Be Careful When Entering A Partnership
It should go without saying, shouldn’t it? And yet every day, people get involved in partnerships without written agreements, or where there are two partners, each of whom is a 50% partner (if I remember right, that was day one of Bus Orgs in law school). A recent, although unpublished, review of a Pierce County case once again demonstrates the potential pitfalls (they are many and deep) of not adequately thinking through a partnership.
In Bushard v. Reisman (Pierce County June 15, 2010), Bushard and Reisman formed a limited liability partnership in 1995, but didn’t enter into any written agreement. Inevitably, there was a dispute over how to run the business and in August 1999, Bushard sent a letter declaring that he was exercising his right to dissolve the partnership and wind up its affairs. This didn’t happen, Bushard didn’t push the issue, and Reisman ran the partnership profitably for the next nine years, towards the end taking a salary in addition to his partnership draws, justified because he was the one running the business, doing the work.
Not so fast, said Bushard, who asked the court to dissolve the partnership and require that Reisman, who was responsible for all the partnership’s income for the last nine years, to pay back all the salary he took. Apparently against all common sense, the circuit court agreed with Bushard:
The circuit court denied Reisman’s motion for summary judgment, concluding that Reisman was prohibited, as a matter of law, from taking a salary from the partnership without Bushard’s agreement. Bushard then moved for orders directing the winding up of the partnership and compelling Reisman to repay the amounts he took as a salary.
The court granted the motion, directing the parties “to complete the winding up of the affairs of PressEnter … and to report to the court in 60 days regarding the progress.” It also ordered Reisman “as part of the winding up of the affairs of PressEnter … to account to and reimburse PressEnter … for the amounts which he took as guaranteed draws or salary,” and dismissed his counterclaims for unjust enrichment and breach of fiduciary duty.
The appellate court agreed, holding that Reisman would have to pay back his salary, and that the partnership was to be dissolved:
When a partner dissolves a partnership, he or she may either (1) “permit the business to continue and claim his or her interest in the dissolution value as a creditor, or (2) … force the dissolved business to wind up and take his or her part of the proceeds.” Matteson v. Matteson, 2008 WI 48, ¶25, 309 Wis. 2d 311, 749 N.W.2d 557. “[T]he settlement of the former partner’s account differs depending on whether it is a wind-up or a continuation.” Lange v. Bartlett, 121 Wis. 2d 599, 601-02, 360 N.W.2d 702 (Ct. App. 1984). Therefore, it is important “for a trial court faced with making a settlement of a former partner’s account … to determine what election the retiring partner made at the point of dissolution.” Id.
Reisman argues Bushard’s election is disputed because he permitted Reisman to continue operating the business for years after initiating the dissolution. He therefore contends the court should not have ordered the parties to complete PressEnter’s winding up without determining whether Bushard in fact elected to wind up the business.
Bushard’s letter dissolving the partnership explicitly referred to “the winding up of the partnership ….” Moreover, wind-up is the default option. “Every partnership dissolution causes a wind-up rather than a continuation unless the outgoing partner ‘consents’ to a continuation.” Id. at 601-02. Thus, unless the dissolving partner expressly elects continuation, we presume he or she elected to force the business to wind up. See id. at 601.
If you’re even thinking about getting involved in a partnership, think long and hard, read this case, and then be sure you have a partnership agreement drafted by people who know what kind of trouble might result in the future.
