Case Analysis

2-3 page written analysis on the case Gilroy vs. Conway partnerships

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41.4 Cases
Breach of Partnership Fiduciary Duty
Gilroy v. Conway
391 N.W. 2d 419 (Mich. App. 1986)
PETERSON, J.
Defendant cheated his partner and appeals from the trial court’s judgment granting that partner a
remedy.
Plaintiff was an established commercial photographer in Kalamazoo who also had a partnership
interest in another photography business, Colonial Studios, in Coldwater. In 1974, defendant became
plaintiff’s partner in Colonial Studios, the name of which was changed to Skylight Studios. Under the
partnership agreement, defendant was to be the operating manager of the partnership, in return for
which he would have a guaranteed draw. Except for the guaranteed draw, the partnership was equal
in ownership and the sharing of profits.
Prior to defendant’s becoming a partner, the business had acquired a small contractual clientele of
schools for which the business provided student portrait photographs. The partners agreed to
concentrate on this type of business, and both partners solicited schools with success. Gross sales,
which were $40,000 in 1974, increased every year and amounted to $209,085 in 1980 [about
$537,000 in 2011 dollars].
In the spring of 1981, defendant offered to buy out plaintiff and some negotiations followed. On June
25, 1981, however, plaintiff was notified by the defendant that the partnership was dissolved as of July
1, 1981. Plaintiff discovered that defendant: had closed up the partnership’s place of business and
opened up his own business; had purchased equipment and supplies in preparation for commencing
his own business and charged them to the partnership; and had taken with him the partnership
employees and most of its equipment.
Defendant had also stolen the partnership’s business. He had personally taken over the business of
some customers by telling them that the partnership was being dissolved; in other cases he simply
took over partnership contracts without telling the customers that he was then operating on his own.
Plaintiff also learned that defendant’s deceit had included the withdrawal, without plaintiff’s
knowledge, of partnership funds for defendant’s personal use in 1978 in an amount exceeding
$11,000 [about $36,000 in 2011 dollars].
The trial judge characterized the case as a “classic study of greed” and found that defendant had in
effect appropriated the business enterprise, holding that defendant had “knowingly and willfully
violated his fiduciary relationship as a partner by converting partnership assets to his use and, in
doing so, literally destroying the partnership.” He also found that the partnership could have been
sold as a going business on June 30, 1981, and that after a full accounting, it had a value on that date
of $94,596 less accounts payable of $17,378.85, or a net value of $77,217.15. The division thereof after
adjustments for plaintiff’s positive equity or capital resulted in an award to plaintiff for his interest in
the business of $53,779.46 [about $126,000 in 2011 dollars].…
Plaintiff also sought exemplary [punitive] damages. Count II of the complaint alleged that defendant’s
conduct constituted a breach of defendant’s fiduciary duty to his partner under §§ 19-22 of the
Uniform Partnership Act, and Count III alleged conversion of partnership property. Each count
contained allegations that defendant’s conduct was willful, wanton and in reckless disregard of
plaintiff’s rights and that such conduct had caused injury to plaintiff’s feelings, including humiliation,
indignity and a sense of moral outrage. The prayer for relief sought exemplary damages therefore.
Plaintiff’s testimony on the point was brief. He said:
The effect of really the whole situation, and I think it was most apparent when I walked into the
empty building, was extreme disappointment and really total outrage at the fact that something that I
had given the utmost of my talent and creativity, energy, and whatever time was necessary to build,
was totally destroyed and there was just nothing of any value that was left.…My business had been
stolen and there wasn’t a thing that I could do about it. And to me, that was very humiliating that one
day I had something that I had worked 10 years on, and the next day I had absolutely nothing of any
value.
As noted above, the trial judge found that defendant had literally destroyed the partnership by
knowingly and willfully converting partnership assets in violation of his fiduciary duty as a partner.
He also found that plaintiff had suffered a sense of outrage, indignity and humiliation and awarded
him $10,000 [$23,000 in 2011 dollars] as exemplary damages.
Defendant appeals from that award, asserting that plaintiff’s cause of action arises from a breach of
the partnership contract and that exemplary damages may not be awarded for breach of that
contract.…
If it were to be assumed that a partner’s breach of his fiduciary duty or appropriation of partnership
equipment and business contract to his own use and profit are torts, it is clear that the duty breached
arises from the partnership contract. One acquires the property interest of a co-tenant in partnership
only by the contractual creation of a partnership; one becomes a fiduciary in partnership only by the
contractual undertaking to become a partner. There is no tortious conduct here existing independent
of the breach of the partnership contract.
Neither do we see anything in the Uniform Partnership Act to suggest that an aggrieved partner is
entitled to any remedy other than to be made whole economically. The act defines identically the
partnership fiduciary duty and the remedy for its breach, i.e., to account:
Sec. 21. (1) Every partner must account to the partnership for any benefit, and hold as trustee for it
any profits derived by him without the consent of the other partners from any transaction connected
with the formation, conduct, or liquidation of the partnership or from any use by him of its property.
So, the cases involving a partner’s breach of the fiduciary duty to their partners have been concerned
solely with placing the wronged partners in the economic position that they would have enjoyed but
for the breach.
[Judgment for plaintiff affirmed, as modified with regard to damages.]
CASE QUESTIONS
1. For what did the court award the plaintiff $53,000?
2.
The court characterizes the defendant as having “cheated his partner”—that is, Conway
committed fraud. (Gilroy said his business had been “stolen.”) Fraud is a tort. Punitive
damages may be awarded against a tortfeasor, even in a jurisdiction that generally
disallows punitive damages in contract. In fact, punitive damages are sometimes awarded
for breach of the partnership fiduciary duty. In Cadwalader, Wickersham & Taft v. Beasley,
728 So.2d 253 (Florida Ct. App., 1998), a New York law firm was found to have wrongfully
expelled a partner lawyer, Beasley, from membership in its Palm Beach, Florida, offices.
New York law controlled. The trial court awarded Beasley $500,000 in punitive damages.
The appeals court, construing the same UPA as the court construed in Gilroy, said:
Under New York law, the nature of the conduct which justifies an award of punitive
damages is conduct having a high degree of moral culpability, or, in other words, conduct
which shows a “conscious disregard of the rights of others or conduct so reckless as to
amount to such disregard.”…[S]ince the purpose of punitive damages is to both punish the
wrongdoer and deter others from such wrongful behavior, as a matter of policy, courts
have the discretion to award punitive damages[.]…[The defendant] was participating in a
clandestine plan to wrongfully expel some partners for the financial gain of other partners.
Such activity cannot be said to be honorable, much less to comport with the “punctilio of
an honor.” Because these findings establish that [the defendant] consciously disregarded
the rights of Beasley, we affirm the award of punitive damages.
As a matter of social policy, which is the better ruling, the Michigan court’s in Gilroy or the
Florida court’s in Cadwalader?
Partnership Authority, Express or Apparent
Hodge v Garrett
614 P.2d 420 (Idaho 1980)
Bistline, J.
[Plaintiff] Hodge and defendant-appellant Rex E. Voeller, the managing partner of the Pay-Ont DriveIn Theatre, signed a contract for the sale of a small parcel of land belonging to the partnership. That
parcel, although adjacent to the theater, was not used in theater operations except insofar as the east
20 feet were necessary for the operation of the theater’s driveway. The agreement for the sale of land
stated that it was between Hodge and the Pay-Ont Drive-In Theatre, a partnership. Voeller signed the
agreement for the partnership, and written changes as to the footage and price were initialed by
Voeller. (The trial court found that Hodge and Voeller had orally agreed that this 20 foot strip would
be encumbered by an easement for ingress and egress to the partnership lands.)
Voeller testified that he had told Hodge prior to signing that Hodge would have to present him with a
plat plan which would have to be approved by the partners before the property could be sold. Hodge
denied that a plat plan had ever been mentioned to him, and he testified that Voeller did not tell him
that the approval of the other partners was needed until after the contract was signed. Hodge also
testified that he offered to pay Voeller the full purchase price when he signed the contract, but Voeller
told him that that was not necessary.
The trial court found that Voeller had actual and apparent authority to execute the contract on behalf
of the partnership, and that the contract should be specifically enforced. The partners of the Pay-Ont
Drive-In Theatre appeal, arguing that Voeller did not have authority to sell the property and that
Hodge knew that he did not have that authority.
At common law one partner could not, “without the concurrence of his copartners, convey away the
real estate of the partnership, bind his partners by a deed, or transfer the title and interest of his
copartners in the firm real estate.” [Citation] This rule was changed by the adoption of the Uniform
Partnership Act.…[citing the statute].
The meaning of these provisions was stated in one text as follows:
“If record title is in the partnership and a partner conveys in the partnership name, legal title passes.
But the partnership may recover the property (except from a bona fide purchaser from the grantee) if
it can show (A) that the conveying partner was not apparently carrying on business in the usual way
or (B) that he had in fact no authority and the grantee had knowledge of that fact. The burden of proof
with respect to authority is thus on the partnership.” [Citation]
Thus this contract is enforceable if Voeller had the actual authority to sell the property, or, even if
Voeller did not have such authority, the contract is still enforceable if the sale was in the usual way of
carrying on the business and Hodge did not know that Voeller did not have this authority.
As to the question of actual authority, such authority must affirmatively appear, “for the authority of
one partner to make and acknowledge a deed for the firm will not be presumed.…” [Citation]
Although such authority may be implied from the nature of the business, or from similar past
transactions [Citation], nothing in the record in this case indicates that Voeller had express or implied
authority to sell real property belonging to the partnership. There is no evidence that Voeller had sold
property belonging to the partnership in the past, and obviously the partnership was not engaged in
the business of buying and selling real estate.
The next question, since actual authority has not been shown, is whether Voeller was conducting the
partnership business in the usual way in selling this parcel of land such that the contract is binding
under [the relevant section of the statute] i.e., whether Voeller had apparent authority. Here the
evidence showed, and the trial court found:
1. “That the defendant, Rex E. Voeller, was one of the original partners of the Pay-Ont Drive In
Theatre; that the other defendants obtained their partnership interest by inheritance upon the
death of other original partners; that upon the death of a partner the partnership affairs were not
wound up, but instead, the partnership merely continued as before, with the heirs of the deceased
partner owning their proportionate share of the partnership interest.
2. “That at the inception of the partnership, and at all times thereafter, Rex E. Voeller was the
exclusive, managing partner of the partnership and had the full authority to make all decisions
pertaining to the partnership affairs, including paying the bills, preparing profit and loss
statements, income tax returns and the ordering of any goods or services necessary to the
operation of the business.”
The court made no finding that it was customary for Voeller to sell real property, or even personal
property, belonging to the partnership. Nor was there any evidence to this effect. Nor did the court
discuss whether it was in the usual course of business for the managing partner of a theater to sell real
property. Yet the trial court found that Voeller had apparent authority to sell the property. From this
it must be inferred that the trial court believed it to be in the usual course of business for a partner
who has exclusive control of the partnership business to sell real property belonging to the
partnership, where that property is not being used in the partnership business. We cannot agree with
this conclusion. For a theater, “carrying on in the usual way the business of the partnership,” [Citation
to relevant section of the statute] means running the operations of the theater; it does not mean
selling a parcel of property adjacent to the theater. Here the contract of sale stated that the land
belonged to the partnership, and, even if Hodge believed that Voeller as the exclusive manager had
authority to transact all business for the firm, Voeller still could not bind the partnership through a
unilateral act which was not in the usual business of the partnership. We therefore hold that the trial
court erred in holding that this contract was binding on the partnership.
Judgment reversed. Costs to appellant.
CASE QUESTIONS
1. What was the argument that Voeller had actual authority? What did the court on appeal say about
that argument?
2. What was the argument that Voeller had apparent authority? What did the court on appeal say
about that argument? To rephrase the question, what facts would have been necessary to confer
on Voeller apparent authority?
Partnership Bound by Contracts Made by a Partner on Its Behalf; Partners’
Duties to Each Other; Winding Up
Long v. Lopez
115 S.W.3d 221 (Texas App. 2003)
Holman, J.
Wayne A. Long [plaintiff at the trial court] sued Appellee Sergio Lopez to recover from him, jointly
and severally, his portion of a partnership debt that Long had paid. After a bench trial, the trial court
ruled that Long take nothing from Appellee. We reverse and render, and remand for calculation of
attorney’s fees in this suit and pre- and post-judgment interest.
Long testified that in September 1996, Long, Lopez, and Don Bannister entered into an oral
partnership agreement in which they agreed to be partners in Wood Relo (“the partnership”), a
trucking business located in Gainesville, Texas. Wood Relo located loads for and dispatched
approximately twenty trucks it leased from owner-operators.…
The trial court found that Long, Lopez, and Bannister formed a partnership, Wood Relo, without a
written partnership agreement. Lopez does not contest these findings.
Long testified that to properly conduct the partnership’s business, he entered into an office
equipment lease with IKON Capital Corporation (“IKON”) on behalf of the partnership. The lease was
a thirty-month contract under which the partnership leased a telephone system, fax machine, and
photocopier at a rate of $577.91 per month. The lease agreement was between IKON and Wood Relo;
the “authorized signer” was listed as Wayne Long, who also signed as personal guarantor.
Long stated that all three partners were authorized to buy equipment for use by the partnership. He
testified that the partners had agreed that it was necessary for the partnership to lease the equipment
and that on the day the equipment was delivered to Wood Relo’s office, Long was the only partner at
the office; therefore, Long was the only one available to sign the lease and personal guaranty that
IKON required. [The partnership disintegrated when Bannister left and he later filed for
bankruptcy.]…Long testified that when Bannister left Wood Relo, the partnership still had “quite a
few” debts to pay, including the IKON lease.…
Eventually, IKON did repossess all the leased equipment. Long testified that he received a demand
letter from IKON, requesting payment by Wood Relo of overdue lease payments and accelerating
payment of the remaining balance of the lease. IKON sought recovery of past due payments in the
amount of $2,889.55 and accelerated future lease payments in the amount of $11,558.20, for a total of
$14,447.75, plus interest, costs, and attorney’s fees, with the total exceeding $16,000. Long testified
that he advised Lopez that he had received the demand letter from IKON.
Ultimately, IKON filed a lawsuit against Long individually and d/b/a Wood Relo, but did not name
Lopez or Bannister as parties to the suit. Through his counsel, Long negotiated a settlement with
IKON for a total of $9,000. An agreed judgment was entered in conjunction with the settlement
agreement providing that if Long did not pay the settlement, Wood Relo and Long would owe IKON
$12,000.
After settling the IKON lawsuit, Long’s counsel sent a letter to Lopez and Bannister regarding the
settlement agreement, advising them that they were jointly and severally liable for the $9,000 that
extinguished the partnership’s debt to IKON, plus attorney’s fees.…
The trial court determined that Long was not entitled to reimbursement from Lopez because Long
was not acting for the partnership when he settled IKON’s claim against the partnership. The court
based its conclusion on the fact that Long had no “apparent authority with respect to lawsuits” and
had not notified Lopez of the IKON lawsuit.
Analysis
To the extent that a partnership agreement does not otherwise specify, the provisions of the Texas
Revised Partnership Act govern the relations of the partners and between the partners and the
partnership. [Citations] Under the Act, each partner has equal rights in the management and conduct
of the business of a partnership. With certain inapplicable exceptions, all partners are liable jointly
and severally for all debts and obligations of the partnership unless otherwise agreed by the claimant
or provided by law. A partnership may be sued and may defend itself in its partnership name. Each
partner is an agent of the partnership for the purpose of its business; unless the partner does not have
authority to act for the partnership in a particular matter and the person with whom the partner is
dealing knows that the partner lacks authority, an act of a partner, including the execution of an
instrument in the partnership name, binds the partnership if “the act is for apparently carrying on in
the ordinary course: (1) the partnership business.” [Citation] If the act of a partner is not apparently
for carrying on the partnership business, an act of a partner binds the partnership only if authorized
by the other partners. [Citation]
The extent of authority of a partner is determined essentially by the same principles as those
measuring the scope of the authority of an agent. [Citation] As a general rule, each partner is an agent
of the partnership and is empowered to bind the partnership in the normal conduct of its business.
[Citation] Generally, an agent’s authority is presumed to be coextensive with the business entrusted to
his care. [Citations] An agent is limited in his authority to such contracts and acts as are incident to
the management of the particular business with which he is entrusted. [Citation]
Winding Up the Partnership
A partner’s duty of care to the partnership and the other partners is to act in the conduct and winding
up of the partnership business with the care an ordinarily prudent person would exercise in similar
circumstances. [Citation] During the winding up of a partnership’s business, a partner’s fiduciary
duty to the other partners and the partnership is limited to matters relating to the winding up of the
partnership’s affairs. [Citation]
Long testified that he entered into the settlement agreement with IKON to save the partnership a
substantial amount of money. IKON’s petition sought over $16,000 from the partnership, and the
settlement agreement was for $9,000; therefore, Long settled IKON’s claim for 43% less than the
amount for which IKON sued the partnership.
Both Long and Lopez testified that the partnership “fell apart,” “virtually was dead,” and had to move
elsewhere.…The inability of the partnership to continue its trucking business was an event requiring
the partners to wind up the affairs of the partnership. See [Citation]…
The Act provides that a partner winding up a partnership’s business is authorized, to the extent
appropriate for winding up, to perform the following in the name of and for and on behalf of the
partnership:
(1) prosecute and defend civil, criminal, or administrative suits;
(2) settle and close the partnership’s business;
(3) dispose of and convey the partnership’s property;
(4) satisfy or provide for the satisfaction of the partnership’s liabilities;
(5) distribute to the partners any remaining property of the partnership; and
(6) perform any other necessary act. [Citation]
Long accrued the IKON debt on behalf of the partnership when he secured the office equipment for
partnership operations, and he testified that he entered into the settlement with IKON when the
partnership was in its final stages and the partners were going their separate ways. Accordingly, Long
was authorized by the Act to settle the IKON lawsuit on behalf of the partnership.…
Lopez’s Liability for the IKON Debt
If a partner reasonably incurs a liability in excess of the amount he agreed to contribute in properly
conducting the business of the partnership or for preserving the partnership’s business or property,
he is entitled to be repaid by the partnership for that excess amount. [Citation] A partner may sue
another partner for reimbursement if the partner has made such an excessive payment. [Citation]
With two exceptions not applicable to the facts of this case, all partners are liable jointly and severally
for all debts and obligations of the partnership unless otherwise agreed by the claimant or provided
by law. Because Wood Relo was sued for a partnership debt made in the proper conduct of the
partnership business, and Long settled this claim in the course of winding up the partnership, he
could maintain an action against Lopez for reimbursement of Long’s disproportionate payment.
[Citations]
Attorneys’ Fees
Long sought to recover the attorney’s fees expended in defending the IKON claim, and attorney’s fees
expended in the instant suit against Lopez. Testimony established that it was necessary for Long to
employ an attorney to defend the action brought against the partnership by IKON; therefore, the
attorney’s fees related to defending the IKON lawsuit on behalf of Wood Relo are a partnership debt
for which Lopez is jointly and severally liable. As such, Long is entitled to recover from Lopez one-half
of the attorney’s fees attributable to the IKON lawsuit. The evidence established that reasonable and
necessary attorney’s fees to defend the IKON lawsuit were $1725. Therefore, Long is entitled to
recover from Lopez $862.50.
Long also seeks to recover the attorney’s fees expended pursuing the instant lawsuit. See [Texas
statute citation] (authorizing recovery of attorney’s fees in successful suit under an oral contract); see
also [Citation] (holding attorney’s fees are recoverable by partner under because action against other
partner was founded on partnership agreement, which was a contract). We agree that Long is entitled
to recover reasonable and necessary attorney’s fees incurred in bringing the instant lawsuit. Because
we are remanding this case so the trial court can determine the amount of pre- and post-judgment
interest to be awarded to Long, we also remand to the trial court the issue of the amount of attorney’s
fees due to Long in pursuing this lawsuit against Lopez for collection of the amount paid to IKON on
behalf of the partnership.
Conclusion
We hold the trial court erred in determining that Long did not have authority to act for Wood Relo in
defending, settling, and paying the partnership debt owed by Wood Relo to IKON. Lopez is jointly
and severally liable to IKON for $9,000, which represents the amount Long paid IKON to defend and
extinguish the partnership debt. We hold that Lopez is jointly and severally liable to Long for $1725,
which represents the amount of attorney’s fees Long paid to defend against the IKON claim. We
further hold that Long is entitled to recover from Lopez reasonable and necessary attorney’s fees in
pursuing the instant lawsuit.
We reverse the judgment of the trial court. We render judgment that Lopez owes Long $5362.50
(one-half of the partnership debt to IKON plus one-half of the corresponding attorney’s fees). We
remand the case to the trial court for calculation of the amount of attorney’s fees owed by Lopez to
Long in the instant lawsuit, and calculation of pre- and post-judgment interest.
CASE QUESTIONS
1. Why did the trial court determine that Lopez owed Long nothing?
2. Absent a written partnership agreement, what rules control the operation and winding up of the
partnership?
3. Why did the appeals court determine that Long did have authority to settle the lawsuit with IKON?
4. Lopez was not named by IKON when it sued Long and the partnership. Why did the court
determine that did not matter, that Lopez was still liable for one-half the costs of settling that
case?
5. Why was Long awarded compensation for the attorneys’ fees expended in dealing with the IKON
matter and in bringing this case?
Dissolution under RUPA
Horizon/CMS Healthcare Corp. v. Southern Oaks Health Care, Inc.
732 So.2d 1156 (Fla. App. 1999)
Goshorn, J.
Horizon is a large, publicly traded provider of both nursing home facilities and management for
nursing home facilities. It wanted to expand into Osceola County in 1993. Southern Oaks was already
operating in Osceola County[.]…Horizon and Southern Oaks decided to form a partnership to own the
proposed [new] facility, which was ultimately named Royal Oaks, and agreed that Horizon would
manage both the Southern Oaks facility and the new Royal Oaks facility. To that end, Southern Oaks
and Horizon entered into several partnership and management contracts in 1993.
In 1996, Southern Oaks filed suit alleging numerous defaults and breaches of the twenty-year
agreements.…[T]he trial court found largely in favor of Southern Oaks, concluding that Horizon
breached its obligations under two different partnership agreements [and that] Horizon had breached
several management contracts. Thereafter, the court ordered that the partnerships be dissolved,
finding that “the parties to the various agreements which are the subject of this lawsuit are now
incapable of continuing to operate in business together” and that because it was dissolving the
partnerships, “there is no entitlement to future damages.…” In its cross appeal, Southern Oaks asserts
that because Horizon unilaterally and wrongfully sought dissolution of the partnerships, Southern
Oaks should receive a damage award for the loss of the partnerships’ seventeen remaining years’
worth of future profits. We reject its argument.
Southern Oaks argues Horizon wrongfully caused the dissolution because the basis for dissolution
cited by the court is not one of the grounds for which the parties contracted. The pertinent contracts
provided in section 7.3 “Causes of Dissolution”: “In addition to the causes for dissolution set forth in
Section 7.2(c), the Partnership shall be dissolved in the event that:…(d) upon thirty (30) days prior
written notice to the other Partner, either Partner elects to dissolve the Partnership on account of an
Irreconcilable Difference which arises and cannot, after good faith efforts, be resolved.…”
Southern Oaks argues that what Horizon relied on at trial as showing irreconcilable differences—the
decisions of how profits were to be determined and divided—were not “good faith differences of
opinion,” nor did they have “a material and adverse impact on the conduct of the Partnerships’
Business.” Horizon’s refusal to pay Southern Oaks according to the terms of the contracts was not an
“irreconcilable difference” as defined by the contract, Southern Oaks asserts, pointing out that
Horizon’s acts were held to be breaches of the contracts. Because there was no contract basis for
dissolution, Horizon’s assertion of dissolution was wrongful, Southern Oaks concludes.
Southern Oaks contends further that not only were there no contractual grounds for dissolution,
dissolution was also wrongful under the Florida Statutes. Southern Oaks argues that pursuant to
section [of that statute] Horizon had the power to dissociate from the partnership, but, in the absence
of contract grounds for the dissociation, Horizon wrongfully dissociated. It asserts that it is entitled to
lost future profits under Florida’s partnership law.…
We find Southern Oaks’ argument without merit. First, the trial court’s finding that the parties are
incapable of continuing to operate in business together is a finding of “irreconcilable differences,” a
permissible reason for dissolving the partnerships under the express terms of the partnership
agreements. Thus, dissolution was not “wrongful,” assuming there can be “wrongful” dissolutions,
and Southern Oaks was not entitled to damages for lost future profits. Additionally, the partnership
contracts also permit dissolution by “judicial decree.” Although neither party cites this provision, it
appears that pursuant thereto, the parties agreed that dissolution would be proper if done by a trial
court for whatever reason the court found sufficient to warrant dissolution.
Second, even assuming the partnership was dissolved for a reason not provided for in the partnership
agreements, damages were properly denied. Under RUPA, it is clear that wrongful dissociation
triggers liability for lost future profits. See [RUPA:] “A partner who wrongfully dissociates is liable to
the partnership and to the other partners for damages caused by the dissociation. The liability is in
addition to any other obligation of the partner to the partnership or to the other partners.” However,
RUPA does not contain a similar provision for dissolution; RUPA does not refer to the dissolutions as
rightful or wrongful. [RUPA sets out] “Events causing dissolution and winding up of partnership
business,” [and] outlines the events causing dissolution without any provision for liability for
damages.…[RUPA] recognizes judicial dissolution:
A partnership is dissolved, and its business must be wound up, only upon the occurrence of any of the
following events:…
(5) On application by a partner, a judicial determination that:
(a) The economic purpose of the partnership is likely to be unreasonably frustrated;
(b) Another partner has engaged in conduct relating to the partnership business which makes it not
reasonably practicable to carry on the business in partnership with such partner; or
(c) It is not otherwise reasonably practicable to carry on the partnership business in conformity with
the partnership agreement[.]…
Paragraph (5)(c) provides the basis for the trial court’s dissolution in this case. While “reasonably
practicable” is not defined in RUPA, the term is broad enough to encompass the inability of partners
to continue working together, which is what the court found.
Certainly the law predating RUPA allowed for recovery of lost profits upon the wrongful dissolution of
a partnership. See e.g., [Citation]: “A partner who assumes to dissolve the partnership before the end
of the term agreed on in the partnership articles is liable, in an action at law against him by his copartner for the breach of the agreement, to respond in damages for the value of the profits which the
plaintiff would otherwise have received.”
However, RUPA brought significant changes to partnership law, among which was the adoption of the
term “dissociation.” Although the term is undefined in RUPA, dissociation appears to have taken the
place of “dissolution” as that word was used pre-RUPA. “Dissolution” under RUPA has a different
meaning, although the term is undefined in RUPA. It follows that the pre-RUPA cases providing for
future damages upon wrongful dissolution are no longer applicable to a partnership dissolution. In
other words a “wrongful dissolution” referred to in the pre-RUPA case law is now, under RUPA,
known as “wrongful dissociation.” Simply stated, under [RUPA], only when a partner dissociates and
the dissociation is wrongful can the remaining partners sue for damages. When a partnership is
dissolved, RUPA…provides the parameters of liability of the partners upon dissolution.…
[Citation]: “Dissociation is not a condition precedent to dissolution.…Most dissolution events are
dissociations. On the other hand, it is not necessary to have a dissociation to cause a dissolution and
winding up.”
Southern Oaks’ attempt to bring the instant dissolution under the statute applicable to dissociation is
rejected. The trial court ordered dissolution of the partnership, not the dissociation of Horizon for
wrongful conduct. There no longer appears to be “wrongful” dissolution—either dissolution is
provided for by contract or statute or the dissolution was improper and the dissolution order should
be reversed. In the instant case, because the dissolution either came within the terms of the
partnership agreements or [RUPA] (judicial dissolution where it is not reasonably practicable to carry
on the partnership business), Southern Oaks’ claim for lost future profits is without merit. Affirmed.
CASE QUESTIONS
1. Under RUPA, what is a dissociation? What is a dissolution?
2. Why did Southern Oaks claim there was no contractual basis for dissolution, notwithstanding the
determination that Horizon had breached the partnership agreement and the management
contract?
3. Given those findings, what did Southern Oaks not get at the lower-court trial that it wanted on this
appeal?
4. Why didn’t Southern Oaks get what it wanted on this appeal?
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