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46 Cards in this Set
- Front
- Back
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A] Three Stages of Termination
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[1] Dissolution – point in time when partners cease to operate business as a partnership
[2] Winding Up – interim period between dissolution and termination during which affairs of business are concluded [3] Partnership is terminated when all its affairs are wound up or completed |
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{B] Methods of Dissolution
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[1] Agreement
[2] Operation of Law (33-41-930) [3] Judicial Decree (33-41-940) [C] Effective Date of Dissolution [D] Effects of Dissolution [E] Notice of Dissolution (33-41-970) [F] Right to Continue Business [G] Interest in Assets of Business [H] Use of Partnership Name [I] Liabilities (33-41-1010) [J] Post-Dissolution Powers of Partnership [K] Winding Up (33-41-1020) |
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{2] Operation of Law (33-41-930)
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[a] End of Term or Purpose
[b] At Will [c] Mutual Consent [d] Expulsion of a Partner [e] Addition of New Partner [f] Assignment of Partnership Interest [g] Illegality [h] Bankruptcy or Insolvency [i] Death |
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[2] Operation of Law (33-41-930)
[a] End of Term or Purpose |
• Those events which by their occurrence will cause a dissolution
o Dissolved upon expiration of the term for which it was established or upon the conclusion of the purpose for which it was created. |
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[2] Operation of Law (33-41-930)
[b] At Will |
o Can be dissolved at will by any partner when there is no agreement as to the partnership’s term of existence and no particular purpose is specified
o Upon notice to the other partners o Must be in good faith o If there is a specified agreement, any partner can still dissolve the partnership; however will be liable for breach of the agreement. |
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[2] Operation of Law (33-41-930)
[c] Mutual Consent |
o Can be dissolved at any time by agreement of all parties – regardless of whether it was set up at will or a for a set term
[i] Assignee’s Consent • Don’t need consent of partners who have assigned their interest. [ii] By Agreement • Agreement by less than all partners can dissolve if partnership agreement says so |
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[2] Operation of Law (33-41-930)
[d] Expulsion of a Partner |
o Dissolved when any partner is expelled pursuant to partnership agreement
o The partnership then continues as a new partnership |
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[2] Operation of Law (33-41-930)
[e] Addition of New Partner |
o Doesn’t cause dissolution – just creates a new partnership
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[2] Operation of Law (33-41-930)
[f] Assignment of Partnership Interest |
o Each partner has right of assignment – doesn’t cause dissolution
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[2] Operation of Law (33-41-930)
[g] Illegality |
o Dissolved if activities become illegal or partnership itself becomes illegal
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[2] Operation of Law (33-41-930)
[h] Bankruptcy or Insolvency |
o Dissolution results when either the partnership as an entity or any of the individual partners are judged bankrupt or insolvent
o When the partnership is deemed bankrupt, its assets are placed in control of a trustee and partners cease management o For individual partner, bankruptcy removes his assets from his control. Partner has no power to bind partnership or act on its behalf. |
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[2] Operation of Law (33-41-930)
[i] Death |
o Death of a partner dissolves the partnership
o However, partnership agreement could say otherwise [i] Estate’s Rights in Partnership Property (33-41-1080) • Estate can sue partnership to get value of deceased partner’s share • If estate leaves dead partner’s interest in partnership, estate must choose: (1) interest on value of property left in partnership, or (2) profit attributable to use of such property • Estate only liable to extent of amt. remaining in partnership (unless there is an intent to subject whole state estate to liability) [ii] Wild v. Davenport • Agreement said that if a partner died, his capital should remain with partnership until its expiration and at expiration, all capital repaid; Johnson died; appointed D’s as executors; they did not participate in the business; partners sold the firm and suit was filed against surviving partners and executors to charge them personally as partners • Issue: Whether the defendants in error, executors of the deceased partner, became personally liable as partners for debts contracted by the firm after the death of the testator? • Rule: a provision in the agreement that states that on the death of a partner, his executive or PR is entitled to replace the deceased partner in the firm with the capital of the deceased is binding upon surviving partners to admit the executor. However, its not binding on the executor to come in. He has an option to come in or not • Rule – To subject a person not a partner to liability of partnership debts, there must be some contract to which he is a party with respect to communion profits, which gives him control as principal over the conduct of the business, or creates as between him and the ostensible partner, the relation of principle and agent |
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[3] Judicial Decree (33-41-940)
[a] Insanity or Incapacity |
o Dissolution ordered where any partner has been declare insane by judge or is shown to be of “unsound mind”, or is in any other way incapable (usually refers to physical duties) of performing duties
o Temporary affliction is not grounds for dissolution; must show it is present and will continue throughout partnership term |
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[3] Judicial Decree (33-41-940)
[b] Misconduct or Breach of Agreement |
o Only where breach is material
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[3] Judicial Decree (33-41-940)
[c] Business Operating at Loss |
o Petition should be granted where business can ONLY be operated at a loss
o Loss must be continuing with no hope of recovery o Due to definition of a partnership … “carried on for profit” |
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[3] Judicial Decree (33-41-940)
[d] Petition of Assignee |
o Assignee can petition for dissolution after term of partnership has expired or when term is expressed
o Essentially, can only request one when partnership is or has become one at will |
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[3] Judicial Decree (33-41-940)
[e] Other Circumstances (Catchall Provision) |
o UPA provides a provision that will allow a court to dissolve partnership when no enumerated provision provides, but is otherwise equitable
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[3] Judicial Decree (33-41-940)
[f] Dissension |
o Courts will normally NOT dissolve because of dissension unless the conflict is so great as to cripple the business
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[3] Judicial Decree (33-41-940)
[g] Fraud or Misrepresentation |
• Will dissolve where partnership agreement was fraudulently induced – under contract remedy of rescission based on fraud or misrepresentation and not a breach
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[C] Effective Date of Dissolution
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o If by operation of law, effective on date of event causing dissolution
o If by judicial decree, on date of decree or as specified by court o As to third parties, effective at time of notice. |
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[D] Effects of Dissolution
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o Does not terminate existence of partnership, b/c it continues for purposes of “winding up”
o Ability to bind partnership or act for it is terminated, except if necessary for winding up o All outstanding obligations remain enforceable and partnership exists until they are satisfied o Where dissolved by death, law, or bankruptcy, co-partners remain liable to any partner acting on behalf of partnership without actual knowledge or event causing dissolution |
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[E] Notice of Dissolution (33-41-970)
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o When dissolved by death or withdrawal of a partner, remaining partners must give actual notice to third parties who they deal with.
o No notice is required when dissolved b/c business has become unlawful or b/c it has gone bankrupt. Creditors are charged with actual notice. o In other circumstances, there is no way which a creditor could reasonably be expected to know or receive notice of dissolution [1] Sufficiency of Notice (Creditors) (33-41-30) • Whether notice is sufficient to relieve partners of liability depends on what is reasonable under circumstances • Actual notice must be given to those who have previously extended credit to partnership • Notice consists of written statement properly delivered; mailing to a proper address raises a rebuttable presumption of notice (can be defeated by proving no delivery) [2] Sufficiency of Notice to Others (33-41-980) • However – no requirement to give actual notice to those who have not extended credit to partnership • General notice to public is enough if published in a newspaper of general circulation in localities where business was regularly conducted |
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[F] Right to Continue Business
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• Where partnership has been dissolved by breach of agreement, remaining partners can continue business so long as they pay breaching partner his share of assets
• Also, partnership agreement can specify that business will continue • Breaching partner should notify all creditors of his withdrawal to avoid liability [1] Agreement to Continue After Death • Enforceable just like any other agreement • Whether the dead partner’s interest remains with the partnership is a question of intent |
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[G] Interest in Assets of Business
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• Dissolved by mutual agreement of partners, which divides property among partners
• After transfer, property becomes property of individual partner not subject to claims of co-partners (except for partnership claims not satisfied) [1] Doctrine of Equitable Tracing • Creditors of partnership can reach these assets prior to individual creditors |
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[H] Use of Partnership Name
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• Successor of dissolved partnership has right to use firm name since sale of assets/goodwill includes name
• If there is no sale of interest, any partner is entitled to use name provided the new business is not represented as a successor to old business |
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[I] Liabilities (33-41-1010)
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• ALL partners are liable upon dissolution of partnership for partnership liabilities existing and those incurred in winding up
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[1] Withdrawing Partners
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o Partners who withdraw are obligated to liabilities existing at time of withdrawal
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[2] Retiring Partners
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o Still liable for existing debts, but not for future obligations
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[3] Agreement to Release Partner
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o A retiring or withdrawing partner is discharged from existing debts of partnership by agreement between himself, the creditor, and the assuming partner or partnership
o Can be inferred from conduct/course of dealing |
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[4] Agreement to Assume Liabilities (33-41-1070)
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o Continuing partners could agree to assume the withdrawing partner’s obligations
o However, this agreement does not relieve withdrawing partner of his obligations to existing partnership creditors. The creditors may still collect from him. o But … that partner has an action against continuing partners to recover amt. paid |
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[5] For New Debts
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o Where withdrawing partners leaves assets in partnership or otherwise gives impression of continuing relationship with business, that partner may be held liable for new debts to creditors without notice of withdrawal
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[6] Of Continuing Partners (33-41-1070)
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o Where business of dissolved partnership is continued by a partner(s), creditors of old partnership are creditors of person(s) continuing the business.
o The new business assumes liabilities of old, regardless of new business’s make up |
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[7] Incoming Partners
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o New partner is liable for debts existing at time of entering partnership
o Liability limited to amount of new partner’s interest in partnership’s assets o Not personally liable for pre-existing debt unless he has assumed them |
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[8] Estate of Deceased Partner (33-41-1080)
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o Liable for debts contracted prior to dissolution by death
o Where partnership is continued after death pursuant to an agreement, liability for future debts is limited to entire estate o Where continued without an agreement, estate is a creditor of partnership to extent of estate’s share of assets. As a creditor, estate is subordinate to both old and new creditors |
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[J] Post-Dissolution Powers of Partnership
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o No longer authority or power to bind partnership (except for winding up)
o However, when dissolution is caused by act of a partner, another partner acting without knowledge can bind partnership o Where death or bankruptcy causes dissolution, partner acting without knowledge and notice can bind o Knowledge – actual knowledge o Notice – stated facts or mailed them [1] To Third Parties o Partner can bind partnership to debt if: [a] Act creating debt would have been binding absent dissolution [b] Creditor extended credit w/out knowledge or notice of dissolution; and [c] Creditor had extended credit prior to dissolution |
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[K] Winding Up (33-41-1020)
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• Process of discharging the obligations of partnership and distributing its assets for purpose of terminating business
• Where dissolved by expiration of term/purpose or mutual consent, all partners have right to participate in winding up and each is under duty to liquidate partnership affairs |
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[1] Wrongful Dissolution or Bankruptcy
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o Where wrongfully dissolved, innocent partners have right to wind up
o If bankruptcy of individual partner, remaining partners have right to wind up o When bankruptcy of partnership, trustee in bankruptcy winds up |
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[2] Death
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o Surviving partners or legal reps of last surviving partner have right to wind up
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[3] Powers
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o Those in charge of winding up and liquidating have powers necessary to conclude operations
o May include borrowing money to pay partnership debts or complete outstanding K’s o May NOT enter into new contracts or incur obligations not in furtherance of winding up |
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[4] Compensation for Liquidating Partner
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o Unless agreement to contrary, liquidating partner is NOT entitled to compensation for winding up duties
o Exception when dissolution caused by death – can get compensation here (33-41-510) |
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[5] Distribution of Assets (Priority) (33-41-1060)
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o UPA ranks liabilities as follows:
1) Amounts owed to creditors other than partners 2) Amounts owed to partners other than for capital and profits (partners’ loans) 3) Amounts owed to partners in respect of capital 4) Amounts owed to partners in respect of profits |
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[a] Contribution
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o When partnership assets are inadequate to satisfy claims of creditor, partners must contribute amount necessary to meet liability
o If any partner cannot or will not pay, remaining partners must contribute additional amount in proportion to manner in which they share profits o Then … have claim against partner who failed to pay |
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[b] Partnership Creditors and Individual Creditors (33-41-1060)
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o Partnership creditors have priority to partnership assets and individual creditors have priority to individual assets
o Rules are also applicable in bankruptcy proceedings |
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[i] Partnership Creditors
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o Partnership creditors have 1st priority. If partnership assets are insufficient, creditors may look to partners’ individual assets
o However, claims of partnership creditor to individual assets is subordinate to claims of creditors of individual partners. If the creditors of individual partners have not asserted their claims, partnership creditors can collect |
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[ii] Individual Creditors
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o Accordingly, creditors of individual partners may seek to attach that partner’s interest in the partnership
o Can only recover to extent of partner’s interest in net assets (amount available after providing for partnership creditors) |
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[c] Partner’s Rights (33-41-1060)
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o Priorities of distribution to partners:
[i] Amounts loaned to partnership [ii] Amounts contributed as capital [iii] Amounts due as profits |
