Business Law Chapter 31 Homework This Section The Instructors Manual Gives Side by side

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*** Chapter Outcome ***

Distinguish between the liability of an incoming partner for debts

arising before his or her admission and those arising after admission.

D. LIABILITY OF INCOMING PARTNER

A person admitted as a partner into an existing partnership is not personally

liable for any partnership obligations incurred before the person’s admission as a

partner. This means that an incoming partner’s liability for preexisting debts and

obligations is limited to her capital contribution. Obviously, though, this

CASE 31-2

CONKLIN FARM v. DORIS LEIBOWITZ

Supreme Court of New Jersey, 1995

140 N.J. 417, 658 A.2d 1257

http://scholar.google.com/scholar_case?

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Garibaldi, J.

This appeal addresses whether an incoming partner is personally liable for interest that accrues

on a partnership debt that arose before the incoming partner’s admission. Under section 17 of

New Jersey’s Uniform Partnership Law, [citation] (the Act), an incoming partner is liable for

preexisting debt only to the extent of partnership property; the incoming partner is not personally

liable for preexisting debt. The parties to this appeal differ over whether the interest on a

preexisting debt that accrues after the incoming partner’s admission is new debt or part of the

preexisting debt.

In December 1986, Paula Hertzberg, Elliot Leibowitz, and Joel Leibowitz formed, under the

Act, a general partnership, LongView Estates (LongView), to acquire from plaintiff Conklin

interest due on January 15, 1992. * * * The final payment on January 15, 1992, was to include

any unpaid interest and the principal amount of $9 million. * * *

* * *

On March 15, 1990, Joel Leibowitz assigned his thirty percent interest in LongView to his

wife, defendant Doris Leibowitz, who “agreed to be bound by all the terms and conditions of the

Partnership Agreement dated December 22, 1986.” Seventeen months later, on August 30, 1991,

Conklin looked to Doris Leibowitz for payment of thirty percent of the interest that accrued on

the Conklin note over the seventeen months during which she had held her husband’s interest.

Conklin sued her in November 1991, claiming that she was personally liable for $547,000: thirty

percent of the interest that accrued during the seventeen months, plus interest and costs. [Court’s

footnote: As the opinion below noted, “It is unclear from this record why plaintiff sought only

thirty percent of the interest from defendant.” [Citation.] If the interest at issue is indeed new

debt, Doris Leibowitz is personally liable for 100% of it under [the Partnership Act]].

* * *

* * * [T]he sole issue became whether Doris Leibowitz, as an incoming partner, was

personally liable for the interest that had accrued on the preexisting debt while she had been a

partner. The trial court held that the interest was part of the preexisting debt, not new debt. The

trial court found that [section 17 of New Jersey’s Uniform Partnership Law] therefore limited

Doris Leibowitz’s liability to her interest in partnership property, which, of course, was by then

III

We find that the plain language of section 17 of New Jersey’s Uniform Partnership Law and its

legislative history compel the conclusion that Doris Leibowitz, as an incoming partner, is liable

for debt to Conklin only to the extent of her interest in partnership assets. Under [section 15(b) of

New Jersey’s Uniform Partnership Law] each partner is personally liable for the debts and

obligations of a partnership. [Section 17 of New Jersey’s Uniform Partnership Law] defines the

liability of new partners entering an existing partnership. That statute provides:

A person admitted as a partner into an existing partnership is liable for all the obligations of

the partnership arising before his admission as though he had been a partner when such

obligations were incurred, except that this liability shall be satisfied only out of partnership

property. (Emphasis added).

* * *

The Conklin note was executed by the partnership prior to Doris Leibowitz’s having any interest

in LongView. She did not sign or guarantee payment of that note. Thus, the issue appears

resolved by the clear language of [section 17]: Because the note was a preexisting debt, and

because Doris Leibowitz was an incoming partner, she is not personally liable for the debt. The

parties agree that the principal of the note was preexisting debt. However, while Doris Leibowitz

* * *

Conklin argues that just as a rent obligation arises for current use of property, an interest

obligation arises for current use of principal. The Appellate Division described the analogy as a

“sound approach,” and agreed that “interest is current rent for money and also should be treated

as new debt.” [Citation.] We disagree, and we find the rent analogy faulty.

Contractual interest is created by the contract, and is therefore inseparable from the

* * *

Because there is no obligation to pay interest independent of the promissory note, Conklin’s

rent analogy fails. Since the obligation to pay interest arises only as a result of the original loan

instrument, interest, unlike rent, cannot be “new” debt. * * *

* * *

Moreover, there is no prejudice to Conklin in the fact that it may look to only the original

partners for payment of the preexisting debt and interest. In executing the note, Conklin

considered the personal credit of only Paula Hertzberg, Elliot Leibowitz, and Joel Leibowitz, all

of whom guaranteed the loan. Conklin did not rely on the personal credit of Doris Leibowitz.

When lenders loan money, they rely on the financial statements of the general partners, and not

of some future, unknown general partner. * * *

III. DISSOCIATION AND DISSOLUTION OF GENERAL

PARTNERSHIPS UNDER (UPA &) RUPA

*** Chapter Outcomes ***

Identify the causes of dissolution of a partnership and the conditions under which

partners have the right to continue the partnership after dissociation.

Explain the effect of dissolution upon the authority and liability of the partners

and the order in which the assets of the partnership are distributed to creditors and

partners.

One of the major difference between the RUPA and the UPA is their respective

treatments of dissociation and dissolution.

UPA RUPA

Uses the term “dissolution” to denote

the change in the relationship caused

by a partner’s ceasing to be associated

in carrying on of the business.

Uses the term “dissociation to denote

the change in the relationship caused by

a partner’s ceasing to be associated in

carrying on of the business. Uses the

NOTE: This section of the instructor’s manual gives a side-by-side comparison of the

two sections in the student’s text that are entitled as follows:

Dissolution of General

Partnerships Under UPA

Dissociation and Dissolution of

General Partnerships Under RUPA

The three stages in the ending

of a partnership are (1)

dissolution, (2) winding up or

liquidation, and (3)

termination. The partnership is

not terminated until the

winding up is completed.

DISSOLUTION

Dissolution refers to those

situations when the Revised

Act requires a partnership to

wind up and be terminated.

Causes of Dissolution

Dissolution by Act of the

Partners — A partner always

has the power to dissolve a

partnership by his actions, but

whether he has the right is

determined by the partnership

agreement. A partner who

A partnership is rightfully

dissolved:

(1) when all the partners who

have not assigned their

interests or permitted their

interests to be charged

expressly agree to dissolve

the partnership,

(2) when the time period

provided in the agreement

has ended or the purpose

for which the partnership

was formed has been

accomplished,

DISSOCIATION

Dissociation occurs when a partner

ceases to be associated in carrying

on of the business.

A partner has the power to

dissociate at any time, but may not

always have the right to dissociate.

A partner who wrongfully

dissociates is liable to the

partnership for damages. If the

wrongful dissociation results in

dissolution of the partnership, the

wrongfully dissociating partner

may not participate in winding up

the business.

Wrongful Dissociations

A partner’s dissociation is wrongful

if it breaches the partnership

agreement. In addition,

dissociation is wrongful in a term

within 90 days after another

partner’s dissociation by death,

bankruptcy, or wrongful

dissociation;

is expelled for misconduct by

judicial determination;

becomes a debtor in bankruptcy;

is an entity (other than a trust or

estate) and is expelled or

dissociated because its dissolution

or termination was willful.

Rightful Dissociations

All other dissociations are rightful

including:

in accordance with a power

to expel conferred by the

partnership agreement.

Dissolution by Operation of

Law — A partnership is

dissolved by operation of law

upon:

(1) the death of a partner,

(2) the bankruptcy of a partner

or of the partnership, or

of law).

Dissolution by Court Order

— After application by or for a

partner, a court will order a

dissolution if it 1nds that

(1) a partner is mentally

incompetent or otherwise

lacks capacity to function

as a partner,

(2) a partner is guilty of

conduct prejudicial to the

business, has willfully or

persistently breached the

(3) the business can be

carried on only at a loss,

(4) other circumstances

render a dissolution

equitable.

Effects of Dissolution

Dissolution does not terminate

the partnership; it continues

until the winding up is

partnership agreement as causing

dissociation, and

in any partnership a court

determines that a partner has

become incapable of performing

the partner’s duties under the

partnership agreement.

effect of Dissociation

Upon a partner’s dissociation the

partner’s right to participate in the

management and conduct of the

The duty not to compete

terminates upon dissociation. The

partner’s other 1duciary duties and

duty of care continue only with

regard to matters arising and

events occurring before the

partner’s dissociation, unless the

partner participates in winding up

the partnership’s business.

DISSOLUTION

Only a limited subset of

dissociations requires the

Causes of Dissolution

Dissolution by Act of the

Partners —In a partnership at will,

a partner’s giving notice of intent

to withdraw will cause dissolution.

(Death or bankruptcy of a partner

does not dissolve a partnership at

will.)

A term partnership will be

dissolved when:

partners to act for the

partnership.

Authority — Dissolution

terminates a partner’s actual

authority to conduct business

on behalf of the partnership

except to complete the

winding up process.

Apparent authority

continues as to third parties

Constructive notice will be

effective as to third parties

who were aware of the

partnership’s existence but did

not extend credit to it before

its dissolution.

Existing Liability — Upon

dissolution individual partner

liability is not discharged, but

liability on some executory

contracts may be discharged.

WINDING UP

Winding up, also known as

liquidation, involves

completing un1nished

business, collecting debts,

The Right to Wind Up

When dissolution occurs, any

partner has the right to insist

on the winding up of the

partnership unless the

partnership agreement

provides otherwise. The only

partner who cannot insist on a

winding up is one who has

wrongfully dissolved the

partnership or who has been

rightfully expelled from the

partnership. All nonbankrupt

to dissolve.

A partner’s dissociation caused by

death or incapacity, bankruptcy or

similar financial impairment, or

wrongful dissociation will bring on

a dissolution if within 90 days after

dissociation at least half of the

remaining partners express their

will to wind up the partnership

business.

in dissolution.

Dissolution by Operation of

Law —A partnership is dissolved

by operation of law if an event

occurs that makes it unlawful to

continue all or substantially all of

the partnership’s business.

Dissolution by Court Order —

A court may order dissolution on

grounds of a partner’s misconduct

or upon a finding that (1) the

economic purpose of the

partnership is likely to be

unreasonably frustrated; (2) a

partner has engaged in conduct

that makes it not reasonably

practicable to carry on the

On application of a transferee of

a partner’s transferable interest or

a purchaser at foreclosure of a

charging order, a court may order

dissolution if it determines it is

equitable to wind up partnership

business (1) at any time in a

partnership at will or (2) after the

term of a term partnership has

expired.

Effects of Dissolution

A partnership continues after

dissolution only for the purpose of

Distribution of Assets

After all the partnership assets

have been collected and

reduced to cash, they are

distributed to creditors and

partners in the following order,

per the UPA:

(1) amounts owing to

creditors other than

partners,

(4) amounts owing to

partners for profit.

Solvent Partnership — The

UPA provides that, absent an

agreement, each partner

shares equally in profit and

surplus after all liabilities (#1,

2 and 3) are satistied. Each

must contribute, according to

his share in pro1ts, toward

losses of the partnership. Thus,

the proportion in which the

partners bear losses depends

not on their capital

Insolvent Partnership/

Contribution of Partner — If

the partnership is insolvent,

the partners individually must

contribute their respective

share of the losses in order to

pay the creditors.

rightfully dissociating partners,

waive the right to have the

business wound up. In that event

the partnership resumes carrying

on its business as if dissolution had

not occurred.

Authority — Upon dissolution, the

actual authority of a partner to act

for the partnership terminates,

except so far as is appropriate to

wind up partnership business.

Liability — Partners are liable for

their share of partnership liabilities

incurred after dissolution. A

partner, who, with knowledge of

the dissolution nevertheless incurs

a liability that is not appropriate for

winding up the partnership

business, is liable to the

partnership for any damage

caused.

Winding Up

Whenever a dissolved partnership

is not to be continued, the

partnership must be liquidated.

The process, called winding up,

partners.

Participation in Winding Up — A

partner who has not wrongfully

dissociated may participate in

winding up. The court may order

judicial supervision of the winding

Marshaling of Assets

Applies only when partnership

assets and the individual

assets of the partners are

being administered by a court

of equity. This doctrine refers

to a segregation of partnership

assets from individual partner

assets. Partnership creditors

have first right to the

partnership assets while

creditors, and then c)

contributions to partners.

If the partnership is a debtor

under the Bankruptcy Code

and partnership assets are

inadequate to pay all claims,

the appointed trustee will first

seek recovery from

nonbankrupt general partners.

up if good cause is shown.

Distribution of Assets — After

partnership assets have been

reduced to cash, they are

distributed to creditors and the

partners.

The partnership must apply its

assets first to discharge the

obligations of partners who are

creditors on parity with other

creditors. Second, any surplus

Each partner is entitled to a

settlement of all partnership

accounts upon winding up. (See

text for details.)

Marshaling of Assets

The Revised Act abolishes the

marshaling of assets doctrine—

which segregates and considers