In an issue of first impression, the Connecticut Supreme Court confirmed that partnerships can expel a partner rather than dissolve when there is a breakdown of the business of the partnership. The case is Brennan v. Brennan Associates, et al. The official opinion will be released on August 18, 2009, but the advanced opinion already was released online.
The case involves a complicated set of facts and circumstances surrounding the deterioration of a once successful partnership that operated a shopping center in Trumbull. The breakdown of the partnership began after the death of a partner.
The decedent partner essentially ran the partnership and kept all the books until his death. The decedent’s will directed that his interest go to his two cousins. Following the will reading, the partnership broke down over disputes on check writing authority, access to records, the transfer of interest, and an old tax conviction of a surviving partner who was the plaintiff in the case.
The plaintiff offered to buy out the decedent’s interest, which as rejected by the estate. The plaintiff subsequently filed a lawsuit seeking, among other things, to accomplish a buy out of the decedent’s partnership interest and to gain access to the books and records. The surviving partners wanted to continue the partnership’s business rather than dissolving it. As such, in addition to other claims by the defendant administrators, they filed a counterclaim application seeking to expel the plaintiff from the partnership under section 34-355 of Connecticut’s Uniform Partnership Act.
The statutory scheme at issue permits a trial court to grant an application for expulsion if a partner engages in conduct that "makes it not reasonably practicable to carry on the business in the partnership with the partner." In this case, after a bench trial, the court issued a ruling granting the application filed by the surviving partners to expel or dissociate the plaintiff partner. The plaintiff appealed claiming that acrimony and distrust between partners may be proper for a dissolution, but it was not a proper basis for dissociation.
On appeal, the Connecticut Supreme Court disagreed with the plaintiff and ruled that dissociation was an available remedy given the facts present as an alternative to dissolution. The supreme court noted that under Connecticut’s Partnership Act,
a partnership now has a choice, either to dissolve the partnership or to seek the dissociation of a partner who has made it not reasonably practicable to carry on the partnership with him. The new remedy of dissociation permits a financially viable partnership to remain intact without dissolving the partnership and reconstituting it.
In this case, the conduct at issue for the dissociated partner was a past felony tax conviction, a pattern of adversarial conduct toward other partners, and a false accusation of fraud against the others partners. With these facts present, the supreme court found that a trial court had enough to grant an application for expulsion and dissociation of the partner. The court stated:
irreparable deterioration of a relationship between partners is a valid basis to order dissolution, and, therefore, is a valid basis for the alternative remedy of dissociation.
It is worth noting that the court indicated that an old felony conviction standing alone likely would not meet the required standard. In any event, the case essentially provides that there is no basis for a higher burden for dissociation as opposed to dissolution.
My takeaway from the decision is that it promotes the policy of cooperation amongst partners by confirming expulsion as an option for getting rid of a "problem" partner. As noted in the decision, prior to the statutory scheme permitting dissociation, partnerships faced with similar problems had to dissolve. This process could perhaps create too much leverage for a "problem" partner forcing dissolution. Instead, this decision confirms the statutory availability of dissociation under no higher of a standard than dissolution. This may be a more preferable remedy for many Connecticut partnership disputes.
The decision also serves as a reminder of how a partnership or closely held company can breakdown following the death or disability of a partner or key member of the business. These circumstances highlight the need for specificity in partnership and operating agreements including buy out provisions for death and disability, transfer or assignment of interests, and continuation of operations.
It is also important to note that the supreme court left open the dissociated partner’s rights to bring a proceeding to compel valuation and purchase of his interest after dissociation. The court also indicated that the partnership agreement could have included a provision allowing the remaining partners to initiate a valuation proceeding, but it did not in this case.