A general partner has the power to voluntarily dissociate, or withdraw, from a limited partnership unless the partnership agreement specifies otherwise. A limited partner theoretically can withdraw from the partnership by giving six months' notice unless the partnership agreement specifies a term, which most do. Also, some states have passed laws prohibiting the withdrawal of limited partners.

In a limited partnership, a general partner's voluntary dissociation from the firm normally will lead to dissolution unless all partners agree to continue the business. Similarly, the bankruptcy, retirement, death, or mental incompetence of a general partner will cause the dissociation of that partner and the dissolution of the limited partnership unless the other members agree to continue the firm [RULPA 801]. Bankruptcy of a limited partner, however, does not dissolve the partnership unless it causes the bankruptcy of the firm. Death or an assignment of the interest of a limited partner does not dissolve a limited partnership [RULPA 702, 704, 705]. A limited partnership can be dissolved by court decree [RULPA 802].

On dissolution, creditors' claims, including those of partners who are creditors, take first priority. After that, partners and former partners receive unpaid distributions of partnership assets and, except as otherwise agreed, amounts representing returns on their contributions and amounts proportionate to their shares of the distributions [RULPA 804].

In the following case, two limited partners wanted the business of the partnership to be sold on its dissolution, while another limited partner (actor Kevin Costner) and the general partner wanted it to continue.

In re Dissolution of Midnight Star Enterprises, LP

BACKGROUND AND FACTS

Midnight Star Enterprises, LP, consisted of a casino, bar, and restaurant in Deadwood, South Dakota. The owners were Midnight Star Enterprises, Limited (MSEL), the general partner, which owned 22 partnership units; actor Kevin Costner, a limited partner, who owned 71.50 partnership units; and Carla and Francis Caneva, limited partners, who owned 3.25 partnership units each. Costner also owned MSEL and thus controlled 93.5 partnership units. The Canevas were the business's managers, for which they received salaries and bonuses. When MSEL voiced concerns about the management, communication among the partners broke down. MSEL filed a petition in a South Dakota state court to dissolve the partnership. MSEL hired Paul Thorstenson, an accountant, to determine the firm's fair market value, which he calculated to be $3.1 million. The Canevas solicited a competitor's offer to buy the business for $6.2 million, which the court ruled was the appropriate amount. At the Canevas' request, the court ordered MSEL and Costner to buy the business for that price within ten days or sell it on the open market to the highest bidder. MSEL appealed to the South Dakota Supreme Court.

IN THE WORDS OF THE COURT ...

SABERS, Justice.

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The Canevas claim the partnership agreement does not allow the general partner to buy out their interest in Midnight Star. Instead, the Canevas argue, the agreement mandates the partnership be sold on the open market upon dissolution. * * * Article 10.4 provides:

After all of the debts of the Partnership have been paid, the General Partner * * * may distribute in kind any Partnership property provided that a good faith effort is first made to sell * * * such property * * * at its estimated fair value to one or more third parties * * *.

* * * *

This provision clearly states the General Partner "may distribute in kind any partnership property" if the property is first offered to a third party for a fair value. While the General Partner may offer the property on the open market, Article 10.4 does not require it.

This interpretation is reinforced when read together with Article 10.3.1 * * * [which] instructs that "no assets * * * shall be sold or otherwise transferred to [any partner] unless the assets are valued at their then fair market value * * *." If Article 10.4 requires a forced sale, then there would be no need to have the fair market value provision of Article 10.3.1. [Emphasis added.]

Read as a whole, the partnership agreement does not require a mandatory sale upon dissolution. Instead, the general partner can opt to liquidate using either a sale or transfer under Article 10.3.1. * * * Because MSEL decided to pursue dissolution under Article 10.3.1, we decide the correct standard for determining the fair market value of the partnership.

* * * *

MSEL claims the correct standard * * * is the hypothetical transaction analysis * * *. [The] Canevas argue that * * * the offer from Kellar represented the fair market value * * *.

* * * *

[There are] sound policy reasons why an offer cannot be the fair market value. * * * What if a businessman, for personal reasons, offers 10 times the real value of the business? What if the partnership, for personal reasons, such as sentimental value, refuses to sell for that absurdly high offer? These arbitrary, emotional offers and rejections cannot provide a rational and reasonable basis for determining the fair market value. [Emphasis added.]

Conversely, the hypothetical transaction standard does provide a rational and reasonable basis for determining the fair market value * * * by removing the irrationalities, strategies, and emotions * * *.

* * * *

Since it was error for the [lower] court to value Midnight Star at $6.2 million, it was also error to force the general partners to buy the business for $6.2 million or sell the business.

* * * *

Instead of ordering the majority partners to purchase the whole partnership for the appraised value, the majority partners should only be required to pay any interests the withdrawing partner is due. * * * The majority partners should only be required to pay the Canevas the value of their 6.5 partnership units * * *.

DECISION AND REMEDY

The South Dakota Supreme Court reversed the judgment of the lower court and remanded the case to allow MSEL and Costner to pay the Canevas the value of their 6.5 partnership units after a revaluation of the partnership. The court concluded that under the partnership agreement, during liquidation, the firm's property could be distributed in kind among the partners if it was first offered for sale to a third party. The court also concluded that the correct value of the business was the accountant's figure, which was based on a fair market value analysis using a hypothetical buyer.

Actor Kevin Costner wanted a partnership to continue doing business.

1. Can another partner force the sale of the business?

2. Under what circumstances on the dissolution of a limited partnership might a forced sale of its property be appropriate?