{"id":158,"date":"2014-09-17T00:42:05","date_gmt":"2014-09-17T00:42:05","guid":{"rendered":"https:\/\/courses.candelalearning.com\/buslegalenv\/?post_type=chapter&#038;p=158"},"modified":"2015-04-16T20:03:22","modified_gmt":"2015-04-16T20:03:22","slug":"19-3-dissolution-and-winding-up","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/chapter\/19-3-dissolution-and-winding-up\/","title":{"raw":"Dissolution and Winding Up","rendered":"Dissolution and Winding Up"},"content":{"raw":"<div class=\"bcc-box bcc-highlight\">\r\n<h3>Learning Objectives<\/h3>\r\nBy the end of this section, you will be able to:\r\n<ul id=\"mayer_1.0-ch52_s02_l01\" class=\"im_orderedlist\">\r\n\t<li>Understand the dissolution of general partnerships under the Uniform Partnership Act (UPA).<\/li>\r\n\t<li>Understand the dissociation and dissolution of general partnerships under the Revised Uniform Partnership Act (RUPA).<\/li>\r\n\t<li>Explain the winding up of partnerships under UPA and RUPA.<\/li>\r\n<\/ul>\r\n<\/div>\r\nIt is said that a partnership is like a marriage, and that extends to its ending too. It\u2019s easier to get into a partnership than it is to get out of it because legal entanglements continue after a person is no longer a partner. The rules governing \u201cgetting out\u201d of a partnership are different under the Revised Uniform Partnership Act (RUPA) than under the Uniform Partnership Act (UPA). We take up UPA first.\r\n<div id=\"mayer_1.0-ch41_s03_s01\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Dissolution of Partnerships under UPA<\/h2>\r\n<em class=\"im_emphasis\">Dissolution<\/em>, in the most general sense, means a separation into component parts.\r\n<div id=\"mayer_1.0-ch41_s03_s01_s01\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Meaning of Dissolution under UPA<\/h2>\r\nPeople in business are sometimes confused about the meaning of <span class=\"im_margin_term\"><span class=\"im_glossterm\">dissolution<\/span><\/span>. It does not mean the termination of a business. It has a precise legal definition, given in UPA Section 29: \u201cThe dissolution of a partnership is the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on as distinguished from the winding up of the business.\u201d The partnership is not necessarily terminated on dissolution; rather, it continues until the winding up of partnership affairs is completed, and the remaining partners may choose to continue on as a new partnership if they want.<span id=\"mayer_1.0-fn41_030\" class=\"im_footnote\">UPA, Section 30.<\/span> But, again, under UPA the partnership dissolves upon the withdrawal of any partner.\r\n\r\n<\/div>\r\n<\/div>\r\n<div id=\"mayer_1.0-ch41_s03_s01_s02\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Causes of Dissolution<\/h3>\r\nPartnerships can dissolve for a number of reasons.<span id=\"mayer_1.0-fn41_031\" class=\"im_footnote\">UPA, Section 31.<\/span>\r\n<div id=\"mayer_1.0-ch41_s03_s01_s02_s01\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">In Accordance with the Agreement<\/h3>\r\nThe term of the partnership agreement may have expired or the partnership may be at will and one of the partners desires to leave it. All the partners may decide that it is preferable to dissolve rather than to continue. One of the partners may have been expelled in accordance with a provision in the agreement. In none of these circumstances is the agreement violated, though its spirit surely might have been. Professor Samuelson calls to mind the example of William Dean Howells\u2019s Silas Lapham, who forces his partner to sell out by offering him an ultimatum: \u201cYou may buy me out or I\u2019ll buy you out.\u201d The ultimatum was given at a time when the partner could not afford to buy Lapham out, so the partner had no choice.\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch41_s03_s01_s02_s02\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">In Violation of the Agreement<\/h3>\r\nDissolution may also result from violation of the agreement, as when the partners decide to discharge a partner though no provision permits them to do so, or as when a partner decides to quit in violation of a term agreement. In the former case, the remaining partners are liable for damages for wrongful dissolution, and in the latter case, the withdrawing partner is liable to the remaining partners the same way.\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch41_s03_s01_s02_s03\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">By Operation of Law<\/h3>\r\nA third reason for dissolution is the occurrence of some event, such as enactment of a statute, that makes it unlawful to continue the business. Or a partner may die or one or more partners or the entire partnership may become bankrupt. Dissolution under these circumstances is said to be by operation of law.<span id=\"mayer_1.0-fn41_032\" class=\"im_footnote\">UPA, Section 31.<\/span>\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch41_s03_s01_s02_s04\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">By Court Order<\/h3>\r\nFinally, dissolution may be by court order. Courts are empowered to dissolve partnerships when \u201con application by or for a partner\u201d a partner is shown to be a lunatic, of unsound mind, incapable of performing his part of the agreement, \u201cguilty of such conduct as tends to affect prejudicially the carrying on of the business,\u201d or otherwise behaves in such a way that \u201cit is not reasonably practicable to carry on the business in partnership with him.\u201d A court may also order dissolution if the business can only be carried on at a loss or whenever equitable. In some circumstances, a court will order dissolution upon the application of a purchaser of a partner\u2019s interest.<span id=\"mayer_1.0-fn41_033\" class=\"im_footnote\">UPA, Section 32.<\/span>\r\n\r\n<\/div>\r\n<\/div>\r\n<div id=\"mayer_1.0-ch41_s03_s01_s03\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Effect of Dissolution on Authority<\/h2>\r\nFor the most part, dissolution terminates the authority of the partners to act for the partnership. The only significant exceptions are for acts necessary to wind up partnership affairs or to complete transactions begun but not finished at the time of dissolution.<span id=\"mayer_1.0-fn41_034\" class=\"im_footnote\">UPA, Section 33.<\/span> Notwithstanding the latter exception, no partner can bind the partnership if it has dissolved because it has become unlawful to carry on the business or if the partner seeking to exercise authority has become bankrupt.\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch41_s03_s01_s04\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">After Dissolution<\/h2>\r\nAfter a partnership has dissolved, it can follow one of two paths. It can carry on business as a new partnership, or it can wind up the business and cease operating (see Figure 19.2 \"Alternatives Following UPA Dissolution\").\r\n<div id=\"mayer_1.0-ch41_s03_s01_s04_f01\" class=\"im_figure im_large im_medium-height im_editable im_block\">\r\n\r\n<span class=\"im_title-prefix\">Figure 19.2<\/span> Alternatives Following UPA Dissolution\r\n\r\n<a href=\"https:\/\/textimgs.s3.amazonaws.com\/buslegalenv\/section_22\/c8734445d87a51672a6cab86a2ec8efc.jpg\" target=\"_blank\"><img src=\"https:\/\/textimgs.s3.amazonaws.com\/buslegalenv\/images\/sm_c8734445d87a51672a6cab86a2ec8efc.jpg#fixme\" alt=\"\" \/><\/a>\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch41_s03_s01_s04_s01\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Forming a New Partnership<\/h2>\r\nIn order to carry on the business as a new partnership, there must be an agreement\u2014preferably as part of the original partnership agreement but maybe only after dissolution (and maybe oral)\u2014that upon dissolution (e.g., if a partner dies, retires, or quits) the others will regroup and carry on.\r\n\r\nUnder UPA the remaining partners have the right to carry on when (1) the dissolution was in contravention of the agreement, (2) a partner was expelled according to the partnership agreement, or (3) all partners agree to carry on.<span id=\"mayer_1.0-fn41_035\" class=\"im_footnote\">UPA, Sections 37 and 38.<\/span>\r\n\r\nWhether the former partner dies or otherwise quits the firm, the noncontinuing one or his, her, or its legal representative is entitled to an accounting and to be paid the value of the partnership interest, less damages for wrongful dissolution.<span id=\"mayer_1.0-fn41_036\" class=\"im_footnote\">UPA, Section 38.<\/span> The firm may need to borrow money to pay the former partner or her estate; or, in the case of a deceased partner, the money to pay the former partner is obtained through a life insurance buyout policy.\r\n\r\nPartnerships routinely insure the lives of the partners, who have no ownership interests in the insurance policies. The policies should bear a face amount equal to each partner\u2019s interest in the partnership and should be adjusted as the fortunes of the partnership change. Proceeds of the insurance policy are used on death to pay the purchase price of the interest inherited by the deceased\u2019s estate. If the insurance policy pays out more than the interest at stake, the partnership retains the difference. If the policy pays out less, the partnership agrees to pay the difference in installments.\r\n\r\nAnother set of issues arises when the partnership changes because an old partner departs and a new one joins. Suppose that Baker leaves the car dealership business and his interest is purchased by Alice, who is then admitted to the partnership. Assume that when Baker left, the business owed Mogul Parts Company $5,000 and Laid Back Upholsterers $4,000. After Baker left and Alice joined, Mogul sells another $5,000 worth of parts to the firm on credit, and Sizzling Radiator Repair, a new creditor, advances $3,000 worth of radiator repair parts. These circumstances pose four questions.\r\n\r\nFirst, do creditors of the old partnership remain creditors of the new partnership? Yes.<span id=\"mayer_1.0-fn41_037\" class=\"im_footnote\">UPA, Section 41(1).<\/span>\r\n\r\nSecond, does Baker, the old partner, remain liable to the creditors of the old partnership? Yes.<span id=\"mayer_1.0-fn41_038\" class=\"im_footnote\">UPA, Section 36(1).<\/span> That could pose uncomfortable problems for Baker, who may have left the business because he lost interest in it and wished to put his money elsewhere. The last thing he wants is the threat of liability hanging over his head when he can no longer profit from the firm\u2019s operations. That is all the more true if he had a falling out with his partners and does not trust them. The solution is given in UPA Section 36(2), which says that an old partner is discharged from liability if the creditors and the new partnership agree to discharge him.\r\n\r\nThird, is Alice, the new partner, liable to creditors of the old partnership? Yes, but only to the extent of her capital contribution.<span id=\"mayer_1.0-fn41_039\" class=\"im_footnote\">UPA, Section 17.<\/span>\r\n\r\nFourth, is Baker, the old partner, liable for debts incurred after his withdrawal from the partnership? Surprisingly, yes, unless Baker takes certain action toward old and new creditors. He must provide actual notice that he has withdrawn to anyone who has extended credit in the past. Once he has done so, he has no liability to these creditors for credit extended to the partnership thereafter. Of course, it would be difficult to provide notice to future creditors, since at the time of withdrawal they would not have had a relationship with the partnership. To avoid liability to new creditors who knew of the partnership, the solution required under UPA Section 35(l)(b)(II) is to advertise Baker\u2019s departure in a general circulation newspaper in the place where the partnership business was regularly carried on.\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch41_s03_s01_s04_s02\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Winding Up and Termination<\/h2>\r\nBecause the differences between UPA\u2019s and RUPA\u2019s provisions for winding up and termination are not as significant as those between their provisions for dissolution, the discussion for winding up and termination will cover both acts at once, following the discussion of dissociation and dissolution under RUPA.\r\n\r\n<\/div>\r\n<\/div>\r\n<div id=\"mayer_1.0-ch41_s03_s02\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Dissociation and Dissolution of Partnerships under RUPA<\/h2>\r\nComment 1 to RUPA Section 601 is a good lead-in to this section. According to the comment, RUPA dramatically changes the law governing partnership breakups and dissolution. An entirely new concept, \u201cdissociation,\u201d is used in lieu of UPA term \u201cdissolution\u201d to denote the change in the relationship caused by a partner\u2019s ceasing to be associated in the carrying on of the business. \u201cDissolution\u201d is retained but with a different meaning. The entity theory of partnership provides a conceptual basis for continuing the firm itself despite a partner\u2019s withdrawal from the firm.\r\n\r\nUnder UPA, the partnership is an aggregate, a collection of individuals; upon the withdrawal of any member from the collection, the aggregate dissolves. But because RUPA conforms the partnership as an entity, there is no conceptual reason for it to dissolve upon a member\u2019s withdrawal. \u201cDissociation\u201d occurs when any partner ceases to be involved in the business of the firm, and \u201cdissolution\u201d happens when RUPA requires the partnership to wind up and terminate; dissociation does not necessarily cause dissolution.\r\n<div id=\"mayer_1.0-ch41_s03_s02_s01\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Dissociation<\/h2>\r\n<span class=\"im_margin_term\"><span class=\"im_glossterm\">Dissociation<\/span><\/span>, as noted in the previous paragraph, is the change in relations caused by a partner\u2019s withdrawal from the firm\u2019s business.\r\n<div id=\"mayer_1.0-ch41_s03_s02_s01_s01\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Causes of Dissociation<\/h3>\r\nDissociation is caused in ten possible ways: (1) a partner says she wants out; (2) an event triggers dissociation as per the partnership agreement; (3) a partner is expelled as per the agreement; (4) a partner is expelled by unanimous vote of the others because it is unlawful to carry on with that partner, because that partner has transferred to a transferee all interest in the partnership (except for security purposes), or because a corporate partner\u2019s or partnership partner\u2019s existence is effectively terminated; (5) by a court order upon request by the partnership or another partner because the one expelled has been determined to have misbehaved (engaged in serious wrongful conduct, persists in abusing the agreement, acts in ways making continuing the business impracticable); (6) the partner has declared bankruptcy; (7) the partner has died or had a guardian appointed, or has been adjudicated as incompetent; (8) the partner is a trust whose assets are exhausted; (9) the partner is an estate and the estate\u2019s interest in the partnership has been entirely transferred; (10) the partner dies or, if the partner is another partnership or a corporation trust or estate, that entity\u2019s existence is terminated.<span id=\"mayer_1.0-fn41_040\" class=\"im_footnote\">RUPA, Section 601.<\/span>\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch41_s03_s02_s01_s02\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Effect of Dissociation<\/h3>\r\nAfter a partner dissociates, the partner\u2019s right to participate in management terminates. (However, if the dissociation goes on to dissolution and winding up, partners who have not wrongfully caused the dissociation may participate in winding-up activities.)<span id=\"mayer_1.0-fn41_041\" class=\"im_footnote\">RUPA. Sections 603(b) and 804(a).<\/span> The dissociated partner\u2019s duty of loyalty and care terminates; the former partner may compete with the firm, except for matters arising before the dissociation.<span id=\"mayer_1.0-fn41_042\" class=\"im_footnote\">RUPA, Section 603(b)(3).<\/span>\r\n\r\nWhen partners come and go, as they do, problems may arise. What power does the dissociated partner have to bind the partnership? What power does the partnership have to impose liability on the dissociated one? RUPA provides that the dissociated partner loses any actual authority upon dissociation, and his or her apparent authority lingers for not longer than two years if the dissociated one acts in a way that would have bound the partnership before dissociation, provided the other party (1) reasonably believed the dissociated one was a partner, (2) did not have notice of the dissociation, and (3) is not deemed to have constructive notice from a filed \u201cstatement of dissociation.\u201d<span id=\"mayer_1.0-fn41_043\" class=\"im_footnote\">RUPA, Section 603(b)(1).<\/span> The dissociated partner, of course, is liable for damages to the partnership if third parties had cause to think she was still a partner and the partnership became liable because of that; she is liable to the firm as an unauthorized agent.<span id=\"mayer_1.0-fn41_044\" class=\"im_footnote\">RUPA, Section 702.<\/span>\r\n\r\nA partner\u2019s dissociation does nothing to change that partner\u2019s liability for predissociation obligations.<span id=\"mayer_1.0-fn41_045\" class=\"im_footnote\">RUPA, Section 703(a).<\/span> For postdissociation liability, exposure is for two years if at the time of entering into the transaction the other party (1) reasonably believed the dissociated one was a partner, (2) didn\u2019t have notice of the dissociation, and (3) is not deemed to have constructive notice from a filed \u201cstatement of dissociation.\u201d For example, Baker withdraws from the firm of Able, Baker, and Carr. Able contracts with HydroLift for a new hydraulic car lift that costs $25,000 installed. HydroLift is not aware at the time of contracting that Baker is disassociated and believes she is still a partner. A year later, the firm not having been paid, HydroLift sues Able, Baker, and Carr and the partnership. Baker has potential liability. Baker could have protected herself by filing a \u201cstatement of dissociation,\u201d or\u2014better\u2014the partnership agreement should provide that the firm would file such statements upon the dissociation of any partner (and if it does not, it would be liable to her for the consequences).\r\n\r\n<\/div>\r\n<\/div>\r\n<div id=\"mayer_1.0-ch41_s03_s02_s02\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Dissolution<\/h2>\r\nDissociation does not necessarily cause dissolution (see the discussion later in this section of how the firm continues after a dissociation); dissolution and winding up happen only for the causes stated in RUPA Section 801, discussed in the following paragraphs.\r\n<div id=\"mayer_1.0-ch41_s03_s02_s02_s01\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Causes of Dissolution<\/h3>\r\nThere are three causes of dissolution: (1) by act of the partners\u2014some dissociations do trigger dissolution; (2) by operation of law; or (3) by court order. The partnership agreement may change or eliminate the dissolution trigger as to (1); dissolution by the latter two means cannot be tinkered with.<span id=\"mayer_1.0-fn41_046\" class=\"im_footnote\">RUPA, Section 103.<\/span>\r\n\r\n(1) Dissolution by <em class=\"im_emphasis\">act of the partners<\/em> may occur as follows:\r\n<ul id=\"mayer_1.0-ch41_s03_s02_s02_s01_l01\" class=\"im_itemizedlist im_editable im_block\">\r\n\t<li>Any member of an <span class=\"im_margin_term\"><span class=\"im_glossterm\">at-will partnership<\/span><\/span> can dissociate at any time, triggering dissolution and liquidation. The partners who wish to continue the business of a <span class=\"im_margin_term\"><span class=\"im_glossterm\">term partnership<\/span><\/span>, though, cannot be forced to liquidate the business by a partner who withdraws prematurely in violation of the partnership agreement. In any event, common agreement formats for dissolution will provide for built-in dispute resolution, and enlightened partners often agree to such mechanisms in advance to avoid the kinds of problems listed here.<\/li>\r\n\t<li>Any partnership will dissolve upon the happening of an event the partners specified would cause dissolution in their agreement. They may change their minds, of course, agree to continue, and amend the partnership agreement accordingly.<\/li>\r\n\t<li>A term partnership may be dissolved before its term expires in three ways. First, if a partner dissociated by death, declaring bankruptcy, becoming incapacitated, or wrongfully dissociates, the partnership will dissolve if within ninety days of that triggering dissociation at least half the remaining partners express their will to wind it up. Second, the partnership may be dissolved if the term expires. Third, it may be dissolved if all the partners agree to amend the partnership agreement by expressly agreeing to dissolve.<\/li>\r\n<\/ul>\r\n(2) Dissolution will happen in some cases by <em class=\"im_emphasis\">operation of law<\/em> if it becomes illegal to continue the business, or substantially all of it. For example, if the firm\u2019s business was the manufacture and distribution of trans fats and it became illegal to do that, the firm would dissolve.<span id=\"mayer_1.0-fn41_047\" class=\"im_footnote\">Trans fats are hydrogenated vegetable oils; the process of hydrogenation essentially turns the oils into semisolids, giving them a higher melting point and extending their shelf life but, unfortunately, also clogging consumers\u2019 arteries and causing heart disease. California banned their sale effective January 1, 2010; other jurisdictions have followed suit.<\/span> This cause of dissolution is not subject to partnership agreement.\r\n\r\n(3) <em class=\"im_emphasis\">Dissolution by court order<\/em> can occur on application by a partner. A court may declare that it is, for various reasons specified in RUPA Section 801(5), no longer reasonably practicable to continue operation. Also, a court may order dissolution upon application by a transferee of a partner\u2019s transferable interest or by a purchaser at a foreclosure of a charging order if the court determines it is equitable. For example, if Creditor gets a charging order against Paul Partner and the obligation cannot reasonably be paid by the firm, a court could order dissolution so Creditor would get paid from the liquidated assets of the firm.\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch41_s03_s02_s02_s02\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Effect of Dissolution<\/h3>\r\nA partnership continues after dissolution only for the purpose of winding up its business. The partnership is terminated when the winding up of its business is completed.<span id=\"mayer_1.0-fn41_048\" class=\"im_footnote\">RUPA, Section 802.<\/span> However, before winding up is completed, the partners\u2014except any wrongfully dissociating\u2014may agree to carry on the partnership, in which case it resumes business as if dissolution never happened.<span id=\"mayer_1.0-fn41_049\" class=\"im_footnote\">RUPA, Section 802(b).<\/span>\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch41_s03_s02_s02_s03\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Continuing after Dissociation<\/h2>\r\nDissociation, again, does not necessarily cause dissolution. In an at-will partnership, the death (including termination of an entity partner), bankruptcy, incapacity, or expulsion of a partner will not cause dissolution.<span id=\"mayer_1.0-fn41_050\" class=\"im_footnote\">RUPA, Sections 601 and 801.<\/span> In a term partnership, the firm continues if, within ninety days of an event triggering dissociation, fewer than half the partners express their will to wind up. The partnership agreement may provide that RUPA\u2019s dissolution-triggering events, including dissociation, will not trigger dissolution. However, the agreement cannot change the rules that dissolution is caused by the business becoming illegal or by court order. Creditors of the partnership remain as before, and the dissociated partner is liable for partnership obligations arising before dissociation.\r\n\r\nSection 701 of RUPA provides that if the firm continues in business after a partner dissociates, without winding up, then the partnership must purchase the dissociated partner\u2019s interest; RUPA Section 701(b) explains how to determine the buyout price. It is the amount that would have been distributed to the dissociated partner if, on the date of dissociation, the firm\u2019s assets were sold \u201cat a price equal to the greater of the liquidation value or the value based on a sale of the entire business as a going concern,\u201d minus damages for wrongful dissociation. A wrongful dissociater may have to wait a while to get paid in full, unless a court determines that immediate payment \u201cwill not cause an undue hardship to the partnership,\u201d but the longest nonwrongful dissociaters need to wait is 120 days.<span id=\"mayer_1.0-fn41_051\" class=\"im_footnote\">RUPA, Section 701(e).<\/span> A dissociated partner can sue the firm to determine the buyout price and the court may assess attorney\u2019s, appraiser\u2019s, and expert\u2019s fees against a party the court finds \u201cacted arbitrarily, vexatiously, or in bad faith.\u201d<span id=\"mayer_1.0-fn41_052\" class=\"im_footnote\">RUPA, Section 701(h)(4)(i).<\/span>\r\n\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n<div id=\"mayer_1.0-ch41_s03_s03\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Winding Up the Partnership under UPA and RUPA<\/h2>\r\nIf the partners decide not to continue the business upon dissolution, they are obliged to wind up the business. The partnership continues after dissolution only for the purpose of winding up its business, after which it is terminated.<span id=\"mayer_1.0-fn41_053\" class=\"im_footnote\">UPA, Section 30; RUPA, Section 802(a).<\/span> <span class=\"im_margin_term\"><span class=\"im_glossterm\">Winding up<\/span><\/span> entails concluding all unfinished business pending at the date of dissolution and payment of all debts. The partners must then settle accounts among themselves in order to distribute the remaining assets. At any time after dissolution and before winding up is completed, the partners (except a wrongfully dissociated one) can stop the process and carry on the business.\r\n\r\nUPA and RUPA are not significantly different as to winding up, so they will be discussed together. Two issues are discussed here: who can participate in winding up and how the assets of the firm are distributed on liquidation.\r\n<div id=\"mayer_1.0-ch41_s03_s03_s01\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Who Can Participate in Winding Up<\/h2>\r\nThe partners who have not wrongfully dissociated may participate in winding up the partnership business. On application of any partner, a court may for good cause judicially supervise the winding up.<span id=\"mayer_1.0-fn41_054\" class=\"im_footnote\">UPA, Section 37; RUPA, Section 803(a).<\/span>\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch41_s03_s03_s02\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Settlement of Accounts among Partners<\/h2>\r\nDetermining the priority of liabilities can be problematic. For instance, debts might be incurred to both outside creditors and partners, who might have lent money to pay off certain accounts or for working capital.\r\n\r\nAn agreement can spell out the order in which liabilities are to be paid, but if it does not, UPA Section 40(a) and RUPA Section 807(1) rank them in this order: (1) to creditors other than partners, (2) to partners for liabilities other than for capital and profits, (3) to partners for capital contributions, and finally (4) to partners for their share of profits (see Figure 19.3 \"Priority Partnership Liabilities under RUPA\"). However, RUPA eliminates the distinction between capital and profits when the firm pays partners what is owed to them; RUPA Section 807(b) speaks simply of the right of a partner to a liquidating distribution.\r\n<div id=\"mayer_1.0-ch41_s03_s03_s02_f01\" class=\"im_figure im_medium im_editable im_block\">\r\n\r\n<span class=\"im_title-prefix\">Figure 19.3<\/span> Priority Partnership Liabilities under RUPA\r\n\r\n<a href=\"https:\/\/textimgs.s3.amazonaws.com\/buslegalenv\/section_22\/9e97dab42b8233777ac1b925aafa9ffe.jpg\" target=\"_blank\"><img src=\"https:\/\/textimgs.s3.amazonaws.com\/buslegalenv\/images\/sm_9e97dab42b8233777ac1b925aafa9ffe.jpg#fixme\" alt=\"\" \/><\/a>\r\n\r\n<\/div>\r\nPartners are entitled to share equally in the profits and surplus remaining after all liabilities, including those owed to partners, are paid off, although the partnership agreement can state a different share\u2014for example, in proportion to capital contribution. If after winding up there is a net loss, whether capital or otherwise, each partner must contribute toward it in accordance with his share in the profits, had there been any, unless the agreement states otherwise. If any of the partners is insolvent or refuses to contribute and cannot be sued, the others must contribute their own share to pay off the liabilities and in addition must contribute, in proportion to their share of the profits, the additional amount necessary to pay the liabilities of their defaulting partners.\r\n\r\nIn the event of insolvency, a court may take possession of both partnership property and individual assets of the partners; this again is a big disadvantage to the partnership form.\r\n\r\nThe estate of a deceased partner is credited or liable as that partner would have been if she were living at the time of the distribution.\r\n<div id=\"mayer_1.0-ch41_s03_s03_s02_n01\" class=\"im_key_takeaways im_editable im_block textbox\">\r\n<h3 class=\"im_title\">Key Takeaway<\/h3>\r\nUnder UPA, the withdrawal of any partner from the partnership causes dissolution; the withdrawal may be caused in accordance with the agreement, in violation of the agreement, by operation of law, or by court order. Dissolution terminates the partners\u2019 authority to act for the partnership, except for winding up, but remaining partners may decide to carry on as a new partnership or may decide to terminate the firm. If they continue, the old creditors remain as creditors of the new firm, the former partner remains liable for obligations incurred while she was a partner (she may be liable for debts arising after she left, unless proper notice is given to creditors), and the former partner or her estate is entitled to an accounting and payment for the partnership interest. If the partners move to terminate the firm, winding up begins.\r\n\r\nUnder RUPA, a partner who ceases to be involved in the business is dissociated, but dissociation does not necessarily cause dissolution. Dissociation happens when a partner quits, voluntarily or involuntarily; when a partner dies or becomes incompetent; or on request by the firm or a partner upon court order for a partner\u2019s wrongful conduct, among other reasons. The dissociated partner loses actual authority to bind the firm but remains liable for predissociation obligations and may have lingering authority or lingering liability for two years provided the other party thought the dissociated one was still a partner; a notice of dissociation will, after ninety days, be good against the world as to dissociation and dissolution. If the firm proceeds to termination (though partners can stop the process before its end), the next step is dissolution, which occurs by acts of partners, by operation of law, or by court order upon application by a partner if continuing the business has become untenable. After dissolution, the only business undertaken is to wind up affairs. However, the firm may continue after dissociation; it must buy out the dissociated one\u2019s interest, minus damages if the dissociation was wrongful.\r\n\r\nIf the firm is to be terminated, winding up entails finishing the business at hand, paying off creditors, and splitting the remaining surplus or liabilities according the parties\u2019 agreement or, absent any, according to the relevant act (UPA or RUPA).\r\n\r\n<\/div>\r\n<div class=\"bcc-box bcc-info\">\r\n<h3>Exercises<\/h3>\r\n<section id=\"self-check-questions\">\r\n<ol>\r\n\t<li>Under UPA, what is the effect on the partnership of a partner\u2019s ceasing to be involved in the business?<\/li>\r\n\t<li>Can a person no longer a partner be held liable for partnership obligations after her withdrawal? Can such a person incur liability to the partnership?<\/li>\r\n\t<li>What obligation does a partnership or its partners owe to a partner who wrongfully terminates the partnership agreement?<\/li>\r\n\t<li>What bearing does RUPA\u2019s use of the term <em class=\"im_emphasis\">dissociate<\/em> have on the entity theory that informs the revised act?<\/li>\r\n\t<li>When a partnership is wound up, who gets paid first from its assets? If the firm winds up toward termination and has inadequate assets to pay its creditors, what recourse, if any, do the creditors have?<\/li>\r\n<\/ol>\r\n<\/section><\/div>\r\n<div id=\"mayer_1.0-ch52_s02_s06_n02\" class=\"im_exercises im_editable im_block\"><\/div>\r\n<\/div>\r\n<\/div>","rendered":"<div class=\"bcc-box bcc-highlight\">\n<h3>Learning Objectives<\/h3>\n<p>By the end of this section, you will be able to:<\/p>\n<ul id=\"mayer_1.0-ch52_s02_l01\" class=\"im_orderedlist\">\n<li>Understand the dissolution of general partnerships under the Uniform Partnership Act (UPA).<\/li>\n<li>Understand the dissociation and dissolution of general partnerships under the Revised Uniform Partnership Act (RUPA).<\/li>\n<li>Explain the winding up of partnerships under UPA and RUPA.<\/li>\n<\/ul>\n<\/div>\n<p>It is said that a partnership is like a marriage, and that extends to its ending too. It\u2019s easier to get into a partnership than it is to get out of it because legal entanglements continue after a person is no longer a partner. The rules governing \u201cgetting out\u201d of a partnership are different under the Revised Uniform Partnership Act (RUPA) than under the Uniform Partnership Act (UPA). We take up UPA first.<\/p>\n<div id=\"mayer_1.0-ch41_s03_s01\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Dissolution of Partnerships under UPA<\/h2>\n<p><em class=\"im_emphasis\">Dissolution<\/em>, in the most general sense, means a separation into component parts.<\/p>\n<div id=\"mayer_1.0-ch41_s03_s01_s01\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Meaning of Dissolution under UPA<\/h2>\n<p>People in business are sometimes confused about the meaning of <span class=\"im_margin_term\"><span class=\"im_glossterm\">dissolution<\/span><\/span>. It does not mean the termination of a business. It has a precise legal definition, given in UPA Section 29: \u201cThe dissolution of a partnership is the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on as distinguished from the winding up of the business.\u201d The partnership is not necessarily terminated on dissolution; rather, it continues until the winding up of partnership affairs is completed, and the remaining partners may choose to continue on as a new partnership if they want.<span id=\"mayer_1.0-fn41_030\" class=\"im_footnote\">UPA, Section 30.<\/span> But, again, under UPA the partnership dissolves upon the withdrawal of any partner.<\/p>\n<\/div>\n<\/div>\n<div id=\"mayer_1.0-ch41_s03_s01_s02\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Causes of Dissolution<\/h3>\n<p>Partnerships can dissolve for a number of reasons.<span id=\"mayer_1.0-fn41_031\" class=\"im_footnote\">UPA, Section 31.<\/span><\/p>\n<div id=\"mayer_1.0-ch41_s03_s01_s02_s01\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">In Accordance with the Agreement<\/h3>\n<p>The term of the partnership agreement may have expired or the partnership may be at will and one of the partners desires to leave it. All the partners may decide that it is preferable to dissolve rather than to continue. One of the partners may have been expelled in accordance with a provision in the agreement. In none of these circumstances is the agreement violated, though its spirit surely might have been. Professor Samuelson calls to mind the example of William Dean Howells\u2019s Silas Lapham, who forces his partner to sell out by offering him an ultimatum: \u201cYou may buy me out or I\u2019ll buy you out.\u201d The ultimatum was given at a time when the partner could not afford to buy Lapham out, so the partner had no choice.<\/p>\n<\/div>\n<div id=\"mayer_1.0-ch41_s03_s01_s02_s02\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">In Violation of the Agreement<\/h3>\n<p>Dissolution may also result from violation of the agreement, as when the partners decide to discharge a partner though no provision permits them to do so, or as when a partner decides to quit in violation of a term agreement. In the former case, the remaining partners are liable for damages for wrongful dissolution, and in the latter case, the withdrawing partner is liable to the remaining partners the same way.<\/p>\n<\/div>\n<div id=\"mayer_1.0-ch41_s03_s01_s02_s03\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">By Operation of Law<\/h3>\n<p>A third reason for dissolution is the occurrence of some event, such as enactment of a statute, that makes it unlawful to continue the business. Or a partner may die or one or more partners or the entire partnership may become bankrupt. Dissolution under these circumstances is said to be by operation of law.<span id=\"mayer_1.0-fn41_032\" class=\"im_footnote\">UPA, Section 31.<\/span><\/p>\n<\/div>\n<div id=\"mayer_1.0-ch41_s03_s01_s02_s04\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">By Court Order<\/h3>\n<p>Finally, dissolution may be by court order. Courts are empowered to dissolve partnerships when \u201con application by or for a partner\u201d a partner is shown to be a lunatic, of unsound mind, incapable of performing his part of the agreement, \u201cguilty of such conduct as tends to affect prejudicially the carrying on of the business,\u201d or otherwise behaves in such a way that \u201cit is not reasonably practicable to carry on the business in partnership with him.\u201d A court may also order dissolution if the business can only be carried on at a loss or whenever equitable. In some circumstances, a court will order dissolution upon the application of a purchaser of a partner\u2019s interest.<span id=\"mayer_1.0-fn41_033\" class=\"im_footnote\">UPA, Section 32.<\/span><\/p>\n<\/div>\n<\/div>\n<div id=\"mayer_1.0-ch41_s03_s01_s03\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Effect of Dissolution on Authority<\/h2>\n<p>For the most part, dissolution terminates the authority of the partners to act for the partnership. The only significant exceptions are for acts necessary to wind up partnership affairs or to complete transactions begun but not finished at the time of dissolution.<span id=\"mayer_1.0-fn41_034\" class=\"im_footnote\">UPA, Section 33.<\/span> Notwithstanding the latter exception, no partner can bind the partnership if it has dissolved because it has become unlawful to carry on the business or if the partner seeking to exercise authority has become bankrupt.<\/p>\n<\/div>\n<div id=\"mayer_1.0-ch41_s03_s01_s04\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">After Dissolution<\/h2>\n<p>After a partnership has dissolved, it can follow one of two paths. It can carry on business as a new partnership, or it can wind up the business and cease operating (see Figure 19.2 &#8220;Alternatives Following UPA Dissolution&#8221;).<\/p>\n<div id=\"mayer_1.0-ch41_s03_s01_s04_f01\" class=\"im_figure im_large im_medium-height im_editable im_block\">\n<p><span class=\"im_title-prefix\">Figure 19.2<\/span> Alternatives Following UPA Dissolution<\/p>\n<p><a href=\"https:\/\/textimgs.s3.amazonaws.com\/buslegalenv\/section_22\/c8734445d87a51672a6cab86a2ec8efc.jpg\" target=\"_blank\"><img decoding=\"async\" src=\"https:\/\/textimgs.s3.amazonaws.com\/buslegalenv\/images\/sm_c8734445d87a51672a6cab86a2ec8efc.jpg#fixme\" alt=\"\" \/><\/a><\/p>\n<\/div>\n<div id=\"mayer_1.0-ch41_s03_s01_s04_s01\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Forming a New Partnership<\/h2>\n<p>In order to carry on the business as a new partnership, there must be an agreement\u2014preferably as part of the original partnership agreement but maybe only after dissolution (and maybe oral)\u2014that upon dissolution (e.g., if a partner dies, retires, or quits) the others will regroup and carry on.<\/p>\n<p>Under UPA the remaining partners have the right to carry on when (1) the dissolution was in contravention of the agreement, (2) a partner was expelled according to the partnership agreement, or (3) all partners agree to carry on.<span id=\"mayer_1.0-fn41_035\" class=\"im_footnote\">UPA, Sections 37 and 38.<\/span><\/p>\n<p>Whether the former partner dies or otherwise quits the firm, the noncontinuing one or his, her, or its legal representative is entitled to an accounting and to be paid the value of the partnership interest, less damages for wrongful dissolution.<span id=\"mayer_1.0-fn41_036\" class=\"im_footnote\">UPA, Section 38.<\/span> The firm may need to borrow money to pay the former partner or her estate; or, in the case of a deceased partner, the money to pay the former partner is obtained through a life insurance buyout policy.<\/p>\n<p>Partnerships routinely insure the lives of the partners, who have no ownership interests in the insurance policies. The policies should bear a face amount equal to each partner\u2019s interest in the partnership and should be adjusted as the fortunes of the partnership change. Proceeds of the insurance policy are used on death to pay the purchase price of the interest inherited by the deceased\u2019s estate. If the insurance policy pays out more than the interest at stake, the partnership retains the difference. If the policy pays out less, the partnership agrees to pay the difference in installments.<\/p>\n<p>Another set of issues arises when the partnership changes because an old partner departs and a new one joins. Suppose that Baker leaves the car dealership business and his interest is purchased by Alice, who is then admitted to the partnership. Assume that when Baker left, the business owed Mogul Parts Company $5,000 and Laid Back Upholsterers $4,000. After Baker left and Alice joined, Mogul sells another $5,000 worth of parts to the firm on credit, and Sizzling Radiator Repair, a new creditor, advances $3,000 worth of radiator repair parts. These circumstances pose four questions.<\/p>\n<p>First, do creditors of the old partnership remain creditors of the new partnership? Yes.<span id=\"mayer_1.0-fn41_037\" class=\"im_footnote\">UPA, Section 41(1).<\/span><\/p>\n<p>Second, does Baker, the old partner, remain liable to the creditors of the old partnership? Yes.<span id=\"mayer_1.0-fn41_038\" class=\"im_footnote\">UPA, Section 36(1).<\/span> That could pose uncomfortable problems for Baker, who may have left the business because he lost interest in it and wished to put his money elsewhere. The last thing he wants is the threat of liability hanging over his head when he can no longer profit from the firm\u2019s operations. That is all the more true if he had a falling out with his partners and does not trust them. The solution is given in UPA Section 36(2), which says that an old partner is discharged from liability if the creditors and the new partnership agree to discharge him.<\/p>\n<p>Third, is Alice, the new partner, liable to creditors of the old partnership? Yes, but only to the extent of her capital contribution.<span id=\"mayer_1.0-fn41_039\" class=\"im_footnote\">UPA, Section 17.<\/span><\/p>\n<p>Fourth, is Baker, the old partner, liable for debts incurred after his withdrawal from the partnership? Surprisingly, yes, unless Baker takes certain action toward old and new creditors. He must provide actual notice that he has withdrawn to anyone who has extended credit in the past. Once he has done so, he has no liability to these creditors for credit extended to the partnership thereafter. Of course, it would be difficult to provide notice to future creditors, since at the time of withdrawal they would not have had a relationship with the partnership. To avoid liability to new creditors who knew of the partnership, the solution required under UPA Section 35(l)(b)(II) is to advertise Baker\u2019s departure in a general circulation newspaper in the place where the partnership business was regularly carried on.<\/p>\n<\/div>\n<div id=\"mayer_1.0-ch41_s03_s01_s04_s02\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Winding Up and Termination<\/h2>\n<p>Because the differences between UPA\u2019s and RUPA\u2019s provisions for winding up and termination are not as significant as those between their provisions for dissolution, the discussion for winding up and termination will cover both acts at once, following the discussion of dissociation and dissolution under RUPA.<\/p>\n<\/div>\n<\/div>\n<div id=\"mayer_1.0-ch41_s03_s02\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Dissociation and Dissolution of Partnerships under RUPA<\/h2>\n<p>Comment 1 to RUPA Section 601 is a good lead-in to this section. According to the comment, RUPA dramatically changes the law governing partnership breakups and dissolution. An entirely new concept, \u201cdissociation,\u201d is used in lieu of UPA term \u201cdissolution\u201d to denote the change in the relationship caused by a partner\u2019s ceasing to be associated in the carrying on of the business. \u201cDissolution\u201d is retained but with a different meaning. The entity theory of partnership provides a conceptual basis for continuing the firm itself despite a partner\u2019s withdrawal from the firm.<\/p>\n<p>Under UPA, the partnership is an aggregate, a collection of individuals; upon the withdrawal of any member from the collection, the aggregate dissolves. But because RUPA conforms the partnership as an entity, there is no conceptual reason for it to dissolve upon a member\u2019s withdrawal. \u201cDissociation\u201d occurs when any partner ceases to be involved in the business of the firm, and \u201cdissolution\u201d happens when RUPA requires the partnership to wind up and terminate; dissociation does not necessarily cause dissolution.<\/p>\n<div id=\"mayer_1.0-ch41_s03_s02_s01\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Dissociation<\/h2>\n<p><span class=\"im_margin_term\"><span class=\"im_glossterm\">Dissociation<\/span><\/span>, as noted in the previous paragraph, is the change in relations caused by a partner\u2019s withdrawal from the firm\u2019s business.<\/p>\n<div id=\"mayer_1.0-ch41_s03_s02_s01_s01\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Causes of Dissociation<\/h3>\n<p>Dissociation is caused in ten possible ways: (1) a partner says she wants out; (2) an event triggers dissociation as per the partnership agreement; (3) a partner is expelled as per the agreement; (4) a partner is expelled by unanimous vote of the others because it is unlawful to carry on with that partner, because that partner has transferred to a transferee all interest in the partnership (except for security purposes), or because a corporate partner\u2019s or partnership partner\u2019s existence is effectively terminated; (5) by a court order upon request by the partnership or another partner because the one expelled has been determined to have misbehaved (engaged in serious wrongful conduct, persists in abusing the agreement, acts in ways making continuing the business impracticable); (6) the partner has declared bankruptcy; (7) the partner has died or had a guardian appointed, or has been adjudicated as incompetent; (8) the partner is a trust whose assets are exhausted; (9) the partner is an estate and the estate\u2019s interest in the partnership has been entirely transferred; (10) the partner dies or, if the partner is another partnership or a corporation trust or estate, that entity\u2019s existence is terminated.<span id=\"mayer_1.0-fn41_040\" class=\"im_footnote\">RUPA, Section 601.<\/span><\/p>\n<\/div>\n<div id=\"mayer_1.0-ch41_s03_s02_s01_s02\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Effect of Dissociation<\/h3>\n<p>After a partner dissociates, the partner\u2019s right to participate in management terminates. (However, if the dissociation goes on to dissolution and winding up, partners who have not wrongfully caused the dissociation may participate in winding-up activities.)<span id=\"mayer_1.0-fn41_041\" class=\"im_footnote\">RUPA. Sections 603(b) and 804(a).<\/span> The dissociated partner\u2019s duty of loyalty and care terminates; the former partner may compete with the firm, except for matters arising before the dissociation.<span id=\"mayer_1.0-fn41_042\" class=\"im_footnote\">RUPA, Section 603(b)(3).<\/span><\/p>\n<p>When partners come and go, as they do, problems may arise. What power does the dissociated partner have to bind the partnership? What power does the partnership have to impose liability on the dissociated one? RUPA provides that the dissociated partner loses any actual authority upon dissociation, and his or her apparent authority lingers for not longer than two years if the dissociated one acts in a way that would have bound the partnership before dissociation, provided the other party (1) reasonably believed the dissociated one was a partner, (2) did not have notice of the dissociation, and (3) is not deemed to have constructive notice from a filed \u201cstatement of dissociation.\u201d<span id=\"mayer_1.0-fn41_043\" class=\"im_footnote\">RUPA, Section 603(b)(1).<\/span> The dissociated partner, of course, is liable for damages to the partnership if third parties had cause to think she was still a partner and the partnership became liable because of that; she is liable to the firm as an unauthorized agent.<span id=\"mayer_1.0-fn41_044\" class=\"im_footnote\">RUPA, Section 702.<\/span><\/p>\n<p>A partner\u2019s dissociation does nothing to change that partner\u2019s liability for predissociation obligations.<span id=\"mayer_1.0-fn41_045\" class=\"im_footnote\">RUPA, Section 703(a).<\/span> For postdissociation liability, exposure is for two years if at the time of entering into the transaction the other party (1) reasonably believed the dissociated one was a partner, (2) didn\u2019t have notice of the dissociation, and (3) is not deemed to have constructive notice from a filed \u201cstatement of dissociation.\u201d For example, Baker withdraws from the firm of Able, Baker, and Carr. Able contracts with HydroLift for a new hydraulic car lift that costs $25,000 installed. HydroLift is not aware at the time of contracting that Baker is disassociated and believes she is still a partner. A year later, the firm not having been paid, HydroLift sues Able, Baker, and Carr and the partnership. Baker has potential liability. Baker could have protected herself by filing a \u201cstatement of dissociation,\u201d or\u2014better\u2014the partnership agreement should provide that the firm would file such statements upon the dissociation of any partner (and if it does not, it would be liable to her for the consequences).<\/p>\n<\/div>\n<\/div>\n<div id=\"mayer_1.0-ch41_s03_s02_s02\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Dissolution<\/h2>\n<p>Dissociation does not necessarily cause dissolution (see the discussion later in this section of how the firm continues after a dissociation); dissolution and winding up happen only for the causes stated in RUPA Section 801, discussed in the following paragraphs.<\/p>\n<div id=\"mayer_1.0-ch41_s03_s02_s02_s01\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Causes of Dissolution<\/h3>\n<p>There are three causes of dissolution: (1) by act of the partners\u2014some dissociations do trigger dissolution; (2) by operation of law; or (3) by court order. The partnership agreement may change or eliminate the dissolution trigger as to (1); dissolution by the latter two means cannot be tinkered with.<span id=\"mayer_1.0-fn41_046\" class=\"im_footnote\">RUPA, Section 103.<\/span><\/p>\n<p>(1) Dissolution by <em class=\"im_emphasis\">act of the partners<\/em> may occur as follows:<\/p>\n<ul id=\"mayer_1.0-ch41_s03_s02_s02_s01_l01\" class=\"im_itemizedlist im_editable im_block\">\n<li>Any member of an <span class=\"im_margin_term\"><span class=\"im_glossterm\">at-will partnership<\/span><\/span> can dissociate at any time, triggering dissolution and liquidation. The partners who wish to continue the business of a <span class=\"im_margin_term\"><span class=\"im_glossterm\">term partnership<\/span><\/span>, though, cannot be forced to liquidate the business by a partner who withdraws prematurely in violation of the partnership agreement. In any event, common agreement formats for dissolution will provide for built-in dispute resolution, and enlightened partners often agree to such mechanisms in advance to avoid the kinds of problems listed here.<\/li>\n<li>Any partnership will dissolve upon the happening of an event the partners specified would cause dissolution in their agreement. They may change their minds, of course, agree to continue, and amend the partnership agreement accordingly.<\/li>\n<li>A term partnership may be dissolved before its term expires in three ways. First, if a partner dissociated by death, declaring bankruptcy, becoming incapacitated, or wrongfully dissociates, the partnership will dissolve if within ninety days of that triggering dissociation at least half the remaining partners express their will to wind it up. Second, the partnership may be dissolved if the term expires. Third, it may be dissolved if all the partners agree to amend the partnership agreement by expressly agreeing to dissolve.<\/li>\n<\/ul>\n<p>(2) Dissolution will happen in some cases by <em class=\"im_emphasis\">operation of law<\/em> if it becomes illegal to continue the business, or substantially all of it. For example, if the firm\u2019s business was the manufacture and distribution of trans fats and it became illegal to do that, the firm would dissolve.<span id=\"mayer_1.0-fn41_047\" class=\"im_footnote\">Trans fats are hydrogenated vegetable oils; the process of hydrogenation essentially turns the oils into semisolids, giving them a higher melting point and extending their shelf life but, unfortunately, also clogging consumers\u2019 arteries and causing heart disease. California banned their sale effective January 1, 2010; other jurisdictions have followed suit.<\/span> This cause of dissolution is not subject to partnership agreement.<\/p>\n<p>(3) <em class=\"im_emphasis\">Dissolution by court order<\/em> can occur on application by a partner. A court may declare that it is, for various reasons specified in RUPA Section 801(5), no longer reasonably practicable to continue operation. Also, a court may order dissolution upon application by a transferee of a partner\u2019s transferable interest or by a purchaser at a foreclosure of a charging order if the court determines it is equitable. For example, if Creditor gets a charging order against Paul Partner and the obligation cannot reasonably be paid by the firm, a court could order dissolution so Creditor would get paid from the liquidated assets of the firm.<\/p>\n<\/div>\n<div id=\"mayer_1.0-ch41_s03_s02_s02_s02\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Effect of Dissolution<\/h3>\n<p>A partnership continues after dissolution only for the purpose of winding up its business. The partnership is terminated when the winding up of its business is completed.<span id=\"mayer_1.0-fn41_048\" class=\"im_footnote\">RUPA, Section 802.<\/span> However, before winding up is completed, the partners\u2014except any wrongfully dissociating\u2014may agree to carry on the partnership, in which case it resumes business as if dissolution never happened.<span id=\"mayer_1.0-fn41_049\" class=\"im_footnote\">RUPA, Section 802(b).<\/span><\/p>\n<\/div>\n<div id=\"mayer_1.0-ch41_s03_s02_s02_s03\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Continuing after Dissociation<\/h2>\n<p>Dissociation, again, does not necessarily cause dissolution. In an at-will partnership, the death (including termination of an entity partner), bankruptcy, incapacity, or expulsion of a partner will not cause dissolution.<span id=\"mayer_1.0-fn41_050\" class=\"im_footnote\">RUPA, Sections 601 and 801.<\/span> In a term partnership, the firm continues if, within ninety days of an event triggering dissociation, fewer than half the partners express their will to wind up. The partnership agreement may provide that RUPA\u2019s dissolution-triggering events, including dissociation, will not trigger dissolution. However, the agreement cannot change the rules that dissolution is caused by the business becoming illegal or by court order. Creditors of the partnership remain as before, and the dissociated partner is liable for partnership obligations arising before dissociation.<\/p>\n<p>Section 701 of RUPA provides that if the firm continues in business after a partner dissociates, without winding up, then the partnership must purchase the dissociated partner\u2019s interest; RUPA Section 701(b) explains how to determine the buyout price. It is the amount that would have been distributed to the dissociated partner if, on the date of dissociation, the firm\u2019s assets were sold \u201cat a price equal to the greater of the liquidation value or the value based on a sale of the entire business as a going concern,\u201d minus damages for wrongful dissociation. A wrongful dissociater may have to wait a while to get paid in full, unless a court determines that immediate payment \u201cwill not cause an undue hardship to the partnership,\u201d but the longest nonwrongful dissociaters need to wait is 120 days.<span id=\"mayer_1.0-fn41_051\" class=\"im_footnote\">RUPA, Section 701(e).<\/span> A dissociated partner can sue the firm to determine the buyout price and the court may assess attorney\u2019s, appraiser\u2019s, and expert\u2019s fees against a party the court finds \u201cacted arbitrarily, vexatiously, or in bad faith.\u201d<span id=\"mayer_1.0-fn41_052\" class=\"im_footnote\">RUPA, Section 701(h)(4)(i).<\/span><\/p>\n<\/div>\n<\/div>\n<\/div>\n<div id=\"mayer_1.0-ch41_s03_s03\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Winding Up the Partnership under UPA and RUPA<\/h2>\n<p>If the partners decide not to continue the business upon dissolution, they are obliged to wind up the business. The partnership continues after dissolution only for the purpose of winding up its business, after which it is terminated.<span id=\"mayer_1.0-fn41_053\" class=\"im_footnote\">UPA, Section 30; RUPA, Section 802(a).<\/span> <span class=\"im_margin_term\"><span class=\"im_glossterm\">Winding up<\/span><\/span> entails concluding all unfinished business pending at the date of dissolution and payment of all debts. The partners must then settle accounts among themselves in order to distribute the remaining assets. At any time after dissolution and before winding up is completed, the partners (except a wrongfully dissociated one) can stop the process and carry on the business.<\/p>\n<p>UPA and RUPA are not significantly different as to winding up, so they will be discussed together. Two issues are discussed here: who can participate in winding up and how the assets of the firm are distributed on liquidation.<\/p>\n<div id=\"mayer_1.0-ch41_s03_s03_s01\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Who Can Participate in Winding Up<\/h2>\n<p>The partners who have not wrongfully dissociated may participate in winding up the partnership business. On application of any partner, a court may for good cause judicially supervise the winding up.<span id=\"mayer_1.0-fn41_054\" class=\"im_footnote\">UPA, Section 37; RUPA, Section 803(a).<\/span><\/p>\n<\/div>\n<div id=\"mayer_1.0-ch41_s03_s03_s02\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Settlement of Accounts among Partners<\/h2>\n<p>Determining the priority of liabilities can be problematic. For instance, debts might be incurred to both outside creditors and partners, who might have lent money to pay off certain accounts or for working capital.<\/p>\n<p>An agreement can spell out the order in which liabilities are to be paid, but if it does not, UPA Section 40(a) and RUPA Section 807(1) rank them in this order: (1) to creditors other than partners, (2) to partners for liabilities other than for capital and profits, (3) to partners for capital contributions, and finally (4) to partners for their share of profits (see Figure 19.3 &#8220;Priority Partnership Liabilities under RUPA&#8221;). However, RUPA eliminates the distinction between capital and profits when the firm pays partners what is owed to them; RUPA Section 807(b) speaks simply of the right of a partner to a liquidating distribution.<\/p>\n<div id=\"mayer_1.0-ch41_s03_s03_s02_f01\" class=\"im_figure im_medium im_editable im_block\">\n<p><span class=\"im_title-prefix\">Figure 19.3<\/span> Priority Partnership Liabilities under RUPA<\/p>\n<p><a href=\"https:\/\/textimgs.s3.amazonaws.com\/buslegalenv\/section_22\/9e97dab42b8233777ac1b925aafa9ffe.jpg\" target=\"_blank\"><img decoding=\"async\" src=\"https:\/\/textimgs.s3.amazonaws.com\/buslegalenv\/images\/sm_9e97dab42b8233777ac1b925aafa9ffe.jpg#fixme\" alt=\"\" \/><\/a><\/p>\n<\/div>\n<p>Partners are entitled to share equally in the profits and surplus remaining after all liabilities, including those owed to partners, are paid off, although the partnership agreement can state a different share\u2014for example, in proportion to capital contribution. If after winding up there is a net loss, whether capital or otherwise, each partner must contribute toward it in accordance with his share in the profits, had there been any, unless the agreement states otherwise. If any of the partners is insolvent or refuses to contribute and cannot be sued, the others must contribute their own share to pay off the liabilities and in addition must contribute, in proportion to their share of the profits, the additional amount necessary to pay the liabilities of their defaulting partners.<\/p>\n<p>In the event of insolvency, a court may take possession of both partnership property and individual assets of the partners; this again is a big disadvantage to the partnership form.<\/p>\n<p>The estate of a deceased partner is credited or liable as that partner would have been if she were living at the time of the distribution.<\/p>\n<div id=\"mayer_1.0-ch41_s03_s03_s02_n01\" class=\"im_key_takeaways im_editable im_block textbox\">\n<h3 class=\"im_title\">Key Takeaway<\/h3>\n<p>Under UPA, the withdrawal of any partner from the partnership causes dissolution; the withdrawal may be caused in accordance with the agreement, in violation of the agreement, by operation of law, or by court order. Dissolution terminates the partners\u2019 authority to act for the partnership, except for winding up, but remaining partners may decide to carry on as a new partnership or may decide to terminate the firm. If they continue, the old creditors remain as creditors of the new firm, the former partner remains liable for obligations incurred while she was a partner (she may be liable for debts arising after she left, unless proper notice is given to creditors), and the former partner or her estate is entitled to an accounting and payment for the partnership interest. If the partners move to terminate the firm, winding up begins.<\/p>\n<p>Under RUPA, a partner who ceases to be involved in the business is dissociated, but dissociation does not necessarily cause dissolution. Dissociation happens when a partner quits, voluntarily or involuntarily; when a partner dies or becomes incompetent; or on request by the firm or a partner upon court order for a partner\u2019s wrongful conduct, among other reasons. The dissociated partner loses actual authority to bind the firm but remains liable for predissociation obligations and may have lingering authority or lingering liability for two years provided the other party thought the dissociated one was still a partner; a notice of dissociation will, after ninety days, be good against the world as to dissociation and dissolution. If the firm proceeds to termination (though partners can stop the process before its end), the next step is dissolution, which occurs by acts of partners, by operation of law, or by court order upon application by a partner if continuing the business has become untenable. After dissolution, the only business undertaken is to wind up affairs. However, the firm may continue after dissociation; it must buy out the dissociated one\u2019s interest, minus damages if the dissociation was wrongful.<\/p>\n<p>If the firm is to be terminated, winding up entails finishing the business at hand, paying off creditors, and splitting the remaining surplus or liabilities according the parties\u2019 agreement or, absent any, according to the relevant act (UPA or RUPA).<\/p>\n<\/div>\n<div class=\"bcc-box bcc-info\">\n<h3>Exercises<\/h3>\n<section id=\"self-check-questions\">\n<ol>\n<li>Under UPA, what is the effect on the partnership of a partner\u2019s ceasing to be involved in the business?<\/li>\n<li>Can a person no longer a partner be held liable for partnership obligations after her withdrawal? Can such a person incur liability to the partnership?<\/li>\n<li>What obligation does a partnership or its partners owe to a partner who wrongfully terminates the partnership agreement?<\/li>\n<li>What bearing does RUPA\u2019s use of the term <em class=\"im_emphasis\">dissociate<\/em> have on the entity theory that informs the revised act?<\/li>\n<li>When a partnership is wound up, who gets paid first from its assets? If the firm winds up toward termination and has inadequate assets to pay its creditors, what recourse, if any, do the creditors have?<\/li>\n<\/ol>\n<\/section>\n<\/div>\n<div id=\"mayer_1.0-ch52_s02_s06_n02\" class=\"im_exercises im_editable im_block\"><\/div>\n<\/div>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-158\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Business and the Legal Environment. <strong>Authored by<\/strong>: Anonymous. <strong>Provided by<\/strong>: Anonymous. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"http:\/\/2012books.lardbucket.org\/books\/business-and-the-legal-environment\/\">http:\/\/2012books.lardbucket.org\/books\/business-and-the-legal-environment\/<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by-nc-sa\/4.0\/\">CC BY-NC-SA: Attribution-NonCommercial-ShareAlike<\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":5,"menu_order":125,"template":"","meta":{"_candela_citation":"[{\"type\":\"cc\",\"description\":\"Business and the Legal Environment\",\"author\":\"Anonymous\",\"organization\":\"Anonymous\",\"url\":\"http:\/\/2012books.lardbucket.org\/books\/business-and-the-legal-environment\/\",\"project\":\"\",\"license\":\"cc-by-nc-sa\",\"license_terms\":\"\"}]","CANDELA_OUTCOMES_GUID":"","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-158","chapter","type-chapter","status-publish","hentry"],"part":765,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/chapters\/158","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/wp\/v2\/users\/5"}],"version-history":[{"count":4,"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/chapters\/158\/revisions"}],"predecessor-version":[{"id":1019,"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/chapters\/158\/revisions\/1019"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/parts\/765"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/chapters\/158\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/wp\/v2\/media?parent=158"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/chapter-type?post=158"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/wp\/v2\/contributor?post=158"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/wp\/v2\/license?post=158"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}