Dissociation and Dissolution

Dissociation

Dissociation occurs when a partner ceases to be associated in the carrying on of the business. It does not necessarily result in a dissolution and winding up of the business. A dissociating partner “withdraws” or “bows out.”

Events of Dissociation

A partner becomes dissociated by: (1) oral or written notice of the express will to withdraw; (2) happening of an agreed event; (3) valid expulsion; (4) bankruptcy of the partner or an appointment of a receiver for a partner; (5) the partner’s death or incapacity; (6) a decision by the court that the partner is incapable of performing; 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 Pship agreement. It is also wrongful in a term partnership if the partner withdraws, is expelled, or becomes bankrupt before the end of the time. Wrongful dissociation results in liability for losses incurred as a result of the wrongful dissociation

At-Will Pship

An at-will partnership is one where the partners have not agreed to remain partners until the expiration of a definite term or the completion of a particular undertaking. It is the default.

Term Partnership

A term partnership is a pship where the partners have agreed explicitly or implicitly to remain partners for a definite term or until the completion of particular undertaking.

Consequences of Dissociation for Pship

When a partner dissociates, one of two statutory avenues is implicated: (1) the first avenue provides that the Pship is dissolved and that its business must be wound up; or (2) the second avenue provides that the pship continues in existence with the dissociated partner being entitled to a buyout of their interests. The nature of events of dissociation dictates which avenue is implicated

Consequences of Dissociation for Partner

Upon a partner’s dissociation, their right to participate in management ceases. The pship must purchase the partner’s interest at either liquidation or going-concern value, and must indemnify them against known pre-dissociation liabilities, as well as against post-dissociation liabilities not incurred by the dissociating partner. A partner who wrongfully dissociates is not entitled to payment until the term expires or undertaking is completed unless they can establish that earlier payment will not cause undue hardship. Interest must be paid on the buyout price from the date of dissociation to the date of payment

Dissolution due to Dissociation (general)

Dissolution and winding up are only required in limited circumstances, for example: an event in the agreement, the business becoming illegal, the issuance of a judicial decree, the unanimous consent of partners in a term partnership, of the expiration of a term partnership

Dissolution Due to DIssociation Particularly Important Circumstances

(1) in general, when a partner dissociates by express in an at-will partnership, the partnership is dissolved and its business must be wound up; and (2) in a term partnership, if one partner dissociates wrongfully, or if a dissociation occurs because of a partner’s death or bankruptcy, dissolution and winding up are required only if, within 90 days after dissociation, at least one-half of the remaining partners agree to wind up

Dissociation: buyout and continuation of business

If a dissociation does not result in dissolution and winding up, the partner is entitled to receive a buyout of his pship interest. The remaining partners may continue the business. If the dissociation is wrongful, any damages will be offset against the buyout price

Liability of Dissociated Partner: Pre-dissociation

A dissociated partner remains liable for pre-dissociation partnership obligations. However, a creditor can agree to release the withdrawing partner from specific obligations

Liability of Dissociating Partner post-dissociation

In the absence of dissolution, a dissociated partner can be liable for post-dissociation pship liabilities incurred within two years after the dissociation if: (1) when entering the transaction, the other party reasonably believed the dissociated partner was still a partner; and (2) the other party did not have notice of the dissociation.

Limiting Partner’s Post-dissociation Liability

A dissociated partner can protect themselves by: (1) notifying creditors immediately of their dissociation, effective immediately; or (2) by filing a public notice of dissociation, which becomes effective 90 days after filing. The pship can file such a notice as well.

Dissociated Partner’s Power to Bind the Pship

A pship can be bound by acts of a dissociated partner undertaken within 2 years after dissociation (if no dissolution) if: (1) the act would have bound the pship 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.

Partnership limiting liability for Dissociated Partner’s Actions

The Pship may protect itself by notifying creditors directly of the dissociation, effective immediately, or by filing a public statement of dissociation, effective in 90 days

Dissolution generally

When dissolution and winding up occur, pship assets must be applied to the discharge of the Pship liabilities. If the assets are insufficient, individual partners are required to contribute in accordance with their loss shares. If there are excess assets, they are distributable to the partners in cash in accordance with profit shares

Dissolution of Pship at Will

A pship at will can be dissolved at any time by the express will of any partner without penalty

Events Triggering Dissolution under RUPA:

(1) in a pship at will, notification by any partner of an express will to withdraw as partner; (2) in partnership for a term or undertaking: (x) expiration of the term or completion of the undertaking; (y) consent of all parties involved; or (z) within 90 day after a partner’s death, bankruptcy, or wrongful dissociation if at least half of remaining partners wish to dissolve; (4) the happening of an agreed-upon event; (5) issuance of a judicial decree on application by a partner that: (x) the economic purpose of the pship is likely to be frustrated; (y) a partner has engaged in conduct making it not reasonably practicable to carry on the business; or (z) the business practically cannot be carried on in conformity with the pship agreement; (6) issuance of judicial decree on application by a transferee of a partner’s interest that it is equitable to wind up the pship (a) after the term expires or the undertaken is completed; or (b) at any time in a partnership at will; and (7) the passage of 90 consecutive days during which the pship does not have at least two partners

Priority of Distribution

Each level of priority must fully satisfied before beginning the next level: (1) First, the pship must pay all creditors, with outside creditors taking priority over partners who loaned money; (2) second, a pship must repay all capital contributions paid into the pship by partners; and (3) third, profits or losses, if any

Pship Continuation After Dissolution

A partnership continues to exist after dissolution until it is wound up

Who Winds up a Pship

As a general rule, all living partners have a right to participate in the winding up of the pship business except partners who have wrongfully dissolved the pship and bankrupt partners. If all partners have died, the legal representatives of the last surviving partner may wind up

Apparent Authority: Partner’s Power to Bind During Winding Up

A pship can be bound after dissolution by any act of a partner appropriate for winding up the pship’s business (as well as partners with apparent authority).

Waiving Dissolution

Any time before the winding up of the pship business is complete, the partners may decide to waive the dissolution and continue the partnership by unanimous vote of the partners who have not wrongfully dissolved. Such waiver does not affect the rights of persons who have relied on the dissolution before receiving notice of the waiver