Know the Dissolution Provisions of Your Partnership Agreement

Stock Photo - ContractThe outcome in Estate of Webster v. Thomas, 2013 IL App (5th) 120121-U, illustrates the importance of business partners’ knowing and complying with the dissolution provisions of their partnership agreement.

The partnership agreement in Estate of Webster provided that the partnership would continue until 2010, unless dissolved earlier. In the event that one of the partners died prior to 2010, the partnership would be dissolved unless partners owning at least 120 partnership units voted to continue it. Upon dissolution, the assets of the partnership were to be liquidated and any gain or loss in the process of liquidation was to be credited or charged to the partners in proportion to their interests.

The partnership in Estate of Webster was comprised of three partners until one of the partners (Clyde Webster) died in 2002. Although the remaining two partners (Theis and Thomas) held 120 votes and Clyde’s estate (by its executor, Joseph) had legal title to Clyde’s interest in the partnership, there was never any vote of partners holding 120 units to continue the partnership. Regardless, after Clyde’s death, Theis and Thomas managed and operated the partnership for years, and Clyde’s estate was listed as a partner on the partnership’s tax returns until at least 2006. In 2003 and 2004, Theis and Thomas made some efforts to resolve Clyde’s partnership interest, but the Executor, Joseph, was generally unresponsive at that time.

In 2007 and thereafter, Joseph, Theis and Thomas engaged in discussions regarding Clyde’s partnership interest, but they could not agree on the date of valuation of Clyde’s interest — i.e., Joseph demanded the then-current value of Clyde’s interest, and Theis and Thomas offered no more than the value of Clyde’s interest at the time of his death. The parties’ inability to agree led Clyde’s estate to file a lawsuit against the partnership, Theis and Thomas in 2008.

In the end, the trial court and appellate court approached the case as one involving straightforward matters of contract interpretation. Due to the partners’ failure to vote to continue the partnership, the partnership was dissolved as of the date of Clyde’s death.  And, because Theis and Thomas failed to liquidate and distribute the partnership’s assets upon dissolution, they violated the partnership agreement, breached their fiduciary duties to Clyde’s estate and owed Clyde’s estate the then-current value of Clyde’s partnership interest.

One of the takeaways from Estate of Webster is that compliance with the dissolution provisions of a partnership agreement has the potential to prevent litigation and save a great deal of time and money.

Contributing Author Amanda M.H. Wolfman

(This is for informational purposes and is not legal advice.)

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