Partner wants out of General Partnership...

[Louise95]

A California General Partnership owns 2 buildings, one held in title by the partnership (value $1.2m), the other held in title by the three equal partners as tenants in common (value $3.3m). Partnership agreement is 35 years old, never updated. The youngest partner was a minor at the time of signing. Partnership agreement assigns book value to withdrawing partner's share. Prior attempts to rewrite agreement and convert to LLCs failed. Partners no longer on speaking terms, and on rare occasions when they have to talk, it's contentious.

Situation: for personal and practical reasons, the youngest partner wants to sell his share of assets and withdraw from the partnership, maximizing the amount he obtains.

Questions:

(1) if the remaining partners do not wish to purchase withdrawing partner's shares, does the withdrawing partner have the right to sell his one-third interest (real estate & partnership accounts) to an outside party, or to force a sale of all assets to obtain liquidation of his share? What would that entail? How much might these actions cost?

(2) if the withdrawing partner is able to sell his real estate assets -- whether to the remaining partners or to an outside party -- can the more valuable property be used for a 1031 tax-deferred exchange (as it is held in the names of the individual partners as tenants in common) assuming other requirements of the 1031 tax-deferred exchange are met? And what about the lesser-valued property held in title by "BlahBlah General Partnership" of which the withdrawing partner is a general partner -- is a 1031 remotely possible?

That's it! Thanks!
All the best,
Louise

 

[tranquility]

You have a specific question that require many more facts and may require more than one expert. I'd start with a tax professional. There is nothing inherently wrong with an exchange, sale or ending of the partnership. You need to pay someone to work through each possibility to see the tax effects when related to your duties and responsibilities under the agreement.

 

[Louise95]

antiquated agreement

Is the agreement binding if the partner was a minor when he signed it?

 

[tranquility]

The "agreement", no. But, the reality of the agreement, yes.

 

[Louise95]

Can you clarify?

The agreement is void. The reality of the partnership exists, but the terms of the agreement are governed by statue and not by the agreement. Right?

 

[tranquility]

Unless the under age partner who signed renounced the contract within a year from becoming an adult, the agreement is not "void".

Info edit:

My mistake. It's not one year, but a "reasonable time". (Also, the word is "disaffirmed", not renounced.)

CA Family code:

6710. Except as otherwise provided by statute, a contract of a
minor may be disaffirmed by the minor before majority or within a
reasonable time afterwards or, in case of the minor's death within
that period, by the minor's heirs or personal representative.

 

[Louise95]

void ab initio

My understanding is that there was a Supreme Court ruling saying that the agreement is considered "void ab initio".

 

[tranquility]

Not that I'm aware. And, we have the statute right in front of us. Besides, the person who can make the agreement void would be the minor, not the person who contracted with him.

 

[HomeGuru]

I am sure the minor is not going to play that card since it is he.she that wants out and some $$$.

 

[Zigner]

I am sure the minor is not going to play that card since it is he.she that wants out and some $$$.

There is no minor. 35 years ago there was a minor that signed on, but he's long since become "not-a-minor"

 

[HomeGuru]

There is no minor. 35 years ago there was a minor that signed on, but he's long since become "not-a-minor"

**A: that is why it is a relatively minor issue.

 

[Louise95]

What about:

§1517. Disabilities of minor. What contracts prohibited.
A minor cannot give a delegation of power, nor make a contract relating to real property, or any interest therein, or relating to any personal property not in his immediate possession or control, except as otherwise specially provided.

Isn't the agreement void ab initio because it would (unlawfully) delegate power from a minor to a partnership AND it acts as a contract relating to real property?

"Reasonable time" is irrelevant because the agreement was never valid.

 

[tranquility]

What about:

�1517. Disabilities of minor. What contracts prohibited.
A minor cannot give a delegation of power, nor make a contract relating to real property, or any interest therein, or relating to any personal property not in his immediate possession or control, except as otherwise specially provided.

Isn't the agreement void ab initio because it would (unlawfully) delegate power from a minor to a partnership AND it acts as a contract relating to real property?

"Reasonable time" is irrelevant because the agreement was never valid.

Fair enough, but that is not the cite for California. (Cal. Fam. Code 6701) Now, what result? One case (Sparks v. Sparks 101 Cal. App. 2d 129) discussion held:

[9] Insofar as Glen is concerned, he was a minor under the age of 18 years at the time he executed the first deed and it is therefore void ab initio and he owed no legal duty upon disaffirmance to restore the consideration received by him. (Civ. Code, �� 33, 35 fn. *; Niemann v. Deverich, 98 Cal. App. 2d 787, 792 [221 P.2d 178, 182]; Lee v. Hibernia S. & L. Soc., 177 Cal. 656, 659 [171 P. 677]; Maier v. Harbor Center L. Co., 41 Cal.App. 79, 81 [182 P. 345].) A person dealing with an infant does so at his peril. [10] The law shields minors from their lack of judgment and experience and confers upon them the right to avoid their contracts in order that they may be protected against their own improvidence and the designs and machinations of other people, thus discouraging adults from contracting with them. (Niemann v. Deverich, supra.)

Admittedly there was no consideration for the deed of 1947. Nothing whatever was paid to or received by either one of the plaintiffs in return for its execution. The money which was in Glen's bank account and which had been placed there as the purported consideration for the deed of 1943 and which he was under no obligation to return was withdrawn from the bank and handed to him upon Carmelita's insistence that he could not receive the money until he had signed the second deed--a statement which she knew to be untrue. The [101 Cal. App. 2d 138] money was his and had been since 1943, and he was entitled to receive it without any condition whatsoever.

So, if the minor disaffirmed in a reasonable time, are you saying he should get the property back and still have the "consideration" of having all rights in the partnership? Not only that, but ALL rents and profits from the contributed property (not just the former minor's share) should be disgorged to him while he continues to accept partial ownership of capital or rights in the other property? That can't be what you want. Joining a partnership would not be a delegation of power in the way the statue means. Also, you have the fact the person has been in this relationship for many years. Pretend the contract was void. The long-standing relationship and acting certainly formed some contract and understanding once he reached majority. Because all parties continued in this for over a decade and there is certainly enough evidence of the relationship to take it out of the statute of frauds. Let alone statute of limitations and laches or other equity problems.

Face it. You have to deal with your situation as though it is a valid partnership. If you are the former minor, you could get an attorney to see how much you want to spend to make new law and try to get way more than you deserve. But, I don't see it happening.

Info edit:

A similar but differently numbered code (Then Civ. Code 33) was the key in Burnand v. Irigoyen, 30 Cal. 2d 861 (1947), there there was an estoppel (an equitable remedy) to having the contract be void.

[5] However, the court made further findings to the effect that if a portion of the moneys paid under the contract could be traced to proceeds from the sale of properties in Mexico in which the children owned an interest, the acts of the defendant in this respect occurred at a time when she had attained the age of capacity, and created an estoppel to avoid an implied agreement of liability for the rental value of the premises during occupancy. In Maier v. Harbor Center Land Co., supra, (41 Cal.App. at p. 81) it was said that the mere payments of installments after the minor reached the age of 18 did not remake the old contract or make a new one for the purchase of the property, and hence did not amount to an estoppel to assert the invalidity of the contract of purchase. Here the estoppel found by the court does not relate to the contract of purchase. The plaintiff is not seeking to enforce that contract. As the trial court viewed it the acts of the defendant after her incapacity had been removed operated to estop a disaffirmance of an implied agreement to pay a reasonable rental for the occupancy of the home.

But, when you look at Maier in the Digest

§ 5. Contracts of Infants. See 5 Kerr's Cal. Dig., p. 4800; also, 14 Ruling Case Law (R. C. L.), p. 222.

(a) A contract for the purchase of land made by a minor under the age of eighteen years, is void ab initio.—Maier v. Harbor Center Land Co., 28 Cal. App. Dec. 1046, 58 Cal. Dec. 31, 182 Pac. 345.

(b) A minor is not estopped from disaffirming such a contract without a restoration of the consideration (damage suffered) by reason of having made payments on the contract after reaching the age of eighteen years, since tinder section 35 of the Civil Code it is only when the contract is made by a minor whilst he is over eighteen that he must restore the consideration, if he elects to disaffirm.— Maier v. Harbor Center Land Co., 28 Cal. App. Dec. 1046, 58 Cal. Dec. 31, 182 Pac. 345.

(c) In such a case there is no consideration to be returned, since the loss is the result of a mistake in entering into a void contract. Maier v. Harbor Center Land Co., 28 Cal. App. Dec. 1046, 58 Cal. Dec. 31, 182 Pac. 345.

(d) An action to cancel such a contract and for the recovery of moneys paid thereunder, is not within the limitations of section 339 of the Code of Civil Procedure providing a two-year limitation for actions for moneys had and received. (See next syllabus).— Maier v. Harbor Center Land Co., 28 Cal. App. Dec. 1046, 58 Cal. Dec. 31, 182 Pac. 345.

(e) In denying the petition for a rehearing of this appeal in the supreme court, after decision by the district court of appeal, the opinion of the latter court (28 Cal. App. Dec. 1046) on the subject of the statute of limitations is not approved.—Maier v. Harbor Center Land Co., 58 Cal. Dec. 31, 182 Pac. 345.

Editorial Notes.

Does right of grantor to maintain a suit in equity to set aside his conveyance on ground of infancy survive to his heir. 2 A. L. R. 437.

apparently, in some cases, the non-minor is in big, big trouble.

Dear Lord, Louise 95, are you the former minor? If so, your position seems far stronger than I imagined. If not, I'm so sorry for your loss.

 

[Louise95]

Indeed I am.

Thank you, Tranquility, for your help. I am already feeling more tranquil.

Indeed I am the former minor.

The partnership is not in doubt; it's the partnership agreement document which has unacceptable clauses. I signed it when I was a minor, had no choice in the matter and could not possibly have understood what I was signing. Several times since, we partners discussed making the necessary changes, but could not agree. Now I'm fed up and concerned that one of my partners may try to enforce those unacceptable clauses one day.

My partners do not want to even discuss changing the agreement by amendment or by creating another entity (ie LLC), even though they did accept doing so in principle several times during the intervening years. In any case, discussion leads nowhere with them.

I am going to have my attorney ask the court to declare the original agreement "void ab initio." Then the partnership will exist without an agreement, and my partners and I will have to come to agreement on new terms, or I'll be able to do whatever I want with my share under California partnership statutes.

 

[tranquility]

I don't believe the partnership agreement is void, but the transfer of your property into it may be. In fact, that is how you would want things to be. While I still have my doubts that equity would not rule or there is something else missing, from a strict reading, the property "transferred" to the partnership is yours as would any profits it earned over time AS IS the "consideration" paid (rights in the partnership) for the property.

However, although Maier seems to stand for the proposition the statute of limitations does not apply for return of the monies, laches is not prohibited as a defense. Please write back after you consult with an attorney.