Partnership Law Issues in the Break-up and Dissolution of Law Firms
| Jurisdiction | Colorado,United States |
| Citation | Vol. 21 No. 3 Pg. 409 |
| Pages | 409 |
| Publication year | 1992 |
1992, March, Pg. 409. Partnership Law Issues in the Break-up and Dissolution of Law Firms
The formation of a law partnership is typically friendly and relatively informal. As a result, when establishing the partnership, the new partners often fail to focus on the legal ramifications of the possible failure of their joint practice. Law firm dissolutions and break-ups have occurred frequently over the last several years and tend to be complex and acrimonious affairs.
Partnership agreements often leave unresolved issues concerning the legal effects of partner withdrawals and partnership dissolutions. Such unresolved matters can include the method for winding up the dissolved partnership's affairs, payments to partners who participate in the winding up process, treatment of unfinished partnership business at the time of the dissolution, the continuation of the firm after a partner's withdrawal and, in the event the firm is not continued, the distribution of assets on dissolution.(fn1)
When there is no partnership agreement or when the agreement is silent on dissolution matters, significant legal issues may need to be handled through litigation or alternative dispute resolution. Therefore, it is a wise practice for lawyers who enter into partnerships to prepare a written partnership agreement containing dissolution provisions, preferably drawn up with the advice of a third-party lawyer having expertise in partnership law.
This article discusses the Uniform Partnership Act in effect in Colorado, fiduciary duties connected with the dissolution of a partnership, issues regarding the winding up of a partnership and malpractice concerns during the winding up period.
The Uniform Partnership Act ("UPA"), as enacted in Colorado,(fn2) defines partnership dissolution as "the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on . . . of the business."(fn3) Thus, any time a partner leaves a law partnership, whether by withdrawal or otherwise, that partnership dissolves as a matter of law. On dissolution, the partnership does not terminate, but continues to exist until a winding up of its affairs is completed.(fn4)
Dissolution generally gives rise to one of three consequences. First, CRS § 7--60--138(1) provides that unless the dissolution was wrongful or the partners have agreed to the contrary, each partner has the power to force a liquidation of the dissolved partnership and a distribution of its assets. Second, CRS § 7--60--138(2)(b) provides that, where the dissolution is in contravention of the partnership agreement (e.g., a partner withdraws from a term partnership before the conclusion of the term), the partners who have not caused dissolution wrongfully may continue the business.(fn5) If the remaining partners continue the business after the dissolution, they usually do so through a new partnership. Third, the partnership agreement can provide for the remaining partners to continue the partnership business after a partner's withdrawal.
Even though partnerships may not be able to avoid technical dissolution on a partner's withdrawal or death, partnership agreements often include language which prevents partners from forcing liquidation and thereby preserves the continuity of the partners' business relationship. This can be accomplished in three ways: (1) inclusion of continuation language; (2) provision that withdrawal
First, by providing continuation language, the partnership agreement may permit the partners remaining after a withdrawal or other dissolution event to continue the partnership business (often under the same name). In this case, the interest of the withdrawing partner is purchased, a new partnership continues to do business and the dissolved law partnership's creditors become creditors of the new partnership.(fn6) Continuation provisions permit law partnerships to maintain the appearance of business continuity, avoid the negative aspects of business liquidation, establish a basis for settling accounts with the withdrawing partner, and define the partners' claims to income generated in completing the partnership's unfinished law business. As discussed below, continuation agreements do not prevent creditors from asserting claims against the withdrawing partner. Continuation provisions assure business continuity and should always be considered when drafting a partnership agreement for a professional partnership.
Second, law partnership agreements may state that the withdrawal of a partner does not cause partnership dissolution. These provisions attempt to distinguish dissolution of the partnership from the withdrawal of individual partners and usually provide that dissolution occurs only on the partners' vote. Although a few courts have upheld the distinction between withdrawal and dissolution,(fn7) there is no Colorado authority on this issue. Support for such a distinction is weak in light of the UPA's aggregate approach to partnership dissolution. Where the partnership agreement contains non-dissolution provisions, the partners should be aware that the legal consequences of a withdrawal are the same as those of a partnership dissolution followed by continuation of the business by a new partnership. For example, in the dissolution-continuation setting, withdrawal does not discharge the withdrawing partner from existing partnership liabilities or from liabilities which may arise in the winding up process.
Third, when a partnership is established for a definite term or particular undertaking, dissolution by a partner's withdrawal prior to the conclusion of the term or undertaking is in contravention of the partnership agreement.(fn8) In this case, the remaining partners may continue the partnership's business, pay the partner who wrongfully caused dissolution the value of his or her interest (less any damages caused by the breach of the partnership agreement), and indemnify the withdrawing partner against present or future partnership liabilities.(fn9)
Law partnerships usually involve a continuing business and thus are not formed for a definite term or particular undertaking. However, the decision of the Colorado Court of Appeals in Yoder v. Hooper(fn10) may support an argument that law partnerships are established for a particular undertaking and cannot be dissolved by the unilateral withdrawal of a partner without a breach of the partnership agreement. Where the remaining partners desire to continue doing business and the partnership agreement contains no continuation language, Yoder appears to provide that the remaining partners can continue the partnership without liquidation.
Despite the Yoder decision, the partnership agreement can be drafted to create a partnership for a definite term. With this approach, the withdrawal of a partner prior to the conclusion of the term is wrongful, and the remaining partners can continue the business and recover damages from the withdrawing partner.
Law partnerships typically are dissoluble at the will of any partner. Although the partnership agreement may delineate the consequences of a withdrawal, it cannot bind the partners to the firm by denying partners the power, as opposed to the right, to withdraw. As a result, partners generally are free to seek other business opportunities.
There are two principal lines of analysis concerning fiduciary duties in the context of law firm dissolutions.(fn11) The first, enunciated by a series of California cases, applies good faith principles to a partner's decision to withdraw. The second, represented by a recent Massachusetts case, focuses on the process and procedures used by the withdrawing partner, rather than on the withdrawal decision.
A number of courts have held that a withdrawing partner is not required to justify his or her decision to withdraw from an at-will partnership and thus to cause its dissolution.(fn12) However, several California courts have held that partnership fiduciary duties extend to the decision to cause dissolution and that the power to dissolve must be exercised in good faith. Although California case law is not precedential in Colorado, given the similarities between the California and Colorado versions of the UPA, the California cases should be considered carefully.
In Page v. Page,(fn13) the California Supreme Court stated in dictum that partnership law creates liability for partners who act in bad faith to cause dissolution. Moreover, in Rosenfeld, Meyer & Susman v. Cohen,(fn14) the California Court of Appeals applied the good faith requirement in the context of a law firm dissolution. In this case, two partners who worked on a major antitrust case demanded that the partnership agreement be amended to increase their share of the income resulting from the case, and, when their demand was not met, withdrew from the partnership, started a new firm which continued the antitrust litigation, settled the case and retained a large contingency fee.
The court determined that law partners do not have the right to dissolve an at-will partnership in bad faith. The court held that partners may not threaten withdrawal in order to renegotiate income-sharing or obtain other benefits from the partnership. More important, the court held that a withdrawal may be in bad...
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