Business Law Chapter 31 Homework The Parties Stipulated Facts Regarding The Cash

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CASE 31-3

HORIZON/CMS HEALTHCARE CORPORATION v.

SOUTHERN OAKS HEALTH CARE, INC.

Court of Appeal of Florida, Fifth District, 1999

732 So.2d 1156, petition for review denied, 744 So.2d 454

http://scholar.google.com/scholar_case?case=12151982165035491195&q=732+So.

+2d+1156&hl=en&as_sdt=2,34

Goshorn, J.

[Horizon is a large, publicly traded provider of both nursing homes and management for

nursing homes. It wanted to expand into Osceola County, Florida, in 1993. Southern Oaks

was already operating in Osceola County; it owned the Southern Oaks Health Care Center

and had a Certificate of Need issued by the Florida Agency for Health Care Administration

for a new one-hundred-and-twenty-bed facility in Kissimmee, Florida. Horizon and

Southern Oaks decided to form a partnership to own the proposed Kissimmee facility, which

was ultimately named Royal Oaks, and agreed that Horizon would manage both the

Southern Oaks facility and the new Royal Oaks facility. To that end, Southern Oaks and

Horizon entered into several twenty-year partnership and management contracts in 1993.

In 1996, Southern Oaks filed suit alleging that Horizon breached its obligations

* * *

* * * First, the trial court’s finding that the parties are incapable of continuing to operate

in business together is a finding of “irreconcilable differences,” a permissible reason for

dissolving the partnerships under the express terms of the partnership agreements. Thus,

dissolution was not “wrongful,” assuming there can be “wrongful” dissolutions, and

Southern Oaks was not entitled to damages for lost future profits. Additionally, the

partnership contracts also permit dissolution by “judicial decree.” Although neither party

Second, even assuming the partnership was dissolved for a reason not provided for in the

partnership agreements, damages were properly denied. Under RUPA, it is clear that

wrongful dissociation triggers liability for lost future profits. See §602(3) (“A partner who

wrongfully dissociates is liable to the partnership and to the other partners for damages

caused by the dissociation. The liability is in addition to any other obligation of the partner

to the partnership or to the other partners.”). However, RUPA does not contain a similar

provision for dissolution; RUPA does not refer to the dissolutions as rightful or wrongful.

A partnership is dissolved, and its business must be wound up, only upon the occurrence

of any of the following events:

* * *

(5) On application by a partner, a judicial determination that:

(a) The economic purpose of the partnership is likely to be unreasonably frustrated;

(b) Another partner has engaged in conduct relating to the partnership business which

makes it not reasonably practicable to carry on the business in partnership with such

partner; or

conformity with the partnership agreement. * * *

Paragraph (5)(c) provides the basis for the trial court’s dissolution in this case. While

“reasonably practicable” is not defined in RUPA, the term is broad enough to encompass the

inability of partners to continue working together, which is what the court found.

NOTE: This section of the instructor’s manual continues the 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

CONTINUATION AFTER

DISSOLUTION

After dissolution, a partnership is

either liquidated or the

remaining partners continue the

partnership. Liquidation

sacrifices the value of a going

Right to Continue Partnership

After dissolution, the remaining

partners have the right to

continue the partnership when:

(1) the partnership has been

partners may.)

(2) a partner has been expelled

in accordance with

partnership agreement,

(Expelled partner may not

force liquidation.) or

(3) all the partners agree to

continue the business.

Rights of Creditors

Continuing a partnership after

DISSOCIATION NOT

CAUSING DISSOLUTION

Non-dissolving Dissociations

With three exceptions, the

partners may by agreement

modify or eliminate any of the

grounds for dissolution. The three

partner, and a court ordered

dissolution on application of a

transferee of a partner’s interest.

Partnership at Will — a

partner’s death, bankruptcy, or

incapacity, the expulsion of a

Term Partnership — if within 90

days after any of following

causes of dissolution occurs,

fewer than half of the remaining

partners express their will to

wind up the partnership

business, then the partnership

will not dissolve: a partner’s

dissociation by death, bankruptcy

or incapacity, the distribution by

dissolution creates a new

partnership. Creditors of the old

partnership personally liable.

Even if the remaining members of

the continuing business agree to

assume and pay all of the firm’s

debts, a withdrawing partner is

still liable to creditors whose

claims arose prior to the

dissolution — but she has a right

of indemnity against her former

partners if she has to pay due to

their failure to pay debts as

agreed.

A retiring partner may be

an old one, same terms but new

parties.) A creditor must agree to

the novation, or his consent may

also be inferred from his course of

dealing with the partnership after

dissolution.

A withdrawing partner may

protect herself against liability on

contracts that the firm enters into

had extended credit to the

partnership prior to its dissolution.

Constructive notice will su0ce

for those who knew of the

partnership but who had not

extended credit to it before its

dissolution.

a trust-partner of its entire

partnership interest, the

Continuation After Dissociation

The remaining partners have the

right to continue the partnership

with a mandatory buyout of the

dissociating partner. The

creditors of the partnership have

claims against the continued

partnership.

Dissociated Partner’s Power to

Bind the Partnership

A dissociated partner’s actual

authority to act for the

partnership terminates; apparent

Dissociated Partner’s Liability to

Third Persons

A partner’s dissociation does not

of itself discharge the partner’s

liability for a partnership

obligation incurred before

dissociation. A dissociated

partner is liable for a partnership

obligation incurred within two

CASE 31-4

WARNICK v. WARNICK

Supreme Court of Wyoming, 2003

2003 Wy 113, 76 P.3d 316

http://scholar.google.com/scholar_case?case=15255465738264221669&q=76+P.3d+316+&hl=en&as_sdt=2,34

Golden, J.

In August 1978, Wilbur and Dee Warnick and their son Randall Warnick contracted to

purchase a ranch in Sheridan County for an agreed price of $335,000, with $90,000 down

plus $245,000 in installments over ten years at 8% interest. In April 1979, they formed

Warnick Ranches general partnership to operate the ranch and complete the installment

purchase agreement. The partnership agreement recited that the initial capital contributions

of the partners totaled $60,000, paid 36% by Wilbur, 30% by Dee, and 34% by Randall.

The partners over the years each contributed additional funds to the operation of the

ranch and received cash distributions from the partnership. After 1983, Randall contributed

very little new money and almost all of the additional funds to pay off the mortgage came

from Wilbur and Dee Warnick. Wilbur also left in the partnership account two $12,000 cash

distributions that were otherwise payable to him. The net cash contributions of the partners

through 1999, considering the initial contributions, payments to or on behalf of the

partnership, draws not taken and distributions from the partnership were:

Wilbur $170,112.60 (51%)

Dee 138,834.63 (41%)

Randall 25,406.28 (8%)

In 1998, Randall Warnick began having discussions with his brother about the possibility

of selling his interest in Warnick Ranches. When Randall mentioned this to his father, a

dispute arose between them concerning the percentage of the partnership that Randall

owned. Finally, on April 14, 1999, Randall’s attorney sent a letter to Warnick Ranches which

stated:

I have been asked to contact you regarding [Randall’s] desire to either sell his interest in

the ranch to a third party, to the partnership, or to liquidate the partnership under

On August 11, 1999, Warnick Ranches responded in writing, treating the letter from

Randall’s attorney as the expressed will of a partner to dissociate. The partnership’s response

included a tender offer for Randall’s share, as provided under [RUPA] §701(e) and (g) in the

* * * The parties stipulated to facts regarding the cash flows into and out of the

partnership accounts, as well as the partnership tax returns for each year from 1979 through

1999. * * *

The district court, in granting Randall Warnick’s motion for summary judgment, found

that dissociation of Randall as a partner was the appropriate remedy and that the schedule of

ownership recited in the partnership agreement, absent evidence of any other written

* * *

Resolution of this matter relies almost entirely on application of the Wyoming Revised

Uniform Partnership Act (“RUPA”), [citation]. * * * RUPA states in pertinent part:

[A] partnership agreement governs relations among the partners and between the

partners and the partnership. To the extent the partnership agreement does not otherwise

provide, this chapter governs relations among the partners and between the partners and

the partnership.

During the existence of the partnership, each partner has authority to act on behalf of the

partnership, [RUPA] §§301, 401(f), and “all partners are liable jointly and severally for all

obligations of the partnership unless otherwise agreed by the claimant or provided by law.”

[RUPA] §306(a). “A partner may lend money to and transact other business with the

partnership,” [RUPA] §404(f), and “[a] partnership shall repay a partner who, in aid of the

partnership, makes a payment or advance beyond the amount of capital the partner agreed to

* * *

9. ACCOUNTING. On December 31 of each year, the accounts of the Partnership

business will be closed for the year. As of that date, the Partnership income and expenses

will be totaled and the difference shall be divided among the Partners on any basis which

is mutually agreed upon by all Partners, giving due consideration to services rendered

during the year by each Partner, drawings during the year by each Partner and the

amount of capital invested by each Partner during such year.

The partnership agreement is entirely silent as to how cash advances or payments on

behalf of the business are to be treated. The partners knew that additional cash would be

It is, however, undisputed that the partners never entered into a unanimous agreement to

amend their partnership agreement or to reflect additional capital contributions. It is also

undisputed that the advances by the partners were not anywhere documented as a loan to the

partnership rather than capital contributions. The district court found these facts dispositive

in granting Randall Warnick’s summary judgment motion. The court specifically found that

there was no documentation to support a conclusion that the payments by the elder Warnicks

were a loan, so they could not be treated as a loan.

The district court’s decision, however, misapplies the clear provisions of the Revised

Uniform Partnership Act. RUPA operates automatically if a partnership agreement does not

The district court’s calculations in this case treat the mortgage payments as neither

capital contributions nor advances, but as something else not contemplated by RUPA. The

partnership agreement at paragraph ten and RUPA at [RUPA] §401(k) are consistent in

requiring that the partners must unanimously consent to any amendments of the partnership

agreement. Advances are not addressed in the agreement, so we must turn to RUPA’s default

provisions in that regard. [Citation.] Nothing in RUPA requires advances to the partnership

or payment of partnership debts by partners to be memorialized in writing as a loan. In fact,

the act addresses payments and advances in several places without requiring a writing or

unanimous partner approval:

•[RUPA] §401(c) requires the partnership to reimburse a partner for payments made by

the partner in the ordinary and proper conduct of the business of the partnership or for

Read [together], these provisions of the act evidence a presumption that additional

amounts paid by a partner, over and above the capital contributions recited in the partnership

agreement or agreed to, are presumed to be loans to the partnership, with interest payable

from the date of the advance. RUPA is unequivocal on this point. The drafters’ comment to

§401(d) states: “Subsection (d) is based on UPA Section 18(c). It makes explicit that the

partnership must reimburse a partner for an advance of funds beyond the amount of the

partner’s agreed capital contribution, thereby treating the advance as a loan.” [Citation.]

Warnick Ranches partnership was formed “for the purpose of managing and operating a

farming and ranching business” on property that was subject to a mortgage at the time the

partnership was formed. It was entirely foreseeable that additional cash would be needed to

* * *

We turn then to the consequences of this dispute. RUPA, with the goal of avoiding

unnecessary dissolutions of partnerships, contains a significant change from prior

partnership law. Again in the words of the drafters:

RUPA dramatically changes the law governing partnership breakups and dissolution. An

entirely new concept, “dissociation,” is used in lieu of the UPA term “dissolution” to

denote the change in the relationship caused by a partner’s ceasing to be associated in

the carrying on of the business. * * *

Under RUPA, unlike the UPA, the dissociation of a partner does not necessarily

cause a dissolution and winding up of the business of the partnership. Section 801

[Revised] Uniform Partnership Act §601, cmt. 1, [citation]. The Warnick Ranch

Partnership Agreement is again silent as to dissociation, addressing only liquidation. RUPA

states that a partner has the power to dissociate at any time by express will, [RUPA] §602(a),

and that:

(a) A partner is dissociated from a partnership upon:

* * *

Under these circumstances, the record supports the district court’s conclusion that there

was no genuine issue as to the material fact that a dissociation occurred. Considering the

April 1999 letter from Randall’s attorney to the partnership, in the context of deposition

testimony regarding allegations of physical violence and misappropriation of partnership

funds, we determine that the date of the letter is the date of dissociation.

However, the court erred in its calculation of the judgment. RUPA states that a

dissociated partner’s interest in the partnership shall be purchased by the partnership for a

buyout price. [RUPA] §§603(a), 701(a), (b). The buyout price is equal to the amount that

would have been distributable to the dissociating partner under [RUPA] §808(b) if, on the

date of the dissociation, the partnership’s assets had been sold. [RUPA] §701(b). However,

§808(a) provides that partnership assets must first be applied to discharge partnership

Next, there is the matter of two $12,000 draws, or “guaranteed payments,” that Wilbur

Warnick was entitled to in 1998 and 1999, but actually left in the partnership account and

did not receive. The guaranteed payment arrangement was at Randall’s request and agreed

among the partners in order to provide Randall an income and to avoid the partnership

showing a taxable profit. Randall received his draw as agreed in 1998 and 1999 but Wilbur

did not, even though he reported it as personal income and paid taxes on it. At the time he

A partnership agreement governs relations among general partners and between partners

and their partnership. To the extent the agreement is silent or ambiguous, the Revised

Uniform Partnership Act provisions apply. Review of the entire record leads us to conclude

that there is no genuine issue regarding the fact that a partner dissociation occurred, and that