2. P A R T P A R T Partnerships 9 McGraw-Hill/Irwin Business Law, 13/e © 2007 The McGraw-Hill Companies, Inc. All rights reserved. Introduction to Forms of Business and Formation of Partnerships Operation of Partnerships Dissolution & Winding Up Limited Liability Companies & Limited Partnerships

3. PARTNERS’ DISSOCIATION AND PARTNERSHIPS’ DISSOLUTION AND WINDING UP PA E TR HC 39 “Change is inevitable, but it is in us to control its content and directions.” Indira Ghandhi, Indian Prime Minister, speech (Jan. 8, 1967)

4. Learning Objectives  Dissociation  Dissolution and winding up the partnership business  When the business is continued  Partners joining an existing partnership 39 - 4

5.  Revised Uniform Partnership Act (RUPA) defines dissociation as a change in the relation of partners caused by any partner ceasing to be associated in carrying on the business:  Partner’s retirement, death, or expulsion  Bankruptcy filing  Dissociation starts process of dissolution, winding up (liquidation), and termination Dissociation 39 - 5

6.  A partner has power – but not necessarily a right – to dissociate from partnership any time (e.g., withdrawing)  Nonwrongful dissociation does not violate a partnership agreement and includes death of a partner and partner’s withdrawal in accordance with partnership agreement  Wrongful dissociation takes many forms Dissociation 39 - 6

7. 1. Withdrawal of partner that breaches express provision of partnership agreement 2. Withdrawal of partner before end of term for partnership or completion of the venture 3. Partner filing a bankruptcy petition or being a debtor in bankruptcy 4. Judicial expulsion of partner by request of partnership or another partner based on expelled partner’s misconduct Wrongful Dissociation 39 - 7

8.  Partners may limit or expand definition of dissociation and wrongful events  Dissolution may be next step after partner’s dissociation, but RUPA allows partnership business to continue  Dissolution not automatic The Agreement 39 - 8

9.  RUPA provides a list of events that force a partnership to be dissolved and wound up  List may be altered by agreement  Dissolution begins winding up process:  Orderly liquidation of the partnership assets and the distribution of the proceeds to those having claims against the partnership Dissolution 39 - 9

10.  Winding up partners have implied authority to act to wind up partnership business and apparent authority to conduct business as before dissolution  To eliminate apparent authority to conduct business in ordinary way, partnership should notify third parties or file Statement of Dissolution with secretary of state  See Paciaroni v. Crane Dissolution & Apparent Authority 39 - 10

11.  After partnership assets sold during winding up, proceeds distributed to those with claims against partnership  Remaining proceeds from sale of assets distributed to partners according to net amounts in their capital accounts  Once assets distributed, termination of partnership occurs automatically Distribution & Termination 39 - 11

12.  Partners may choose not to seek dissolution and winding up after dissociation  When partnership continues, partnership must purchase dissociated partner’s partnership interest  New partners may be admitted according to partnership agreement or RUPA If Business Continued 39 - 12

13. Test Your Knowledge  True=A, False = B  Dissociation is the orderly liquidation of the partnership assets and the distribution of the proceeds to those having claims against the partnership.  When a partner dissociates, dissolution is the required next step.  Winding up is a change in the relation of partners caused by any partner ceasing to be associated in the carrying on of the business. 39 - 13

14. Test Your Knowledge  True=A, False = B  In winding up, remaining proceeds from the sale of assets will be distributed to partners according to the net amounts in their capital accounts  Winding up partners have apparent authority to conduct business as before dissolution.  When a partnership continues, partnership must purchase the dissociated partner’s partnership interest 39 - 14

15. Test Your Knowledge  Multiple Choice  James was a partner in a three-person law partnership without a partnership agreement. Medical bills forced James to file for personal bankruptcy. James has:  (a) Engaged in wrongful dissociation  (b) Engaged in nonwrongful dissociation  (c) Engaged in wrongful dissolution  (d) Engaged in nonwrongful dissolution 39 - 15

16. Test Your Knowledge  Multiple Choice  Greg, Pat, and Oprah were partners in a music store. Greg transferred his transferable partnership interest to his nephew. Greg:  (a) Engaged in wrongful dissociation  (b) Has exercised a partnership right  (c) Engaged in nonwrongful dissociation  (d) None of the above 39 - 16

17. Thought Questions  How would you deal with a partner who was mismanaging the firm or committed malpractice? How would you deal with a partner who had a substance abuse problem? 39 - 17