Wisconsin Supreme Court says UPA trumps equity in partnership dispute

By Joe Forward, Legal Writer, State Bar of Wisconsin

July 7, 2011 – Despite an equity argument, the Wisconsin Supreme Court recently ruled that it was unlawful for one partner to draw a salary while keeping the business running after the other partner left.

In 1995, David Bushard and Steven Reisman both contributed $15,000 to start PressEnter LLP, an internet dial-up service. They did not draft a partnership agreement.

Bushard informed Reisman in 1999 that he was dissolving the partnership, effective August 31. He offered to sell his interest, estimated to be worth about $3 million at the time.

No one bought Bushard’s interest. Reisman continued to run the business, and began taking a salary of $150,000 to $160,000 per year, starting in January of 2008. PressEnter still paid Reisman for his half interest in the partnership, approximately $2.3 million after dissolution.

When Bushard learned that Reisman was drawing a salary in 2006, he filed suit. Under Wis. Stat. section 178.15(6) of Wisconsin’s Uniform Partnership Act (UPA), Brushard asserted, Reisman was not legally allowed to draw a salary.

The UPA applies in the absence of a partnership agreement.

Section 178.15(6) states that, “[n]o partner is entitled to remuneration for acting in the partnership business, except that a surviving partner is entitled to reasonable compensation for his or her services in winding up the partnership affairs.” A surviving partner is one who winds up the business after another partner dies.

Still, Reisman argued that he had not been adequately compensated and Brushard was unjustly enriched from “the fruits of his labor.” In other words, Reisman argued that Brushard received more in distributions than he would have if Reisman bought Brushard’s interest on the date of dissolution in 1999.

The circuit and appeals courts discharged Reisman’s argument via summary judgment and ordered him to pay Brushard half his take in salary, $352,350.

The Wisconsin Supreme Court affirmed in Bushard v. Reisman, 2011 WI 51 (June 30, 2011), concluding the equitable principles cannot trump the plain language of section 178.15(6).

“Contrary to Reisman’s assertions, the real controversy in this case is not what distribution of PressEnter’s profits is most equitable under the circumstances,” wrote Justice Ann Walsh Bradley for the 7-1 majority (Justice Patience Roggensack dissented). “Instead, the real controversy is what distribution is mandated by the plain language of the statute.”

Reisman also argued dissolution resulted in a continuation and Brushard “already received distributions in excess of the continuation value of his interest in the partnership.”

“Distinguishing in the first instance whether dissolution resulted in a wind-up or a continuation is critical because the settlement of the former partner’s account differs depending on whether it is a wind-up or a continuation,” Justice Bradley wrote.

The court explained that a partnership is valued on the date of dissolution where another partner continues the business. In a wind- situation, the partnership is valued on the date the wind-up is completed. The court also explained that partnership dissolution causes a wind-up rather than a continuation unless the outgoing partner consents.

Here, Brushard did not consent to a continuation, the court concluded. That the partnership actually continued with Brushard’s knowledge does not change this conclusion.

“Had Brushard consented to a continuation, he would not have been entitled to partnership distributions,” Justice Bradley noted. “Rather his 50 percent share of PressEnter would have been fixed on the date of dissolution.”

The court affirmed but left the issue of an accounting open for the circuit court to consider, consistent with its opinion.

Dissent

Justice Patience Roggensack noted that over an 11-year period, Reisman worked on a full-time basis for PressEnter and section 178.15(1) “permits consideration of the 11 years of service that Reisman provided to PressEnter as a contribution from him to the value of the partnership.”

Section 178.15(1) states that “[e]ach partner shall be repaid that partner's contributions, whether by way of capital or advances to the partnership property and share equally in the profits and surplus remaining after all liabilities, including those to partners, are satisfied. …”

Justice Roggensack would remand the case for an accounting, taking into consideration the skill and services Reisman provided in adding value to the partnership.

Attorneys

J. Drew Ryberg and Michael J. Happe of Ryberg & Happe S.C., Eua Claire, represented Steven Reisman. Kay Nord Hunt, Thomas R. Jacobson and Diane M. Odeen of Lomme, Abdo, Cole, King & Stageberg P.A., Hudson, represented David Bushard.