Does the dissolution of the partnership relieve Davis of personal liability for the accounts? Explain.
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Davis and Shipman founded a partnership under the name of Shipman & Davis Lumber Company. Four years later, the partnership was dissolved by written agreement. Notice of the dissolution was published in a newspaper of general circulation in Merced County, where the business was conducted. No actual notice of dissolution was given to firms that previously had extended credit to the partnership. By the dissolution agreement, Shipman, who was to continue the business, was to pay all of the partnership’s debts. He continued the business as a sole proprietorship for a short time until he formed a successor corporation, Shipman Lumber Servaes Co. After the partnership’s dissolution, two firms that previously had done business with the partnership extended credit to Shipman for certain repair work and merchandise. The partnership also had a balance due to Valley Company for a prior purchase. Five months later, two checks were drawn by Shipman Lumber Servaes Co. and accepted by Valley as partial payment on this debt. Credit Bureaus of Merced County, as assignee of these three accounts, sued the partnership as well as Shipman and Davis individually. Does the dissolution of the partnership relieve Davis of personal liability for the accounts? Explain. |
Explanation
According to UPA, a creditor who extends credit to a partnership, in case of any default, can sue both partnership and individual partners, if they did not get the actual notice of dissolution of firm. So, in this case, claim of creditor can be considered as true as they have extended credit to partnership before and also after dissolution of firm. Partnership has not served them with any actual notice on dissolution of firm. Thus, Partner D without an actual notice will be considered partner of the firm and will be personally liable to the creditors.
But under RUPA, this rule has been changed, within two years of dissociation of partners without dissolution of firm, a partner will be personally liable only if:
Creditors had reasonably believed that dissociated partner is a partner to the firm.
Creditors do not have actual notice of dissociation of partners.
Creditors do not deem to have constructive notice of filed dissociation statement.
In this case, it is not clear that creditors have fulfilled all the above requirements, so D cannot be held personally liable to pay the creditors. Also, any claim arising after two years of dissociation does not make the dissociated partner personally liable.
Verified Answer
In this case, Partner D may or may not get relieved from personal liability of paying the creditors as UPA and RUPA have different rule regarding the personal liability of the partners. Rules are as follows:
Under UPA, partners after dissolution of firm may remain liable for personal liability, if they have not provided an actual notice of dissolution of firms to the creditors.
Under RUPA, this rule has changed, the dissociated partner would remain liable for personal liability for a period of two years only if, creditors knew about the partner and did not get an actual notice of dissolution of firm. After two years, there would be no personal liability on the dissociated partners.
