Friday, June 2, 2017

A Partnership . . . of One???

    One of my favorite casebook problems involves a general partnership and the interesting question of whether a one-partner “partnership” is possible.  Consider the following:  Polly and Peter are the only partners of a general partnership with an express term of ten years. After two years of operation, Peter notifies the partnership that he is withdrawing as a partner. Is dissolution of the partnership now required? If not, what is the status of the remaining business?

    (A good portion of the below discussion and all of the case citations were taken from the excellent article, Partners Without Partners:  The Legal Status of Single Person Partnerships, 17 Fordham J. Corp. & Fin. L. 449, by Professors Robert W. Hillman and Donald J. Weidner.)

    Is there such a thing as a partnership with only one partner?  Under RUPA, Peter has dissociated by express will under § 601.  It is a term partnership, so dissolution is not required under § 801(1).  Unless Polly wants to dissolve the partnership, dissolution is also not required under § 801(2).  Section 801 states that a partnership is dissolved “only” upon the occurrence of the events listed in § 801; thus, it would appear that a buyout is necessary under § 701. 

    The problem with this conclusion, however, is that a partnership, by definition, requires “two or more persons.”  See id. §§ 101(6), 202(a).  While § 202 might be read to suggest that two or more persons are only needed to form a partnership (i.e., two or more persons are not needed after formation), § 101(6) defines a “partnership” as “an association of two or more persons * * * formed under Section 202,” which suggests that a partnership, by definition, must always have two or more persons.

    Until the time when Peter is fully bought out, it is possible to argue that the partnership still exists.  After all, Peter’s dissociation ends many of his rights and obligations as a partner, see id. § 603(b), but a dissociated partner is still a “partner” for some purposes.  For example, under § 702, a dissociated partner can still bind the partnership for two years.  Under § 703(b), a dissociated partner can still be liable as a partner for some post-dissociation obligations.  Under § 403(b) (and comment 2), a dissociated partner has some rights to inspect the books and records of the partnership.  Until Peter has been completely bought out, therefore, perhaps one can argue that he has enough vestiges of “partner-ness” remaining to count him as the second “person” under the partnership definition.  Cf. RUPA § 601 cmt. 1 (“A dissociated partner remains a partner for some purposes and still has some residual rights, duties, powers, and liabilities. Although Section 601 determines when a partner is dissociated from the partnership, the consequences of the partner’s dissociation do not all occur at the same time. Thus, it is more useful to think of a dissociated partner as a partner for some purposes, but as a former partner for others.”).

    This argument, however, is somewhat of a dodge, as it does not answer the ultimate question of whether there can be a partnership of one partner.  What happens, in other words, when Peter is fully bought out?  Does the partnership still exist when Polly is undeniably the only partner left standing?  On the one hand, a partnership is an entity distinct from its partners (§ 201(a)), which suggests that the entity itself should not disappear simply because the composition of the owners changes.  On the other hand, this argument proves too much, as it would suggest that the entity remains even if all of the partners dissociated through death or otherwise.  Moreover, presumably § 201(a) cannot override the partnership definition, which seems to require two or more persons.  As further support, comment 6 to § 302 states, in part, the following: 

The UPA does not have a provision dealing with the situation in which all of the partners’ interests in the partnership are held by one person, such as a surviving partner or a purchaser of all the other partners’ interests. Subsection (d) allows for clear record title, even though the partnership no longer exists as a technical matter. When a partnership becomes a sole proprietorship by reason of the dissociation of all but one of the partners, title vests in the remaining “partner,” although there is no “transfer” of the property.

Id. (emphasis added).  This language suggests that the drafters of RUPA believe that a partnership ends (and becomes a sole proprietorship) when there is only one remaining partner.

    In summary, Articles 6-8 of RUPA suggest that Peter’s dissociation requires a buyout, but not a dissolution of the partnership.  The definition of partnership, however, does not seem to allow for a partnership of one person, which suggests that the partnership would have to terminate (through, presumably, the dissolution process).  The case law on the issue sides with this latter position.  See, e.g., Corrales v. Corrales, 2011 WL 3484470 (Cal. App. 4th Dist. 2011) (“Having carefully studied the idea of a one-partner partnership in light of the Revised Uniform Partnership Act, we conclude that no such animal exists.  If a partnership consists of only two persons, the partnership dissolves by operation of law when one of them departs.”); Wheatley v. Fink, No. C048328, 2006 WL 3071451, at *4 (Cal. Ct. App. Oct. 31, 2006) (holding that buyout provisions do not apply when one partner leaves a two-person partnership because the partnership could not be continued by a single partner); Vesco v. San Diego Cmty. Corr. Ctr., No. D049266, 2008 WL 2547890, at *7 (Cal. App. Mar. 25, 2008)Kuist v. Hodge, No. B193863, 2008 WL 510075, at *11 (Cal. Ct. App. Mar. 25, 2008)Pemstein v. Pemstein, No. G030217, 2004 WL 1260034, at *1 (Cal. Ct. App. June 9, 2004) (“‘Can one person carry on a partnership?’  In short, the answer is no.  * * * Just as it takes two to form a marriage, it takes a minimum of two to run a viable partnership.  We were unable to find any contrary authority, and appellants fail to provide any, holding a partnership can be carried on by less than two persons.”); Costa v. Borges, 79 P.3d 316, 320 (Idaho 2008) (holding that “because it takes at least two persons to have a partnership,” a two-person partnership does not survive the withdrawal of a partner); see also  Rules of the State Bar of Cal., R. 3.179 (2010) (“The State Bar must terminate certification of a limited liability partnership if there is only one partner in the limited liability partnership * * * .”).

    The analysis under RUPA (2013) is similar, but there is one significant difference.  A “partnership” is still defined as “an association of two or more persons” under § 102(11); a partnership is a separate legal entity under § 201(a); and a dissociation by express will under § 601 does not, in a term partnership, lead to dissolution under § 801.  The significant difference is § 801(6), which states that a partnership is dissolved upon “the passage of 90 consecutive days during which the partnership does not have at least two partners.”  Interestingly, this suggests that a partnership can exist with only one partner, at least for 89 days.  The comment to RUPA (2013) § 302 quotes the comment from RUPA § 302, and then states the following:

      Section 801(6), added during the Harmonization Project, changes the analysis.  The paragraph states that dissolution is caused by “the passage of 90 consecutive days during which the partnership does not have at least two partners.”  Consequently, for at least eighty-nine consecutive days a partnership remains un-dissolved although having only one partner, and even at ninety days the partnership remains a partnership, albeit dissolved and compelled to wind up its business.  Subsection (d) remains quite useful if the sole remaining partner winds up the partnership by becoming a sole proprietor, but it is no longer accurate to state that a partnership with only one partner “no longer exists as a technical matter."

So . . . do we have an answer?  What do you think dear reader?

http://lawprofessors.typepad.com/business_law/2017/06/a-partnership-of-one.html

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Comments

i cannot tell you how much hair tearing this problem caused me the first year i taught business - until i found that article and affirmation

Posted by: Ann Lipton | Jun 2, 2017 1:02:56 PM

I have determined, having read this, that after the 2013 revisions, based on the change and the associated comment, § 801(6) creates an exception to § 102(11). But § 102(11) should note that! Section 801(6) creates a continuing statutory partnership, in other words, imv. But until I read this, I had not focused on the full meaning of the change . . . .

Love this post, Doug. Many of us have struggled with this over time. By gathering these sources together, you have done us all a great service.

Posted by: joanheminway | Jun 4, 2017 3:09:08 PM

The group of people who draft Colorado partnership/LLC/corporate/etc. law discussed this issue about a decade ago and there was disagreement. The Weidner/Hillman piece came out a bit after our conversations and nailed the discussion right on the head. It has been on my agenda to draft a revision to Colo statute to permit single partner partnerships upon the dissociation of the penultimate partner (but not on formation). Given the existence of SMLLCs that seems like the right policy answer. It would permit continuation without real property conveyance on dissolution (loan acceleration, etc), and makes sense to me in myriad ways. Maybe Doug's good posting spurs me to get this done, since I do not think the drafting is hard. I will share when (if?) I actually get in gear.

Posted by: Bill Callison | Jun 5, 2017 8:52:25 AM

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