Partnership Liability, Fiduciary Duties, Dissociation, and Dissolution

Partner Liability: Joint and Several, Incoming, and Outgoing Partners

The defining feature of the general partnership is unlimited personal liability. Under RUPA, all partners are jointly and severally liable for all obligations of the partnership, whether arising in contract or tort (Cal. Corp. Code §16306). Joint and several liability means a partnership creditor may sue any one partner for the entire obligation, though RUPA adds an exhaustion requirement: a judgment creditor generally must first exhaust partnership assets before levying on a partner's personal assets (§16307).

A partner who pays more than her share has a right of contribution from the other partners and indemnification from the partnership.

Timing of admission and departure is heavily tested. An incoming partner is not personally liable for partnership obligations incurred before the partner's admission; the new partner's exposure to pre-admission debt is limited to the capital she contributed — that capital can be reached by existing creditors, but the partner's other personal assets cannot. For obligations arising after admission, the new partner has full joint and several liability.

A dissociating (outgoing) partner remains personally liable for partnership obligations incurred before dissociation, and can even be liable for obligations incurred within two years after dissociation if the other party reasonably believed the dissociated partner was still a partner and lacked notice of the dissociation. To cut off that lingering liability, the dissociated partner (or the partnership) can file a statement of dissociation, which is deemed to give third parties notice 90 days after filing.

A partner can also limit exposure by obtaining a release from creditors, but the mere agreement of the remaining partners to assume the debt does not bind a creditor who has not consented.

Each Partner as Agent: Binding the Partnership

Because a partnership acts only through its partners, RUPA makes each partner an agent of the partnership for the purpose of its business. The key rule (Cal. Corp. Code §16301) is that an act of a partner — including the execution of an instrument in the partnership name — for apparently carrying on in the ordinary course the partnership business or business of the kind carried on by the partnership binds the partnership, unless the partner had no authority to act and the third party knew or had received notification that the partner lacked authority.

This pairs an apparent-authority rule (ordinary-course acts bind even without actual authority) with an actual-authority overlay (extraordinary acts bind only if actually authorized). An act not apparently in the ordinary course binds the partnership only if the act was actually authorized by the other partners.

RUPA allows partnerships to manage these authority questions through a statement of partnership authority, a public filing that can grant or restrict a partner's authority, particularly for real-property transactions. A grant of authority in a recorded statement is generally conclusive in favor of a person who gives value relying on it; a limitation on authority for transfers of real property is effective against third parties if properly recorded, but a limitation on authority for other transactions is generally not constructive notice to non-partners.

The partnership is also liable for a partner's wrongful acts (torts) and breaches of trust committed in the ordinary course of the partnership's business or with the authority of the partnership (§16305) — the partnership analog of respondeat superior. Thus a partner driving on partnership business who injures a third party can subject the partnership, and through joint-and-several liability the other partners, to liability.

Fiduciary Duties: Loyalty, Care, and Meinhard v. Salmon

Partners are fiduciaries of the partnership and of one another. The high-water mark of the common-law standard is Meinhard v. Salmon (N.Y. 1928), where Chief Judge Cardozo wrote that co-adventurers owe one another "the duty of the finest loyalty" — "not honesty alone, but the punctilio of an honor the most sensitive" — and held that a managing partner who secretly took for himself a lease renewal opportunity that grew out of the joint venture had to share it, because he had appropriated an opportunity belonging to the venture without disclosure.

RUPA codifies and narrows these duties. The duty of loyalty is limited by statute (Cal. Corp. Code §16404) to three components: (1) to account to the partnership for any property, profit, or benefit derived in conducting the partnership business, from use of partnership property, or from appropriation of a partnership opportunity; (2) to refrain from dealing with the partnership as an adverse party; and (3) to refrain from competing with the partnership before dissolution.

The duty of care is limited to refraining from grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law — ordinary negligence does not breach the partnership duty of care. Partners must also discharge their duties consistently with the obligation of good faith and fair dealing. Importantly, RUPA permits the partnership agreement to modify these duties but not to eliminate the duty of loyalty entirely or to unreasonably reduce the duty of care; the agreement may identify specific types of conduct that do not violate loyalty if not manifestly unreasonable.

A partner does not violate a duty merely by furthering the partner's own interest, but self-interested transactions must satisfy the loyalty constraints.

Dissociation, Dissolution, and Distribution Priority

Dissociation is the change in a partner's relationship caused by the partner ceasing to be associated with the carrying on of the business — most commonly by the partner's express will to withdraw, but also by expulsion, bankruptcy, death, or incapacity. Dissociation is rightful unless it breaches an express provision of the agreement or, in a term partnership, occurs before the end of the term — those are wrongful dissociations, exposing the partner to damages for the breach. After dissociation, RUPA charts one of two paths.

If the dissociation does not trigger dissolution (the common case in an at-will partnership where the others continue), the partnership buys out the dissociated partner's interest at the greater of liquidation or going-concern value, and the business continues. If the dissociation does trigger dissolution (for example, in an at-will partnership, a partner's express will to withdraw can cause dissolution and winding up), the partnership proceeds to wind up.

Dissolution is followed by winding up — liquidating assets, paying creditors, and settling accounts — after which the partnership terminates. During winding up, partners retain authority only to complete unfinished business and wind up affairs; acts inconsistent with winding up no longer bind the partnership once third parties have notice.

The distribution priority on winding up (Cal. Corp. Code §16807) is fixed: partnership assets are applied first to creditors, a category that includes partners who are creditors (e.g., for loans or advances), and then to partners in settlement of their accounts — each partner's account is credited with contributions and profits and charged with distributions and losses, and the partnership must pay each partner the positive balance in that account.

If assets are insufficient, partners with negative capital accounts must contribute the amount needed to satisfy the priorities, in the proportion in which they share losses.