When is it ‘unpracticable’ to continue a partnership? (Corp. Code § 16801(5))
Partnerships are incredibly common business entities that many Californians enter on a regular basis, often to acquire and develop real estate over many years. Unfortunately, many fail to get off the ground, as mismanagement, poor spending, and bickering derail what may have been promising ventures. In these instances, a single partner can apply to have a court dissolve the partnership, effectively ending the entity by triggering wind-up procedures. At Underwood Law firm, our attorneys know how tough this situation can be. Thankfully, our attorneys are well-versed in partnership law, and we know the best ways to tackle the disputes that accompany dissolution and winding up. Our team has the legal acumen and skills necessary to help you achieve your litigation goals.
When can a partnership be dissolved?
Absent specific provisions in a partnership agreement that control dissolution, Corporations Code section 16801 governs the events that lead to dissolution and winding up of the entity. Some of its provisions are fairly self-explanatory. For instance, if half or more of the partners declare that they want to wind up the business, then it will be dissolved. Or if the term of the partnership ends (for example, a real estate investment partnership dictated it would last only 20 years), then that too would lead to dissolution. There are, however, an additional set of reasons for dissolution that can be broadly characterized under the umbrella of “impracticability.” These reasons are that (1) the economic purpose of the partnership is likely to be unreasonably frustrated, (2) another partner has engaged in conduct relating to the partnership business that makes it not reasonably practicable to carry on the business in partnership with that partner, and (3) it is not otherwise reasonably practicable to carry on the partnership business in conformity with the partnership agreement. (Corp. Code § 16801 (5).) Unlike the other grounds for dissolution mentioned above, dissolution on impracticability grounds requires the complaint of only a single partner. Moreover, this section is mandatory in nature. Provided the court agrees with the partner’s argument, the partnership “shall be wound up.” (Navarro v. Perron (2004) 122 Cal.App.4th 797, 801.)
When is the economic purpose of a partnership “unreasonably frustrated?”
If a partner wants to show the “unreasonable” frustration of the firm’s economic purpose, then they have to make a fairly substantial showing. Just because the partnership isn’t pulling in as much profit as the partner wants probably isn’t enough to satisfy the court. Of course, every situation is different. Unreasonable to one person is acceptable to another. As such, potential litigants should turn to case law on the subject to get a good idea of what courts have agreed constitutes unreasonable frustration in the past. For example, in Wallace v. Sinclair (1952) 114 Cal.App.2d 220, a once successful partnership running liquor stores and cafes, began to seriously falter. Over a five year period, the assets of the partnership decline 23%, with the last two years seeing a staggering 16% decrease alone. (Id. at 225.) In the eyes of the court, this was enough to demonstrate unreasonable frustration. Another prime example is also an older case, Thomson v. Langton (1921) 51 Cal.App. 142, wherein “firm capital had become so seriously impaired that further profitable conduct of the business was impossible without fresh [partner] contributions or the negotiations of loans.” (Wood v. Apodaca (N.D. Cal. 2005) 375 F.Supp.2d 942, 948.) As such, a partner trying to initiate dissolution on these grounds has to demonstrate, in essence, that the continued operation of the partnership will only be at a loss.
When is it “not reasonably practicable” to carry on a partnership?
The “reasonably practicable” clause of the dissolution statute deals with two situations: partner misconduct and general impracticability. Partner misconduct is a serious allegation. This is especially true because partners owe fiduciary duties to one another not to damage each other’s interests. (Jacoby v. Feldman (1978) 81 Cal.App.3d 432, 442.) Thus, plaintiffs would again need to meet a fairly high bar in demonstrating that the conduct was so bad that carrying on with the partner is simply not an option. Sometimes, the misconduct is obvious. In Pankosta, Partners, LP v. Hammer Lane Management, LLC (2011) 199 Cal.App.4th 612, a bunch of partners who only held a collective minority interest filed a purported amendment to the partnership’s certificate with California’s Secretary of State. More often than not, however, the “misconduct” alleged is mere squabbling over the misplacement of partnership funds and assets. Even if a partner is ultimately justified in their action, this argument can nonetheless lead to dissolution. “Where bitter and antagonistic feeling between partners has developed to the point that the partners cannot continue the partnership to their mutual advantage…,” dissolution is proper. (Wallace, 114 Cal.App.2d at 228.) Lastly, a partner can apply under this section by stating that it’s just not practicable to carry on the partnership in general. Subsection (5)(C) of Corporations Code section 16801 is worded to function as, essentially, a catch-all statute. For example, in Price v. Slawter (1960) 184 Cal.App.2d 715, the Court found that dissolution may be proper when a partnership can only be continued at a loss but also notes that dissolution may be practicable even when there is a “reasonable prospect of an immediate increase in business.” This makes sense because not every partnership dispute concerns a single partner’s misconduct or serious economic hardships. For example, in Guttman v. Guttman (2021) 72 Cal.App.5th, 396, miscommunication over management led to the buildup of waste on the partnership property, which in turn led to excessive spending on projects and services to try and fix the issue. All of this, in total, made the continuation of the partnership not reasonably practicable.
How can the attorneys at Underwood Law Firm assist you?
Winding up a partnership can prove to be a difficult task. Some partners will inevitably wish for the relationship to continue, while others may only be looking out for themselves. In these situations, the right attorney can make all the difference. As each case is unique, partners would be well-served to seek experienced counsel familiar with partnerships and the winding up procedure. At the Underwood Law Firm, our knowledgeable attorneys are here to help. If you are trying to begin dissolution, wondering whether you can fight one off, or if you just have questions, please do not hesitate to contact our office. Learn more here.