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 is a legal entity recognized under NJ law much like a corporation. As such, a partner in his/her individual name or in the name of the partnership 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 on its own may bring legal action to recover damages both economic or otherwise incurred by the partnership.
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 NJ, expelling a partner (at some point) requires the dissolution of the partnership unless the issue of expulsion is addressed in a written partnership agreement signed by the partners. A well-written partnership agreement generally includes the power of the partners to expel a partner or partners. The agreement can/should specify the circumstances under which a partner can be expelled, how the decision to expel is to be made (such as by majority vote), discuss what if any payments will be made to the expelled partner, and provide 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 prohibit a partner from being expelled if he or she can show that the co-partners have taken advantage of an expulsion clause in the partnership agreement for an unjust purpose 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 (in the absence of a material breach of the partnership agreement) must be paid by the other partners for the value of his or her interest in the partnership. The terms of payment including the timeframe for payment can be agreed upon in advance, in writing under a partnership agreement, otherwise the valuation and related issues of the partnership will result in contentious litigation.
Liabilities for Breach of a NJ Partnership
When a partnership dissolves prior to the term specified in the partnership agreement because of a breach of the partnership by a partner, a co-partner may bring a lawsuit against the breaching partner for damages caused by his or her breach. Similarly, a lawsuit for damages may be brought by the remaining partners against a partner who wrongfully dissociates from the partnership under the Uniform Partnership Act, which NJ has adopted.
Individual Liability for Partnership Debts
Partners are individually and jointly liable for the business debts and obligations of the partnership but a judgment entered against the partnership entity is binding on the assets of the partnership, at least initially, and not on the partners individually. The individual assets of partners are not at risk for the contract debt(s) 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 much like 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. of Hanlon Niemann & Wright, a NJ partnership law firm 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 individually or corporately 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 against 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.
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. It’s an underdeveloped area of the law when it comes to minority partnership rights under a partnership agreement. The law that is available on this subject is complicated and very fact sensitive. 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 rights in a partnership violated, contact Fredrick P. Niemann. He can be reached at toll free at (855) 376-5291 or by e-mail at fniemann@hnlawfirm.com.
Partnership Liability for the Tortious Acts of its Partners
When a partnership is formed, a contract is also 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 become part of New Jersey partnership law and forms the basic foundation for partner to partner responsibility and liability. Partners are jointly and severally liable for a partner’s wrongful acts and sometimes as between themselves for a breach of trust. A partnership, and every member of the partnership, is liable for the tortious actions committed by one of the partners to third parties if done 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 a 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 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 a new partnership agreement independent of the old partnership agreement.
Acting as Local Counsel in Business Litigation Cases
We act as local counsel to New Jersey lawyers who do not practice business litigation and to out of state lawyers and to that find themselves litigating in New Jersey. In addition to practicing before all twenty-one (21) County Superior Courts, we also practice in all of the New Jersey federal courts. Our experience and familiarity with local practices and procedures can be indispensable to firms and their clients less familiar with the nuances of NJ practice. We also understand and respect the primary attorney-client relationship and carefully define our role as local counsel to align with the needs of clients and their attorneys. Yet we stand ready to handle the full scope of services needed by client disputes and litigated matters. We provide this representation with our commitment to value, efficiency, and effectiveness.
Out-Of-State Attorneys
We typically assist out-of-state attorneys in a variety of ways, including:
- Prepare and file motions including pro hac vice
- Advise on strategy and local rules.
- Handle personal service and next day filings.
- Ensuring compliance with time periods for filing discovery.
- Providing out-of-state attorneys with background intelligence on local judges and arbitrators.
- Serving subpoenas for documents and testimony.
- Filing and arguing motions to compel compliance with subpoenas.
- Domesticating subpoenas and foreign judgments.
- Enforcing judgments against New Jersey based judgment debtors.
Fredrick P. Niemann Esq.
Are you considering a partnership dissolution?
If so, contact me personally today to discuss your partnership dissolution. I am easy to talk to, very approachable and can offer you practical, legal ways to handle your matter. You can reach me toll free at (855) 376-5291 or e-mail me at fniemann@hnlawfirm.com.
Written by Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a New Jersey Partnership Attorney