Delaware Supreme Court Finds Limited Liability Partnership Agreement Chose the “Aggregate Model” and Partner Withdrawal Caused Dissolution
In this case, the Delaware Supreme Court answered three certified questions from the United States Third Circuit Court of Appeals concerning the effect of a partner’s withdrawal from a Delaware limited liability partnership formed to prosecute a qui tam action. The Court ruled that unambiguous language in the Partnership Agreement opting out of the “entity model” of partnership provided in the Delaware Revised Uniform Partnership Act meant that the partner’s withdrawal dissolved the partnership (Question 1). The Court also held that the entity that was continuing litigation through an amended complaint after the partner’s withdrawal was a new and different partnership (Question 2). Moreover, because the old entity dissolved at such an early point in the litigation, and because the partners had formed it solely to prosecute the litigation, the old partnership could not continue the litigation because to do so was inconsistent with the agreement’s requirements for a prompt liquidation (Question 3).
The case arose out of three partners forming JKJ Partnership 2011 LLP (“JKJ”), a Delaware limited liability partnership, solely to prosecute a qui tam action under the False Claims Act against Sanofi-Aventis U.S. Services, Inc., Bristol-Myers Squibb Company and certain related entities. After filing the complaint, one of JKJ’s partners left and another joined the partnership in his place. The partnership subsequently filed an amended complaint. Defendants moved to dismiss on the ground that the entity filing the amended complaint was a new plaintiff because the withdrawal of the partner and admission of a new partner had dissolved the original entity under Delaware law. JKJ argued that its change of partners did not dissolve the partnership, and, even if it did, it could continue to pursue the qui tam action.
A New Jersey District Court dismissed the amended complaint on the ground that the withdrawal dissolved JKJ and the “new” partnership lacked standing. JKJ appealed. Because the appeal raised novel issues of Delaware partnership law, the U.S. Court of Appeals for the Third Circuit certified the three questions above to the Delaware Supreme Court.
Determining whether the partner’s withdrawal dissolved the partnership required the Supreme Court to interpret the Partnership Agreement. Section 1.3 of the Partnership Agreement provided that “the Partnership shall not be a separate legal entity distinct from its Partners.” The Court explained that this provision meant that the partnership existed as an association of individual partners (under the former “aggregate theory” of a partnership), rather than as a separate legal entity distinct from its partners (under the more modern “entity” theory). The partnership thus contractually opted out of the default rule in the Delaware Revised Uniform Partnership Act, which follows the “entity theory.” Of dispositive import, the provision also specified that Section 1.3 controlled over conflicting provisions of the Agreement that the plaintiff argued supported a contrary determination. Therefore, the Supreme Court ruled that the withdrawal and substitution of a partner resulted in the dissolution of the partnership.
As to whether the entity that filed the amended complaint was the old or the new partnership, the Supreme Court relied upon the parties having stipulated as an undisputed fact that “[t]he new partner arrangement continued to prosecute this action by filing a second amended complaint." The Supreme Court could not determine from the record presented whether the old partnership had transferred the litigation asset to the new partnership, a question it said remained to be determined by the trial court.
Finally, the Supreme Court held that the dissolved partnership could not prosecute the action post-dissolution. The Partnership Agreement provided for the prompt liquidation of the business upon dissolution. Prosecuting the action, which was in its early stages, was the express business purpose of the partnership. So continuing with it would be to continue with business as usual. That was inconsistent with the “winding up” process.Share