Unincorporated Business Entities Law

In a partnership at will, unless the partners otherwise agree, the voluntary withdrawal of a partner (a much nicer word than “dissociation”) automatically causes dissolution of the partnership.  RUPA § 801(1).  For partnerships for a definite term or particular undertaking, after the voluntary withdrawal of a partner only results in dissolution of the partnership by the express will of at least half of the remaining partners.  RUPA § 801(2)(i). If the withdrawal of a partner does not result in dissolution of the partnership, the partnership must purchase the interest of the withdrawn partner.  RUPA §§ 603(a), 701(a).

But what if the partnership had only two partners?  does the remaining partner have the right to buyout the other partner? Robert Hillman (Cal-Davis) and Donald Weidner address this question in an article forthcoming in The Fordham Journal of Corporate and Financial Law, Partners without Partners:  The Legal Status of Single Person Partnerships (SSRN, draft dated Aug. 1, 2011).  Prof. Hillman is of the view that, under RUPA § 101(6),  the partnership dissolves by operation of law:

The core of RUPA’s definition is that a partnership is “an association of two or more persons to carry on as co-owners a business for profit.” If one partner leaves, the predicate association of two or more persons no longer exists, which means a partnership is constituted only for the limited purpose of winding up the business. In other words, the partnership that existed prior to the dissociation is no more.

Id. at 3 (footnotes omitted).  Dean Weidner, who was the Reporter for the RUPA, disagrees:

I obviously think you are asking the definition of partnership to do too much by effectively operating as a special dissolution rule whenever partnerships no longer meet the language of the definition. RUPA contains three separate articles on partnership breakups, defining when and how liquidations versus buyouts are to take place. To attach to the definition substantive breakup consequences would create yet another set of dissolution rules and certainly was not considered in the drafting of the RUPA.

* * *

RUPA’s breakup provisions are much more detailed than the UPA on how a departing partner is to be cashed out. * * *

* * * Section 801, by its terms, lists the “only” events that cause dissolution and winding up, and a departure from a term partnership is not on the list. Both Sections 603(a) and 801, therefore, require a buyout in this situation.

Id. at 6-7 (footnotes omitted).

In a recent opinion, the Third Division of the Fourth District of the California Court of Appeals reasoned that, by definition, a partnership requires at least two partners, and ruled that the withdrawal of one partner in a two-partner partnership automatically caused dissolution.  Corrales v. Corrales, G043598 (Cal. Ct. App. Aug. 10, 2011).

In many ways, this conundrum is a self-inflicted wound, in that it is an artifact of the RUPA generally embracing the “entity” concept.  Under the UPA, the withdrawal of a partner automatically dissolved the partnership, and usually gave each partner the right to liquidation.  But, in a partnership for a term or undertaking, UPA § 38(2)(a) gave the other partners the right to continue the business, either alone, or with others.

In any event, the problem of the partner-less partner under the RUPA illustrates how the entity approach can be a snare; you begin to believe that all partnership-related problems can be solved by the ritual invocation of the entity.  Even the RUPA retains aggregate elements, such as liability of the partners. Partnerships and sole proprietorships are the only business forms that can be formed without filing with the state.  The difference between the two has always been the partnerships were aggregates; it takes at least two to partner.  As Bruce Springsteen sang in When You’re Alone:

When you’re alone you’re alone
When you’re alone you ain’t nothing but alone

Hat tip:  Eric C. Chaffee (Dayton), Jay Adkisson.

Gary Rosin

This entry was posted on Friday, August 19th, 2011 at 1:08 pm and is filed under Cases, Commentary, Partnerships, Scholarship. You can follow any responses to this entry through the RSS 2.0 feed. Responses are currently closed, but you can trackback from your own site.