Skip to main content

Rescuing a Limited Partnership From Dissolution

September 04, 2014

Posted in Business Litigation, Business Start Ups, Corporate Law, Limited Liability Company Law, Partnership Law

There can be life and death struggles playing out in a courtroom. One of those struggles could involve the fate of a limited partnership. Through a judicial dissolution, the partnership could be broken apart and ended, or a party not filing for dissolution would have the option of buying out the other parties and saving the limited partnership from destruction.

All this revolves around one section of California’s Commercial Code, §15908.02. Its provisions include a way for dissolution or a buy out amongst the partners and it states in part,

(a) On application by a partner, a court…may order dissolution of a limited partnership if it is not reasonably practicable to carry on the activities of the limited partnership in conformity with the partnership agreement.

(b) In any suit for judicial dissolution, the other partners may avoid the dissolution of the limited partnership by purchasing for cash the partnership interests owned by the partners so initiating the proceeding (the “moving parties”) at their fair market value…

(c) If the purchasing parties (1) elect to purchase the partnership interests owned by the moving parties, (2) are unable to agree with the moving parties upon the fair market value of the partnership interests, and (3) give bond with sufficient security to pay the estimated reasonable expenses…(the court) shall stay the winding up and dissolution proceeding and shall proceed to ascertain and fix the fair market value of the partnership interests owned by the moving parties.

(d) The court shall appoint three disinterested appraisers to appraise the fair market value of the partnership interests owned by the moving parties, and shall make an order referring the matter to the appraisers…for…ascertaining that value…

(e) If the purchasing parties desire to prevent the winding up and dissolution of the limited partnership, they shall pay to the moving parties the value of their partnership interests ascertained and decreed within the time specified pursuant to this section…On receiving that payment or the tender thereof, the moving parties shall transfer their partnership interests to the purchasing parties.

Even in the business’ darkest hour, when partners have reached an impasse over what to do with the business and the party (or parties) owning at least a 50% share of the business essentially have gone to the court seeking the death penalty (dissolution) for the limited partnership, there is still hope for a reprieve.

This legal mechanism can salvage a dysfunctional limited partnership, however, as you can see, it requires the non-moving party/parties to come up with enough cash to buy out the other partners. Depending on the circumstances, that may require far more financial creativity than legal creativity to save the business, but there is that possibility.

If you are involved in a limited partnership, or thinking about becoming part of one, call my office so we can talk about all the legal issues involved, including dissolutions, buy outs and partnership agreements so you can fully understand what is involved and how to protect your interests.