Tag: dissolution

Partnership Dissolution: Illinois Basics

Cross v. O’Heir, 2013 IL App (3d) 120760 spotlights a dispute over the division of partnership property.

The plaintiff’s husband (who died before lawsuit was filed) entered a written partnership with the defendant to develop property.

A few years later, and unbeknownst to plaintiff’s husband, the defendant signed a cross-easement agreement with some adjacent owners to provide vehicle and pedestrian access over three parcels that were allotted to the defendant after he and plaintiff’s husband began dividing up the partnership real estate.

The plaintiff, as executor of her husband’s estate, filed suit for a declaration that the cross-easement agreement benefitted her property (adjacent to the defendant’s three parcels) and defendant counter-sued to dissolve the partnership and for an accounting.

The court entered summary judgment for the defendant and on defendant’s dissolution action.  After a bench trial on damages, the court entered a money judgment of about $40K for the defendant and the plaintiff appealed.

(¶¶ 17-19).

The Court affirmed summary judgment on the defendant’s partnership dissolution counterclaim.

The dissolution of a partnership means a change in the relation of the partners caused by any party ceasing to be associated in the carrying on of the partnership’s business.

 A partnership can be dissolved by judicial order or by operation of law.  Death of a partner normally dissolves a partnership unless the partnership agreement says otherwise. 

Judicial dissolution can be granted upon a partner’s application if the court finds that the partnership business can’t be carried out in accordance with the partnership agreement.  (¶¶ 32-33); 805 ILCS 206/801(5). 

After dissolution, each partner is entitled to a settlement of partnership accounts and a partner’s right to an accounting accrues on the date of dissolution.  A dissolution action can be brought in tandem with an accounting suit.  (¶ 34), 805 ILCS 206/807(b). 

Following dissolution, each partner must contribute to the partnership, amounts equal to any surplus funds (over credits) in the partnership’s account to pay creditors.  In addition, the estate of a deceased partner is liable for the partner’s obligation to contribute to the partnership.  805 ILCS 206/807(b), (e).

The plaintiff argued that the defendant’s dissolution action was untimely since the partnership “constructively dissolved” when it stopped doing business twelve years before the lawsuit was filed.  The Court disagreed, noting that at the time defendant filed its dissolution action, the partnership still owned property.  It wasn’t until 2011 when the last of the partnership property – the two outlots – was finally transferred.  Until those two lots were disposed of, a dissolution and accounting suit was still timely.  (¶¶ 36-37).

Afterwords:

–  A partnership agreement can provide that the partnership continues after the death of a partner;

– If a partnership has ceased doing business, a partner can still bring a dissolution action so long as there is partnership property at the time the dissolution suit is filed;

– A deceased partner’s estate is liable to the partnership for the deceased partner’s contribution to the partnership after dissolution.

 

Partnership’s Incorporation Insulates Partners From Personal Contractual Liability

Today’s post features the case law equivalent of a Deep Cut.  The Deep Cut – as musical buzz-phrase and phenomenon – appears to be gaining traction in the FM radio realm.

The moniker denotes an obscure song from a well-known artist that’s not normally associated with the artist.

For example, a Styx fan likely connects that band with radio staples “Babe” or “Renegade”; instead of their lesser-known cuts “Queen of Spades” or “Castle Walls.”

“Hair metal” fans might associate Guns N’ Roses with its FM stalwarts like “Welcome to the Jungle” or “Sweet Child O’ Mine” instead of its more remote offerings, “One in a Million” or “Coma.”

Jensen Sound Laboratories v. Long, 113 Ill.App.3d 331 (4th Dist. 1983)  is “deep” in the sense that it’s both dated (1983) and geographically remote (4th District).  But the case is still post-worthy because its salient issue  – corporate vs. personal contractual liability – continues to recur in my practice.

The plaintiff creditor sued the defendants – a husband and wife who were also officers of a defunct corporation – for breach of contract after the corporation dissolved.  The defendants had previously operated a partnership before incorporating under a similar sounding name.

The plaintiff had done business with the partnership under an open-end credit agreement where the plaintiff would provide services to the partnership and then submit invoices to it.  After the defendants dissolved the partnership and began operating as a corporation, they continued ordering services from the plaintiff and would pay with checks bearing the corporate name.

Defendants never formally notified plaintiff of the incorporation and plaintiff never asked why a corporate entity was paying plaintiff’s invoices.

When the corporation dissolved, plaintiff sued the individual defendants for past-due invoices.  After a bench trial, the court ruled in favor of the defendants and found that plaintiff’s remedy was against the defunct corporation; not the individual defendants.

Held: Affirmed.

Why?

Normally, a partnership must give creditors notice of the partnership’s dissolution in order to relieve the partners of personal liability for debts incurred in the partnership’s name.

But where a partnership morphs into a corporation, the (former) partnership is no longer liable for partnership debts unless the partnership continues to deal with third parties in the same manner as before and fails to give notice of the partnership’s dissolution or change in form.

The critical fact relied on by the court was that the plaintiff received corporate checks for almost two years before it sued the individual defendants.

Since there was no evidence that the defendants continued to deal with the plaintiff as a partnership once the defendants incorporated, the trial court correctly found that the plaintiff was (or should have been) on notice of the change in business form.

Take-aways:

1/ where a business entity changes forms (e.g. partnership to a corporation), the members of that entity should notify creditors to possible personal liability to those creditors.

2/ Where someone fails to notify creditors of a change in business form, he can still avoid personal liability if the parties’ course of conduct demonstrates that the creditor was objectively put on notice of the structural change.

3/  A lengthy time span of receiving payment via corporate checks without objection can be viewed as constructive notice of a business entity change.