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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?
q=658+A.2d+1257&hl=en&as_sdt=2,34&case=6472930221798179666&scilh=0
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,
II
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).
* * *
IV
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
* * *
V
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. * * *
VI
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;
or
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
