In the case of TP Racing, L.L.L.P. v. Simms, the Arizona Court of Appeals, Division One, ruled that the removal of a general partner from a limited partnership was not automatically required under Arizona’s Limited Partnership Act.
That statute provides that a general partner must be withdrawn if 120 days after a dissolution proceeding has been commenced against the general partner the proceeding has not been dismissed.
The appeals court determined that the automatic withdrawal provisions did not apply where the proceedings seeking the judicial dissolution were legally deficient.
The case arose in 2010 from certain legal disputes between two brothers over the control of a limited partnership that owns and operates a horse-racing facility. One of the legal claims asserted was a request for a judicial dissolution of the partnership and a separate request for judicial dissolution of the partnership’s sole general partner, which was a limited liability company jointly owned by the two brothers.
In 2012, one of the parties asserted that the limited liability company’s status as the partnership’s general partner had been withdrawn automatically, due to the pendency of the dissolution proceedings for more than 120 days. The trial court ruled that the general partner had not been withdrawn under the statute because the dissolution proceedings did not involve a claim of bankruptcy or other, similar insolvency-related claims. The trial court issued an order permitting the limited liability company to continue as the general partner. The ruling was appealed to the Arizona Court of Appeals.
The Arizona Court of Appeals agreed with the trial court’s decision, albeit on different grounds. The argument urging the court to interpret the statute in its most literal sense would lead to “absurd results,” wrote the appeals court. The court rejected an argument that the statute required automatic withdrawal of the general partner if “any proceeding” for dissolution has not been dismissed within 120 days.
The appeals court concluded that the legislature’s intent in requiring a dissolution claim to survive dismissal for a period of at least 120 days was to prevent frivolous claims from triggering the automatic withdrawal. The legislature intended the requirement for withdrawal only in non-frivolous cases where the proceeding could actually cause a dissolution to occur.
In this particular case, the appeals court determined that the proceedings for dissolution were legally defective for several reasons. The allegations of the legal pleadings related only to the limited partnership and did not contain any facts relating to the business of the limited liability company. The dissolution claim was brought under the Limited Partnership Act, and thus was not applicable to the limited liability company. Also, a claim for dissolution of a limited liability company can only be asserted by a member of the limited liability company. The claim in this case was brought by the limited partners of the partnership who were not members of the limited liability company.
A petition for further review of the appeals court’s decision in the Arizona Supreme Court was denied.
Business entities with concerns about business formation, dissolution, and other business litigation matters should consult qualified legal counsel, experienced in such matters, to ensure that the legal rights of the business entity are fully protected.