Partnership Disputes FAQ

Under California Corporations Code Section 16404, partners in a California partnership owe each other significant fiduciary duties that form the foundation of the partnership relationship. The duty of loyalty requires partners to account for any property, profit, or benefit derived from partnership business, to refrain from dealing with the partnership as adverse parties, and to avoid competing with the partnership. The duty of care requires partners to refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or knowing violations of law.

Partners must also discharge their duties consistent with the contractual obligation of good faith and fair dealing. These duties cannot be entirely waived in the partnership agreement, though they can be modified to some extent. Breach of fiduciary duty can result in personal liability for damages, disgorgement of profits, and potential dissolution of the partnership.

When partners cannot agree on dissolution, California law provides several mechanisms under Corporations Code Sections 16601-16603. A partner can dissociate from the partnership at any time by expressing the will to withdraw, though this may be wrongful if it breaches the partnership agreement. For at-will partnerships, any partner can cause dissolution by giving notice. For term partnerships, dissolution requires unanimous consent unless the term expires.

If agreement cannot be reached, a partner may petition the court for judicial dissolution under Section 16801, which is available when the partnership's economic purpose is frustrated, when a partner's conduct makes it unreasonably impracticable to continue, or when it is not otherwise reasonably practicable to carry on business in conformity with the partnership agreement. The court can appoint a receiver to wind up affairs and ensure fair distribution of assets.

California Corporations Code Sections 16701-16703 govern the buyout process when a partner dissociates. Within 120 days after dissociation, the partnership must either pay the dissociated partner the buyout price or provide a written offer stating the amount. The buyout price is determined by calculating the amount that would have been distributed to the dissociating partner if the partnership were wound up on the dissociation date, plus interest from the dissociation date.

If the dissociation is wrongful, the partnership may offset damages caused by the wrongful dissociation against the buyout amount. Partners can agree in writing to defer payment, but interest accrues on the unpaid balance. If there is a dispute over the buyout price, either party can file an action within 120 days of the partnership's written notice to determine the amount. The court may award attorney fees to the prevailing party if the other party's offer or demand was unreasonable.

Yes, California law permits partner expulsion under specific circumstances outlined in Corporations Code Section 16601. The partnership agreement may specify events that trigger expulsion, and partners can vote to expel a partner in accordance with the agreement's terms. Even without agreement provisions, a partner can be expelled by unanimous vote of the other partners if the partner has engaged in wrongful conduct that adversely affects the business, willfully or persistently committed a material breach of the partnership agreement, or engaged in conduct making it not reasonably practicable to carry on business with the partner.

Additionally, a court can order expulsion upon application by the partnership or another partner. An expelled partner is entitled to the buyout price as of the expulsion date, though damages may be offset if the expulsion was caused by the partner's wrongful conduct. The expulsion must follow proper procedures or it may be challenged as wrongful dissociation.

California Corporations Code Section 16807 establishes the order of payment when a partnership winds up after dissolution. First, partnership creditors must be paid, including partners who are creditors of the partnership. Second, any remaining surplus is distributed to partners based on their profit-sharing ratios, after accounting for contributions. Partners remain personally liable for partnership debts that cannot be satisfied from partnership assets under Section 16306.

This liability continues even after dissolution until the applicable statute of limitations expires. Creditors can pursue individual partners for partnership debts, though a partner who pays more than their share can seek contribution from other partners. The partnership should provide notice to known creditors upon dissolution to limit future liability. Partners should be cautious about distributing assets before all debts are paid, as improper distributions can result in personal liability to creditors.

When a partnership agreement does not address a particular dispute, California's Revised Uniform Partnership Act provides default rules under Corporations Code Sections 16401-16405. Ordinary business matters are decided by a majority vote of partners, while fundamental changes to the partnership require unanimous consent. If the agreement lacks dispute resolution provisions, partners may negotiate directly, engage in mediation, or ultimately litigate in court.

California courts strongly encourage alternative dispute resolution, and many Superior Courts have mandatory mediation programs for business disputes. Without an arbitration clause, partners have the right to a jury trial on disputed factual issues. The court will apply principles of contract interpretation to the partnership agreement and fill gaps with statutory default rules and common law principles. Partners considering litigation should understand that partnership disputes often involve complex accounting, require expert witnesses, and can be expensive and time-consuming to resolve.

California provides comprehensive remedies for breach of fiduciary duty in partnerships. Under Corporations Code Section 16405, an injured partner can bring a direct action for their own damages or a derivative action on behalf of the partnership. Available remedies include compensatory damages measuring the actual harm caused, disgorgement requiring the breaching partner to surrender profits or benefits obtained through the breach, and constructive trust imposing equitable ownership on improperly acquired assets.

Courts may also award punitive damages where the breach involves fraud, malice, or oppression under Civil Code Section 3294. Injunctive relief can prevent ongoing or threatened breaches. An accounting may be ordered to determine partnership finances and each partner's share. In severe cases, courts may order dissolution and winding up of the partnership. The statute of limitations for breach of fiduciary duty is generally four years under Code of Civil Procedure Section 343, though discovery rules may extend this period.

Minority partners in California have several protections under the Corporations Code. First, certain fundamental decisions require unanimous consent regardless of partnership interest percentage, including admitting new partners, amending the partnership agreement, and actions outside the ordinary course of business. Second, all partners owe fiduciary duties to each other, protecting minority partners from majority overreach. Third, minority partners have statutory rights to partnership information under Section 16403, including access to books and records and the right to obtain information concerning partnership affairs.

Fourth, the partnership agreement can include additional minority protections such as supermajority voting requirements, veto rights on specific matters, and guaranteed management roles. If majority partners breach their duties or engage in oppressive conduct, minority partners can seek judicial intervention including dissolution. Minority partners should negotiate protective provisions before entering the partnership and document all agreements in writing.

Under California's Revised Uniform Partnership Act, dissociation and dissolution are distinct legal concepts with different consequences. Dissociation under Corporations Code Sections 16601-16603 refers to a change in the relationship between a departing partner and the partnership, such as withdrawal, expulsion, death, or bankruptcy. Dissociation does not necessarily end the partnership; the remaining partners may continue the business. Upon dissociation, the departing partner's management rights terminate, their duty of loyalty ends except for matters arising before dissociation, and they become entitled to a buyout of their interest.

Dissolution under Section 16801, in contrast, triggers the winding up of partnership business, meaning the partnership will terminate after affairs are concluded. Dissolution can occur by agreement, expiration of partnership term, or court order. After dissolution, the partnership continues only for purposes of winding up, settling debts, and distributing assets. Understanding this distinction is crucial for partners considering exit strategies.

Proactive planning through a comprehensive partnership agreement is the most effective way to prevent disputes in California partnerships. Essential provisions include clear capital contribution requirements and profit-sharing ratios, detailed management responsibilities and decision-making procedures, dispute resolution mechanisms such as mandatory mediation followed by binding arbitration, specific buyout procedures including valuation methods and payment terms, and provisions for death, disability, or retirement of partners.

The agreement should address non-compete obligations, confidentiality requirements, and restrictions on transferring partnership interests. Regular partner meetings with documented minutes help maintain communication and prevent misunderstandings. Annual financial reviews and accountings keep all partners informed. Consider including provisions for periodic agreement reviews and amendments. Partners should also maintain adequate insurance, including professional liability coverage where applicable. While California law provides default rules, customizing your partnership agreement to your specific situation significantly reduces the likelihood of costly disputes.