New Developments

Nebraska Supreme Court on partnership buyout and partnership property

The Supreme Court of Nebraska has held that a partnership agreement’s buyout option is triggered by service of process of a lawsuit for dissolution rather than by the court’s judgment in that lawsuit. The supreme court also applied the presumptions in the UPA to determine whether two pieces of real estate were partnership property. In Mogensen v. Mogensen, three brothers formed a partnership to operate a family farm. After a falling out, Steven Morgensen sued for dissolution. The court entered summary judgment for the defendants on the ground that the partnership agreement provided an avenue for withdrawal and therefore the UPA’s provisions for dissolution were inapplicable. The partnership agreement permitted the other partners to purchase a withdrawing partner’s interest if they gave notice within 90 days of receiving notice of the intent to withdraw. About a month after the court’s judgment, Keith Morgensen gave notice of his intent to purchase Steven’s partnership interest. Steven refused. Keith brought suit for specific performance and Steven counterclaimed for declaratory relief as to whether two parcels were partnership property.

Justice Connolly held that the 90 day window began when Keith received service of process rather than when the court granted summary judgment. This holding was based on caselaw from other jurisdictions. The court determined that one of the disputed parcels was partnership property because it was purchased in part with partnership funds, but that the other disputed property was not partnership property because it was not acquired with partnership property. These holdings are quite straightforward but the discussions of the two parcels make a very nice contrast with one another. That part of the opinion would teach well because the facts are readily apprehended, the statutory provisions clear, and the application reasonable.

Washington State Supreme Court on partner liability

The Supreme Court of Washington has held that a tort plaintiff may recover against the partner of a general partnership without suing the partnership or exhausting partnership assets where the general partner is independently liable for the tort. In Gildon v. Simon Property Group, Inc., plaintiff was employed by a mall tenant as a cleaning service worker. She fell while performing her cleaning services and sued Simon Property, which she believed to be the mall owner, on a theory of premises liability. She later moved to amend her complaint to name the title owner of the mall, a general partnership. The trail court denied the motion on the ground that the amendment would not relate back and also dismissed the action on the ground that the partnership was an indispensable party and that the statute of limitations had run so that plaintiff could not file a separate action against the partnership. Simon Property was one of the partnership’s two general partners.

Justice Madsen held that that the partnership was not an indispensable party because Gildon could recover directly against Simon Property as a “possessor” of the mall. She also rejected Simon Property’s argument that the action should be dismissed because Gildon could not recover from Simon Properties without exhausting the partnership assets, which was not possible because the statute of limitations against the partnership had run. Justice Madsen held that the partnership need not be sued because UPA § 307(a) is permissive (citing my friend and colleague Kelly Kunsch). She then held that § 307(d)(5) permits Gildon to execute against Simon Properties. That section reads,

(d) A judgment creditor of a partner may not levy execution against the assets of the partner to satisfy a judgment based on a claim against the partnership unless the partner is personally liable for the claim under Section 306 [imposing joint and several liability on partners] and:

(5) liability is imposed on the partner by law … independent of the existence of the partnership.

Here, Simon Property is liable as a partner for the partnership’s debt (UPA § 306) and is independently liable for premises liability as a possessor.

This strikes me as clearly correct, though somewhat convoluted. The UPA’s liability scheme is generally intuitive: partners are jointly and severally liable for partnership debts (§ 306). However, a judgment against the partnership is not a judgment against the partner and a partnership judgment creditor may not execute against a partner’s property without a judgment against the partner (§ 307(c)).

Section 307(d) is not intuitive, however. It deals with the situation in which a claim against a partnership is asserted against one or more partners rather than against the partnership, which is permitted under § 307(a). In that setting, a judgment creditor typically cannot execute against the partner’s assets (even though the judgment is against the partner!) until the partnership’s assets are exhausted (§ 307(d)(1)). This seems to run counter to the point of permitting a plaintiff to sue the partnership or one or more partners, or both. However that rule is subject to four exceptions applies (§ 307(d)(2-5)), one of which applied in this case.

Indiana court on partnership

The Indiana Court of Appeals has affirmed a trial court finding that no partnership existed. In Copenhaver v. Lister, Copenhaver began working with a partnership that drilled water wells. Copenhaver’s primary duty was to rebuild a 1966 drilling rig. A few months later the original partners, Lister and Norris, split up and divided the assets of the partnership. Lister apparently continued to use the partnership’s name, Lister Well Drilling. Copenhaver continued to work and continued to be paid by Lister Well Drilling. About a year after Lister and Norris split up, Lister became ill and, upon recovery, believed Copenhaver was stealing from him. Lister filed an action for replevin and Copenhaver counterclaimed seeking a declaration that a partnership existed and for an accounting.

The court, per Baker, J., upheld the trial court’s finding of no partnership.

Indiana retains the UPA (1914) but the statutory definition of “partnership” is functionally identical to that of the current UPA, at least in this setting. Indiana overlays, as several other states do, pre-UPA criteria on the UPA definition of partnership. Thus, the court cited a ten year old Indiana Court of Appeals case that trotted out snippets from Indiana cases from the 1910s, ‘20s, ‘30s, ‘40s, and ‘50s. These criteria vary the UPA standards by imposing such requirements as,

[T]hat the parties must have joined together to carry on a trade or adventure for their common benefit, each contributing property or services, and having a community of interest in the profits.

(cites omitted)

In my view these sorts of overlays cloud the question, increase litigation, and defeat uniformity in an important area of law. The Indiana Supreme Court should make it clear that the test is the statutory one unencumbered by extraneous requirements.

Washington State case on UPA § 807

The Washington State Court of Appeals has erroneously interpreted UPA § 807 to permit a court ordered buy-out upon dissolution, rather than requiring a public sale. In Horne v. Aune,an unmarried couple formed a partnership that owned their residence. When the domestic relationship deteriorated, Ms. Horne brought suit for dissolution. Both parties wanted to own the house. The trial court found that the equity in the house was $100,000, ordered the parties to decide which party would buy out the other, and ordered the property sold if the parties were unable to agree. However, when the parties reported that they were unable to agree which would buy out the other, the court ordered that Ms. Horne buy out Mr. Aune and the Court of Appeals affirmed. The case rejects McCormick v. Brevig, casebook page 730, which correctly decided the issue.

One entertaining aspect is the language that begins the partnership agreement:

'This will serve as the legal jargon to indicate that this is a legal and binding agreement.'

The parties owned no business in common thus it is unclear why the UPA applies at all, since the parties were not co-owners of a business for profit.