You can "wind up" a partnership without having to liquidate all of its assets and terminating its existence. So ruled Judge McGuire last week in Hardin v. Lewis, 2016 NCBC 55. But that may not be true for all partnerships. This case involved a law firm partnership which was continuing to operate its practice after one of its partners left to start her own law firm.
The lawsuit concerned the amount due to the Plaintiff from her former partners for the value of her partnership share (along with a host of other claims on which the Court will rule later). Her withdrawal had constituted a dissolution of the partnership as a matter of law (Op. ¶4). She had also requested the winding up of the partnership.
What Is "Winding Up"?
North Carolina’s Uniform Partnership Act seems to dictate that winding up is the final stage in the existence of a partnership. Section 59-60 of the General Statutes says that: "[o]n dissolution the partnership is not terminated, but continues until the winding up of partnership affairs is completed." N.C.G.S. §59-60.
That is consistent with the definition often given to "winding up":
The last phase in the dissolution of a partnership or corporation, in which accounts are settled and assets are liquidated so that they may be distributed and the business may be terminated.
That a winding up ending in liquidation was not required of their law partnership was particularly good news for the Defendants in Hardin, as they were the remaining partners in the law firm which Plaintiff had left. They had continued to practice law without their departing partner, and filed a Certificate of Amendment with the NC Secretary of State to change the name of the firm to delete Plaintiff’s name.
Judge McGuire found support for his ruling that the old partnership would not have to liquidate as a part of its winding up in decisions from other states, observing that:
a number of courts have concluded that a ‘winding up’ is technically effected when an outgoing partner is compensated for their interest in the dissolving partnership, without any strict requirement that the dissolving partnership be liquidated.
Judge McGuire said that given "the potential disruption to the representation of [the law firm’s] current clients that would result from a liquidation of the Firm’s assets" that an accounting and settling of accounts between the partners as of the date of the dissolution, with the new partnership continuing in business was the appropriate means of a "winding up." Op. ¶19.
Law Firms Should Have Written Partnership Agreements In Place To Avoid Cases Like This
The Business Court has been called upon before to adjudicate breakups of law firms, like in Walters & Zimmerman, PLLC v. Zimmerman and in Mitchell, Brewer, Richards, Adams, Burge & Boughman, PLLC v. Brewer, In the Mitchell case, the Court struggled with the issue of how a withdrawing partner should be compensated for fees generated from a contingent fee engagement after the withdrawal.
in every one of these kind of cases in the Business Court, the partnership (or the PLLC) did not have a written agreement regarding the relationship of its partner/members, which led to significant dispute. If you are a lawyer practicing with one or more other lawyers, put your agreement in writing and avoid having to get a Business Court Judge to resolve your disagreement.
Even though the Defendants in the Hardin case didn’t have to liquidate their firm and shut down their practice, they still have to deal with the annoyance of having a Receiver overseeing their practice while the amount to be paid to the Plaintiff for her partnership interest is determined. And they have to bear the cost of the Receiver.