Dissociation of a Partnership

Question 1

Dissociation - Basic Concept

Answer 1

• dissociation = a change in the relationship of the partners caused by any partner ceasing to be associated in the carrying on of the business
• doesn’t necessarily cause a dissolution + winding up of the partnership business -> term just refers to withdrawal

Question 2

Events of Dissociation

Answer 2

Partner becomes dissociated from events of the partnership by:
1) oral or written notice of partner’s express will to withdraw
2) happening of an agreed event
3) valid expulsion of the partner
4) partner’s bankruptcy or appointment of a receiver for a partner
5) partner’s death or incapacity to perform partnership duties
6) decision of a court that the partner is incapable of performing a partner’s duties OR
7) termination of a business entity that is a partner

Question 3

Wrongful Dissociation

Answer 3

• wrongful dissociation if the dissociation is a breach of express term in the partnership agreement
• also wrongful if partner withdraws, is expelled, or becomes bankrupt before end of term

Question 4

Wrongful Dissociation - Liability

Answer 4

• partner who wrongfully dissociates is liable to partnership for any damages caused by the dissociation

Question 5

At-Will Partnership

Answer 5

• default form of partnership
• one where partners have not agreed to remain partners until the expiration of a definite term or the completion of a particular undertaking

Question 6

Term Partnership

Answer 6

• partnership where partners have agreed, explicitly or implicitly, to remain partners for a definite term or until the completion of a particular undertaking

Question 7

Consequences of Dissociation - For Partnership

Answer 7

One of two statutory avenues is implicated (nature of the event of dissociation dictates which):
- first avenue provides that the partnership is dissolved + that its business must be wound up
-> means the partnership business will be liquidated
- second ave provides that the partnership continues in existence w/ the dissociated partner becoming entitled to a buyout of their partnership interest

Question 8

Consequences of Dissociation - For Partner

Answer 8

• when partner dissociates, their right to participate in management ceases
• partnership must purchase (buy out) their interest at either liquidation or going-concern value
• partnership must indemnify them against known pre-dissociation liabilities + post-dissociation liabilities not incurred by the dissociating partner’s acts
• partner who wrongfully dissociates before expiration of partnership term or completion of a particular undertaking is NOT entitled to payment of the buyout price until term expires or undertaking is completed
  -> UNLESS they can establish that earlier payment will not cause undue hardship to the partnership business
• interest must be paid on the buyout price from the date of dissociation to the date of payment

Question 9

Dissolution

Answer 9

• dissolution + winding up required only in limited circumstances
  -> Ex:
• event in agreement requiring winding up,
• business becomes illegal,
• issuance of a judicial decree,
• unanimous consent of the partners in a term partnership,
• expiration of a term partnership

Question 10

Dissolution - Two Key Circumstances to Note

Answer 10

• in general, when a partner dissociates by express will in an at-will partnership, the partnership is dissolved + its business must be wound-up
• in a term partnership, if one partner dissociates wrongfully, or if a dissociation occurs b/c of a partner’s death or bankruptcy, dissolution + winding up of the partnership are required only if, w/in 90 days of dissociation, at least one-half of the remaining partners agree to wind up the partnership

Question 11

Buyout and Continuation of the Business

Answer 11

• if a partner’s dissociation doesn’t result in a dissolution + winding up, the partner is entitled to receive a buyout of his partnership interest
• the remaining partners may continue the business
• if the dissociation is wrongful, any damages will be offset against the buyout price

Question 12

Liability of Dissociated Partner - Pre-Dissociation

Answer 12

• generally, a dissociated partner remains liable for pre-dissociation partnership obligations
  -> creditor can agree though to release withdrawing partner from specific obligations

Question 13

Liability of Dissociated Partner - Post-Dissociation

Answer 13

Dissociated partner can be liable for post-dissociation partnership liabilities incurred w/in 2 yrs after dissociation (assuming dissolution hasn’t occurred) if:
1) when entering the transaction the other party reasonably believed the dissociated partner was still a partner AND
2) did not have notice of the partner’s dissociation

• dissociated partner can protect self though (NO liability) by notifying creditors directly of dissociation (effective immediately) or by filing public notice of dissociation (effective 90 days after filing)

Question 14

Dissociated Partner’s Power to Bind the Partnership

Answer 14

Partnership can be bound by an act of a dissociated partner undertaken w/in 2 yrs after dissociation (assuming dissolution hasn’t occurred) if:
1) the act would’ve bound the partnership before dissociation AND
2) the other party to the transaction a) reasonably believed the dissociated partner was sill a partner and b) did not have notice of the dissociation

-> partnership can protect itself by notifying creditors directly of the dissociation (effective immediately) or by filing a public statement of dissociation (becomes effective 90 days after filing)