What Withdrawing Partners Can Expect

If you are a partner in a limited liability partnership, or if you have clients who are, you'll want to read Judge Gale's opinion in Chesson v. Rives, 2013 NCBC 49, decided last week.  It provides guidance on the rights of partners withdrawing from LLPs.

Chesson, one of the Plaintiffs, was a partner in an accounting firm, Rives & Associates, an LLP.  Chesson and two other partners withdrew from the firm, and then sued two of their former partners on a variety of claims, including breach of fiduciary duty, constructive fraud, and "constructive expulsion."

The case is a good reminder that most of the relationship between partners is governed by the Uniform Partnership Act (Chapter 59 of the General Statutes), but can often be modified by a written Partnership Agreement.

Can a partner make claims against his partners after he has withdrawn from the partnership?  Judge Gale said that "[a]lthough Plaintiffs withdrew from the partnership, they retained personal rights for the value of their partnership interest at the time of their withdrawal."  Op. ¶22.  In other words, the withdrawing partners had standing to make their claims.

Didn't the former partners' withdrawal result in a dissolution of the partnership? Ordinarily it would have, because dissolution "occurs automatically by operation of law upon any partner's unequivocal expression of an intent and desire to dissolve the partnership."  Op. ¶29 (quoting Sturm v. Goss, 90 N.C. App. 326, 332, 368 S.E.2d 399, 402-03 (1988)),  In this case, the partnership agreement provided that the non-withdrawing partners could continue the partnership.

Does a partner have to make a demand on the partnership, and have that demand refused,  before suing for an accounting?  Judge Gale said that a demand was not necessary.

Can Partners eliminate the fiduciary duties they owe to one another via a partnership agreement? No, "a partnership agreement cannot eliminate those enumerated fiduciary duties partners owe to one another as a matter of law."  Op. ¶26.  Those "duties include providing full information to the partnership, accounting for the use of partnership property, disclosing self-dealing transactions, and remitting profits obtained through transactions affiliated with the partnership’s business." Id.

Thus, the partners who had withdrawn had not lost claims that the remaining partners had diverted partnership assets to themselves personally and had used partnership assets to form a separate entity.

What is the measure of damages for partners who have withdrawn?  "Absent agreement to the contrary, upon dissolution which was not caused by contravention of the partnership, a partner's right is his pro rata share of the net value of the partnership assets at the time of dissolution."  Op. ¶30.

What about a claim for "constructive expulsion," that the remaining partners had made working conditions so intolerable that they forced a resignation?  North Carolina "does not recognize a claim for wrongful expulsion from a partnership," held Judge Gale.  Op. ¶36.

At least accountants don't commonly have contingent fee engagements.  Those can cause real headaches in valuation, as the Court's opinion last year in Mitchell v. Brewer, 2013 NCBC 14, illustrates.  I wrote about that case last year.

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