Plein, Thomas A.

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Recent Decisions: Partnership: The Concept of the  Continuing Partnership

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Marquette Law ReviewVolume 48Issue 2 Fall 1964 Article 10Recent Decisions: Partnership: The Concept of the"Continuing Partnership"Thomas A. PleinFollow this and additional works at: http://scholarship.law.marquette.edu/mulrPart of the Law CommonsThis Article is brought to you for free and open access by the Journals at Marquette Law Scholarly Commons. It has been accepted for inclusion inMarquette Law Review by an authorized administrator of Marquette Law Scholarly Commons. For more information, please contactmegan.obrien@marquette.edu.Repository CitationThomas A. Plein, Recent Decisions: Partnership: The Concept of the "Continuing Partnership", 48 Marq. L. Rev. (1964).Available at: http://scholarship.law.marquette.edu/mulr/vol48/iss2/10RECENT DECISIONSare supported by corroborating circumstances, in order that the oppor-tunity to perpetrate fraud upon the courts shall not be presented.COLLEEN A. ROACHPartnership: The Concept of the "Continuing Partnership"-The recent Wisconsin case of Adams v. Jarvis' involved a three-manmedical partnership at will, governed by a formal and detailed partner-ship agreement. Under the rather unique contract, the partnership wasnot to terminate at the withdrawal or death of a partner. Instead, untila full settlement was made in accordance with the agreement, the with-drawing partner or the deceased partner's estate would continue toparticipate in partnership profits and losses, but not in the managementof the clinic. A retiring partner would receive any balance standing tohis credit on the books of the partnership, the amount of his capitalaccount, and that proportion of profits to which he was entitled pursu-ant to the agreement. It was specifically agreed that on the withdrawalof any partner the accounts receivable were to remain the property ofthe clinic. The books of the firm were not to close until the end of thefiscal year.On May 8, 1961, the plaintiff submitted a letter to the partnershipgiving notice of withdrawal, declaring the partnership dissolved, andrequesting an accounting. The plaintiff terminated his association withthe firm on June 1. The remaining partners carried on the business ofthe firm and refused, by virtue of the agreement, to pay any portion ofthe accounts receivable to the plaintiff. The plaintiff brought an actionfor a declaratory judgment in the county court, urging that the partner-ship was dissolved upon his withdrawal and that partnership property,including accounts receivable, be divided equally among the three part-ners. The plaintiff reasoned that if the partnership dissolved upon with-drawal, the retiring partner's rights should be determined pursuant tosection 123.372 of the Wisconsin statutes, and the partnership affairs123 Wis. 2d 453, 127 N.W. 2d 400 (1964). Relevant portions of the partnershipcontract were quoted by the court.2 "Rights of retiring or deceased partner. When any partner retires or dies, andthe business is continued under any of the conditions set forth in [section]123.36(1), (2), (3), (5) and (6) or [section] 123.33(2) (b), without any settle-ment of accounts as between him or his estate and the person or partnershipcontinuing the business, unless otherwise agreed, he or his legal representativeas against such persons or partnership may have the value of his interest at thedate of dissolution ascertained, and shall receive as an ordinary creditor anamount equal to the value of his interest in the dissolved partnership with in-terest, or, at his option or at the option of his legal representative, in lieu ofinterest, the profits attributable to the use of his right in the property of thedissolved partnership; provided that the creditors of the dissolved partnershipas against the separate creditors, or the representative of the retired or de-ceased partner, shall have priority on any claim arising under this section, asprovided by [section] 123.36 (8)."19641MARQUETTE LAW REVIEWwound up pursuant to section 123.33.' The trial court agreed, holdingthat the plaintiff's withdrawal constituted a statutory dissolution,4 thatthe assets of the clinic should be liquidated, and that the plaintiff'sshare would be one-third of the total, including accounts receivable.The decision of the trial court was reversed by the WisconsinSupreme Court. In answering the plaintiff's contention that the partner-ship dissolved by operation of law at the withdrawal of the plaintiff,the court said that "while the withdrawal of a partner works a dis-solution of the partnership under the statute as to the withdrawingpartner, it does not follow that the rights and duties of remainingpartners are similarly affected."5 The court went on to say:The agreement does provide that Dr. Adams shall no longeractively participate and further provides for winding up theaffairs insofar as his interests are concerned. In this sense hiswithdrawal does constitute a dissolution. We conclude, however,that when the plaintiff, Dr. Adams, withdrew, the partnershipwas not wholly dissolved as to require complete winding up ofits affairs, but continued to exist under the terms of the agree-ment. The agreement does not offend the statute and is valid.'(Emphasis added.)Has the court by this language decreed that the partnership was dis-solved' at the withdrawal of the plaintiff? If the partnership was not"wholly dissolved," was a "partial dissolution" effected by the with-drawal? A "partial dissolution" would be an anomaly, considering thestatutory definition of dissolution, s which conforms to section 29 of theUniform Partnership Act. The Commissioners' note to this sectionfurnishes an insight to the term "dissolution," and distinguishes itfrom other verbiage relating to the" final phases of partnership life:In this act dissolution designates the point in time when thepartners cease to carry on the business together; termination isthe point in time when all partnership affairs are wound up;3 "Application of partnership property on dissolution. (1) When dissolution iscaused in any way, except in contravention of the partnership agreement, eachpartner, as against his co-partners and all persons claiming through them inrespect of their interests in the partnerships, unless otherwise agreed, mayhave the partnership properly applied to discharge its liabilities, and the surplusapplied to pay in cash the net amount owing to the respective partners ......(Emphasis added.) (This statute does not correspond exactly with its counter-part as enacted in Wis. Laws 1915, ch. 358, or Wis. STAT. §§17 24(m)-33 (1915),due to a typographical error which has persisted through the revisions. Theword properly should read property.)' WIs. STAT. §123.25 (1961) : "Dissolution of partnership defined. (1) The dis-solution of a partnership is the change in the relation of the partners causedby any partner ceasing to be associated in the carrying on as distinguished fromthe winding up of the business.(2) On dissolution the partnership is not terminated, but continues until thewinding up of partnership affairs is completed."23 Wis. 2d at 458, 127 N.W. 2d at 403.6 Id. at 459, 127 N.W. 2d at 403-04.7Annot., 55 A.L.R. 2d 1391, 1395 (1957).1 See note 4 supra.[Vol. 48RECENT DECISIONSwinding up, the process of settling partnership affairs afterdissolution.9There is no doubt that in this case the partners did cease to carry onthe business together on June 1, 1961. Therefore, considering the defi-nition quoted, the Adams-Jarvis partnership must have dissolved onthat date.10 Had the court unequivocally granted the plaintiff's firstcontention; namely, that the partnership dissolved on the effective dateof the withdrawal, it would'not follow that the clinic assets need beliquidated under the applicable statutes." The contract stated that thepartnership shall not terminate on withdrawal, but no specific provisionwas made against dissolution. The paragraph of the agreement whichdefines "withdrawal" as "any situation in which a partner leaves thepartnership, at a time when said partnership is not dissolving, pursuantto a written agreement of the parties to do so" could be said to be anattempt to preclude dissolution on withdrawal, if not read in the lightof the rest of the agreement. A specific provision was made for dis-solution by agreement of the parties whereby business assets would beliquidated. It appears, therefore, that the definition merely speaks of"withdrawal" as any time when a partner leaves the firm when the firmis not liquidating its assets under a general agreement of the partnersto close the clinic. The court held that the contract did not offend thepartnership chapter of the statutes. The provision that the accounts re-ceivable were to remain the property of the clinic was not construedto be void as a forfeiture against public policy.' 2Considering these determinations, the plaintiff's contention that theassets should be distributed pursuant to the applicable statutes is with-out merit. These statutes outline the rights of the partners and providerules for settling accounts on dissolution. The statutes contemplate aliquidation of partnership assets which, under the Adams-Jarvis agree-ment, would not be necessary at the death or retirement of a partner.The assets of the firm will be used by the remaining members, and theretiring partner will receive his settlement under the contract. A liqui-dation would be necessary only if the partners agreed to close theclinic. The statutes themselves contain express limitations on theirapplicability; ziz., "unless otherwise agreed,"' 3 or "subject to any agree-9 UNIFORM PARTNERSHIP AcT §29, Commissioners' Note.10 Egner v. States Realty Co., 223 Minn. 305, 26 N.W. 2d 464 (1947) ; Harwell v.Cowan, 175 Ga. 33, 165 S.E. 19 (1932) ; 40 Am. JuP. PARTNERSHIP §242 (1942).But cf. California Employment Stabilization Comm'n v. Walters, 64 Cal. App.2d 554, 149 P. 2d 17 (1944) ; Moore v. May, 117 Wis. 192, 94 N.W. 45 (1902) ;68 C.J.S. Partnership §347 (1950). The Moore decision was handed down priorto the adoption of the Uniform Partnership Act in Wisconsin.1 Devlin v. Rockey, 295 F. 2d 266 (7th Cir. 1961) ; 68 CJ.S. Partnership §§243,246 (1950).1223 Wis. 2d at 459, 127 N.W. 2d at 404; see also McPherson v. J. E. Surrine &Co., 206 S.C. 183, 33 S.E. 2d 501 (1945) ; 17A C.J.S. Contracts §320 (1963) ; 68C.J.S. Partnership §246 (1950).13 Wis. STAT. §§123.33, .37 (1961).1964]MARQUETTE LAW REVIEWment to the contrary." 14 Therefore, a thoughtfully drafted agreementsupplying a different method of ascertaining a partner's rights willoperate to preclude the general statutory rules governing account-ability.'5The Adams-Jarvis partnership dissolved and proceeded to a wind-ing-up pursuant to the partnership contract. A question that immedi-ately arises is whether the partnership terminated notwithstanding acontract provision to the contrary. In other words, is the two-manpartnership which was in existence after the three-man partnershipwound up its affairs the same partnership or a different one? Thisquestion is important, because it involves the controversy over theentity versus the aggregate theory of partnership law. The aggregatetheory sees the partnership as an association of individuals which hasno existence distinct from the persons who compose it.16 Many otherjurisdictions recognize the partnership as an entity distinct from itsmembers.1 7 It seems to the author that if the original three-man part-nership never terminated, but continued and is identical with the two-man partnership, then the clinic can be viewed as a separate entity,distinct from its members. However, if two technically distinct partner-ships are involved, the court has reasoned consistently with the ag-gregate theory. It was not necessary in the instant case to decide whethera termination took place; indeed, the court did not openly deal with thequestion. Neither theory was mentioned by the court, but inferencesmight be seen in the following language:We conclude the parties clearly intended that even though apartner withdrew, the partnership and the partnership businesswould continue for the purposes for which it was organized....The agreement contemplates a partnership would continue toexist between the remaining partners even though the personnelconstituting the partnership was changed .... [W]hen the plain-tiff, Dr. Adams, withdrew, the partnership was not wholly dis-solved so as to require complete winding up of its affairs, butcontinued to exist under the terms of the agreement.' 8 (Empha-sis added.)Wisconsin has always followed the aggregate approach to partnershiplaw in substantive matters.' 9 Despite the language quoted, there seemslittle basis for arguing that the court views the partnership as an entity14 WIS. STAT. §123.35 (1961).15 In re Eddy's Estate, 175 Misc. 1011, 26 N.Y.S. 2d 115 (1941) ; Annot., 2 A.L.R.2d 1084, 1092 (1948) ; see also authorities cited note 11 supra.18 37 MARQ. L. REv. 66, 69 (1953).17 Ibid.Is 23 Wis. 2d at 458-59, 127 N.W. 2d at 403-04.19 Westby v. Bekkedal, 172 Wis. 114, 178 N.W. 451 (1920) ; Thomas v. IndustrialComm'n, 243 Wis. 231, 10 N.W. 2d 206 (1943); and Kalson v. IndustrialComm'n, 248 Wis. 393, 21 N.W. 2d 644 (1946); all cited in 37 MARQ. L. REV.66 (1953). The Kalson case deals with a partnership as an entity for purposesof the workmen's compensation statutes.[ Vol; 48RECENT DECISIONSdistinct from its members. This is especially true considering thatneither theory was mentioned in the opinion. The court has, however,been urged to adopt the entity approach to partnership law,2 and thelanguage of this case could be used to argue that the court is leaningin the direction of the entity theory. The court's statement that "thepartnership . . . continued to exist"21 (emphasis added) could be con-strued to mean that the old partnership "entity" survived the with-drawal of a member. It is more reasonable to assume, however, thatthe court still regards the partnership as an aggregate of individualshaving no recognized separate existence except for certain proceduralmatters. It would follow, then, that the Adams-Jarvis partnership dis-solved, wound up in accordance with the contract, and at least techni-cally terminated,22 and that a new partnership sprang up in its placeconsisting of the two remaining members. This new partnership isgoverned by the old agreement. Any change in membership, as by theadmission of a new member, will send the partnership through its tech-nical evolution, and a new, legally distinct partnership will result. 23The "continuing partnership" is a useful form of business organiza-tion, especially for firms whose membership is constantly changing.2 4It would be impractical, indeed, for a firm to be forced to liquidate itsassets each time a member leaves the firm and each time a new partneris admitted. The "continuing partnership" provides a means wherebya firm may continue its day to day business without the impedimentof a.statutory settlement of accounts. A specific contractual provisionwill eliminate the necessity of dividing the accounts receivable eachtime a new member is admitted or an old member withdraws. 25 It isessential, however, that careful consideration be given to the draftingof the agreement, in order that it be kept consistent with the theory ofpartnership law. THOMAs A. PLEINEvidence: Attorney-Client Privilege: Communications with In-surance Agent- In Jacobi v. Podevels,' an automobile negligencecase, both drivers testified during the trial that they were traveling ata rate of speed below the legal limit of twenty-five miles per hour. Ina statement given to his insurance company's agent, however, respond-ent admitted that he was traveling at a speed of thirty miles per hour,and also included damaging remarks concerning his lookout at the timeof the accident.2037 MARQ. L. REv. 66 (1953).2123 Wis. 2d at 459, 127 N.W. 2d at 404.22 Egner v. States Realty Co., note 10 supra; 40 Am. JuR. Partnership §197 (1942).23 Annot., 45 A.L.R. 1240 (1926) ; 40 Am. JuR. Partnership §233 (1942).24 Millikan, The Continuing Partnership Whether and When, 28 Los ANGELES B.BULL. 123 (1953).25 Hirsh, The Medical Partnership, 13 DE PAUL L. REv. 28 (1963).123 Wis. 2d 152, 127 N.W. 2d 73 (1964).

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Recent Decisions: Partnership: The Concept of the Continuing Partnership

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