Partnership Disputes and Lawsuits Among Partners of a New Jersey Partnership
Sometimes a partnership goes bad. When that happens, what do you do?
A partnership in its own name or an individual partner in his or her name, is allowed to bring a lawsuit against another partner(s) for breach of the partnership agreement or for a violation of a legal duty owed to the partnership. New Jersey partnership law permits a partner to bring legal action against the partnership or another partner to enforce rights that exist on behalf of the partnership as an entity or of an individual partner. As a general proposition, an individual partner or the partnership entity may bring legal action to recover economic damages or losses incurred by the partnership.
Understanding a Limited Partnership Under New Jersey Law
Expulsion of Partners from a NJ Partnership
Sometimes the partners of the partnership believe it is necessary to expel a partner. Maybe it’s because the partner has broken or breached the partnership agreement, or undertaken individual action not authorized by the partnership which is highly detrimental to the partnership.
In a NJ partnership, expelling a partner at some point requires the dissolution of the partnership unless the issue of expulsion is addressed in the written partnership agreement signed by the partners. A well written partnership agreement should include the power of expulsion. The agreement can set out the circumstances under which a partner can be expelled, how the decision to expel is to be made (such as by majority vote) and state that the partnership may continue its business without the expelled partner. In addition, the value and payout schedule of the expelled partner’s interest in the partnership should be addressed in the agreement.
Bad Faith Expulsions of Partners in NJ
A NJ court may not allow a partner to be expelled if he or she can show that the co-partners have taken advantage of an expulsion clause in the partnership agreement for unjust purposes or for improper motives, even though justified by the literal wording of the expulsion clause in the partnership agreement. This is known as a “bad faith” Expulsion.
Unlawful Expulsions of Partners in NJ
Paying for an Expelled Partner’s Interest in a NJ Partnership
When a partner leaves the partnership through expulsion and the partnership plans to continue, the outgoing partner must be paid from the other partners for his or her interest in the partnership. The terms of re-payment including the time-frame for payment should be agreed upon in advance, in writing by the partners, otherwise valuation and related issues will result in contentious litigation.
Liabilities for Breach of a NJ Partnership
When a partnership dissolves before the end of the term agreed upon in the partnership contract because of a breach of the partnership agreement by a partner, a co-partner may bring a lawsuit against a defaulting partner for damages caused by his or her breach of contract. Similarly, a lawsuit for damages may be brought by the remaining partners when a partner wrongfully dissociates from the partnership under the Uniform Partnership Act, which NJ has adopted.
Individual Liability for Partnership Debts
Partners are jointly liable for business debts and obligations. However, a judgment entered against a partnership is binding on partnership assets, at least initially, and not on partners individually. The individual assets of partners are not at risk for the contract debts of the partnership unless and until the partnership cannot satisfy the debt from partnership assets or funds. Thus, a partner of a NJ partnership is similar to a guarantor of collection as distinguished from a guarantor of payment.
The concept of guarantor of collection vs. guarantor of payment is a complex legal concept which can involve significant financial liability to a partner of a NJ partnership. You should contact Fredrick P. Niemann, Esq., a NJ partnership law attorney for an explanation of these concepts.
Creditors Rights to a Partner’s Interest in the Partnership
Stated generally, a partner has a right to receive his or her share of partnership profits and/or losses and a right to receive his or her share of partnership distributions equal to his or her ownership interest in the partnership. Under New Jersey law a partner is not a co-owner of partnership property and has no transferable interest or right in partnership property as a member of the partnership.
A judgment creditor of an individual partner has no automatic right to receive the profits, distributions and ownership interest of the individual partner but instead must make an application to a New Jersey court for an order directing that the partner’s share of the profits and/or partnership distribution be made to him or her as a judgment creditor. This legal process is called a “charging order”. A charging order against a partner’s interest in the partnership is designed to satisfy an outstanding judgment of the individual member of the partnership and , is the sole remedy available to the judgment creditor. A judgment creditor of an individual partner is specifically prohibited from: 1) interfering with the management of the partnership; 2) seeking to force a dissolution of the partnership; and 3) requiring a sale of the partner’s transferable interest, if such a transfer or assignment is prohibited under the terms of a written partnership agreement.
Contact me personally today to discuss your partnership matter. I am easy to talk to, very approachable and can offer you practical, legal ways to handle your concerns.
Minority Ownership Members and Their Rights
New Jersey has limited case law interpreting the Uniform Partnership Act and the protection of partners who own a minority interest in a NJ partnership. Unfortunately, the law is undeveloped when it comes to minority partnership rights under a NJ partnership agreement. The law is complicated and very fact sensitive on the causes of action that can be brought by an oppressed minority partner. For more information about minority interest partners go to the next page of this site entitled “Minority Partner Protection” or CLICK HERE.
If you believe you have had your minority partnership interest rights violated in a NJ partnership, contact Fredrick P. Niemann.
Partnership Liability for Tortious Acts of its Partners
When a partnership is formed, a contract is formed between the partners individually. Each partner acts in his or her own behalf and as an agent for his or her co-partners. A legal principle known as “mutual benefit” has been made part of New Jersey partnership law and forms the basic foundation for partnership responsibility and liability. Partners are jointly and severally liable for a partner’s wrongful acts or a partner’s breach of trust. A partnership, and every member of the partnership, is liable for the tortious actions committed by one of the partners acting within the scope of the partnership’s business. This is true even if the other partners did not participate in, approve of or even know about the tortuous act because partner liability is considered one of the risks of doing business assumed by the partnership enterprise to compensate an injured third party.
Dissolution of a New Jersey Partnership
A decision to dissolve a partnership should not be made impulsively. With dissolution comes the potential for further problems and partner liability. Under the New Jersey Partnership Act dissolution is disfavored. Only under limited circumstances will dissolution be permitted or ordered by a judge. However, dissolution is permitted and will not be reversed by a judge if the reasons for the dissolution are clearly described and approved in a written partnership agreement.
When dissolution occurs, the law permits an authorized partner to file a statement of dissolution. This statement provides notice to the world that the partnership has been dissolved and that the partnership is in the process of winding up and ending its business affairs. Third parties including creditors are deemed to have notice of a partnership dissolution (whether they in fact do or do not have actual notice of the dissolution) 90 days after a Statement of Dissolution is filed with the Secretary of State. In addition, upon filing the statement of dissolution the authority of a partner to act on behalf of the partnership is limited to (only) those actions which are necessary and reasonably appropriate to winding-up the partnership. After a statement of dissolution is filed, a partnership may file a new statement of partnership which essentially is the creation filing of a new partnership agreement that will operate independently of the old partnership under the terms of agreement among the new partners.
Confronting issues of partnership dissolution?
Contact me personally today to discuss your partnership matter. I am easy to talk to, very approachable and can offer you practical, legal ways to handle your concerns. You can reach me toll free at (855) 376-5291 or e-mail me at email@example.com.
Written by Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a New Jersey Partnership Attorney