AN OVERVIEW OF NJ PARTNERSHIP LAW

WHAT IS A NJ PARTNERSHIP: 

A partnership is simply a contractual relationship between two or more persons to conduct a business or other lawful activity, as co-owners or co-partners. It is a voluntary association which cannot be forced on anyone without his or her consent.

The organization and operation of a partnership is governed by the New Jersey Uniform Partnership Act.

A NJ partnership can exist even in the absence of a written partnership agreement.  You may ask how that can be.  Here’s an example.  When a person or persons act together in such a way that another person(s) reasonably believes that he or she is the partner of another and that person’s belief and reliance is reasonable, a partnership by estoppel can exist. Of course, there must be proof by way of evidence to find a partnership by estoppel, but if such a partnership is found to exist, efforts to deny this obligation may not be successful and if a lawsuit is brought for damages, financial responsibility may exist.

Individual Partner Liability for NJ Partnership Obligation(s)

A partnership and its partners are individually liable for any contract, obligation, liability and commitment made by a partnership.

The Acts of Partners Which May Bind the NJ Partnership and Its Partners

A partner cannot obligate a partnership to something that he or she is not authorized to undertake for the partnership absent some form of consent by the other partners. On the other hand, a creditor who is unaware of the existence of a partnership when extending credit to the partnership may recover from the partnership and even as against an individual partner.

Partners in NJ are each individually liable for the obligations of the partnership if partnership assets are not sufficient to satisfy these claims. The personal assets of the partner may also be attached by making him/her a defendant in a lawsuit against the partnership. To the extent that an individual partner is required to pay more than his or her proportionate share of the partnership obligations, he/she is entitled to proceed against his or her co-partners for the excess paid.  But beware, a partner with “deep pockets” may be forced to pay 100% of a partnership debt if the creditor proceeds exclusively against him or her because of their “deep pockets”.  A partner in this vicious situation must then proceed against their co-partners for contribution and hope each co-partner has the deep pockets to pay back.  This concept is very important to understand and recognize as a member of a NJ partnership. 

A newly admitted partner to a NJ partnership is liable to the extent of his/her ownership interest only in the partnership for all obligations existing prior to his admission. However, personal liability for partnership debt liabilities and judgments attaches only to those partnership debts incurred after his/her admission.  This is an important concept for individuals contemplating the purchase into a NJ partnership.

Unless the partnership agreement provides to the contrary, each partner in a NJ partnership has equal responsibility and say as to the operation of partnership business.  They have equal rights in management, access and inspection of the books and records, and to a formal accounting of the partnership’s affairs.  They have an equal right to the use, possession and benefits of partnership property if used for partnership purposes only.  Their interest and share in partnership property is not assignable, or subject to attachment or execution for individual debts of the partner, to satisfy his/her personal obligations.

A judgment creditor of an individual partner may obtain a “charging order” against the partner under NJ law.  A charging order in NJ allows a creditor to charge the interest of the debtor partner equal to the total dollar amount of the partner’s unsatisfied debt from partnership funds or assets to be distributed to him or her.

A Legal dissolution does not automatically terminate the partnership.  The partnership continues until the affairs of the partnership are finished up, partnership property is liquidated, all creditors and obligations are satisfied, and all remaining assets are distributed among the partners.  Legally, a NJ partnership dissolution terminates the authority of each partner to act for his co-partners, except as it is necessary to wind up partnership affairs or to complete the transactions of the partnership.

In a NJ 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 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.

Expulsion of Partners from a NJ Partnership

Sometimes the partners of the partnership believe it is necessary to expel a partner. Maybe its 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 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.

You should consult with an experienced NJ expulsion of partner attorney as part of your due diligence partnership planning.  Contact Fredrick P. Niemann, Esq. at (855) 376-5291 or email him at fniemann@hnlawfirm.com for a low cost consultation.  You’ll find Mr. Niemann easy to talk to and very approachable.

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 their 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 should be agreed upon in advance, in writing by the partners, otherwise valuation 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.

LIABILITY FOR A NJ PARTNERSHIP'S 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.  He can be reached at fniemann@hnlawfirm.com or by calling him toll-free at (855) 376-5291.

RIGHTS OF MINORITY PARTNERS IN

A NEW JERSEY PARTNERSHIP

New Jersey has adopted statutes and case law has interpreted those statutes to protect oppressed minority partners just like those protections offered for oppressed minority interest shareholders in a NJ Corporation and minority interest members of a NJ LLC.  The law is complicated and very fact sensitive on the causes of action that can be brought by an oppressed minority partner in a NJ partnership. 

If you believe you have had your minority interest rights violated in a NJ partnership, contact Fredrick P. Niemann at (855) 376-5291  or email him at fniemann@hnlawfirm.com.

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.

Contact Fredrick P. Niemann, Esq., an experienced breach of partnership agreement attorney toll-free at (855) 376-5291 or email him at  fniemann@hnlawfirm.com to schedule a consultation about your particular needs.  He welcomes your calls and inquiries and you’ll find him very approachable and easy to talk to.

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