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Agency & Partnership Professor Donald J. Kochan Class 24-25.

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1 Agency & Partnership Professor Donald J. Kochan Class 24-25

2 Class Materials Pages ; ; 772; 778; 782; Pages ; ; 772; 778; 782; Dissociation and Dissolution Dissociation and Dissolution

3 Introduction to Dissociation and Dissolution Dissolution Dissolution As a right As a right As leverage (undue/abuse?) As leverage (undue/abuse?) As fairness doctrine (used to justify emergence of other seemingly unfair rules (deadlock rules for example) As fairness doctrine (used to justify emergence of other seemingly unfair rules (deadlock rules for example) Freedom of Contract, Movement, and Exit Freedom of Contract, Movement, and Exit Efficiencies v. Inefficiencies of Automatic Nature Efficiencies v. Inefficiencies of Automatic Nature Transaction Costs Associated with Continuing Business or Reestablishing Partnership Transaction Costs Associated with Continuing Business or Reestablishing Partnership

4 Introduction to Dissociation and Dissolution Read carefully pages and read the statutory provisions cited Read carefully pages and read the statutory provisions cited Dissolution -- UPA sec 29 Dissolution -- UPA sec 29 UPA sec 38(1) – sets stage for termination of business and recognizes it as a default rule where partners can agree otherwise both pre- and post- dissolution UPA sec 38(1) – sets stage for termination of business and recognizes it as a default rule where partners can agree otherwise both pre- and post- dissolution UPA 41 & 42 – dealing with rights and liabilities when business is continued UPA 41 & 42 – dealing with rights and liabilities when business is continued Dissociation and Dissolution under RUPA articles 6, 7 and 8 Dissociation and Dissolution under RUPA articles 6, 7 and 8 RUPA introduces concept of dissociation; some dissociations automatically become dissolutions and some dissociations do not; understand triggering events in Art 6, standards for buyouts (default rules) in Art 7 and process of dissolution and winding up in Art 8 RUPA introduces concept of dissociation; some dissociations automatically become dissolutions and some dissociations do not; understand triggering events in Art 6, standards for buyouts (default rules) in Art 7 and process of dissolution and winding up in Art 8 Liquidation Rights under UPA 38(1) and RUPA 807(b) Liquidation Rights under UPA 38(1) and RUPA 807(b)

5 Driefuerst v. Driefuerst Strong statement of liquidation rights under UPA – strong doctrinal case Strong statement of liquidation rights under UPA – strong doctrinal case Important fact – no written articles of partnership govern here Important fact – no written articles of partnership govern here Cash preferred rule Cash preferred rule Sale of Assets rather than Valuation is Norm Sale of Assets rather than Valuation is Norm Understand the definition of at will – A partnership at will is a partnership which has no definite term or particular undertaking and can rightfully be dissolved by the express will of any partner. Understand the definition of at will – A partnership at will is a partnership which has no definite term or particular undertaking and can rightfully be dissolved by the express will of any partner. Shows statutory power of one partner to force a sale of the business Shows statutory power of one partner to force a sale of the business A) absent agreement otherwise; or A) absent agreement otherwise; or B) absent an exceptional appeal to equity (very narrow option) – Rinke case and Nicholas v. Hunt (Note 1); see also notes 2-3 showing judicial exceptions to liquidation sale rare yet suject of splits in courts B) absent an exceptional appeal to equity (very narrow option) – Rinke case and Nicholas v. Hunt (Note 1); see also notes 2-3 showing judicial exceptions to liquidation sale rare yet suject of splits in courts

6 UPA 38(1) When dissolution is caused in any way, except in contravention of the partnership agreement, each partner, as against his co-partners and all persons claiming through them in respect to their interests in the partnership, unless otherwise agreed, may have the partnership property applied to discharges its liabilities, and the surplus applied to pay in cash the net amount owing to the respective partners.

7 UPA Causes of Dissolution Sections 31 and 32 Sections 31 and 32 1) No violation of agreement but predetermined termination time certain or at will if no term is agreed upon 1) No violation of agreement but predetermined termination time certain or at will if no term is agreed upon 2) Violation of Partnership Agreement 2) Violation of Partnership Agreement 3) Other circumstances (including court decree) 3) Other circumstances (including court decree)

8 Girard Bank v. Haley Issue of when did dissolution occur (at the time of the letter or at the time of death)? Issue of when did dissolution occur (at the time of the letter or at the time of death)? Why and to whom did it matter? Why and to whom did it matter? Issue of whether there must be grounds stated to effect dissolution Issue of whether there must be grounds stated to effect dissolution Answer: No Answer: No Right to dissolve pursuant to UPA 31(1)(b) is not qualified; a partner in a partnership at will can dissolve the firm at any time and in any arbitrary manner, without regard to the harm it will cause his fellow partners; can dissolve for a good reason, a bad reason, or no reason at all; need not be a justification (good or bad) and a dissolution with no justification offered is still a dissolution Right to dissolve pursuant to UPA 31(1)(b) is not qualified; a partner in a partnership at will can dissolve the firm at any time and in any arbitrary manner, without regard to the harm it will cause his fellow partners; can dissolve for a good reason, a bad reason, or no reason at all; need not be a justification (good or bad) and a dissolution with no justification offered is still a dissolution Note that can protect selves from arbitrary termination by agreeing to a term, where any partner would still have the power to dissolve for any reason but could still be liable for damages Note that can protect selves from arbitrary termination by agreeing to a term, where any partner would still have the power to dissolve for any reason but could still be liable for damages

9 Page v. Page California Case California Case Declaratory Judgment Action – what is that and why does plaintiff want it? Declaratory Judgment Action – what is that and why does plaintiff want it? Reversed trial court holding that a term was created, seeming to take a more restrictive view of courts power to imply a term Reversed trial court holding that a term was created, seeming to take a more restrictive view of courts power to imply a term Here, profitability could not be a term, where profitability is a mere hope common to all ventures and not enough to convert it to a term from at will Here, profitability could not be a term, where profitability is a mere hope common to all ventures and not enough to convert it to a term from at will Demonstrates policy debate over rules favoring dissolution versus rules favoring continuation of the business Demonstrates policy debate over rules favoring dissolution versus rules favoring continuation of the business On one hand, partners should not be trapped On one hand, partners should not be trapped On other hand, partners who want to continue should not be forced to sell On other hand, partners who want to continue should not be forced to sell This case favors freedom of action and free movement of capital – demanding evidentiary requirement should exist before applying a term This case favors freedom of action and free movement of capital – demanding evidentiary requirement should exist before applying a term Of course, demonstrates why express provisions, which will be respected by the courts, are so important if a term is what you want Of course, demonstrates why express provisions, which will be respected by the courts, are so important if a term is what you want

10 Page v. Page (cont.) Also explains concept of wrongful dissolution, noting that fiduciary duties exist on the exercise of the right to dissolve a partnership at will, and one cannot freeze out another partner in order to appropriate partnership assets for himself – UPA 38(2) and a good faith duty as the basis Also explains concept of wrongful dissolution, noting that fiduciary duties exist on the exercise of the right to dissolve a partnership at will, and one cannot freeze out another partner in order to appropriate partnership assets for himself – UPA 38(2) and a good faith duty as the basis Of course, note the good faith is measures NOT by the cause for the termination but the adequacy of the compensation to the partner being frozen out Of course, note the good faith is measures NOT by the cause for the termination but the adequacy of the compensation to the partner being frozen out

11 Dissolution by Judiciary Read the notes on pages , especially that judicial intervention should be rare and is available in very limited circumstances Read the notes on pages , especially that judicial intervention should be rare and is available in very limited circumstances Read notes 2-4 regarding buyouts and changes in RUPA as means of resolution in situations of partnership disagreements Read notes 2-4 regarding buyouts and changes in RUPA as means of resolution in situations of partnership disagreements Equity is not a referee of partnership quarrels Equity is not a referee of partnership quarrels BUT intervention is necessary at times – see note 1 BUT intervention is necessary at times – see note 1

12 Potter v. Brown Wrongful Misconduct Case Wrongful Misconduct Case Focuses on standard whether the misconduct affected prejudicially the carrying on of the business Focuses on standard whether the misconduct affected prejudicially the carrying on of the business Here, profits increased – so what consequence? Here, profits increased – so what consequence? Court rejects profitability or non-profitability as the measure for whether misconduct occurred Court rejects profitability or non-profitability as the measure for whether misconduct occurred Ultimately, this case turns on facts of non- materiality Ultimately, this case turns on facts of non- materiality

13 Horizon/CMS Healthcare Corp. v. Southern Oaks Health Care, Inc. Nursing Home Facilities contract caseRead for purposes of understanding changes made in RUPA Nursing Home Facilities contract caseRead for purposes of understanding changes made in RUPA 3 bases for decision 3 bases for decision Factual finding of irreconcilable differences Factual finding of irreconcilable differences Court decree of dissolution, and RUPA does not make dissociation a condition precedent to dossiolution Court decree of dissolution, and RUPA does not make dissociation a condition precedent to dossiolution RUPA eliminates wrongful dissolution, although it provides for damages (which was not the action here) RUPA eliminates wrongful dissolution, although it provides for damages (which was not the action here)

14 Notice of Dissolution and Termination of Authority Among Partners Read carefully notes on pages and know provisions cited therein Read carefully notes on pages and know provisions cited therein UPA 33 – dissolution terminates all authority of any partner to act for the partnership except so far as may be necessary to wind up partnership affairs or to complete transactions begun but not then finished. (emphasis added) UPA 33 – dissolution terminates all authority of any partner to act for the partnership except so far as may be necessary to wind up partnership affairs or to complete transactions begun but not then finished. (emphasis added) Understand distinctions in UPA 33 and 34 regarding treatment depending on cause of dissolution (act v. bankruptcy or death) Understand distinctions in UPA 33 and 34 regarding treatment depending on cause of dissolution (act v. bankruptcy or death) UPA 35 – effects of dissolution on third parties – read note and section UPA 35 – effects of dissolution on third parties – read note and section

15 Notice of Dissolution and Termination of Authority Among Partners Read carefully notes on pages and know provisions cited therein Read carefully notes on pages and know provisions cited therein RUPA sec 806 – read note and section RUPA sec 806 – read note and section Does not distinguish between kinds of dissolution, unlike UPA Does not distinguish between kinds of dissolution, unlike UPA Contribution provisions for post-dissolution liabilities incurred Contribution provisions for post-dissolution liabilities incurred Appropriate/Inappropriate Acts towqrd winding up Appropriate/Inappropriate Acts towqrd winding up Dissociation distinct Dissociation distinct RUPA secs 703 and 704 RUPA secs 703 and 704 Notice limits liability Notice limits liability Statement of dissociation gives constructive notice 90 days after filing Statement of dissociation gives constructive notice 90 days after filing 2 year statute of limitations for exposure to liability even if no notice 2 year statute of limitations for exposure to liability even if no notice Dissolution has similar provisions in Article 8 Dissolution has similar provisions in Article 8 Notice covered in RUPA 804 and 805 Notice covered in RUPA 804 and 805 Actual or regular constructive notice generally still applies Actual or regular constructive notice generally still applies But also, Statement of Dissolution filing – constructive notice 90 days after filing But also, Statement of Dissolution filing – constructive notice 90 days after filing Conclusively limits apparent authority thereafter Conclusively limits apparent authority thereafter

16 Warner v. Modano Trade accounts for goods sold and delivered; supermarket case Trade accounts for goods sold and delivered; supermarket case Mortgage security case Mortgage security case Dual role issues Dual role issues First 2 claims: Use of UPA sec 15(b) – knowledge of a partner not necessary so long as it is an ongoing business at the time of the extension of credit. Liability rests on statutory grounds as a partner for a partnership obligation not on third-party expectations First 2 claims: Use of UPA sec 15(b) – knowledge of a partner not necessary so long as it is an ongoing business at the time of the extension of credit. Liability rests on statutory grounds as a partner for a partnership obligation not on third-party expectations Last 4 claims: Sec 15 c/n apply because dissolved Last 4 claims: Sec 15 c/n apply because dissolved Court applies standard of reasonableness to determine whether Beale was sufficiently known or active as a partner Court applies standard of reasonableness to determine whether Beale was sufficiently known or active as a partner Liability, if at all, rested on failure to give notice Liability, if at all, rested on failure to give notice Court in dicta notes that knowledge of a partnership probably not necessary if there is knowledge of a business and the requisite player was active Court in dicta notes that knowledge of a partnership probably not necessary if there is knowledge of a business and the requisite player was active

17 Note on page 754 Read the note carefully regarding your counsel and advisor role Read the note carefully regarding your counsel and advisor role Cannot stress enough that taking responsibility to provide actual notice is always the wise counsel in affairs like dissolution; providing notice always helps to insulate one from liabilities, reduce disputes, and provide clarity to the market Cannot stress enough that taking responsibility to provide actual notice is always the wise counsel in affairs like dissolution; providing notice always helps to insulate one from liabilities, reduce disputes, and provide clarity to the market

18 Continuing the Business When and How? When and How? Consider the benefits of continuing and the downsides – who gains and who suffers Consider the benefits of continuing and the downsides – who gains and who suffers Consider not just the partners but also the market and consumers and third parties in relationships Consider not just the partners but also the market and consumers and third parties in relationships

19 Buy-Sell Agreements Buy sell agreements generally provide for the remaining partner or partners to buy out the interest of a partner who has died or left the firm Buy sell agreements generally provide for the remaining partner or partners to buy out the interest of a partner who has died or left the firm Specifically enforceable and not testamentary Specifically enforceable and not testamentary Valuable Planning tool – evaluation decisions made while parties neutral Valuable Planning tool – evaluation decisions made while parties neutral Avoids exercising liquidation Avoids exercising liquidation

20 Seattle-First National Bank v. Marshall Basic Buy-sell agreements case Basic Buy-sell agreements case Read to understand basic form, function, and enforceability Read to understand basic form, function, and enforceability Generally the sale governed by the partnership agreement not some other standard even if it does not seem to be the optimal valuation method; courts will generally not interfere with the agreement Generally the sale governed by the partnership agreement not some other standard even if it does not seem to be the optimal valuation method; courts will generally not interfere with the agreement See note following for thoughts on structuring these agreements See note following for thoughts on structuring these agreements

21 Continuation Clauses and Hunter v. Straube 3 man medical/radiologist partnership case 3 man medical/radiologist partnership case Basically one has a right to dissolve but the manner of distribution can be reasonably governed by contract and that can include a continuation provision Basically one has a right to dissolve but the manner of distribution can be reasonably governed by contract and that can include a continuation provision Express provision in partnership agreement controls where retirement does not dissolve Express provision in partnership agreement controls where retirement does not dissolve Agreements call for distribution of the partnership property Agreements call for distribution of the partnership property Only way per the agreement to withdraw was with notice that here was insufficient Only way per the agreement to withdraw was with notice that here was insufficient Cannot file suit and divest a partner of a right to continue the partnership business that is provided in the partnership agreement Cannot file suit and divest a partner of a right to continue the partnership business that is provided in the partnership agreement

22 Liability of an Incoming Partner UPA secs 17 and 41(7); RUPA sec 306(b) – incoming partner is liable for existing debts of the business but such liability shall be satisfied only out of partnership property. UPA secs 17 and 41(7); RUPA sec 306(b) – incoming partner is liable for existing debts of the business but such liability shall be satisfied only out of partnership property. BUT note that incoming partner who then shares the benefits of a pre-existing contract after joining can be personally liable for obligations under those contracts – courts split on this executory portion issue (see note on pages ) BUT note that incoming partner who then shares the benefits of a pre-existing contract after joining can be personally liable for obligations under those contracts – courts split on this executory portion issue (see note on pages )

23 Liability of a Withdrawing Partner Often continues Often continues See UPA 36(1)-(3) and RUPA 703 See UPA 36(1)-(3) and RUPA 703 Based on idea that 3 is not a party to agreements between partners Based on idea that 3 is not a party to agreements between partners Consider the cases Consider the cases

24 Redman v. Walters Known to be a case that incentivized LLP legislation Known to be a case that incentivized LLP legislation An attorney who leaves a partnership, having never met the aggrieved client of the firm, can be exposed to vicarious liability years later for the negligence of another partner of the firm An attorney who leaves a partnership, having never met the aggrieved client of the firm, can be exposed to vicarious liability years later for the negligence of another partner of the firm He was vicariously liable when the case came to the firm, so remains so after his departure He was vicariously liable when the case came to the firm, so remains so after his departure Why? Right legal result but bad policy? How could this have been avoided? Why? Right legal result but bad policy? How could this have been avoided?

25 Munn v. Scalera Construction contract case; completion of project post-dissolution issues Construction contract case; completion of project post-dissolution issues UPA sec 36(3) – (1) dissolution of a partnership does not of itself discharge the existing liability of a partner, and (3) Where a person agrees to assume the existing obligations of a dissolved partnership, the partners whose obligations have been assumed shall be discharged from any liability to any creditor of the partnership who, knowing of the agreement, consents to a material alteration in the nature or time of payment of such obligations. UPA sec 36(3) – (1) dissolution of a partnership does not of itself discharge the existing liability of a partner, and (3) Where a person agrees to assume the existing obligations of a dissolved partnership, the partners whose obligations have been assumed shall be discharged from any liability to any creditor of the partnership who, knowing of the agreement, consents to a material alteration in the nature or time of payment of such obligations. Principal of Surety Principal of Surety Look closely at behavior to determine when and if consent given – here double payment issue Look closely at behavior to determine when and if consent given – here double payment issue Note that facts of election to have house completed by one was not enough to equal consent to discharge Note that facts of election to have house completed by one was not enough to equal consent to discharge A point to be taken from the trial courts decision is that just because you resolve a partnership issue does not mean there are not other legal theories for these types of cases in other doctrines of law A point to be taken from the trial courts decision is that just because you resolve a partnership issue does not mean there are not other legal theories for these types of cases in other doctrines of law

26 Creditors Claims Any change in personnel dissolved a partnership at common law, just as it does today under the UPA. Any change in personnel dissolved a partnership at common law, just as it does today under the UPA. If business continued: If business continued: At common law, creditors had no claim against new partnership At common law, creditors had no claim against new partnership Page 772 Note 3: RUPA – dissolution not automatic and sec 703 covers successor liability; entity theory resolves complexities of UPA here Page 772 Note 3: RUPA – dissolution not automatic and sec 703 covers successor liability; entity theory resolves complexities of UPA here

27 Rights of a Retired or Dissociated Partner or the Estate of a Deceased Partner when the Business Continues Presents unique problems Presents unique problems For time purposes we will not discuss beyond recognition of tensions between estate law and partnership law For time purposes we will not discuss beyond recognition of tensions between estate law and partnership law Just read Note 6 on p. 782 – RUPA 701 and comments Just read Note 6 on p. 782 – RUPA 701 and comments

28 Good Will Understand the methods of valuation Understand the methods of valuation Understand the definitions of what constitutes good will Understand the definitions of what constitutes good will Tangibles and Intangibles Tangibles and Intangibles P. 784 Bromberg & Ribstein: P. 784 Bromberg & Ribstein: Goodwill has a variety of meanings but is generally used in partnership cases to refer to the going concern value of the business, as opposed to the breakup or liquidation value of its separate assets. This going concern value is almost always related in some way to profitability... Giidwill in this sense includes favorable relationships with customers, employment relationships, credit rating, and other aspects of relationships with suppliers, the value of an assembled organization of property, equipment, and personnel, and such relatively objective components as trade name and customer records. Goodwill has a variety of meanings but is generally used in partnership cases to refer to the going concern value of the business, as opposed to the breakup or liquidation value of its separate assets. This going concern value is almost always related in some way to profitability... Giidwill in this sense includes favorable relationships with customers, employment relationships, credit rating, and other aspects of relationships with suppliers, the value of an assembled organization of property, equipment, and personnel, and such relatively objective components as trade name and customer records.

29 Dawson v. White & Case Reflects trend in recognizing good will for law firms and other professional businesses Reflects trend in recognizing good will for law firms and other professional businesses Case limited to specific facts of case where partnership expressly excluded good will as an asset of the firm Case limited to specific facts of case where partnership expressly excluded good will as an asset of the firm

30 Winding Up; Liquidation; Terminating the Business UPA secs 29 and 37; and RUPA 803: UPA secs 29 and 37; and RUPA 803: In this act dissolution designates the point in time when the partners cease to carry on the business together; termination is the point in time when all the partnership affairs are wound up; winding up, the process of settling partnership affairs after dissolutions. Section 37 of UPA focuses on the right to wind up, stating that, subjects to agreement, the partners who have not wrongfully dissolved have the right to wind up, provided, however, that any partner, his legal representative or his assignee, upon cause shown, may obtain winding up by the court. In this act dissolution designates the point in time when the partners cease to carry on the business together; termination is the point in time when all the partnership affairs are wound up; winding up, the process of settling partnership affairs after dissolutions. Section 37 of UPA focuses on the right to wind up, stating that, subjects to agreement, the partners who have not wrongfully dissolved have the right to wind up, provided, however, that any partner, his legal representative or his assignee, upon cause shown, may obtain winding up by the court. Section 803 of RUPA is the counterpart to 37. It defines the right to wind up in similar terms, except that it adds a provision delineating some of the rights of the person winding up the business. Section 803 of RUPA is the counterpart to 37. It defines the right to wind up in similar terms, except that it adds a provision delineating some of the rights of the person winding up the business.

31 Liquidation and Winding Up Liquidation. Beals v. Superior Welding Co., 653 N.E.2d 430, 438 (III. App. 1995), states the following with regard to liquidation: Liquidation. Beals v. Superior Welding Co., 653 N.E.2d 430, 438 (III. App. 1995), states the following with regard to liquidation: Plaintiff presents no authority to support her claim that the partnership of Hall and Schwartz was no liquidated within the meaning of section 41 [of UPA]. The term liquidation is not defined in winding up of partnership affairs referenced in section 29 and 37 of the Partnership Act….Schwartz purchased Halls interest in the firm, notified clients and the public of the dissolution, acknowledged the completion of all projects and receipt of all accounts receivable, and agreed not to transact any business on behalf of the former partnership when he commenced business as a proprietorship. Under these facts, nothing more was required to wind up or liquidate the partnership. Plaintiff presents no authority to support her claim that the partnership of Hall and Schwartz was no liquidated within the meaning of section 41 [of UPA]. The term liquidation is not defined in winding up of partnership affairs referenced in section 29 and 37 of the Partnership Act….Schwartz purchased Halls interest in the firm, notified clients and the public of the dissolution, acknowledged the completion of all projects and receipt of all accounts receivable, and agreed not to transact any business on behalf of the former partnership when he commenced business as a proprietorship. Under these facts, nothing more was required to wind up or liquidate the partnership.

32 Resnick v. Kaplan Duty of a partner after dissolution to finish the business that existed at the tim eof the dissolution Duty of a partner after dissolution to finish the business that existed at the tim eof the dissolution In the absence of agreement, the partner is required to perform the contracts without additional compensation but continues to receive regular share of profits until termination -- i.e., the partnership continues until winding up is complete In the absence of agreement, the partner is required to perform the contracts without additional compensation but continues to receive regular share of profits until termination -- i.e., the partnership continues until winding up is complete Where partners split the cases, as here, profits still divided according to original shares not based on who took what case; partner has duty to account for cases he takes with him; principal does not apply to new business even if with same client Where partners split the cases, as here, profits still divided according to original shares not based on who took what case; partner has duty to account for cases he takes with him; principal does not apply to new business even if with same client

33 Marr v. Langhoff Rule applied in Resnick does not apply if there is an instant winding up Rule applied in Resnick does not apply if there is an instant winding up Because there is no fiduciary obligation after termination Because there is no fiduciary obligation after termination Note references back to Meehan Note references back to Meehan

34 Ohlendorf v. Feinstein A corollary to the duty to wind up is the right to wind up A corollary to the duty to wind up is the right to wind up Cannot force continuation of the business as a means of mitigating damages – doesnt work in partnership context Cannot force continuation of the business as a means of mitigating damages – doesnt work in partnership context

35 Termination UPA 40(b) UPA 40(b) RUPA 807 RUPA 807 Read carefully the summaries on p. 797 Read carefully the summaries on p. 797

36 Settlement of Accounts Read carefully the notes on page Read carefully the notes on page Priority issues Priority issues Insufficient Assets issues Insufficient Assets issues

37 Judicial Sales and Prentiss v. Sheffel Request for a receiver granted by trial court probably meaning it viewed the plaintiff partners as wrongful dissolvers; freeze out deemed unjustified under 18( (All partners have equal rights in the management and conduct of the partnership business) – wrongfulness was irrelevant on appeal Request for a receiver granted by trial court probably meaning it viewed the plaintiff partners as wrongful dissolvers; freeze out deemed unjustified under 18( (All partners have equal rights in the management and conduct of the partnership business) – wrongfulness was irrelevant on appeal Even a wrongfully discharged partner can bid at a judicial sale – court explains no injury Even a wrongfully discharged partner can bid at a judicial sale – court explains no injury Neutrality and open competition of judicial sale discussed Neutrality and open competition of judicial sale discussed Note that even when a partner forgoes one of his rights under UPA 38 to continue the business himself in the judicial sale setting, he still has available the right under UPA 38(2) to damages for breach of the partnership agreement Note that even when a partner forgoes one of his rights under UPA 38 to continue the business himself in the judicial sale setting, he still has available the right under UPA 38(2) to damages for breach of the partnership agreement

38 Losing Venture: Claims Among Partners; Kovacik v. Reed California case 1957 – read for California line of cases requiring contribution in unequal capital account situations – court then notes all of these involved some capital contribution from each partner, or the services partner received compensation as expense of business California case 1957 – read for California line of cases requiring contribution in unequal capital account situations – court then notes all of these involved some capital contribution from each partner, or the services partner received compensation as expense of business Kovacik distinguished – In the absence of those facts above, the court will infer that services constitute an equal capital contribution to the money contributed Kovacik distinguished – In the absence of those facts above, the court will infer that services constitute an equal capital contribution to the money contributed

39 Charging and Sharing Losses More on Kovacik Note 2 on p. 804: Note 2 on p. 804: RUPA 401 (b) states that [a] partnership shall charge each partners account with a share of the partnership losses, whether capital or operating, in proportion to the partners share of the profits. This continues the rule in UPA 18(a). The Comment to 401 acknowledges that this rejects the Kovacik approach and that this may seem unfair, stating that [i]n entering a partnership with such a capital structure, the partners should foresee that application of the default rule may bring about unusual results and take advantage of their power to vary by agreement the allocation of capital losses. On the other hand, as a practical matter, the working partners obligation to contribute anything beyond his original investment may be illusory. The partner who contributes little of no capital may be without resources to share losses and is, in that case, execution proof. RUPA 401 (b) states that [a] partnership shall charge each partners account with a share of the partnership losses, whether capital or operating, in proportion to the partners share of the profits. This continues the rule in UPA 18(a). The Comment to 401 acknowledges that this rejects the Kovacik approach and that this may seem unfair, stating that [i]n entering a partnership with such a capital structure, the partners should foresee that application of the default rule may bring about unusual results and take advantage of their power to vary by agreement the allocation of capital losses. On the other hand, as a practical matter, the working partners obligation to contribute anything beyond his original investment may be illusory. The partner who contributes little of no capital may be without resources to share losses and is, in that case, execution proof.


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