Lawlis v. Kightlinger & Gray

Indiana Court of Appeals · 1990 · Corporations

CorporationsPartnershipsWrongful expulsion of partnerGood faithFiduciary dutypartnership agreementexpulsiondissolution

Facts

Lawlis became a general partner in the law firm and signed partnership agreements in 1972 and 1984 providing that senior partners could, by majority or supermajority vote depending on the matter, determine units of participation and involuntarily expel partners. After Lawlis developed alcoholism, the firm's Finance Committee imposed conditions on his continued relationship with the firm, first in a 1983 Program Outline stating there was 'no second chance,' and then again after a 1984 relapse, although he stopped drinking after March 1984. In late 1986, after Lawlis sought an increase in participation units, the Finance Committee recommended severing his relationship no later than June 30, 1987, removed files from his office, and proposed that he remain a senior partner temporarily with one unit and a weekly draw while transitioning to other employment. Lawlis refused to sign the 1987 addendum, and on February 28, 1987, the senior partners voted seven to one to expel him under Article X of the 1984 agreement.

Issue

Did the partnership wrongfully expel Lawlis by breaching the partnership agreement, violating a duty of good faith or fiduciary duty, committing constructive fraud, or breaching an oral promise to restore him to full status? More specifically, did dissolution occur when he was notified of the recommendation and files were removed, or only when he was actually expelled by the required vote?

Rule

When a partnership agreement gives senior partners the power to expel a partner, dissolution occurs upon the actual expulsion carried out bona fide and in accordance with the agreement, not upon earlier notice of a proposed expulsion. Under a freely negotiated no-cause expulsion clause, the remaining partners act in good faith regardless of motivation if the expulsion does not wrongfully withhold money or property legally due the expelled partner at the time of expulsion. Claims of fiduciary breach and constructive fraud fail where the complained-of conduct does not involve taking an improper business or property advantage from the expelled partner and the expulsion was authorized by the agreement.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

A consulting partnership in Denver has a written agreement allowing any partner to be expelled by a two-thirds vote of the executive partners. In April, Nora Benton is told that the committee intends to recommend her removal at the June annual meeting, and her client files are reassigned, but she remains on the firm's website, continues receiving weekly draws, and votes at partner meetings until the June vote passes.

When did dissolution as to Nora most likely occur?

Explanation. Dissolution by expulsion occurs upon actual expulsion carried out bona fide and in accordance with a power conferred by the partnership agreement, not upon earlier notice of a future recommendation. Reassignment of work, standing alone, does not establish earlier dissolution where the partner continues to be treated as a partner by remaining on firm materials, receiving draws, and participating in governance.