Sellar Hazard Manning Ficenec & Lucia

Buy Out Payment To Departing Partner Not Subject To Forced Sale Discount

James Ficenec — Sun, 14 Aug 2011 00:59:08 +0000

In the absence of a partnership agreement to the contrary, a partner who departs an ongoing partnership is entitled to have the partnership buy out his or her interest. In Rappaport v. Gelfand, the California court of appeal rejected an argument that the value of a partner’s interest should be determined by assuming a one day liquidation sale. Instead, the court ruled that the buy out price should be determined by calculating the value of the partnership assets if those assets were sold by to a knowledgeable and willing seller, with neither being under any compulsion to buy or sell.

In Rappaport, a three person partnership had no agreement regarding a partner’s departure. When one partner left, he was entitled under California law to have the partnership pay him for his interest if the other partners wished to continue the partnership business. California law provides that the price is to be calculated at the greater of liquidation value or the value of the business as a going concern.

The parties’ evidence regarding value of the partnership assets differed considerably. The partnership assumed that the assets would be sold under “fire sale” circumstances at a one day liquidation sale. This approach resulted in a substantial discount to the book value of the assets. The departing partner assumed a sale of assets in an orderly process over time. This approach resulted in a small discount.

The Rappaport court ruled that the term “liquidation value” under applicable California law did not contemplate an immediate forced sale. Accordingly, the court approved the departing partner’s approach that assumed an orderly sale between willing and knowledgeable parties.

As noted above, California law permits partners to avoid these type of disputes by entering into an agreement regarding the partners’ rights and obligations upon the departure of a partner. Partners may agree on both the right of a departing partner to be compensated and the method of calculating the compensation.

A California Partnership Ceases To Exist Without Two Or More Partners

James Ficenec — Thu, 11 Aug 2011 04:37:20 +0000

Occasionally a court decision seems so obvious that it is difficult to understand why the issue was disputed. In Corrales v. Corrales, the California Court of Appeal held that a partnership cannot exist without two or more partners. This common sense conclusion has an important effect on the rights of former partners.

Under the California Revised Uniform Partnership Act, a partner is permitted to “disassociate” from the partnership. The partnership must then buy out the disassociated partner’s interest. This process assumes, however, that the partnership continues to exist after the disassociation.

Because a partnership requires at least two partners, if a disassociation leaves only one remaining partner, the partnership’s business must be wound up and dissolved. In the Corrales case, one partner disassociated from a two-person partnership. The partners then litigated the buy-out value. On appeal, the court concluded that the partners were litigating the wrong issue. Since the disassociation left only one partner, the partnership was dissolved and had to be wound up — the partnership had to cease its business, pay its creditors, equalize the partners’ investments, and distribute any proceeds. One person could not continue as a partnership.

The best way to avoid unpleasant surprises, like the one experienced by the partners in Corrales, is to obtain a well drafted partnership agreement that clearly sets outs the partners’ rights and obligations and prevents the unintentional dissolution of the partnership.

Licensed Contractor’s Use Of Incorrect Fictitious Business Name Did Not Bar Claim For Payment

James Ficenec — Tue, 28 Jun 2011 06:04:09 +0000

California law precludes actions by unlicensed contractors to recover payment for services as a contractor. In Ball v. Steadfast-BLK, the California Court of Appeal ruled that the law did not prevent recovery by contractor who, while licensed as a sole proprietor, entered into a contract under an unregistered false business name.

Mr. Ball was a licensed contractor who registered a fictitious business name, Clark Air Conditioning and Heating. However, he entered a contract under the name Clark Heating and Air Conditioning. When his client failed to pay, he recorded a mechanic’s lien and ultimately filed suit to foreclose the lien. The client claimed that since “Clark Heating and Air Conditioning” was not licensed, it could not recover payment.

The Court of Appeal ruled that California’s licensing law did not preclude the claim. The court noted that Mr. Ball was a licensed sole proprietor doing business under a business name. Unlike an entity, such as a partnership or a corporation, that can obtain a license under California law, a fictitious business name can not obtain a contractor’s license. Mr. Ball, not the business name, was the licensee. The court ruled that, at most, Mr. Ball’s use of the incorrect fictitious business name might be grounds for disciplinary action by the Contractors State License Board.

A Defendant May Recover Its Attorneys’ Fees Incurred Defending Frivolous Civil Rights Claims

James Ficenec — Mon, 27 Jun 2011 03:34:29 +0000

Federal law generally permits a plaintiff who successfully pursues a civil rights claim to recover his or her attorneys’ fees. A successful defendant, however, is typically only entitled to recover its attorneys’ fees if the complainant claims are determined to be absurd. In this context, “frivolous” means without legal or factual basis. A claim that has some legal and factual basis, but that does not succeed, is not frivolous.

The United States Supreme Court recently issued an opinion providing guidance to the trial courts for cases in which only some of the complainant demands are not having legal basis . In Fox v. Vice, the court analyzed the various options in such cases. The court rejected a standard that purported to award a defendant fees “fairly attributable” to the plaintiff’s frivolous claims. The court found that standard to be too amorphous.

Instead, the court ruled that the appropriate standard is to award the defendant the attorneys’ fees it would not have incurred “but for” the frivolous claims. The court stated that this amount could be measured by the extra time spent on the lawsuit, by the increased expense (if any) litigating in federal court, and by the higher rates that might be charged by an attorney specializing in civil rights litigation. The court reasoned that the “but for” standard provided a sufficiently clear standard to fairly award a defendant its attorneys’ fees incurred in fighting frivolous civil rights claims, even if not all of the plaintiff’s demands are absurd.

Arbitration Clause In Trust Document Not Enforceable Against Beneficiaries

James Ficenec — Mon, 16 May 2011 04:21:05 +0000

Beneficiaries cannot be bound by an arbitration clause in testamentary trust documents. In Diaz v. Bukey, the California Court of Appeal affirmed a probate court ruling that denied a trustee’s motion to require a beneficiary to arbitrate a petition to remove the trustee. The trustee’s motion was premised on language in the trust that any dispute arising from the trust would be resolved by binding arbitration. The Court of Appeal noted that although arbitration is a favored means of resolving disputes, it may only be compelled for parties to a contract requiring arbitration. The Court found that a trust does not meet the definition of a contract. In order to form a contract, the parties must: a) consent; and b) provide consideration (for example, something of value or a promise to do something). Since trust beneficiaries are not required to consent or provide consideration, they are not parties to a contract and, for that reason, are not bound by an arbitration clause contained in a trust.