilities.

A partner who wrongfully dissociates before the expiration of a definite term or the completion of a particular undertaking is not entitled to payment of any portion of the buyout price until the expiration or completion, unless the partner establishes to the satisfaction of the court that an earlier payment will not cause undue hardship. Any deferred payment must be secured and bear interest.

If no agreement for purchase of a partner’s interest is reached within 120 days after a written demand for payment, the PS must pay, or cause to be paid, in cash, to the partner the amount the PS estimates to be the buyout price plus interest, reduced by an offsets and accrued interest.

If a deferred payment is authorized, the PS may tender a written offer to pay the amount it estimates, reduced by the offsets, stating time of payment and the other terms and conditions of the obligation.

Question 6

What is the dissociating partner’s power to bind the PS?

Answer 6

For two years after a partner dissociates without resulting in dissolution and winding up of the PS business, the PS is bound by an act of the dissociate partner that would have bound the PS before dissociation only if, at the time of entering into the transaction, the other party:

1. reasonably believed that the dissociate partner was then a partner;
2. did not have notice of the partner dissociation; and
3. is not deemed to have had knowledge of the dissolution by virtue of a statement of authority or statement of dissociation.

If the PS becomes liable for any obligation that the dissociating partner incurs after dissociation, then that partner will be liable to the PS for such damages.

Question 7

What are the continuing obligations of a dissociating partner?

Answer 7

A partner’s dissociation does not by itself discharge the partner’s liability for PS obligations incurred before dissociation. A dissociated partner is not liable, however, for a PS obligation incurred after dissociation.

A partner who dissociates without resulting in a dissolution and winding up of PS business is liable to the other party in a transaction entered into by the PS or surviving PS within two years after the partner’s dissociation, but only if the partner would have otherwise been liable for the obligation had he remained as a partner and, at the time of 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; and
3. is not deemed to have had knowledge of the dissociation by virtue of a statement of authority or statement of dissociation.

The partners continuing the business may agree with the PS’s creditors to release the dissociated partner from liability.

If a creditor has notice of a partner’s dissociation and, without the dissociating partner’s consent, agrees to a material alteration of the nature or time of payment of a PS obligation, the dissociated partner will be released from liability for that obligation.

Question 8

When does the partner’s ability to bind the PS terminate?

Answer 8

A dissociated partner, or the PS, may file a statement of dissociation with the DOS stating:

1. the name of the PS; and
2. that the partner is dissociated from the PS.

A person who is not a partner is deemed to have notice of the dissociation 90 days after a statement of dissociation has been filed.

The continued use of a dissociated partner’s name in the ongoing PS business does not by itself make the dissociated partner liable for future obligations of the PS occurring after the date of dissociation.

Question 9

When is there mandatory dissolution of a PS?

Answer 9

A PS is dissolved and its business must be wound up upon the occurrence of any of the following events:

1. in a PS at will, a PS receives notice from a partner of that partner’s express will to withdraw as a partner;
2. in a PS for a definite term or particular undertaking: a within 90 days after a partner’s dissociation by death, bankruptcy/insolvency, incapacity, distribution of all of a trust or estate that is a partner of such trust or estate’s entire interest in the PS, or termination of a partner that is not an individual, PS, corporation, trust, or estate, it is the express will of at least half of the remaining partners to wind up the PS business; or the expiration of the term or completion of the undertaking.
3. an event agreed to in the PS agreement resulting in the winding up of the PS; or
4. an event that makes it unlawful for all, or substantially all, f the business of the PS to be continued, expect when there is a cure of illegality within 90 days after notice of the event to the PS, which is effective retroactively to the date of the event for purposes of this section.

Question 10

When is dissolution permissive?

Answer 10

A PS can be dissolved at any time by unanimous consent.

A PS can also be dissolved:

1. on application by a partner, by judicial determination stating that:
   a. the economic purpose of the PS is likely to be unreasonably frustrated;
   b. another partner has engaged in conduct relating to the PS business that makes it not reasonably practicable to carry on business in PS with that partner; or
   c. it is not otherwise reasonably practicable to carry on the PS business in conformity with the PS agreement; or
2. on application by a transferee of a partner’s transferable interest, by a judicial determination stating that it is equitable to wind up the PS business:
   a. after the expiration of the term or completion of the undertaking; or
   b. at any time, if the PS was a PS at will at the time of transfer or entry of the charging order that gave rise to the transfer.

Question 11

What happens after dissolution?

Answer 11

A PS continues after dissolution only for the purpose of winding up the business. The PS is terminated when the winding up of its business is complete.

Following dissolution and before winding up, all the partners may waive the right to have the PS’s business wound up and the PS terminated.

Upon a decision to waive the right to wind up the business and terminate the PS:

1. the PS resumes carrying on its business as if dissolution had never occurred, and any liability incurred by the PS or a partner after dissolution and before the waiver is determined as if dissolution had never occurred; and
2. the rights of a third party accruing by virtue of a partner’s act to bind the PS after dissolution, or arising out of conduct in reliance on the dissolution before the third party knew or received notice of the waiver, will not be adversely affected.

Question 12

What effect does a dissolution have on the authority of a partner?

Answer 12

As to Third Persons

A partnership is bound by a partner’s act after dissolution that:

1. is appropriate for winding up the PS business; or
2. would have bound the PS before dissolution if the other party did not have notice of the dissolution.

A partner who has not wrongfully dissociated is allowed to file a statement of dissolution with the appropriate state agency stating the name of the PS and that the PS has dissolved and is winding up its business.

A person not a partner is deemed to have notice of the dissolution and limitation on the partner’s authority 90 days after the statement of dissolution has been filed.

As to Co-Partners

After dissolution, a partner is liable to the other partners for his share of any PS liability incurred following dissolution.

A partner, who knows of the dissolution and incurs a PS liability by an act that is not appropriate for winding up the PS business, is liable to the PS for any damage caused to the PS arising from the liability.

Question 13

What is the right to wind up?

Answer 13

Generally, all the partners who have not wrongfully dissociated may participate in winding up the PS’s affairs.

The legal representative of the last surviving partner, ultimately, has the right to wind up.

Any partner, legal representative, or transferee, upon cause shown, may seek from a court judicial supervision of the winding up.

Question 14

What are the powers and duties in winding up?

Answer 14

A partner winding up a PS may:

1. preserve the PS business or property as a going concern for a reasonable time;
2. prosecute and defend actions and proceedings;
3. settle and close the PS’s business;
4. dispose of and transfer the PS property;
5. discharge the PS’s liability;
6. distribute the assets of the PS;
7. settle disputes by mediation or arbitration; and
8. perform other necessary acts.

Question 15

What is the order of distribution?

Answer 15

In winding up the business, the assets of the PS must be applied in the following manner:

1. the assets must first be applied to discharge obligations owing to creditors, including, to the extent permitted by law, partners who are creditors; and
2. any surplus must be applied to pay in cash the net amount attributable to partners in accordance with their distribution rights.

Although the partners may vary these rules by agreement, they cannot change the creditors’ priorities or their own liabilities to the PS’s creditors.

Question 16

What is the settlement of accounts?

Answer 16

Each partner is entitled to a settlement of all PS accounts upon winding up the PS business.

Profits and losses that result from the liquidation of the PS assets must be credited and charged to the partners’ accounts, and the PS must then make a distribution to each partner in an amount equal to the excess of the credits over the charges in such partner’s account.

A partner must contribute to the PS any excess of charges over the credits in the partner’s account.

Question 17

What is contribution?

Answer 17

Liabilities are satisfied first out of PS property. If this is insufficient, the partners must contribute the necessary to satisfy the liabilities.

If a partner fails to contribute the full amount required, all of the other partners must contribute the additional amount necessary to satisfy the PS obligations for which they are personally liable. Such contributions must be made in the same proportion as those in which the partners share in losses.

Any partner who pays more than his share can recover his contribution from the other partners to the extent that the amount exceeds his share.

The estate of a deceased partner is liable for the partner’s obligation to the PS.

Following settlement, a partner must contribute an amount necessary to satisfy PS obligations that were not known at the time of settlement and for which the partner is personally liable.

Question 18

What is the effect of a conversion of the PS?

Answer 18

Conversion of a PS to another business entity has no effect on preexisting obligations of the partnership or personal liabilities of the partners.

A conversion becomes effective when the certificate of conversion is field with the secretary of state or on the future effective date stated in the articles of conversion.