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Prentiss v. Sheffel

Court of Appeals of Arizona
1973 Ariz. App. LEXIS 749, 20 Ariz.App. 411, 513 P.2d 949 (1973)
ELI5:

Rule of Law:

Partners who exclude another partner from management in a partnership-at-will, if not done for a wrongful purpose or in bad faith, are not prohibited from bidding on and purchasing partnership assets at a subsequent judicially supervised dissolution sale.


Facts:

  • Two plaintiffs and one defendant formed a three-person partnership-at-will to acquire and operate the West Plaza Shopping Center.
  • The plaintiffs collectively owned an 85% interest in the partnership, while the defendant owned a 15% interest.
  • The parties never entered into a detailed partnership agreement defining how management decisions would be made or the term of the partnership.
  • Numerous unresolved disputes arose between the parties, causing their professional relationship to deteriorate.
  • The plaintiffs notified the defendant that all future dealings must go through their attorney, effectively excluding him from partnership management and affairs in what the court termed a 'freeze-out'.
  • The defendant, citing poor financial condition, failed to contribute his full pro-rata share of the partnership's operating losses when required.

Procedural Posture:

  • The two majority partners (plaintiffs) sued the minority partner (defendant) in a state trial court, seeking dissolution of their partnership.
  • The defendant filed a counterclaim seeking dissolution and the appointment of a receiver, alleging he had been wrongfully excluded from the partnership.
  • The trial court found that a partnership-at-will existed and had been dissolved as a result of the plaintiffs' 'freeze-out' or exclusion of the defendant from management.
  • The court appointed a receiver, ordered a judicial sale of the partnership's primary asset, and expressly denied the defendant's request for an order forbidding the plaintiffs from bidding at the sale.
  • At the judicial sale held in open court, the plaintiffs submitted the highest bid for the asset.
  • The trial court entered an order confirming the sale of the asset to the plaintiffs.
  • The defendant (appellant) appealed the trial court's order confirming the sale to the state's intermediate court of appeals.

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Issue:

May majority partners who have excluded a minority partner from management, but not for a wrongful purpose, purchase the partnership assets at a subsequent judicially supervised dissolution sale?


Opinions:

Majority - Haire, Judge

Yes. Majority partners who have excluded a minority partner may purchase partnership assets at a judicial dissolution sale, provided the exclusion was not for a wrongful purpose or in bad faith. The court found no evidence that the defendant's exclusion was for the wrongful purpose of obtaining the partnership assets; rather, it was the result of the partners' inability to function harmoniously. Furthermore, the defendant failed to demonstrate any injury from the plaintiffs' participation in the sale. In fact, their bidding drove the final sales price higher, which enhanced the value of the defendant's 15% interest. The defendant had the same right as the plaintiffs to bid on the assets, and his claim that they were bidding with 'paper dollars' is unpersuasive, as he also could have bid to the extent of his 15% interest.



Analysis:

This decision clarifies the rights and obligations of partners during a non-wrongful dissolution of a partnership-at-will. It establishes that a 'freeze-out' from management, if not motivated by bad faith or a fraudulent scheme to acquire assets cheaply, does not strip the excluding partners of their right to participate in a fair, court-supervised liquidation sale. The ruling distinguishes between dissolutions caused by mere discord and those caused by wrongful conduct, suggesting that the remedy for the former is a properly conducted sale open to all parties. This precedent reinforces the principle that judicial sales should be conducted to maximize value for all partners, and allowing all partners to bid often serves this purpose.

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