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Drashner v. Sorenson

South Dakota Supreme Court
1954 S.D. LEXIS 10, 63 N.W.2d 255, 75 S.D. 247 (1954)
ELI5:

Rule of Law:

Under the Uniform Partnership Act, a partner who wrongfully causes the dissolution of a partnership is not entitled to have the value of the business's goodwill included in the valuation of their interest when the remaining partners continue the business.


Facts:

  • In January 1951, C. H. Drashner, A. D. Sorenson, and Jacob P. Deis formed a partnership for a real estate, loan, and insurance business.
  • Sorenson and Deis advanced the entire $7,500 purchase price for the business on behalf of the partnership.
  • The oral partnership agreement stipulated a specific formula for partner compensation and provided that remaining income would be used to pay expenses and then reimburse Sorenson and Deis for their capital investment.
  • A continuing dispute arose because Drashner persistently demanded withdrawals for living expenses in amounts greater than what the partnership agreement allowed.
  • Drashner neglected his business duties, spent significant time in bars during business hours, and was arrested and jailed for reckless driving.
  • After his partners refused a request for a $100 advance, Drashner threatened to dissolve the partnership if he did not get the money.

Procedural Posture:

  • C. H. Drashner (plaintiff) sued A. D. Sorenson and Jacob P. Deis (defendants) in a South Dakota trial court, seeking an accounting, dissolution, and winding up of their partnership.
  • The defendants filed a counterclaim, also seeking dissolution and alleging Drashner's conduct wrongfully caused the need for it.
  • The trial court found that Drashner had wrongfully caused the dissolution in contravention of the partnership agreement.
  • The trial court ruled that the defendants were entitled to continue the business and that the value of Drashner's interest would be calculated without including the value of the business's goodwill.
  • After a valuation hearing, the trial court found the partnership had insufficient assets to reimburse the defendants' capital and decreed that Drashner had no interest in the partnership property.
  • Drashner (appellant) appealed the trial court's judgment to the Supreme Court of South Dakota.

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Issue:

Does a partner who causes the dissolution of a partnership in contravention of the partnership agreement forfeit their right to have the value of the business's goodwill included when calculating the value of their partnership interest?


Opinions:

Majority - Smith, P. J.

Yes. A partner who wrongfully causes the dissolution of a partnership forfeits the right to have the value of the business's goodwill included in the calculation of his partnership interest. The court found substantial evidence that Drashner caused the dissolution wrongfully by willfully and persistently breaching the partnership agreement and conducting himself in a way that made it impracticable to carry on the business. His constant demands for money contrary to the agreement, neglect of the business, and threats to dissolve the partnership constituted such wrongful conduct. Therefore, under the Uniform Partnership Act (SDC 49.0610(2)(c)(2)), the trial court correctly applied the statutory sanction of excluding the value of goodwill when determining the value of Drashner's interest in the partnership.



Analysis:

This case serves as a direct application and reinforcement of the Uniform Partnership Act's provisions regarding wrongful dissolution. It establishes that conduct making it 'not reasonably practicable' to continue a partnership, such as persistent financial demands contrary to the agreement and neglect of duties, can be deemed a wrongful cause for dissolution. The decision highlights the significant financial penalty imposed on a wrongfully dissolving partner—the forfeiture of goodwill value—which can drastically reduce or eliminate their buyout amount. This precedent provides a clear example of the type of partner misconduct that triggers this statutory penalty, protecting the remaining partners who wish to continue the business.

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