In Russell Realty Associates, et al. v. C. Edward Russell, Jr., the Supreme Court of Virginia upheld a trial court’s order that dissolved a partnership due to discord between the partners which “frustrated the economic purpose” of the partnership and a kept the partnership from being able to practicably operate under the written partnership agreement.
Nina Russell Randolph (“Nina”) and her brother, C. Edward Russell, Jr. (“Eddie”), were partners in Russell Realty Association (RRA), a partnership formed to acquire and invest in properties, with Eddie having a slightly larger interest.
When their father died, the siblings constantly disagreed over whether properties should be developed or sold, whether RRA should be converted to an LLC, and issues regarding the operational control of the partnership. The siblings hired a consultant to facilitate the relationship between them and advance RRA partnership affairs.
Under the written Partnership Agreement, Eddie had ultimate decision-making and management authority in the event of disagreement. However, he still went ahead and filed a proceeding to dissolve the partnership due to conflicts over constant disagreements between the partners.
The statutory basis for judicial dissolution of a partnership are when: (1) the economic purpose of partnership is unreasonably frustrated, (2) another partner has engaged in conduct relating to the partnership business which makes it not reasonably practicable to carry on the business in partnership with that partner, or (3) it is not reasonably practicable to carry on the partnership business in conformity with the partnership agreement.
After a 13-day bench trial in the Circuit Court of the City of Chesapeake, the court dissolved RRA based on the first and third prongs.
The case was appealed to the Supreme Court of Virginia to decide whether the trial court erred in holding that Eddie met the strict standards for judicial dissolution of a partnership under Va. Code § 50-73.117(5). The Supreme Court upheld the lower court’s decision.
The court applied the same standard applicable to LLCs to the partnership dissolution issue because of the statutes’ similarities. Despite arguments by Nina that RRA was an ongoing profitable business and therefor its economic purpose was not frustrated, the court opined that the decision regarding whether to dissolve the partnership under the “economic purpose” prong is not dependent upon whether the partnership is financially successful. The court concluded that poor financial performance may be a basis for dissolution under the economic purpose prong but is not the sole basis for dissolution under that prong.
The Supreme Court found that the purpose of RRA was to acquire, hold, invest in, and lease and sell investment properties. The partners’ expectations for realizing these purposes included not only expectations of economic success, but also the ability to undertake these activities in an efficient and productive manner to maximize return to the partnership. Due to significant distrust and disagreement between the partners, their relationship frustrated the ability of the partnership to take advantage of a lucrative offer for the sale of property and to secure certain zoning and appraisals for another property in a timely manner.
The record demonstrated that the disruptive relationship between the partners resulted in the partnership incurring substantial added costs relating to the conduct, recording, and transcribing of meetings and minutes of the partnership meetings, as well as the costs incurred in addressing discord and litigation filed or threatened to be filed aside from the instant case. The parties’ relationship imposed unnecessary economic costs on the partnership in a number of ways including preventing the partnership from taking advantage of and conducting its business in a timely and efficient manner. Because nothing in the record suggested the relationship of the partners would improve, the court determined that the economic purpose of the partnership had, in fact, been unreasonably frustrated.