The Business Divorce Law Report
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When one partner fails to respond to a notice of breach from the other partner, the relationship may be so damaged that dissolution is required.
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Courts may apply the ‘not reasonably practicable’ standard in determining whether a business can continue in its present form.
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The ‘not reasonably practicable standard’ is incorporated in the partnership statutes of most states.
An appellate court orders the dissolution of a general partnership after taking up the question of what exactly the statutory standard of “not reasonably practicable” means for the second time in a reported opinion.
The issue of what it means for particular conduct or circumstances to make it “not reasonably practicable” is
often a critical issue in business divorce cases. We see it in both in judicial dissolution cases and in those states that permit judicial expulsion (i.e., dissociation) of owners.
Yet, the case law excamining the contours of the reasonably practicable is sparse, relatively speaking, despite the fact that the standard is applied in the limited liability company and partnership laws of most states.
AC Ocean Walk, LLC v. Blue Ocean Waters, LLC, the Appellate Division affirmed the judicial dissociation of Blue Ocean Waters, LLC from its partnership with AC Ocean Walk, LLC, and the subsequent dissolution of the partnership.
The court affirmed the lower court’s decision that Blue Ocean Waters’ failure to respond to a notice of breach constituted grounds for judicial dissociation under the Revised Uniform Partnership Act (RUPA) as adopted in New Jersey.
The New Jersey Supreme Court considered the application of the not reasonable practicable standard in IE Test, LLC v. Carroll, a case that involved the judicial association. The application of the standard — the RUPA and the Revised Uniform Limited Liability Company Act (RULLCA) — both use the same language — was not entirely consistent.
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It’s true that the individual behavior that merits judicial expulsion and the behavior that is grounds to terminate the enterprise may be quite different. Nonetheless, it seems strange that the Appellate Division makes no mention of a Supreme Court decision construing the same three words.
Partnership Operated Ocean Casino’s Beach Club
In January 2018, AC Ocean Walk acquired ownership of the Ocean Casino Resort in Atlantic City. At that time, IDEA Boardwalk LLC’s lease of the casino’s nightclub and beach club was still in effect despite the closing of the casino (then the Revel) in 2014.
When AC Ocean Walk bought the shuttered casino, it purchased the lease rights from IDEA Boardwalk for $8 million, with $3 million upfront and the remainder in five annual $1 million installments. AC Ocean Walk then entered into a partnership agreement with Blue Ocean Waters, LLC.
The partnership agreement required Blue Ocean Waters to operate the clubs, and to cover one-third of the $3 million upfront payment and half of any revenue shortfalls for the annual installment payments. Blue Ocean Waters also agreed to fund renovations, capital costs, and half of the pre-opening costs and to prepare an annual budget for AC Ocean Walk’s approval.
The clubs reopened on June 28, 2018. Disputes arose over the next two years about multiple issues: renovation costs, invoice validity, personnel, partnership asset use, recordkeeping, accounting, and control over the clubs.
Ultimately, AC Ocean Walk declared a breach on September 29, 2020, sending written notice to Blue Ocean Waters, asserting that it had 10 days to cure the breaches. Blue Ocean Waters did not respond.
Ocean Walk sued in February 2021, seeking dissociation of Blue Ocean Waters, the dissolution of the partnership, and damages.
Court’s Rationale
The trial court held that Blue Ocean Waters’ non-response to the breach notice was a clear indication that judicial dissociation was appropriate. Under the UPA, a partner can be judicially dissociated if it is “not reasonably practicable to carry on the business in partnership with the partner” (N.J.S.A. 42:1A-31(e)(3)). The court noted that Blue Ocean Waters’ failure to respond to the notice of breach, even if only to deny that it occurred, was mandatory. The failure to give any response therefore met the not reasonably practicable standard.
Discussion of the Relevant Provisions of the Partnership Statute
The relevant provisions of the UPA cited by the court include N.J.S.A. 42:1A-31(e)(3), which allows for judicial dissociation of a partner, and N.J.S.A. 42:1A-39(e)(3), which provides for judicial dissolution of a partnership. Judicial dissociation under N.J.S.A. 42:1A-31(e)(3) is permissible when a partner engages in conduct making it not reasonably practicable to carry on the business in partnership with that partner. Judicial dissolution under N.J.S.A. 42:1A-39(e)(3) is warranted when it is not reasonably practicable to continue the partnership business in conformity with the partnership agreement.
The Appellate Division does not mention IE Test but does cite to other decisions from courts in RUPA states construing the language. It was the failure to respond to the notice of breach of the partnership agreement that made dissolution appropriate, the court reasoned.
[O]ther jurisdictions did not rely upon a singular act to dissociate a partner, [but] Blue Ocean Waters’ conduct in not responding to the notice of breach warrants dissociation because it evinces “an irreparable deterioration of [the partnership] relationship,” … a “refus[al] to personally interact with” AC Ocean Walk, and “an impasse regarding important business because of a lack of communication between [the] partners.
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For a partnership to exist and thrive, the partners need to communicate to resolve issues that are intrinsic to their business. Defendants’ failure to do so is a clear indication that judicial dissociation is appropriate as “it [is] not reasonably practicable to carry on the business in partnership with the partner”
The appellate Division relied on cases from other states in which RUPA had been enacted. These include Brennan v. Brennan Associates, in which the Connecticut Supreme Court applied a similar standard for judicial dissociation and dissolution, focusing on the deterioration of the partnership relationship and lack of trust.
Similarly, the Montana Supreme Court in Merila v. Burke upheld judicial dissociation where partners could no longer effectively communicate or work together. In Giles v. Giles Land Co., L.P., the Kansas appellate court found that an impasse in communication and business operations justified judicial dissociation.
Comparison with the IE Test Standards
The Supreme Court in the IE Test case had held that in seeking to expel a member from a limited liability company because it was not reasonably practicable to continue the business with that member. There not reasonably practicable meant not really possible.
[T]he pivotal language suggests that it must be unfeasible, despite reasonable efforts, to keep the LLC operating while the disputed member remains affiliated with it.
The IE Test court applied a list of factors to determine whether the member’s conduct must be so disruptive that it becomes unfeasible, despite reasonable efforts, to continue the business with that member as part of the LLC. The court emphasized the need to consider ongoing disputes, hindrance in decision-making, significant impediments in the company’s operations, and the impact of the behavior on the company’s ability to function effectively. Judging whether conduct meets the not reasonably practicable standard, the Supreme Court held, requires a balancing of factors.
In that inquiry, a trial court should consider the following factors, among others that may be relevant to a particular case: (1) the nature of the LLC member’s conduct relating to the LLC’s business; (2) whether, with the LLC member remaining a member, the entity may be managed so as to promote the purposes for which it was formed; (3) whether the dispute among the LLC members precludes them from working withone another to pursue the LLC’s goals; (4) whether there is a deadlock among the members; (5) whether, despite that deadlock, members can make decisions on the management of the company, ursuant to the operating agreement or in accordance with applicable statutory provisions; (6) whether, due to the LLC’s financial position, there is still a business to operate; and (7) whether continuing the LLC, with the LLC member remaining a member, is financially feasible.
Here, of course, there was a partnership with two members, but the opinion says nothing about what the partners had agreed to concerning decision making. Partners are presumed to have an equal say in the operations of the business, so one might infer that it was unable to go on. The opinion doesn’t discuss decision making, but it’s difficult — and probably impossible — to be in business with a partner who just ignores important documents.
Nonetheless, the opinion does not go through the seven-factor analysis. The lesson here is that in such a circumstance, no response is sufficient to conclude that a partnership relationship cannot continue.