Legal Question in Business Law in California

Re: Partnership Dissolution - winding down practices

What happened to the proceeds from the sale of the partnership business? If they were NOT used to pay its debts, that was a mistake. No partner should get a dime until all the bills are paid.

There is no special kind of accounting that is especiallyy appropriate to the windup of a partnership, unless perhaps one could say it needs to be "careful" "independent" and "professional."

When a partner of a general partnership becomes bankrupt, that results in dissociation of that partner. See Corporations Code section 16601(6)(A). The partner's dissociation by bankruptcy is usually considered wrongful (Corporations Code section 16602(b)(2)(C)). A wrongfully dissociating partner is not eligible to participate in winding up the partnership business.

The partner's bankruptcy probably will discharge this partner's liability to the other partners and to partnership creditors, but each other partner or former partner should consult bankruptcy counsel for any possibility of lodging a claim in the bankruptcy proceeding on behalf of themselves, or the partnership.

I generally disagree with the notion that any undischarged debt should be split evenly, but this issue would require research beyond by present knowledge and probably should be asked as a bankruptcy law question.

Re: Partnership Dissolution - winding down practices

If your partnership is a general partnership, and one partner files for bankruptcy, the remaining non-bankrupt partners are fully liable, jointly and severally, for the remaining debt.

Also, the creditors can pick and chose which of the non-bankrupt partners (if there are more than one) they can go after to collect. This is called "joint and several liability". To the extent that you would seek to get some of the debt paid by the remaining non-bankrupt partners, you would have to file your own lawsuit against them unless they agreed.

Thus, your issue really isn't one of accounting. It would seem that the best approach is to use the assets of the business to pay down the debt, but this also gets complicated by one partner's bankruptcy, as the partnership interest becomes an asset of the bankruptcy estate, and you would have to get permission of the bankruptcy court to act.

Naturally, we cannot give definitive legal advice without (a) being retained and (b) seeing all of the documentation and getting all of the facts available to you. If you are interested in pursuing this further, feel free to call our office.