Partnership - Dissolution Flashcards
Dissociation
Dissociation = Partners withdrawal from Partership. (bows out)
Dissociation is a change in the relationship of the partners caused by any partner ceasing to be associated in the carrying on of the business.
Dissociation of a partner does not necessarily cause a dissolution and winding up of the partnership business.
Exception: notice of a partner’s express will to withdraw from a partnership AT-WILL automatically triggers dissolution of the partnership. (other events do not)
**Dissociation is about partners
**Dissolution is about Pship.
What causes Dissociation - Events of Dissociation
A partner becomes dissociated from the partnership by:
(1) Dissociation by Express will and notice: Partner VOLUNTARY leaves, and oral or written notice of the partner’s express will to withdraw;
AT-WILL automatically triggers dissolution of the partnership. (other events do not)
(2) happening of an agreed event;
(3) valid expulsion of the partner;
(4) the partner’s bankruptcy or the appointment of a receiver for a partner;
(5) the partner’s death or incapacity to perform partnership duties;
(6) the 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.
Wrongful Dissociation
A partner will be deemed to have wrongfully dissociated if:
the dissociation is in breach of an express term in the partnership agreement; or
in a TERM partnership if the partner withdraws, is expelled, or becomes bankrupt BEFORE the end of the term;
A partner who wrongfully dissociates is liable to the partnership for any damages caused by the dissociation.
AT-WILL Partnership: No agreement to remain partners. It is the default form of partnership. (Most partnerships are atwill.)
TERM Partnership: the partners have agreed, explicitly or implicitly, to remain partners for amount of time (definite term) or until the completion of a particular undertaking (a project).
*pship agmt to just run a biz is at-will, not a term… bc it doesnt say they have to remain until the completion of some term, it will last indefinitely. (A partnership is formed to operate a linen supply business.)
Consequences of Dissociation
a. Consequences For Partnership: Either dissolving the Pship, OR buying out the partner’s Pship interest.
When a partner dissociates from a partnership, EITHER:
1. the partnership is DISSOLVED and that its business must be wound up. The partnership business will be LIQUIDATED (that is, “sold off”).
- the partnership CONTINUES in existence with the dissociated partner becoming entitled to a BUYOUT of their partnership interest.
The nature of the event of dissociation dictates which of these avenues will be implicated.
b. Consequences For Partner that dissociates
right to participate in management ceases.
partnership must
purchase (buy out) their interest at either liquidation or going-concern value (with exception below), and
must indemnify them against known pre-dissociation liabilities, and
must indemnify them against post-dissociation liabilities not incurred by the dissociating partner’s acts.
EXCEPT:
a partner who WRONGFULLY dissociates before the expiration of a partnership term or completion of a particular undertaking is NOT entitled to payment of the buyout price until the term expires or the 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.
Dissolution
Dissolution: Partnership ends (is dissolved), and business is wound up. Partnershp business liquidated (assets are sold off).
Dissolution and winding up are required only in limited circumstances (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).
Generally, a partnership is dissolved and its business must be wound up:
a. In a partnership at will, when a partner gives notice of her express will to withdraw
*Dissociation by express will = Partner volutnarily leaves
• Dissociating partner can force partnership to dissolve.
b. In a partnership for a definite TERM or particular undertaking, when:
1) Within 90 days after a partner’s death, bankruptcy, or wrongful dissociation, at least half the remaining partners express a will to wind up the business; or
2) All the partners express a will to wind up the business; or
3) The term expires or the undertaking is complete.
c. Upon the happening of an agreed upon event
d. Upon the happening of an event that makes it unlawful for the partnership to continue, or
e. Upon a judicial decree
Dissolution - partnership assets and liabilities
When dissolution and winding up occur, partnership assets must be applied to the discharge of partnership liabilities.
• If the assets are insufficient, individual partners are required to CONTRIBUTE (“pay in”) in accordance with their loss shares.
• If there are excess assets, they are distributable to the partners in cash in accordance with their profit shares.
Buyout and Continuation of the Business
Buyout: Dissociating Partner has right to be paid value of Pship interest by continuing partners, if no dissolution and winding up.
If a partner’s dissociation does not result in a dissolution and 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.
A partner who WRONGFULLY dissociates before the expiration of a partnership term or completion of a particular undertaking is NOT entitled to payment of the buyout price until the term expires or the undertaking is completed, unless they can establish that earlier payment will not cause undue hardship to the partnership business.
Liability of Dissociated Partner: Pre-dissociation obligations
a. Pre-Dissociation
Generally, a dissociated partner remains liable for PRE-dissociation partnership obligations.
(a creditor can agree to release the withdrawing partner, however, from specific obligations).
Liability of Dissociated Partner: Post dissociation obligations
b. POST-Dissociation
A dissociated partner can be liable for POST-dissociation partnership liabilities incurred within TWO YEARS AFTER the dissociation (assuming that dissolution has not 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.
• BUT, a dissociated partner can protect themselves (cut short this period of liability) by…
- notifying creditors directly of their dissociation (effective immediately), OR
- by filing a PUBLIC NOTICE of dissociation (becomes effective 90 days after filing). The partnership can make the filing as well.
Dissociated Partner’s Power to Bind Partnership (Apparent Authority of Dissociated Partner)
A partnership can be bound by an act of a dissociated partner undertaken within TWO YEARS after dissociation (assuming that dissolution has not occurred) IF:
(1) the act WOULD HAVE bound the partnership before dissociation, and
(2) the other party to the transaction
- (a) reasonably believed the dissociated partner was still a partner and
- (b) did not have notice of the dissociation.
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).
DISSOLUTION triggers
b. Events Causing Dissolution - The following events trigger dissolution under the R.U.P.A.:
a. In a partnership at will, notification by any partner of an express will to withdraw as a partner;
b. In a partnership for a definite term or particular undertaking:
(1) expiration of the term or completion of the undertaking,
(2) consent of all of the partners to dissolve, or
(3) within 90 days after a partner’s death, bankruptcy, or wrongful dissociation, at least half of the remaining partners wish to dissolve;
c. The happening of an event agreed to in the partnership agreement that requires winding up the partnership business;
d. The happening of an event that makes it unlawful for the partnership to continue;
e. Issuance of a judicial decree on application by a partner that
(1) the economic purpose of the partnership is likely to be frustrated,
(2) a partner has engaged in conduct making it not reasonably practicable to carry on the business, or
(3) the business cannot practicably be carried on in conformity with the partnership agreement;
f. Issuance of a judicial decree on application by a transferee of a partner’s interest that it is equitable to wind up the partnership
(1) after the term expires or the undertaking is completed in a partnership for a definite term or particular undertaking, or
(2) at any time in a partnership at will; and
g. The passage of 90 consecutive days during which the partnership does not have at least two partners.
a. Dissolution of a Partnership at Will
When a partnership is formed with no particular undertaking or definite term, it is said to be a partnership at will.
A partnership at will can be dissolved at any time by the express will (for example, notice of dissolution) of any partner without penalty.
Distribution of Pship assets at DISSOLUTION. (Priority of distribution)
PRIORITY of DISTRIBUTION of Pship Assets:
Each level of priority must be fully satisfied before beginning the next level:
a. FIRST, TO CREDITORS:
- the partnership must pay all creditors.
- Creditors include “outside creditors” (for example, trade creditors, lenders, suppliers) AND “inside creditors” (for example, partners who LOANED money).
b. SECOND, to reimburse partners for capital contributions
- the partnership must repay all capital contributions paid into the partnership by partners. partners are OWED for their capital contributions.
*** So, if SHORTFALL (pship cannot afford to repay capital contributions) … all partners split the shortfall.
— then each partner must contribute (pay in) their share of the loss). So split the total shortfall by # of partners, each partner owes that amount…
——–So Each partner (including the cap’ contributor) pays that number to the Pship, then P ship pays off shortfall.
— Ex: after paying off creditors, Partner B is owed 200k from capital contributions he made… now there is 200k shortfall, A and B each pay 100k to the Pship, Pship pays B the 200k. Thus, A is basically splitting the shortfall with B (so now each partner has paid equally to that og capital contribution).
c. Third, profits or losses, if any. (to partners)
- if agmt exists, split using that. if no agmt, default rules.
Partnership Continues After Dissolution
The partnership continues to exist after dissolution until the partnership is wound up.
Who May Wind Up
As a general rule, all living partners have a right to participate in the winding up of the partnership’s business except partners who have wrongfully dissolved the partnership and bankrupt partners.
If all partners have died, the legal representative of the last surviving partner may wind up.
