In Sunseri v. Proctor, 2006 WL 3206078, the issue arose as to which members of the Proctor family were partners in Macro Cellular Partners. The court relates the following facts:
Macro was formed in 1988 as a general partnership with the purpose of participating in Federal Communications Commission ("FCC") cellular phone lotteries. ... Macro initially consisted of ten general partners, each owning a 10% interest in the partnership. Defendant Conrad Proctor, a Michigan ear, nose and throat doctor who had been involved with other similar ventures, introduced the opportunity to become a partner in Macro to his son David. On June 7, 1988, David agreed to become an original partner in Macro, and Conrad paid for David's initial capital contribution. ...
[O]n January 2, 1991, Conrad Proctor, on David's behalf, drafted a letter to Macro, which David signed, instructing the managing partner to transfer his "interest in the Ohio-4 RSA Cellular Market" to his mother, Phyllis D. Proctor. ... Thereafter, on February 9, 1991, Conrad Proctor again wrote to the managing partner of Macro, this time on Phyllis's behalf, informing the partner that Phyllis transferred "all rights, title and interest" in the "10% interest in Ohio-4 RSA Cellular Market" to the Phyllis D. Proctor Trust.
What strikes me as curious about this case is that the court applies the definitional standards of whether someone is a partner rather than simply applying the rules governing transfers of partnership interest. For example, the court writes that:
Based on the evidence submitted by both parties, the Court finds that there is a genuine issue of material fact concerning whether Phyllis Proctor was a partner in Macro. ... While there is evidence that supports Plaintiffs' argument that Phyllis Proctor was a partner, there is also evidence that supports the conclusion that she was not a partner. In light of Plaintiffs' burden of proof on the issue of partnership, the Court cannot say that Phyllis Proctor was a partner in Macro as a matter of law.
Likewise, the court also writes:
Plaintiffs' claim that the Trust was a general partner is unconvincing. The only evidence of the Trust's involvement with Macro is a letter from Phyllis Proctor to Macro instructing that it transfer her interest in the Ohio-4 market to her trust. Plaintiffs argue that this automatically rendered the Trust a partner in Macro. However, as Defendants point out, there is no evidence that the Trust acted as a partner in anyway, was ever represented as a partner at partnership meetings, was ever identified as a partner in any partnership documents, and was ever admitted to the partnership by agreement of the partners.
This is not at all how I would have analyzed the case. I would have said that David is a partner in Macro. On January 2, 1991, David assigned his interest in the partnership to his mother. On February 9, 1991, Phyllis assigned her interest to the Trust.
As a matter of law, the assignee of a partnership interest does not become a partner in the business. As i wrote in my book Agency, Partnership and LLCs:
By the nature of tenancy in partnership, a partner’s rights to partnership property are not assignable except in connection with an assignment of the rights of all the partners (e.g., a sale of the partnership as a whole). Does lawyer Alice have any right she can assign to Xavier? Yes, but not much of one. Alice can assign Xavier her “interest” in the firm. The partner’s interest in the firm is the partner’s share of firm profits. The partner’s interest is her personal property. Hence, while Alice cannot unilaterally transfer or assign her share of the partnership’s assets, she can assign to Xavier her right to receive the stream of income generated through the use of partnership assets.
The rights Xavier receives, however, are severely limited. When a partnership interest is assigned, the assignee gets none of the general rights of a partner—the assignee can not interfere in firm management, can not demand any information about the firm and may not inspect the firm’s records. All the assignee gets is the right to be paid the profits to which the assigning partner would otherwise be entitled.
I would add that Section 503(a)(2) of the 1997 UPA codifies prior law that transfer of an interest does not effect a dissolution of the partnership. Further, Section 503(d) of the 1997 Act likewise codifies prior law that: “Upon transfer, the transferor retains the rights and duties of a partner other than the interest in distributions transferred.” A partner who has transferred his interest thus remains a partner! This conclusion is buttressed by UPA (1997) § 601(4)(ii), which authorizes expulsion of a partner who transfers substantially all of his interest. If the transfer of interest resulted in the partner getting “out,” there would be no need to provide for expulsion of such a partner.
Hence, David remained a partner, while Phyllis and then the Trust are mere assignees of his interest. Accordingly, the Plaintiff's claim that they became partners should fail as a matter of law. There was no reason to get into the question of whether Phyllis or the Trust satisfied the definition of a partner. Or am I missing something?
Update: Larry Ribstein writes that: "it's not clear that what was transferred here was merely an economic interest in the firm rather than the whole package, including management rights."
My point is that partnership law does not permit the transfer of "the whole package." I see cases like Sunshine Cellular or Sunseri or Putnam v. Shoaf (in my casebook) as erring by suggesting that there is anything that can be transferred beyond the economic "interest" as that term is defined by statute. Accordingly, I believe, in these cases, if the parties tried to assign something beyond that interest, the court should say they failed to do so.
I agree with Larry that the problem could be solved by good lawyering. But it's good lawyering about dissolution and/or admission of new members, not good lawyering about assignment of an interest. In order to make the trust a partner, either the other Partners should vote to admit the trust with an expulsion ot disassociation of David, or the partnership should be dissolved and the business continued as a new partnership in which the Trust has been admitted in lieu of David.
Update 2: The debate continues in the comment thread to Larry's post. Anyone want to referee?
