Partnership Law on the UBE - Dissolution vs. Dissociation – When Does Winding Up Occur?

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Partnerships - Dissolution vs. Dissociation – When Does Winding Up Occur?


There are two events within the realm of partnership law that are closely related which need to be distinguished because of the significant impact on the partnership existence following the triggering of one of these events.  A partnership may dissolve and cease to exist with the withdrawal of a partner, or may continue to exist via dissociation if we follow the Revised Uniform Partnership Act (“RUPA”).  Knowing when and how these triggers will occur and how to apply each is extremely important for ultimately coming up with the correct conclusion on a partnership MEE on the UBE.

General Partnership Dissolution -  

            Dissolution can be defined as any material change in a partnership including a change caused by the death of a partner or the withdrawal of a partner, creating an automatic dissolution.  The end of the partnership is known as termination.   What transpires between dissolution and termination in which the remaining partners liquidate the partnership assets to satisfy creditors is known as winding up, a very important part of the dissolution process.  Partners may be paid for their work during the period of winding up.

So what of the partners’ liability once dissolution has been triggered?  As concerns old business, aka business (contracts, agreements, promissory notes, etc.) entered into prior to dissolution  of the partnership, the partnership and by extension individual general partners retain liability on all old business.  As concerns new business, aka brand new business entered into during the winding up period, all partners and the partnership will retain liability on this new business UNLESS and UNTIL the Notice of Dissolution has been given to existing creditors and potential creditors.  At such time, partners will not be liable for new business.

Finally, what is the Priority of Distribution of proceeds such that partnership creditors can be satisfied?  We first satisfy all debt to outside and inside creditors and then, each partner must be repaid his loans and capital contributions, plus that partners share of the profits or surplus minus that partners share of the losses.

As for liquidation of assets and paying back creditors, we begin by satisfying the following levels fully before moving on the next level:

1 – Outside creditors must be paid; creditors not a part of the partnership nor a partner.    
2 – Inside creditors must be paid; for example, a partner who lent money to the partnership.
3 – Capital contributions by the partners, pro-rata if necessary; capital contributions are the amount put into the partnership by each partner at the time of the partnership creation.  
4 – Finally, we split remaining profits and any surplus.

If we run out of money before satisfying the above list and money is still owed to creditors? That amount becomes the liability of the partnership and partners become personally liable on those debts.

Partner / Partnership Dissociation per RUPA -
Dissociation is defined as a change in the relationship of partners caused by any parent who ceases to be associated in carrying on the business of the partnership.  The partnership agreement may provide that RUPA dissolution-triggering events, including dissociation, will not trigger dissolution.  BAR EXAM NOTE - DOES NOT necessarily cause a dissolution and winding up of partnership business like dissolution does!

Dissociation can occur by:
1 – Notice of partner(s) express will to withdraw;
2 – The happening of an agreed upon event;
3 – Expulsion of a/the partner pursuant to an agreement;
4 – Bankruptcy of a partner;
5 – A partner(s) death or incapacity to perform;
6 – Appointment of a receiver or;
7 – Termination of a business entity that also happens to be a partner.

A partner will be deemed to have wrongfully dissociated if the dissociation is in breach of an express term in the partnership agreement. Dissociation is also wrongful in a term partnership if the partner withdraws, is expelled, or becomes bankrupt before the end of the term. A partner who wrongfully dissociates is liable to the partnership for any damages caused by the dissociation.

BAR EXAM NOTE - The partnership may be bound by an act of a dissociated partner undertaken within two years after dissociation if the act would have bound the partnership, and the other party believed the dissociated partner was still a partner and this other party did not have notice of dissociation.  Always keep an eye out for this, it pop up often. 

For example, Partnership A is made up of Partners X, Y and Z.  We are in a jurisdiction that applies RUPA.  Partner Z has provided written notice to the partnership of his express desire to withdraw.  Partners X and Y wish to continue the partnership and may do so pursuant to dissociation; wind up and dissolution need not occur at this time.  That said, three months after dissociation, Partner Z entered into an agreement with a Vendor B who has conducted business with the partnership in the past, specifically dealing with Partner Z who Vendor B has contracted with on numerous occasions.  If Vendor B (1) believed that Partner Z was still a partner, (2) did not have notice of the dissociation and (3) the partnership (as in the past) would have been bound by this new contract, the partnership will in fact be bound by this act of dissociated Partner Z.

Conclusion –

In summation, keep an eye out for whether we are in a jurisdiction that follows RUPA.  If not, dissolution is the appropriate path for the partnership, and begins with the dissolution, ending in termination.  In the interim, the process of winding up, satisfying all creditor debt prior to actual termination occurs.  If we follow RUPA, check to see if one of the seven triggering events for dissociation has occurred.  If so, the partnership may continue without the need to dissolve.  Finally, check to see if the dissociating partner has bound the partnership to new business, even though he or she has properly dissociated.
Should you have any additional questions about dissolution vs. dissociation, partnership and partner liability, or another area of the UBE, please do not hesitate to contact us at PassYourBarExam@gmail.com


GOOD LUCK!

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