NJ partnership law uses the term dissociation to describe a partner’s voluntary (or involuntary) decision to withdraw from a partnership. Dissociations are divided into 1) “rightful disassociations” or 2) “wrongful dissociations”.
A Wrongful dissociation includes those in which: 1) a partner breaches an express provision of the partnership agreement; 2) a partner within the partnership becomes a debtor in bankruptcy, or 3) is expelled from the partnership by a judgment of a New Jersey Court.
A Wrongful Disassociation Means You’re Getting a Partnership Divorce
The consequences of a wrongful dissociation under New Jersey law include 1) potential personal liability to the partnership entity and to the individual partners for the economic losses and damages caused by the wrongful dissociation; 2) forfeiture of the right to participate in the meetings to wind up the partnership; 3) forfeiture of the right to participate in on-going partnership decisions; and 4) forfeiture of the right to vote in favor of or against the dissolution and termination of the partnership. In addition, a partner who wrongfully dissociates from the partnership prior to the expiration date set forth in the partnership agreement is not entitled to immediate payment of their buyout price until the partnership or individual partners are able or willing to make payments if to do so will cause undue economic hardship to the partnership.
As is the case with the admission of a new partner(s), the rights of a voluntary disassociation by a partner from the partnership are limited. A disassociation does not in and of itself, release the dissociating partner from previously incurred debts and obligations of the partnership. If a dissociated partner is being brought out by the other partners, he or she can be indemnified by the partnership for all existing partnership liabilities, but this indemnification will not be binding upon creditors absent their consent. A disassociating partner is, however, released from further personal liability, for future partnership obligations, absent his or her consent to assume future obligations. A partner may also be discharged from existing liability, by an agreement between the partner, the partnership creditor(s), and the partner(s) continuing in the business.
Under New Jersey law, if a partner wants out (whether voluntary or not) the partnership does not automatically dissolve. Instead, the partnership and its member(s) have the first option to buy out the withdrawing partner at the fair value of his or her partnership interest. In the event that the partnership chooses not to offer a buyout of the partner’s interest or the parties cannot agree on a buyout price, the withdrawing partner must then bring legal action before the Superior Court requesting a court to establish a buyout price or dissolve the partnership. This legal action must be filed within 120 days after the partnership has made an offer of payment, or within one year of the partner’s written demand for payment which is not accepted by the partnership or no action is taken by the partnership on the offer.
Dissolution of a Partnership
A lawful dissolution does not automatically terminate the partnership. The partnership continues until the affairs of the partnership are finished, the partnership property is liquidated, all creditors/obligations are satisfied, and all remaining assets are distributed among the partners. Legally, in NJ a partnership dissolution terminates the authority of each partner to act on behalf of his/her co-partners, except as it is necessary to wind up partnership affairs or to complete the transactions of the partnership.
In a partnership dissolution, the distribution of partnership assets (unless otherwise provided for in the original partnership agreement) must first be made to creditors in the order of their priority, then to partners for loan(s) advanced for capital contributions and, finally, profits, if any to the individual partners.
If the assets are insufficient to satisfy creditors, the partners must personally contribute their proportionate share to satisfy creditor claims or they remain jointly and severally liable to pay the unpaid debts of the partnership.
Only when all of the debts of the partnership have been satisfied can the business of the NJ partnership be deemed legally terminated.
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Written by Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a New Jersey Partnership Attorney