New Law January 1, 1997

I. UNIFORM PARTNERSHIP ACT OF 1994

A. OVERVIEW

§ 17:1 Legislative action

In 1996, the Legislature enacted a version of the Revised Uniform Partnership Act (RUPA) entitled "The Uniform Partnership Act of 1994" ("the Act") (Corp C §§ 16100 et seq.). The law governs partnerships formed on or after January 1, 1997, unless the partnership is continuing the business of a dissolved partnership. Partnerships formed before January 1, 1997, continue to be governed by the Uniform Partnership Act (UPA) (Corp C §§ 15001 et seq.) until January 1, 1999, unless the partnership elects to be governed by the Act. On and after January 1, 1999, the Act replaces the UPA with respect to all partnerships. [See Corp C § 16111]

Ä Observation

Although entitled "The Uniform Partnership Act of 1994," the legislation was enacted in 1996 (AB 583). The bill's author initially introduced the legislation in 1994 as AB 2612 recommending the adoption of the Revised Uniform Partnership Act adopted by the National Conference of Commissioners of Uniform State Laws in 1993. However, unresolved controversies relating to the bill put the matter over for interim study and discussion. The result was AB 583, reiterating the adoption of RUPA, and including modifications and refinements that resolved all controversies. [See California Senate Judiciary Committee Comments to AB 583 (hereafter "Committee Comments")]

§ 17:2 Additions and changes to UPA

The Act makes additions and changes to Articles 1 through 6, and Article 8 of the current Uniform Partnership Act and adds Articles 7, 9 and 10. The articles are as follows:

Article 1. General Provisions [Corp C §§ 16100-16114];

Article 2. Nature of Partnership [Corp C §§ 16201-16204];

Article 3. Relations of Partners to Persons Dealing with Partnership [Corp C §§ 16301-16308];

Article 4. Relations of Partners to Each Other and to Partnership [Corp C §§ 16401-16406];

Article 5. Transferees and Creditors of Partner [Corp C §§ 16501-16504];

Article 6. Partner's Dissociation [Corp C §§ 16601-16603];

Article 7. Partner's Dissociation When Business Not Wound Up [Corp C §§ 16701-16705];

Article 8. Winding Up Partnership Business [Corp C §§ 16801-16807];

Article 9. Conversions and Mergers [Corp C §§ 16901-16917]; and

Article 10. Limited Liability Partnerships [Corp C §§ 16951-16961].

The most significant changes and additions are contained in Article 2 [see §§ 17:4 et seq.]; Article 4 [see §§ 17:6 et seq.]; and Articles 6-9 [see §§ 17:10 et seq.].

Ä Observation

Although the Act's express reference to the appropriation of a partnership opportunity is new, common law has long held that a partner may not usurp a partnership opportunity. [See, for example, Ferry v McNeil (1963, 4th Dist) 214 CA2d 411, 29 Cal Rptr 577 (principle that partner cannot derive benefit from partnership relationship for self as against copartners prevented partner from obtaining renewal of partnership lease for own purposes)].

§ 17:3 Incorporated and conforming provisions

The Act incorporates and conforms the following [see Committee Comments]:

(1) The limited liability partnership provisions (LLP) added to California's Uniform Partnership Act in 1995. [Stats 1995 Ch 679 §9; Corp C §§ 15047 et seq.] Since the Act will become the new governing law of general partnerships, it was essential to add LLP provisions to conform with current California law. [See Corp C §§ 16951 et seq.; for detailed discussion of LLPs, see Business Entities: Limited Liability Partnerships (Ch 21); see also, Witkin, 9 Summary (9th), Partnership §§ 169 et seq.]

(2) Conforms "interspecies" merger provisions to those contained in California's Revised Limited Partnership Act [Corp C §§ 15611 et seq.] and Limited Liability Company Act [Corp C §§ 17000 et seq.; for detailed discussion of Revised Limited Partnership Act, see Business Entities: Limited Partnerships (Ch 18); see also Witkin, 9 Summary (9th) Partnership §§ 65 et seq.; for detailed discussion of limited liability companies, see Business Entities: Limited Liability Companies (Ch 16); see also, Witkin, 9 Summary (9th) Witkin, 9 Summary (9th), Partnership §§ 120 et seq.; for further discussion of merger and conversion provisions of the Act, see Business Entities: Sale or Transfer of Partnership Interest (Ch 19)]

(3) Conforms the partnership conversion provisions to track the revised interspecies merger provisions of the Act. Specifically, conversions between a partnership and a limited partnership, between partnerships and a limited liability company or a foreign business entity, but not a foreign or domestic corporation, are permitted. [See Corp C §§ 16901 et seq.; for further discussion of merger and conversion provisions of the Act, see Business Entities: Sale or Transfer of Partnership Interest (Ch 19)]

(4) Conforms probate-related provisions to those of the UPA. Current California law provides that the provisions of the UPA override the provisions of the Probate Code regarding the rights and duties of surviving partners, the legal representatives of deceased partners, their creditors, and the creditors of the partnership. [See Corp C § 15045] The Act continues this rule. [See Corp C § 16109]

B. SIGNIFICANT CHANGES

1. NATURE OF PARTNERSHIP

§ 17:4 Entity theory

Historically, partnerships have been considered a hybrid organization viewed as an aggregation of individuals for some purposes, and as an entity for others. [For discussion, see § 17:13] The Act seemingly settles the conflict by expressly providing that a partnership is "an entity distinct from its partners." [Corp C § 16201; see also Committee Comments] The Act continues the entity approach throughout its provisions.

For example, under the Act, property acquired by a partnership becomes property of the partnership as an entity and not of the partners individually. [See Corp C § 16203; for discussion of partnership property under UPA, see § 17:22 and Corp C § 15008] Further, a partnership may sue and be sued in the name of the partnership, thus allowing a partnership to be treated as separate and distinct from the individual partners [see Corp C § 16307(a)]; however, this is not new to California law. [See, for example, CCP §369.5(a); § 17:13] The partner can only be paid the value of the partnership interest. In addition, the Act provides that a judgment against the partnership is not, by itself, a judgment against a partner. Thus, unless a partner is individually named in the suit and judgment entered against that partner, the partner's personal assets escape liability in a levy against the partnership. [See Corp C § 16307; for discussion on joint and several liability under the Act, see § 17:9]

Ä Observation

The Committee Comments also note that under Corp C § 16201 it is no longer necessary to convey title from an old partnership to a new partnership when there is a change in partners. In addition, Corp C § 16203 prevents a partner from forcing an in kind distribution of the property on leaving the partnership.

§ 17:5 Definitions

The Act incorporates the following terms, phrases, and meanings:

(1) "Debtor in bankruptcy" means a person who is the subject of either of the following [Corp C § 16101(2)]:

An order for relief under Title 11 of the United States Code or a comparable order under a successor statute of general application.

A comparable order under federal, state, or foreign law governing insolvency.

(2) "Distribution" means a transfer of money or other property from a partnership to a partner in the partner's capacity as a partner or to the partner's transferee. [Corp C § 16101(3)]

(3) "Partnership" means an association of two or more persons to carry on as coowners a business for profit formed under Corp C § 16202, predecessor law, or comparable law of another jurisdiction, and includes, for all purposes of California law, a registered limited liability partnership. [See Corp C § 16101(7)]

(4) "Partnership agreement" means the agreement, whether written, oral, or implied, among the partners concerning the partnership, including amendments to the partnership agreement. [Corp C § 16101(8)]

(5) "Partnership at will" means a partnership in which the partners have not agreed to remain partners until the expiration of a definite term or the completion of a particular undertaking. [Corp C § 16101(9)]

(6) "Partnership interest" or "partner's interest in the partnership" means all of a partner's interests in the partnership, including the partner's transferable interest and all management and other rights. [Corp C § 16101(10)]

(7) "Person" means an individual, corporation, business trust, estate, trust, partnership, limited partnership, limited liability partnership, limited liability company, association, joint venture, government, governmental subdivision, agency, or instrumentality, or any other legal or commercial entity. [Corp C § 16101(11)]

(8) "Professional limited liability partnership services" means the practice of public accountancy or the practice of law. [Corp C § 16101(12)]

(9) "Property" means all property, real, personal, or mixed, tangible or intangible, or any interest in that property. [Corp C § 16101(13)]

(10) "State" means a state of the United States, the District of Columbia, the Commonwealth of Puerto Rico, or any territory or insular possession subject to the jurisdiction of the United States. [Corp C § 16101(14)]

(11) "Statement" means a statement of partnership authority under Corp C § 16303, a statement of denial under Corp C § 16304, a statement of dissociation under Corp C § 16704, a statement of dissolution under Corp C § 16805, a statement of conversion under Corp C § 16906, a statement of merger under Corp C § 16915, or an amendment or cancellation of any of the foregoing. [Corp C § 16101(15)]

(12) "Transfer" includes an assignment, conveyance, lease, mortgage, deed, and encumbrance. [Corp C § 16101(16)]

2. FIDUCIARY DUTIES

§ 17:6 In general

The Act's codification of a partner's fiduciary duties apparently makes no substantive change in existing law. [See Committee Comments; for discussion of case law, see § 17:17] However, the Act provides significant changes and additions to the statutory scheme. [For discussion, see § 17:7]

Ä Observation

Members of the RUPA Subcommittee reviewed a number of California cases dealing with a partner's fiduciary duties and concluded that none of the cases would have been decided differently had the Act's Article 4 been applied. [See Committee Comments]

§ 17:7 Statutory scheme

Article 4 (Corp C §§ 16401 et seq.) contains the Act's treatment of a partner's fiduciary duties, and expressly provides that a partner's fiduciary duties to the partnership and to other partners are the duties of loyalty and care as follows:

(1) To account to the partnership and hold for it as trustee any profits or benefits derived by the partner in conducting and winding up partnership business or from the use of partnership property or information including any "appropriation of a partnership opportunity." [See Corp C § 16404(b)(1)]

(2) To refrain from dealing with the partnership when conducting or winding up partnership business as or on behalf of a party having an interest adverse to the partnership. [Corp C § 16404(b)(2)]

(3) To refrain from competing with the partnership when conducting partnership business before the dissolution of the partnership. [Corp C § 16404(b)(3)]

(4) To refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law when conducting and winding up the partnership business. [See Corp C § 16404(c)]

The Act further provides that a partner must discharge the duties specified under the Act or under the partnership agreement and exercise any rights consistently with the obligation of good faith and fair dealing. [See Corp C § 16404(d)]

Ä Observation

Although the Act's express reference to the appropriation of a partnership opportunity is new, common law has long held that a partner may not usurp a partnership opportunity. [See, for example, Ferry v McNeil (1963, 4th Dist) 214 CA2d 411, 29 Cal Rptr 577 (principle that partner cannot derive benefit from partnership relationship for self as against copartners prevented partner from obtaining renewal of partnership lease for own purposes)].

Neither "good faith" nor "fair dealing" are defined in AB 583. RUPA comments indicate this is an intentional omission to allow the meaning to evolve through case law. [See Committee Comments]

A partner does not violate a duty or obligation under the Act or under the partnership agreement merely because the partner' s conduct furthers the partner's own interest. [See Corp C § 16404(e)] Finally, on a partner's dissociation, that partner's duty of loyalty under Corp C § 16404(b)(3) terminates [see Corp C § 16603(2)], and the duty under Corp C §§ 16404(b)(1) and (2) and 16404(c) continues only with respect to matters arising before the dissociation. [See Corp C § 16603(3)]

§ 17:8 Nonwaivability

Although the Act concedes that relations among partners and between the partners and the partnership are generally governed by the partnership agreement [see Corp C § 16103(a)], the Act expressly prohibits the agreement from doing any of the following:

(1) Eliminating the duty of loyalty under Corp C § 16404(b) [see Corp C § 16103(b)(3)];

(2) Unreasonably reducing the duty of care under Corp C § 16404(c) [see Corp C § 16103(b)(4)];

(3) Eliminating the obligation of good faith and fair dealing under Corp C § 16404(d). [See Corp C § 16103(b)(5)]

Ä Observation

Although the good faith and fair dealing obligation is nonwaivable, the Act permits the partnership agreement to prescribe reasonable standards by which the obligation's performance may be measured. [See Corp C § 16103(b)(5)]

3. LIABILITY OF PARTNERS

§ 17:9 Joint and several liability

Under the Act, all partners are jointly and severally liable for all partnership obligations unless otherwise agreed by the claimant or provided by law. [See Corp C § 16306(a)] This liability is broader than the exclusive tort-type liabilities under the UPA [see Corp C § 15015; for discussion, see § 17:18]. Generally, creditors must exhaust the partnership assets before levying against a partner to satisfy a judgment against the partnership. [See Corp C § 16307(d)(1)] However, exhaustion is not necessary under the following conditions [see Corp C § 16307(d)(2)-(d)(5)]:

(1) When the partnership is in Chapter 11 bankruptcy;

(2) When the claimant and partner have agreed otherwise;

(3) When the court determines (a) the partnership's assets in California are insufficient, (b) that exhaustion is excessively burdensome, or (c) that permission is an appropriate exercise of the court's equitable powers; or

(4) When liability is imposed on the partner by law or contract independent of the partnership's existence.

4. DISSOCIATION AND DISSOLUTION

§ 17:10 In general

Under the UPA, the dissociation of a partner causes dissolution. [See Corp C §§ 15029, 15031(7); for discussion, see §§ 17:26, 17:28] This aggregate view interferes with the continuity of the partnership and is displaced by the Act. [See § 17:4; see Committee Comments]

The Act clearly separates partner dissociation and dissolution by the following Articles:

(1) Article 6 identifies events that cause a partner's dissociation [Corp C §§ 16601 et seq.];

(2) Article 7 deals with the buyout of a dissociated partner by a continuing entity [Corp C §§ 16701 et seq.]; and

(3) Article 8 deals with dissolution and winding up the partnership business. [Corp C §§ 16801 et seq.]

§ 17:11 Dissociation and buyout provisions

Under the Act, a partnership does not automatically dissolve when a partner dissociates. [See Corp C §§ 16701 et seq.; for discussion of dissolution under the UPA, see Corp C §§ 15029; 15031(7) (dissolution caused by withdrawal of partner) and §§ 17:26 et seq.] When a partner dissociates, the partnership must allow that partner's interest to be purchased at a buyout price comparable to an amount that would have been distributable to that partner if the partnership were wound up as of the date the partner dissociates. Interest must be paid from the date of dissociation to the date of payment. [See Corp C §§ 16701(a) and (b), 16807; for provisions specifying what events result in partner's dissociation, see Corp C § 16601]

However, a partnership will dissolve after the expiration of 90 days from a partner's dissociation by death or events specified in Corp C § 16601(6)-(10), or a wrongful dissociation under Corp C § 16602(b), unless a majority in interest of the partners agree to continue the partnership. [See Corp C § 16801(2)(A)]

§ 17:12 Dissolution and winding up

Article 8 does not define dissolution as a change in the relation of the partners caused by a partner dissociation as does the UPA. [See Corp C § 15029; for discussion, see § 17:28] Instead, Corp C § 16801 provides that a partnership is dissolved, and its business must be wound up, only on the occurrence of certain events. Although some of the specified events are similar to those in Corp C § 15031, Corp C § 16801 continues the Act's entity approach by assuring continuity of life unless dissolution is clearly predicated on a term in the partnership agreement or other specifically detailed events.

For example, the partnership business will dissolve and be wound up:

(1) In a partnership at will, by the express will to dissolve and wind up the partnership business of at least half of the partners, including partners who have properly dissociated within the preceding 90 days, and for which purpose a dissociation under Corp C § 16601(1) constitutes an expression of that partner's will to dissolve and wind up the partnership business. [Corp C § 16801(1)]

(2) In a partnership for a definite term or particular undertaking, when any of the following occurs:

(A) After the expiration of 90 days after a partner's dissociation by death or otherwise under Corp C § 16601(6)-(10), or a partner's wrongful dissociation under Corp C § 16602(b) unless before that time a majority in interest of the partners, including partners who have rightfully dissociated, agree to continue the partnership. [See Corp C § 16801(2)(A)]

(B) The express will of all of the partners to wind up the partnership business. [Corp C § 16801(2)(B)]

(C) The expiration of the term or the completion of the undertaking. [Corp C § 16801(2)(C)]

(3) An event agreed to in the partnership agreement resulting in the winding up of the partnership business. [See Corp C § 16801(3)]

(4) An event that makes it unlawful for all or substantially all of the business of the partnership to be continued, but a cure of illegality within 90 days after notice to the partnership of the event is effective retroactively to the date of the event. [See Corp C § 16801(4)]

(5) On application by a partner, a judicial determination that any of the following apply:

(A) The economic purpose of the partnership is likely to be unreasonably frustrated. [See Corp C § 16801(5)(A)]

(B) 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. [See Corp C § 16801(5)(B)]

(C) It is not otherwise reasonably practicable to carry on the partnership business in conformity with the partnership agreement. [See Corp C § 16801(5)(C)]

(6) On application by a transferee of a partner's transferable interest, a judicial determination that it is equitable to wind up the partnership business after the expiration of the term or completion of the undertaking, if the partnership was for a definite term or particular undertaking at the time of the transfer or entry of the charging order that gave rise to the transfer. [See Corp C § 16801(6); for detailed discussion of dissolution of partnership, see Business Entities: Dissolution and Termination of Partnerships (Ch 20)]