Monday, January 13, 2020

Compelling Dissolution of an At-Will Partnership (?)

A belated Happy New Year to everyone! 

I've been meaning to blog for quite some time on a partnership puzzle that Elizabeth Pollman brought to my attention.  Assume that Jack, Jill, and Jen have an at-will general partnership.  Jack gives notice to the partnership that he is withdrawing, and he demands the liquidation of the partnership business.  (Assume that there is no partnership agreement governing this dispute.)

Is Jack correct?  Does he have the ability under the default rules to compel dissolution of the partnership if Jill and Jen wish to continue the business?

Under RUPA (1997), the answer is "yes." Jack dissociated by express will under RUPA § 601(1).  It is an at-will partnership, so the dissociation is not wrongful.  RUPA § 602.  Under RUPA § 801(1), the partnership “is” dissolved and "its business must be wound up."

Under RUPA § 802(b), however, the winding up of the partnership can be avoided if the partners agree.  Who must agree?  Section 802(b) says clearly that it is “all of the partners, including any dissociating partner other than a wrongfully dissociating partner.”  So Jack’s consent is necessary to avoid winding up.  Let's assume he is not going to consent; thus, the partnership must be dissolved.

This result, by the way, is a well-known principle of partnership law.  At-will partnerships are unstable because any partner can dissociate by express will and compel dissolution.  See RUPA § 801 cmt. 3 (“Section 801 continues two basic rules from the UPA.  First, it continues the rule that any member of an at-will partnership has the right to force a liquidation.”).

RUPA, however, was amended in 2011 and 2013.  And the amendments appear to have reversed this well-known principle of partnership law.  Under the amended statute, Jack again dissociated by express will under § 601(1).  It is an at-will partnership, so the dissociation is not wrongful.  RUPA (2013) § 602.  Under RUPA (2013) § 801(1), the partnership “is” dissolved and "its business must be wound up."

Under RUPA (2013) § 803, however, a partnership may “rescind its dissolution” if it gets the “affirmative vote or consent of each partner.”  RUPA (2013) § 803(b)(1).  But here is the rub:  RUPA (2013) § 102(10) defines “partner” as someone who “has not dissociated as a partner under Section 601.”  So Jack’s consent is NOT necessary under the 2013 version because Jack, after dissociating, is no longer a partner.  It appears that Jill and Jen can rescind dissolution and continue the business.  RUPA (1997) has no definition of partner at all, and as mentioned above, it explicitly requires the dissociating partner’s consent to rescind dissolution under § 802(b).

So bottom line:  the 2013 version has made a major change.  It does not discuss this in the comments at all, and I personally think that it is an unintended consequence of the 2011/2013 harmonization effort.  The 1997 version requires Jack to consent if the partnership is going to continue.  The 2013 version does not seem to require Jack to consent because he is no longer a partner upon dissociation.

Believe it or not, the Uniform Bar Examination tested on this issue last year. I don't think they realized that the application of RUPA (1997) versus RUPA (2013) might produce a different result. To be fair, in that question, an argument could be made that a partnership agreement existed that would lead to the same result under either version of the statute, but I for one was surprised to see the issue in play.

Does anyone out there have any insight on this issue?  If so, please feel free to share in the comments.

https://lawprofessors.typepad.com/business_law/2020/01/happy-new-year-to-everyone-ive-been-meaning-to-blog-for-quite-some-time-on-a-partnership-puzzle-that-elizabeth-pollman-broug.html

| Permalink

Comments

This had me tearing my hair and I thought I was the crazy one! Thank you for posting!

Posted by: Ann Lipton | Jan 13, 2020 9:27:32 AM

Doug:

I believe you have hit on an interesting point, but the bigger question (I suggest) is whether it matters. Specifically, how are the rights of the withdrawing partner different under dissolution of the partnership versus 701. I think it is that differential that matters.

TER

Posted by: Thomas Rutledge | Jan 16, 2020 9:42:36 AM

Thanks Tom. Under RUPA (1997), a dissociating partner in an at-will partnership has the right to compel dissoution. I assume that gives some good leverage to the dissociating partner to demand a buyout on better terms than he or she would get under 701? That leverage is gone under RUPA (2013). But I'm just speculating.

Posted by: Doug | Jan 17, 2020 10:26:26 AM

Post a comment