Thursday, August 11, 2011
Court Rules Partnerships Require a Minimum of Two People
By SHERRI M. OKAMOTO, Staff Writer
A partnership requires the joining of a minimum of two persons, and the partnership dissolves by operation of law when one of them departs, the Fourth District Court of Appeal ruled yesterday.
Div. Three, in a decision by Justice William W. Bedsworth, said it had “reluctantly concluded” that a business dispute between two brothers over their electronics company “has to go back to the long-suffering judge” since the case before Orange Superior Court Temporary Judge Richard W. Luesebrink had been “tried for the most part on a completely erroneous theory” that a partnership can consist of one person, when “no such animal exists.”
Bedsworth commented that the “trial judge in this case had a truly unenviable task before him as he pondered his decision” over the valuation of a partnership buyout between brothers Rudy and Richard Corrales, after finding “none of the key witnesses credible” and being confronted with “virtually no independent corroboration” and “records kept, not by GAAP (generally accepted accounting principles), but by ‘winging it.’ ”
Luesebrink “probably developed severe neck pain from constantly shaking his head over the way the participants ran their business,” Bedsworth said.
The business at issue, RC Electronics, was established by the Corrales brothers in 1989, according to a written partnership agreement with an indefinite term.
Richard Corrales claimed that after several successful years of operations, he discovered Rudy Corrales and his wife and daughters had formed a competing business, PK Electronics, to perform the same services offered by RC. He then sent Rudy Corrales a “Notice of Dissociation,” dated April 12, 2005, in which he stated that he was withdrawing from the partnership.
The brothers later sued each other in separate lawsuits. Richard Corrales stated claims for breach of contract, breach of fiduciary duty, fraud, conspiracy, misappropriation of trade secrets, and accounting in his action against Rudy Corrales and his family. Rudy Corrales asserted causes of action for breach of contract, common counts, fraud, negligent misrepresentation, breach of fiduciary duty, and “Cal. Corp. Code, §§ 16703.”
Both cases were tried together over four days in June 2009. At trial, the brothers proceeded on the assumption of the vitality of a one-person partnership, and the main issue in contention was the valuation of the business for buyout purposes, pursuant to Corporations Code Sec.16701.
After hearing competing expert testimony, Luesebrink adopted the valuation presented by Rudy Corrales. He also found Rudy Corrales had concealed the existence of PK from his brother, but that Richard Corrales had not proved any damages arising from the concealment.
Bedsworth explained in his decision yesterday that an expert opinion which assumes an incorrect legal theory cannot constitute substantial evidence to support a verdict on appeal.
“With both sides relying on that theory, there was neither legal nor evidentiary support for this portion of judgment,” he said, and so it could not be upheld.
The justice noted that the California Revised Uniform Partnership Act, which applied to the Corrales brothers, defines a partnership as “an association of two or more persons to carry on as coowners a business for profit .”
When a partner withdraws from a two-person partnership, Bedsworth said, “the business cannot continue as before,” so “the dissolution procedures take over.” He concluded the buyout procedure in Sec.16701 only applies to disassociations, when the business is not wound up, and could not apply to a situation where one partner leaves a two-person partnership, since “a person cannot dissociate from a dissolved partnership.”
Accordingly, Bedsworth—joined by Justices Eileen C. Moore and Richard D. Fybel—concluded the trial court’s “use of the buyout remedy of section 16701 was error, and we must reverse the judgment and remand it to the trial court with instructions to enter a judicial dissolution of the partnership under sections 16801 and 16807.”
The case is Corrales v. Corrales, 11 S.O.S. 4353.
Copyright 2011, Metropolitan News Company