Legal Question in Business Law in California

Re: Business Liquidation

Options? Promptly get an attorney to help you work out the details of a written agreement the covers the investments, costs, debt, payments, remaining liabilities, etc. If one can not be negotiated, someone will end up having to file suit and waste more money. There are rules and laws regarding priority of debts, investments, etc. You should be entitled to offset the credit card debt with the inventory, but a fight is brewing among 'partners'. Contact me if interested in doing it right.

Re: Business Liquidation

You may have a couple of arguments why the NY folks shouldn't receive any of the inventory. Email me.

Re: Business Liquidation

I am assuming that the entire credit card debt you described was used solely for the purchase of partnership assets and that the other partners were aware of your purchase of these assets with your credit card. I also assume that both of you believe the equipment to be an asset of the partnership.

Generally, a partner who loans money to the partnership is entitled to be repaid prior to the final distribution of the assets of the partnership to the partners. That means that the partnership is required to pay you the amount of the debt prior to final distribution.

The assets usually must be liquidated in order to pay off the debt of the partnership. So, in this case, you would probably sell off the equipment and use the proceeds first to pay off any creditors of the partnership (of which you are one) and thereafter to each partner according to their percentage interest.

In the event that there are insufficient funds with which to pay (1) the creditors of the partnership; and (2) your respective initial capital contributions (as added by profit and additional contributions, less draws), then each of you will need to contribute funds to the partnership, in proportion to your partnership interests, in order to ensure that creditors are paid and initial capital contributions repaid.

Hope that answers your questions.

Re: Business Liquidation

I assume the business is a partnership from the absence of formalities that would be necessary to create an LLC or corporation.

No express agreement, either written or oral, is required to form a partnership. A partnership can be inferred from the surrounding facts.

California law would apply if the business were formed here, but New York partnership law would be similar in broad principle if not in certain details.

Keep in mind that the law covering the relations of partners to each other, and to the partnership, is different from the law covering the relationship of the partners and partnership to outsiders, such as creditors.

Further, the legal relationships are different while the partnership is intact than after a partner leaves (whether due to retirement, death, withdrawal, or other cause), and that a withdrawing partner's rights are considerably lessened if the withdrawal is "wrongful," i.e., in violation of some understanding or right.

With respect to the request for 55% of the inventory, the Uniform Partnership Act provides (see Corporations Code section 16402) "A partner has no right to receive, and may not be required to accept, a distribution in kind." That is exactly what the New York couple is requesting.

To wind up this partnership "by the book," you should either hire a lawyer or, if this is too expensive, get a paperback self-help law book on how to form and operate partnerships. Winding up can be done by any partner who has not "wrongfully dissociated," but there are certain rules (see the Corporations Code, sections 16601 to 16807) for handling assets and liabilities.