Dissolving a Partnership for Frustration of Purpose

Under Virginia law, a partner can apply for dissolution of a partnership under Virginia Code § 50-73.117(5) upon grounds that: (a) The economic purpose of the partnership is likely to be unreasonably frustrated; (b) Another partner has engaged in conduct relating to the partnership business which makes it not reasonably practicable to carry on the business in partnership with that partner; or (c) It is not otherwise reasonably practicable to carry on the partnership business in conformity with the partnership agreement. The Virginia Supreme Court recently had the opportunity to consider for the first time dissolution under the first and third prongs and found dissolution to be proper on the facts before it.

In 1978, Charles Russell set up trusts for the benefit of his daughter, Nina, and her two children, Robert and Isham. Nina and her brother, Eddie, were named co-trustees of the trusts. Charles also created Russell Realty Associates, a partnership, to invest in various properties, including real estate, with Charles, Eddie (individually) and Eddie and Nina as co-trustees holding the partnership interests. The partnership agreement provided that all partners would manage the business but, “in the event of any disagreement between them the decision of Edward Russell shall be controlling.” The agreement further gave Eddie authority, “by his sole act, to borrow, execute, and deliver instrument[s], including any deed or lease, on behalf of the partnership.” Under the agreement, partners did not have the right to withdraw from the partnership but partners could be added if all partners agreed.

After several years, Eddie was running the company and held half the partnership interests individually and the other half, with dissolve.jpgNina, as co-trustee for Nina and her two sons. Though Eddie had authority to act for the partnership, he tried to resolve the many disagreements he and Nina had, some of which cost the partnership. At his death, Charles left more properties to Eddie and Nina as tenants in common. The siblings had to hire lawyers to resolve their disagreements over those properties and a mediator remained involved long term.

In 2003, the siblings began discussions on distribution, whether Rob would become a partner, and whether the partnership should become a limited liability company (LLC). Again, they retained counsel. Eddie tried to negotiate resolutions but Nina was unresponsive and delayed decisions. In response, Eddie refused to agree to add Rob as a partner. Nina then insisted on being included in all aspects of the business’ management, interfered in business actions and accused Eddie of breaching his fiduciary duty because he didn’t convert the partnership to a LLC.

When Nina and Rob’s efforts thwarted lucrative land deals, Eddie filed suit to dissolve the partnership, claiming they had frustrated the partnership’s economic purpose and rendered the partnership’s management not “reasonably practicable.” Nina filed an intervenor complaint alleging Eddie had breached his fiduciary obligations, seeking equitable accountings and declaratory relief on her sons’ rights to distributions, and attempting to have Eddie removed as co-trustee. The Chesapeake Circuit Court granted dissolution of the partnership and rejected Nina’s claims. Nina appealed.

The Virginia Supreme Court applied the strict standard for judicial dissolution it had applied to a LLC in an earlier case which required deferring to the partnership agreement and only permitting dissolution where the circumstances fit specific statutory conditions. The Court rejected Nina’s argument that comments to the Revised Uniform Partnership Act (RUPA) required a showing of poor financial performance for the ‘economic purpose’ test, the first prong, to apply. Neither § 50-73.117(5) nor the RUPA requires financial failure to meet the ‘economic purpose’ prong for dissolution. Moreover, the partners’ expectations were not limited to economic success. The partners also expected to be able to conduct the business efficiently and productively to maximize returns. Instead, the constant disagreements, delays, working at cross purposes and acrimony cost the partnership in unnecessary higher costs and lost lucrative deals. Finding sufficient evidence in the record to support the lower court’s ruling, the Court affirmed the ruling, paving the way for the dissolution.

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