09 Dec Am I in a Partnership? If so, How Do I Get Out? Litigation Q&A Part III

In our last blog, Edwards Law addressed common questions that clients often have concerning claims for fraud.  This week we explore the world of partnership law and what you need to know about partnership litigation.

Partnership Law–Common Questions

Q: My friend asked me to help him get his new company off the ground.  I was out of work and needed the experience to put on my resume, so I helped.  I got really good at the marketing piece of the business and my friend paid me some good money.  However, I found a new job that pays more, and now I want to stop helping my friend.  My friend tells me it is too late, and that I can’t take that new job because I am now his “partner”.  Is he right?  Am I stuck?

A: Possibly. Under this fact pattern you might be stuck in a “de facto” partnership, which places duties on you as a partner to act as a fiduciary and to refrain from taking any course of action that could jeopardize the success of the business.  De facto partnerships are easy to form.  It doesn’t have to be formal or intentional, and no express agreement is necessary.  A partnership may be formed simply by the conduct of the parties.  Under Colorado law a partnership is described in one of two ways:

• An association of two or more persons to carry on as co-owners a business for profit (C.R.S. Section 7–60–107(1)); or
• An express or implied contract between two or more persons to place their money, skill, effects, or labor into a business and to share the profits and losses.

Q: I agreed to start a business with my friend. We did not put in writing what each of us was responsible for doing in the business.  My friend is a good talker and he spends a lot of time schmoozing and going to social functions to bring in clients.  I do all of the heavy lifting, behind the scenes, to keep operations going.  I feel like he does all of the easy work and I am doing all of the hard, grunt work.  It’s not fair!  Can I make him do more work in the business?  Can I threaten to leave if he doesn’t do more? 

A: You can ask your partner to do more, but he may not be required to do more under the law. It is not a requirement for a partnership to exist that every partner participate in the day to day management of the partnership business. The management and control of the partnership business may be delegated by agreement, express or implied.  By allowing your partner to get away with doing little or nothing for the business, you may have impliedly consented to him doing less in the partnership.

Q: I am tired of doing all of the work but getting the same pay as my lazy partners. I want out!  How do I do that?     

A: You can dissociate from the partnership or, if all of the partners agree, the partnership can be dissolved. A partnership may only be dissolved by “the express will of any partner when no definite term or particular undertaking is specified”.  Where a particular undertaking is involved, equity will not permit the unilateral withdrawal of one partner to the detriment of the other.

Alternatively, you could disassociate from the partnership.  If you dissociated from a partnership without resulting in a dissolution and winding up of the partnership business, the partnership must cause your interest in the partnership to be purchased for a buyout price determined under the Colorado Partnership Act.

The amount offered to you in the buyout should be an amount equal to the value of your interest in the partnership.  You are also entitled to be paid interest, from the date of dissociation to the date of payment.

Q: The other partners want to engage in activity that I think is unlawful. I want to disassociate from the partnership, but I am afraid that I might be held liable for this improper activity after I leave.  Do I have anything to worry about?

A: Likely not. Once you disassociate from the partnership and the partnership purchases your interest against all partnership obligations, the partnership must  indemnify you for any litigation or dispute that you are brought into due to the actions of the partnership, whether the activity occurred before or after the dissociation.  However, any partnership obligations you incurred would not be indemnified.

Q: My partner does not want to allow me to dissociate from the partnership and does not want to dissolve the partnership. Am I stuck in the partnership?

A: No.  If no agreement for the purchase of your interest is reached within one hundred twenty days after you make a written demand for payment, the partnership shall pay, or cause to be paid, in cash to you the amount the partnership estimates to be the buyout price and accrued interest, reduced by any offsets, accompanied by the following:

• A written statement of partnership assets and liabilities as of the date of dissociation
• The latest available partnership balance sheet and income statement, if any;
• A written explanation of how the estimated amount of the payment was calculated; and
• A written statement that the payment is in full satisfaction of the obligation to purchase.

If your partner, within one hundred twenty days after you make a buyout demand, does not pay you, or pays you the incorrect amount, you may file a lawsuit to have a judge determine the buyout price, any offsets, or other terms of the obligation to purchase.  If no payment is made, you have up to one year to file this lawsuit.  Also, if your partner unfairly and in bad faith withholds payment from you, the court could also award you attorneys’ fees.

Partnership issues and breakups can be messy and complicated, worse than a divorce.  Trying to handle these issues on your own can lead to more legal issues.  Call Edwards Law today for a complimentary initial 20-minute consultation about your partnership issues.