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

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)

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

 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

 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

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

 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

 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

 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

 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

 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

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

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

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

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

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?