Buy-Sell Agreement Incorporated In Limited Partnership Agreement Construed

In this case, the limited partners of an Iowa limited liability partnership (LLP) that was engaged in farrowing and raising hogs, claimed that the buy-sell agreement that was incorporated into the limited partnership agreement required the partnership to repurchase their units once they issued a “dissociation notice” to the limited partnership- even if the partnership declared an “impairment circumstance.” However, the partnership argued that an “impairment circumstance” suspended the partnership’s obligation to purchase the limited partners ownership interests. 
  
The entity’s partnership agreement stated that a partner who gave a “dissociation notice” would be permitted to withdraw, but would be liable to the partnership for any damages caused by the withdrawal. The buy-sell agreement that was incorporated into the limited partnership agreement expressly provided that the partnership was “obligated” to buy out the limited partners’ ownership interest under certain circumstances.  If there was an “impairment circumstance,” the LLP was required to provide written notice of that circumstance to an “affected partner.” 

In 2008, the limited partners issued the required “dissociation notice.” One week later, the LLP declared an “impairment circumstance” and refused to honor the dissociation. Thus, the limited partners asked the trial court to issue a declaration that the LLP was obligated to purchase its units under the buy-sell agreement. The trial court sided with the LLP and stated that after a “clear reading” of the partnership and buy-sell agreement, the LLP was not obligated to honor the “dissociation notice” until 30 days after the “impairment circumstance” ended. According to the trial court, the general partners were to use their best “business judgment” to ascertain the end of the impairment. 

The limited partners appealed and the appellate court reversed, finding that the LLP’s obligation to purchase was subject to a determination that “it would not materially impair or adversely affect the partnership’s finances.” Thus, the obligation to purchase the limited partners’ shares remained, even if payment for the shares was suspended for a time. 

This case demonstrates the need for every entity to have a carefully drafted partnership or operating agreement and further demonstrates the need for all involved to understand their obligations under the agreement. Craton Capital L.P. v. Natural Pork Production II, L.L.P., No. 0-887/10-0680, 2011 Iowa App. LEXIS 72 (Iowa Ct. App., Feb. 9, 2011).