CA Appellate: No Partnership Buyout When Only 1 Partner Remains
Partnerships, like Olsen twins’ movies or Ikea furniture assembly, require two people.
This is common knowledge in business associations, but, as some people insist on bringing lawsuits without reviewing facts or statutes, it is one that a California Appellate Court was forced to enumerate this week in its ruling that there cannot be a partnership buyout if there is no longer a partnership.
The litigants in this case are brothers Rudy and Richard Corrales, proprietors of RC Electronics (RCE). The Corrales brothers formed RCE according to a written partnership agreement with an indefinite term. Rudy ran RCE, while Richard, who already had a full-time gig running a successful business, supplied financing and business know-how.
RCE became a family affair, drawing in Rudy's wife, Pamela, and daughters. In 2004, however, Richard discovered that Rudy, Pamela, and their daughters had formed a competing business, PK Electronics, (PKE), to perform the same services performed by RCE, but without Richard.
When Richard inquired about PKE, Rudy refused to tell him anything and cut off all communication with him. Richard responded by sending a Notice of Dissociation saying that he was withdrawing from the partnership.
Richard and Rudy sued each other in separate lawsuits. Both brothers based their cases on the theory that they were arguing a partnership buyout valuation, and the trial court ruled in the matter as if it were ruling in a partnership buyout valuation.
The only player in this case that wasn't on board with the partnership buyout theory was the California Appellate Court, which found that there was no partnership buyout because when Richard sent Rudy a Notice of Dissociation, the partnership ceased to exist.
Not that the California Appellate Court faulted the trial court for this error. The court noted that "the trial judge ... found none of the key witnesses credible and had virtually no independent corroboration on which to rely. He was confronted with partnership books and records kept, not by GAAP (generally accepted accounting principles), but by 'winging it.' He probably developed severe neck pain from constantly shaking his head over the way the participants ran their business."
In one of the funniest remands we've read, the appellate court laments, "The parties have now brought this matter to us, and we have reluctantly concluded it has to go back to the long-suffering judge."
Disassociation of a partnership can be similar to divorce, full of hurt feelings and attempts to take the other party for everything he's worth. If you have a similarly-situated, jilted-partner client seeking judicial retribution à la Corrales brothers, it may be easiest to explain the non-existence of a single person partnership with this simple equation: 2 Person Partnership - 1 Person = 0.
- The Family Limited Partnership (FindLaw's Library)
- Partnership Agreements (FindLaw's Library)
- Pregnancy and Partnership: A Law Firm Partner's Anti-Discrimination Suit (FindLaw)
- Intentional "Testicular Tagging" Not Indemnified (FindLaw's California Case Law blog)