Absentee Partners: What To Do With The Dead Weight
February 25, 2015
Who is an Absentee Partner?
To understand who an absentee partner is, first one must understand who is considered a partner. Tennessee has adopted the Revised Uniform Partnership Act, which states, except as otherwise provided in Tenn. Code Ann. § 61-1-202(b), “the association of two (2) or more persons to carry on as co-owners of a business for profit forms a partnership, whether or not the persons intend to form a partnership.” Tenn. Code Ann. § 61-1-202(a). In summary, one is a partner if he is part of an “association of two or more persons” and the purpose of that association is to carry on as co-owners of a business for profit. This is true, even if the partners involved have no specific intention to form a partnership.
“In determining whether a partnership is formed, the following rule applies: A person who receives a share of the profits of a business is presumed to be a partner in the business, unless the profits were received in payment: (A) of a debt by installments or otherwise; (B) for services as an independent contractor or of wages or other compensation to an employee; (C) of rent; (D) of an annuity or other retirement or health benefit to a beneficiary, representative, or designee of a deceased or retired partner; (E) of interest or other charge on a loan, even if the amount of payment varies with the profits of the business, including a direct or indirect present or future ownership of the collateral, or rights to income, proceeds, or increase in value derived from the collateral; or (F) for the sale of the goodwill of a business or other property by installments or otherwise.” Tenn. Code Ann. § 61-1-202(c)(3). (emphasis added)
Generally speaking, a partner only owes two fiduciary duties to the partnership: the duty of loyalty and the duty of care. Tenn. Code Ann. § 61-1-404(a). These duties are more fully described in Tenn. Code Ann. § 61-1-404(b) and (c). I believe one might say it is a breach of the duty of care, if not both the duty of care and the duty of loyalty, to abandon a partnership–especially without notice–before the business of the partnership is properly wound-up. In Moran v. Willensky, 339 S.W.3d 651 (Tenn. Ct. App. 2010), appeal denied, (Sept. 1, 2010), the partner wrongfully abandoned the partnership; therefore, he had no right to participate in the winding-up of the business of the partnership. Abandonment of a partnership before the completion of the business for the carrying on of which the partnership exists is considered a “wrongful dissociation,” which the Tennessee Court of Appeals has characterized as “wrongful abandon[fusion_builder_container hundred_percent=”yes” overflow=”visible”][fusion_builder_row][fusion_builder_column type=”1_1″ background_position=”left top” background_color=”” border_size=”” border_color=”” border_style=”solid” spacing=”yes” background_image=”” background_repeat=”no-repeat” padding=”” margin_top=”0px” margin_bottom=”0px” class=”” id=”” animation_type=”” animation_speed=”0.3″ animation_direction=”left” hide_on_mobile=”no” center_content=”no” min_height=”none”][ment].” Moran. A partner who has wrongfully abandoned the partnership is one I refer to as an “absentee partner.”
What if I don’t have a Partnership Agreement?
A Partnership Agreement is an essential part of a well-formed partnership. Not every partnership is well-formed, of course; and partnerships formed without a Partnership Agreement are likely to have more legal problems than partnerships which employ a Partnership Agreement. Among such problems is the problem of getting rid of an absentee partner, or effectively acting on behalf of the partnership without the absentee partner’s consent.
If a Partnership Agreement does not exist, removing the absentee partner as an operation of law may be the remaining partner’s or partners’ only option. Tenn. Code Ann. § 61-1-101 provides:
“A partner is dissociated from a partnership upon the occurrence of any of the following events:
(1) The partnership’s having notice of the partner’s express will to withdraw as a partner or on a later date specified by the partner;
(2) An event agreed to in the partnership agreement as causing the partner’s dissociation;
(3) The partner’s expulsion pursuant to the partnership agreement;
(4) The partner’s expulsion by the unanimous vote of the other partners if:
(A) It is unlawful to carry on the partnership business with that partner;
(B) There has been a transfer of all or substantially all of that partner’s transferable interest in the partnership, other than a transfer for security purposes, or a court order charging the partner’s interest, which has not been foreclosed;
(C) Within ninety (90) days after the partnership notifies a corporate partner or limited liability company partner that it will be expelled because it has filed a certificate of dissolution or the equivalent, its charter, articles of organization or equivalent has been revoked, or its right to conduct business has been suspended by the jurisdiction of its incorporation or organization, there is no revocation of the certificate of dissolution or no reinstatement of its charter, articles of organization or equivalent or its right to conduct business; or
(D) A partnership that is a partner has been dissolved and its business is being wound up;
(5) On application by the partnership or another partner, the partner’s expulsion by judicial determination because:
(A) The partner engaged in wrongful conduct that adversely and materially affected the partnership business;
(B) The partner willfully or persistently committed a material breach of the partnership agreement or of a duty owed to the partnership or the other partners under § 61-1-404; or
(C) The partner engaged in conduct relating to the partnership business which makes it not reasonably practicable to carry on the business in partnership with the partner;
(6) The partner’s:
(A) Becoming a debtor in bankruptcy;
(B) Executing an assignment for the benefit of creditors;
(C) Seeking, consenting to, or acquiescing in the appointment of a trustee, receiver, or liquidator of that partner or of all or substantially all of that partner’s property; or
(D) Failing, within ninety (90) days after the appointment, to have vacated or stayed the appointment of a trustee, receiver, or liquidator of the partner or of all or substantially all of the partner’s property obtained without the partner’s consent or acquiescence, or failing within ninety (90) days after the expiration of a stay to have the appointment vacated;
(7) In the case of a partner who is an individual:
(A) The partner’s death;
(B) The appointment of a guardian or general conservator for the partner; or
(C) A judicial determination that the partner has otherwise become incapable of performing the partner’s duties under the partnership agreement;
(8) In the case of a partner that is a trust or is acting as a partner by virtue of being a trustee of a trust, distribution of the trust’s entire transferable interest in the partnership, but not merely by reason of the substitution of a successor trustee;
(9) In the case of a partner that is an estate or is acting as a partner by virtue of being a personal representative of an estate, distribution of the estate’s entire transferable interest in the partnership, but not merely by reason of the substitution of a successor personal representative; or
(10) Termination of a partner who is not an individual, partnership, corporation, limited liability company, trust, or estate.”
For the purposes of our discussion, we can ignore Tenn. Code Ann. § 61-1-101(1), (2), and (3), because they each involve a Partnership Agreement, and this part of our discussion presumes one does not exist. Circumstances will dictate whether Tenn. Code Ann. § 61-1-101(4)-(10) are applicable. If you believe your circumstances are provided for by one or more sections of Tenn. Code Ann. § 61-1-101, you should contact a business attorney, and discuss filing a petition to have a Court expel the absentee partner by judicial determination (i.e., operation of law).
What if I have a Partnership Agreement, but I’m still unsure what my rights are or how to proceed?
If you have a Partnership Agreement, it should clearly state how partners may be removed from the partnership. If, however, your Partnership is badly drafted and / or ambiguously worded, you may need to have your Partnership Agreement reviewed by a business attorney. After reviewing your Partnership Agreement, a competent business attorney will be able to tell you how you can proceed to either compel the absentee partner to fulfill his or her duties and obligations to the partnership or how you can remove the absentee partner for failure or inability to do so.
If you have a Partnership Agreement, you should also pay special attention to provisions that may be triggered upon the exit of a partner from the partnership. Sometimes, the remaining partner(s) may be required to buy out the exiting partner’s interest. If your Partnership Agreement has such a provision, be prepared to pay any expenses that may be incurred as the result of giving an absentee partner the boot!
Whether or not you have a Partnership Agreement, if you want to get rid of an absentee partner, you should consult with a business attorney. Remember, if partners are equally divided, those who forbid a change must have their way. Summers v. Dooley, 481 P.2d 318 (Idaho 1971). See also: “Business Formation: Forming a Partnership“. So, if you’re trying to do something in a 50 / 50 partnership, and your partner is not giving their required consent or authorization, you may have to remove the partner before you can take the action you want to take. If you are in circumstances like these, don’t wait–call a business attorney, today!
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