Partnership DISSOCIATION AND DISSOLUTION OF A PARTNERSHIP

Question 1

What does the word disassociation refer to?

Answer 1

The term “dissociation” simply refers to a withdrawal. When a partner dissociates from a partnership, the partner withdraws or “bows out” of the partnership.

Question 2

What are the 3 events of disassociation?

Answer 2

(1) a partner giving notice to the partnership of his desire to withdraw (dissociation by “express will”);
(2) a partner’s expulsion, death, or bankruptcy;
(3) an agreed-upon event; and
(4) the appointment of a receiver for a partner.

Question 3

If there is an express term in the partnership agreement and it is breached leading to a disassociation what is the result?

Answer 3

A partner will be deemed to have wrongfully dissociated if the dissociation is in breach of an express term in the partnership agreement.

Question 4

What is the result if a partner withdraws, is expelled, or becomes bankrupt before the end of the term of the partnership?

Answer 4

A dissociation is also wrongful in a term partnership if the partner withdraws, is expelled, or becomes bankrupt before the end of the term.

Question 5

What is the partner who wrongfully dissociates liable for?

Answer 5

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

Question 6

What is an at will partnership?

Answer 6

“at-will partnership” is one where the partners have not agreed to remain partners until the expiration of a definite term or the completion of a particular undertaking. It is the default form of partnership. (Most partnerships are at-will.)

Question 7

What is a term partnership?

Answer 7

A “term partnership” is the converse—it is a partnership where the partners have agreed, explicitly or implicitly, to remain partners for a definite term or until the completion of a
particular undertaking.

Question 8

A partnership is formed with the agreement that it shall terminate after five years. what kind of partnership is this? Why?

Answer 8

It is a term partnership because the partners have agreed to remain partners for a definite term.

Question 9

A partnership is formed to construct an office building. what kind of partnership is this? Why?

Answer 9

It is a term partnership because the partners have agreed to remain partners until a particular undertaking— the construction of the building—is completed. Alternatively, it is a term partnership because the partners have agreed to remain partners for a definite term—the time required to complete the construction of the building.

Question 10

A partnership is formed to operate a linen supply business. Why?

Answer 10

It is an at will partnership because the partners have not agreed to remain partners for a definite term or until the completion of a particular undertaking. The partnership is simply conducting a business which may last indefinitely.

Question 11

When a partner dissociates from a partnership, one of two statutory avenues is implicated. What are the two avenues?

Answer 11

1. the partnership is dissolved and that
   its business must be wound up. This means that the partnership business will be liquidated
2. the partnership continues in existence with the dissociated partner becoming entitled to a
   buy out of his partnership interest.

Question 12

When are Dissolution and winding up are required?

Answer 12

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 13

What are the 2 most important circumstances that require dissolution?

Answer 13

1. In an at-will partnership, any partner who dissociates by express will may compel dissolution
   and winding up.
2. In a term partnership, if one partner dissociates wrongfully, or if a dissociation occurs because of a partner’s death or bankruptcy, dissolution and winding up of the partnership are required only if,
   within 90 days after the dissociation, one half of the remaining partners agree to wind up the partnership.

Question 14

What happens If a partner’s dissociation does not result in a dissolution and winding up?

Answer 14

the partner is entitled to receive a buyout of his partnership interest. The remaining partners may continue the business.

Question 15

What happens If a partner’s wrongful dissociation does not result in a dissolution and winding up?

Answer 15

the partner is entitled to receive a buyout of his partnership interest any damages will be offset against the buyout price. The remaining partners may continue the business.

Question 16

What is the dissociated partner liable for?

Answer 16

1. Generally, a dissociated partner remains liable for pre-dissociation partnership obligations (a
   creditor can agree to release the withdrawing partner, however, from specific obligations).
2. He may also be liable for post-dissociation partnership liabilities incurred within two years after the dissociation (assuming that dissolution has not occurred).

Question 17

How can a dissociated partner protect himself from ost-dissociation partnership liabilities?

Answer 17

He can protect himself by notifying creditors directly of his dissociation (effective immediately) or by filing a public statement of dissociation (becomes effective 90 days after filing). The partnership can
make the filing as well.

Question 18

How long does a dissociated partner have apparent authority to bind the partnership?

Answer 18

A dissociated partner has apparent authority to bind the partnership for a period of time not exceeding two years after dissociation (assuming that dissolution has not occurred)

Question 19

How can the partnership protect itself from the disassociated party using his apparent authority to bind the company?

Answer 19

The 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).

Question 20

When dissolution and winding up occur, partnership assets must be applied to what first?

Answer 20

the discharge of partnership liabilities.

Question 21

What if at dissolution If the partnership’s assets are insufficient to discharge the partnership liabilities?

Answer 21

Individual partners are required to contribute (“pay in”) in accordance with their loss shares.

Question 22

What if at dissolution the partnership has excess assets after discharging the partnership liabilities?

Answer 22

If there are excess assets, they are distributable to the partners in cash in accordance with their profit shares.

Question 23

What is the priority of distribution?

Answer 23

a. First, the partnership must pay all creditors. Creditors include “outside creditors” (e.g., trade creditors, lenders, suppliers) and “inside creditors” (e.g., partners who loaned money).
b. Second, the partnership must repay all capital contributions paid into the partnership by partners.
c. Third, profits or losses, if any.

Question 24

A and B dissolve the AyeBee partnership. In winding up, they liquidate the partnership assets and have a total of $1 million to distribute. How should that amount be distributed if (1) the partnership owes $600,000 to trade creditors; (2) Partner A loaned the partnership $100,000; and
(3) Partner B made capital contributions of $200,000?

Answer 24

1 million dollar- 600k to outside creditors- 100k to the partner creditor-200k for capitol contribution= 100 k profit that goes to the partners equally (if there is the default rule

Question 25

A and B dissolve the AyeBee partnership. In winding up, they liquidate the partnership assets and have a total of $700,000 to distribute. How should that amount be distributed if (1) the partnership owes $600,000 to trade creditors; (2) Partner A loaned the partnership $100,000; and
(3) Partner B made capital contributions of $200,000?

Answer 25

This leaves a $200,000 shortfall. B is owed that money by the partnership. Each partner must contribute (“pay in”) their share of the loss. Assuming equal sharing, A pays $100,000 to the partnership, B pays $100,000 to the partnership, and the partnership pays that $200,000 to B. Effectively, A contributes $100,000 to partner B’s loss.

Question 26

Who has a right to be a part of the process of winding up?

Answer 26

Partners who have not wrongfully dissociated

may participate in the winding up of the partnership’s business.

Question 27

Do partners retain apparent authority to bind

the partnership to a third party on new business even after an event requiring winding up?

Answer 27

Yes, Partners retain apparent authority to bind

the partnership to a third party on new business even after an event requiring winding up.

Question 28

How can the partnership protect itself from partners who retain apparent authority to bind it to new business during wind up?

Answer 28

the partnership can protect itself by notifying
creditors directly of the dissolution (effective immediately). In addition, any partner who has not wrongfully dissociated may file a public
statement of dissolution (becomes effective 90 days after filing).

Question 29

A, B, and C are partners in the Ah-Bay-Chay partnership. On May 5, an event requiring dissolution of the partnership occurs. On June 1, A contracts with TP for new business (the contract does not involve winding up). Is the partnership liable to TP on the contract?

Answer 29

Yes, assuming that the contract was in the ordinary course of the partnership’s business (that is, assuming that apparent authority was established).

Question 30

A, B, and C are partners in the Ah-Bay-Chay partnership. On May 5, an event requiring dissolution of the partnership occurs. On June 1, A contracts with TP for new business (the contract does not involve winding up) Are the partners liable to TP?

Answer 30

Yes, partners are jointly and severally liable for partnership obligations (but TP must exhaust partnership resources first).

Question 31

A, B, and C are partners in the Ah-Bay-Chay partnership. On May 5, an event requiring dissolution of the partnership occurs. On June 1, A contracts with TP for new business (the contract does not involve winding up) Would the partnership be liable to TP if B had filed a statement of dissolution on May 6?

Answer 31

No, because a statement of dissolution does not become effective until 90 days after it
is filed.

Question 32

A partnership has a two-year term. May a partner dissociate before the term is up?

Answer 32

Yes. but the dissociation will be wrongful and the partner will be liable for damages since she agreed to stay for two years. The other partners can continue the business without dissolution and winding up; a buyout of the dissociated partner will be required.

Question 33

A partnership is formed to buy a piece of land, subdivide it, and sell off the lots. Can a partner dissociate before the last lot is sold off?

Answer 33

Yes, but the dissociation will be wrongful. This is a term partnership because it is a partnership to accomplish a particular undertaking. The partner will be liable for damages since she agreed to stay until the undertaking was completed. The other partners can continue the business without dissolution and winding up; a buyout of the dissociated partner will be required.

Question 34

A partnership is formed to operate a bar. May a partner dissociate after one week?

Answer 34

Yes, This is an at will partnership from which any partner may withdraw at any time without penalty. The dissociating partner may compel dissolution and winding up of the partnership.

Question 35

A partnership has a two-year term. One of the partners dies. May the business continue, or must the partnership dissolve and wind up?

Answer 35

The business may continue unless, within 90 days after the dissociation, if 1/2 of the remaining partners agree to wind up the partnership.

Question 36

A partnership is an at-will partnership. One of the partners dies. May the business continue, or must the partnership dissolve and wind up?

Answer 36

This would not be considered a dissociation by express will, so the business can continue.