Bette Robin, DDS, JD 877 DrRobin
SELECT PRACTICE SERVICES, INC. / DENTAL PRACTICE SALES
SELECT PRACTICE SERVICES, INC. / DENTAL PRACTICE SALES
PROBLEMATIC PARTNERSHIPS
Professional partnerships are frequently entered into without a great
deal of thought or consideration, much less a written agreement. New
professionals often see a partnership as less expensive way to set up
their own business, as well as provide needed office coverage and
allow for professional camaraderie. However, statistics show that most
partnerships fail and, like a bad marriage, fail miserably with the
expenditure of great sums of money and many nights of lost sleep and
huge amounts of anger.
Drs. Rafati, Salinas and Salazar were engaged in a radiology
partnership in Laredo, Texas that enjoyed considerable financial and
professional success for a number of years. However, almost inevitably
the doctors began fighting, and the fighting became so intense that their
disagreements ended up being decided by the Supreme Court of
Texas on June 27, 1997.
These doctors had a written agreement that addressed many relevant
issues, but significantly did not address termination of the partnership.
The doctors were able to amicably divide up the cash on hand and the
accounts receivables but came to an impasse when attempting to
place value on the intangible aspects of the partnership. The problem
came to a head when Dr. Salinas and Salazar decided to form a new
partnership by themselves and exclude Dr. Rafati and they continued to
enjoy some of the benefits and contracts of the old partnership. Dr.
Rafati then sued Salinas and Salazar alleging breach of fiduciary duty
and wrongful dissolution additionally alleging that he had not been paid
for the goodwill and the good name of the business.
In that these physicians’ partnership agreement did not cover
termination or include associated dissolution formulas, the Supreme
Court was forced to turn to the State’s Partnership Act. The Court was
clear that the Partnership Act was only used to decide this case
because the partners themselves did not contemplate the issues in
advance in a written partnership agreement. The Court stated that
partners may by agreement provide for any sort of distribution upon
dissolution, but lacking a statement the Act must be utilized. The Court
found that the dissolution was not wrongful and there was no “evidence
that the name of the former partnership had goodwill separate and
apart from the personal talents and abilities of each of the partners or
that any partner had the right . . . to form a new partnership using the
name of the dissolved partnership.” The case was ultimately remanded
to the trial court to determine the proper split of the office furniture
(which had the value of a grand estimated sum of $7,500), and the
value of the leased office space. I dare say their combined legal bills
greatly exceeded the amounts in dispute, but at least they each got their
‘day in court’! (Is this any solace?!)
California has enacted the Revised Uniform Partnership Act (RUPA)
which generally governs all partnerships formed on and after January 1,
1997 and conclusively will govern all partnerships after December 31,
1998, irrespective of when formed. RUPA dramatically changes some
aspects of partnership law, especially since RUPA considers
partnerships as an ‘entity,’ more like a corporation than as individuals
engaged in business together. However, RUPA has no effect if a
written partnership agreement speaks to the relevant issue in question.
RUPA only steps in and governs when the partners themselves have
neglected to explore, or adequately explore, an issue facing litigation.
Therefore, before entering into a partnership, carefully and thoroughly
examine termination of that partnership. In particular:
1. First, decide what can or may cause termination of the partnership,
and what the procedure for that termination is. For example, when can a
partner voluntary leave, what can cause forced expulsion of a partner,
and when does the entire partnership end? What happens in the event
of partial or total disability of a partner, and what exactly is meant by
these terms? What happens in the event of death of a partner?
2. Determine a formula or procedure for valuation of the practice in the
event of dissolution, breach of the partnership agreement, forced or
voluntary buy-out, death, disability, etc. These formulas may each be
different or one in the same.
3. Decide who gets to stay in the office space and be certain your lease
allows a partner to leave and the other partner(s) to take over the lease
and release the other from financial obligations under the lease.
4. Figure out what happens to the patient charts should a partner leave
or the entire
partnership dissolve. Who has the legal responsibility for their
maintenance and storage? Who has the legal notification requirements
to comply with the State Board regulations?
5. Who gets the benefit of the partnership name, telephone numbers,
referral sources, and other goodwill upon dissolution? Do you want a
covenant not to compete included in the agreement, and for how long
and how many miles?
In other words, partnerships - like marriages - are one of the most risky
and potentially financially and emotionally devastating arrangements
professionals can enter into. Think twice, and then commit all your
thoughts to writing!
© Bette Robin, DDS, JD 10/97
deal of thought or consideration, much less a written agreement. New
professionals often see a partnership as less expensive way to set up
their own business, as well as provide needed office coverage and
allow for professional camaraderie. However, statistics show that most
partnerships fail and, like a bad marriage, fail miserably with the
expenditure of great sums of money and many nights of lost sleep and
huge amounts of anger.
Drs. Rafati, Salinas and Salazar were engaged in a radiology
partnership in Laredo, Texas that enjoyed considerable financial and
professional success for a number of years. However, almost inevitably
the doctors began fighting, and the fighting became so intense that their
disagreements ended up being decided by the Supreme Court of
Texas on June 27, 1997.
These doctors had a written agreement that addressed many relevant
issues, but significantly did not address termination of the partnership.
The doctors were able to amicably divide up the cash on hand and the
accounts receivables but came to an impasse when attempting to
place value on the intangible aspects of the partnership. The problem
came to a head when Dr. Salinas and Salazar decided to form a new
partnership by themselves and exclude Dr. Rafati and they continued to
enjoy some of the benefits and contracts of the old partnership. Dr.
Rafati then sued Salinas and Salazar alleging breach of fiduciary duty
and wrongful dissolution additionally alleging that he had not been paid
for the goodwill and the good name of the business.
In that these physicians’ partnership agreement did not cover
termination or include associated dissolution formulas, the Supreme
Court was forced to turn to the State’s Partnership Act. The Court was
clear that the Partnership Act was only used to decide this case
because the partners themselves did not contemplate the issues in
advance in a written partnership agreement. The Court stated that
partners may by agreement provide for any sort of distribution upon
dissolution, but lacking a statement the Act must be utilized. The Court
found that the dissolution was not wrongful and there was no “evidence
that the name of the former partnership had goodwill separate and
apart from the personal talents and abilities of each of the partners or
that any partner had the right . . . to form a new partnership using the
name of the dissolved partnership.” The case was ultimately remanded
to the trial court to determine the proper split of the office furniture
(which had the value of a grand estimated sum of $7,500), and the
value of the leased office space. I dare say their combined legal bills
greatly exceeded the amounts in dispute, but at least they each got their
‘day in court’! (Is this any solace?!)
California has enacted the Revised Uniform Partnership Act (RUPA)
which generally governs all partnerships formed on and after January 1,
1997 and conclusively will govern all partnerships after December 31,
1998, irrespective of when formed. RUPA dramatically changes some
aspects of partnership law, especially since RUPA considers
partnerships as an ‘entity,’ more like a corporation than as individuals
engaged in business together. However, RUPA has no effect if a
written partnership agreement speaks to the relevant issue in question.
RUPA only steps in and governs when the partners themselves have
neglected to explore, or adequately explore, an issue facing litigation.
Therefore, before entering into a partnership, carefully and thoroughly
examine termination of that partnership. In particular:
1. First, decide what can or may cause termination of the partnership,
and what the procedure for that termination is. For example, when can a
partner voluntary leave, what can cause forced expulsion of a partner,
and when does the entire partnership end? What happens in the event
of partial or total disability of a partner, and what exactly is meant by
these terms? What happens in the event of death of a partner?
2. Determine a formula or procedure for valuation of the practice in the
event of dissolution, breach of the partnership agreement, forced or
voluntary buy-out, death, disability, etc. These formulas may each be
different or one in the same.
3. Decide who gets to stay in the office space and be certain your lease
allows a partner to leave and the other partner(s) to take over the lease
and release the other from financial obligations under the lease.
4. Figure out what happens to the patient charts should a partner leave
or the entire
partnership dissolve. Who has the legal responsibility for their
maintenance and storage? Who has the legal notification requirements
to comply with the State Board regulations?
5. Who gets the benefit of the partnership name, telephone numbers,
referral sources, and other goodwill upon dissolution? Do you want a
covenant not to compete included in the agreement, and for how long
and how many miles?
In other words, partnerships - like marriages - are one of the most risky
and potentially financially and emotionally devastating arrangements
professionals can enter into. Think twice, and then commit all your
thoughts to writing!
© Bette Robin, DDS, JD 10/97
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DrRobin@BetteRobin.com
17482 Irvine Blvd., Suite E
Tustin, CA 92780
Tustin, CA 92780
877 DrRobin
Tele:
714.421.4407
Fax:
714.398.8808