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Partnership Buyout in California: California allows for partnership buyout in lieu of partnership dissolution

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Real estate litigation lawyers in Los Angeles are usually very familiar with partnership disputes and dissolutions. However, not all real estate attorneys are familiar with California’s Corporation Code and its provisions regarding the partnership buyout procedure. This code section provides that in a suit for judicial dissolution of a limited partnership, the other partners may avoid the dissolution of the limited partnership by purchasing for cash the partnership interest owned by the partners initiating the proceeding.

A Partnership Buyout At Fair Market Value

The code section is California Corporations Code section 15908.02 and the buyout procedure is set forth in subdivision (b). As noted above, the other partners may avoid the dissolution by purchasing for cash the partnership interest or interests of those seeking dissolution. This buyout is to be at “fair market value”.

The Purchasing Parties May Initiate The Procedure by Application or Suit

The purchasing parties are defined as the “other partners” who initiate the buyout procedure. Their attorney may either make an “application” in the pending action or commence a separate proceeding in the superior court. Typically, most attorneys would bring a motion in the existing dissolution lawsuit.

The Court Will Stay The Partnership Dissolution And Appoint Appraisers

If the court grants the application, it must “stay the winding up and dissolution proceeding and shall proceed to ascertain and fix the fair market value of the partnership interests owned by the moving parties.” The court shall appoint appraisers to appraise the fair market value of the moving parties’ partnership interests and order the “the time and manner for producing evidence, if evidence is required.” Note that the Code defines “moving party” as the partners who commence the dissolution proceeding (rather than the partners bringing the buyout application). In other words the appraisers are to appraise the fair market value of the partnership interests to be purchased.

The Appraisers Appraised Value Is Final And Conclusive

Subdivision (d) provides that the award of the appraisers or a majority of them, when confirmed by the court, shall be final and conclusive upon all parties.

The question then arises as to what happens when multiple appraisers all reach different values. The Court has the ability to select among the various appraisals or independently determine the value of the parties’ interests.

A 2021 California appellate case construing identical language in Corporations Code section 17707.03 pertaining to limited liability companies held that the “appraisers’ award does not bind the trial court” and the “court may select among the conflicting appraiser opinions or decide the matter de novo. See, Cheng v. Coastal L.B. Associates, LLC (2021) 69 Cal.App.5th 112, 119. A 2016 case held that notwithstanding identical language in Corporations Code section 2000, concerning buyout of corporate shareholder interests, court could “make a de novo determination of the fair value of a party’s shareholder interests. See, Goles v. Sawhney (2106) 5 Cal.App.5th  1014, 1021.

The Purchasing Partners Must Then Pay Or The Partnership Is Dissolved

Ultimately, the court sets a value for the partnership interests to be bought out and sets a date by which the purchase must be consummated. The purchasing partners must then pony up the cash, in which case the moving parties (parties seeking dissolution) shall transfer their partnership interests to the purchasing parties. In the event that the purchasing partners do not make timely payment, the court will enter a decree that shall provide for winding up and dissolution of the limited partnership. If the purchasing partners, after having made the motion and forcing the other partners to go through this process, do not buy the partnership interests, judgment against them shall also include all of the expenses, including attorneys’ fees, incurred by the moving partners.

The Moving Partners May Not Dismiss Their Dissolution After The Court Grants A Buyout Motion

In a recent California case originally heard in the Los Angeles Superior Court, a plaintiff general partner in a family limited partnership sued to dissolve the partnership. His lawsuit alleged causes of action for breach of fiduciary duty, waste, and dissolution of the partnership. Plaintiff sought an order that the partnership be dissolved and its affairs wound up pursuant to Corporations Code section 15908.02(a).

The other partners initiated the statutory procedure to buy out the plaintiff’s interest and the court granted that motion. The court-appointed appraisers submitted their valuations but, before the trial court had determined the buyout value, the plaintiff dismissed his complaint for dissolution without prejudice. The plaintiff believed that the appraisers undervalued the properties in the partnership.

The other partners brought a motion to vacate the dismissal, which the trial court granted. The question on appeal was whether the plaintiff was entitled to dismiss his dissolution action after the court had granted the motion to determine a buyout value and the appraisers had done their work.

The appellate court noted that a plaintiff’s right to dismiss an action is not absolute. Courts have denied a plaintiff the right to dismiss when the dismissal would frustrate a statutory scheme. In a prior case regarding the statutory partnership buyout provision, the court of appeal had held that when a court grants a partnership buyout motion, the buyout procedure “supplants” the action for involuntary dissolution. The Court found that the dissolution action had been stayed and “supplanted”.

“If [plaintiff] is allowed to dismiss his dissolution action and then permitted to file a new action for dissolution, he would effectively nullify the order staying the action and deny [the other partners] the relatively quick and efficient resolution of the issue the buyout procedure was intended to provide.” Could it be that a plaintiff could wait until the appraisals had been conducted and, if unhappy with the conclusions, simply dismiss his action and start again? The court said no, noting that this is patently unfair to the other partners and “an obvious waste of judicial resources.” See, Guttman v. Guttman (2021) 72 Cal.App.5th 396.

The appellate court however explained that although policy concerns weigh heavily in denying plaintiff the right to dismiss, the denial of that right cannot be based solely on policy grounds. It therefore also reasoned that the granting of the buyout motion determined that there would be no trial on the dissolution cause of action and thus effectively disposed of that cause of action.

Partnership Buyout: Lessons For Los Angeles Partnership Litigation Lawyers

Experienced partnership trial attorneys should be well versed in the Corporations Code sections relating to partnerships and the buyout procedure. The procedure provides an efficient way to buy out a disgruntled partner. The procedure does not necessarily prevent all of the related litigation raised by this case—breach of fiduciary duty, waste, etc. However, it does provide an efficient way to resolve most partnership disputes.

The Guttman v. Guttman case does, however, make clear that once the court has ruled on the buyout motion, the dissolution action is ‘supplanted’ and plaintiff may lose the right to change his or her mind and dismiss the action.

 

Los Angeles partnership litigation attorney Laine T. Wagenseller is the founder of Wagenseller Law Firm in downtown Los Angeles. The experienced litigation lawyers at Wagenseller Law Firm handle numerous partnership, LLC and corporate dissolution lawsuits throughout Southern California. For more information, please call us at (213) 805-7445.

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