II. General Partnerships

Duty of Disclosure (Meehan v. Shaughnessy)

1) A partner has a fiduciary duty to provide, on demand of another partner, true and complete information of any and all things affecting the partnership 2) Reasoning: Partners owe each other a fiduciary duty to act with loyalty and in good faith to each other. Partners may not use their status as partners to purely benefit themselves, particularly if their actions harm the other partners. Ethical standards require that when attorneys planning to leave a firm solicit clients, they must state that the clients have a choice of staying with the firm or transferring their business to the departing attorneys new firm.

Capital Accounts

1) Capital Contribution - cash or property that partner gives to the partnership that is not given back to the person until the end of the partnership 2) Different from a loan Loan can be returned during the partnership with or without the end of the partnership No default rule Distribution[draw] +Profits - Losses = Capital Account Balance

Forcing Partner Liabilities against Partners

1) Exhaustion Requirement: different jurisdictionally whether a creditor can reach funds of the partners when exhausting partnership funds. Some jurisdictions, you must prove you can/ cannot get to funds before going to partners. If dissolving go to court to get it 2) Joint versus Joint & Several Liability: Tort/Wrongful Conduct - Joint and Several UPA §15(a) UPA §13 All other obligations jurisdictional UPA §15(b) Joint versus Several: distinction without a difference, creditor can sue each individually, joint can sue as a whole If plaintiff owes $50,000 and no resources in partnership, creditor cannot after either for the full amount 3) Indemnify by Partnership (UPA §18(b)): Partners that pay from personal funds are entitled to indemnify the partnership. If no funds but they get money later on then this partner can obtain it Partnership reimbursing the partner Contribution from Other Partners: one partner suing the other In some UPA jurisdiction, whether the exhaustion rule applies depends on the characterization of the partners' liability as either "joint" [all partners must be joined in the suit brought to collect on the partnership obligation' or "joint and several" [fewer than all of the partners may be sued] Under UPA §15, the partners' liability for tort claims against the partnership is "joint and several" while their liability for contract and other claims is only joint Under the law of some UPA jurisdictions, the creditor must show exhaustion before he can reach the personal assets of the partners whose liability is "joint" but not where the partners' liability is "joint and several"

Dissolution Page v. Page

1) Rule: A partner at will is not bound to remain in a partnership, regardless of whether the business is profitable or unprofitable. A partnership at will may be dissolved by the express will of any partner so long as it is exercised in good faith 2) Reasoning: A partnership is at will when it formed without partners specifying/implying that it to last for a set period of time or to accomplish a specific task. Any partner can dissolve at will partnership on notice to the other partners.

Wrongful Dissolution

Buyout provision in the contract is ideal, (continuity in the buyout provision) Sets a formula/trigger for buyout/price. Upon any of the listed events then the other partners have the right to buy the withdrawing partner out and this is how they determine the price. If a partner is dead, you get the money from his life insurance if there are insufficient funds

Formation of a General Partnership

May be created informally No written agreement is required, does not need anything to be filed with the state

Sheridan v. Desmond

Rule: (1) A partner is acting within the scope of the partnership business when the wrongful act must have (a) been the kind of thing a partner would do, (b) occurred substantially within the authorized time and geographic limits of the partnership, and (c) been motivated at least in part by a purpose to serve the partnership

Partners' Remedies Against Other Partners

UPA §22 and the common law general rule: an accounting action is the exclusive means by which a partner can seek recourse against co-partners for breach of fiduciary duty RUPA §405: follows suit- "a partner may maintain an action against the partnership or another partner for legal or equitable relief, with or without an accounting as to partnership business"

Expulsion

UPA: No default right to expel a partner RUPA: May be expelled for specified reasons by unanimous vote of other partners OR by court

Indemnity and Conribution

1) If a partner pays a partnership obligation, he is entitled to be indemnified by the partnership If the partnership is unable to pay, the other partners must contribute and pay according to their loss shares Partners may also be required to contribute to satisfy creditors, including partner creditors, on dissolution 2) Every partner is liable for partnership obligation Any third party may collect the entirety of a partnership obligation from any partner under UPA and any partner under RUPA, if a judgment against the partnership goes unsatisfied Partnership bears any losses or the partners bear the losses in accordance with their loss shares However, if the loss was caused by the wrongful act of one of the partners, the culpable partner ultimately bears the entire loss and must indemnify the partnership or any partner who paid the third party's claim

National Biscuit v. Stroud

1) One partner under the UPA has equal rights in the management and conduct of the partnership business. Under UPA §18(h) the partner could not restrict his co-partner the power and authority previously exercised as a going concern, for such a purchase was an 'ordinary matter connected with the partnership business' 2) A partnership will be bound if a co-partner had authority to purchase the product because the other co-partner did not have a majority vote to restrict authority. In Summers v. Dooley the partnership was NOT bound because it was the first time they hired an employee, the co-partner was changing the status quo. The burden to get a majority vote there was on Summers. In order to restrict Freeman, he needed to obtain a majority vote 3) Actual Authority existed because the purchase was within the ordinary course of business.

Duty of Care (Bane v. Furguesson)

1) Rule: A partner is a fiduciary of his partners, not of former partners 2) Reasoning: The withdrawal of a partner terminates the partnership as to him and the present partners owe no fiduciary duty to former partners. Even if the duty of care owed it would not have been breached because the partners in making the decision have a measure of discretion. Business judgment rule comes in.

Wrongful Dissolution Drashner v. Sorenson

1) Rule: A partner who dissolves a partnership in contravention of the partnership agreement is not entitled to a valuation that includes the going concern or good will value of the business 2) Reasoning: Unless a partnership agreement states otherwise, a partner who dissolves in contravention gets no share of the business' good will. Under UPA: consequences of being a wrongfully dissolving partner are significant. Other partners can buy you out without good will. If any damages based on breach, it gets taken out of the buyout price. Partner does not get to participate in the winding up and settling up of the business

Summers v. Dooley

1) Rule: Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners. UPA §18(e) bestows equal rights in the management and conduct of the partnership business upon all partners 2) Reasoning: It is manifestly unjust to permit recovery of an expense which was incurred individually and not for the benefit of the partnership but rather for the benefit of one partner. 3) In a general partnership, each partner has equal rights regarding the management of the ordinary affairs of the partnership. Unless there is an agreement to the contrary, differences between the partners about everyday business are to be decided by a majority of the partners. 4) When a partnership consists of only two partners, one partner cannot unilaterally bind the partnership by incurring expenses over the objection of the other 5) Dooley was not obligated, because Summers had no actual authority to hire the employee because he needed a majority vote to authorize the decision.

Meinhard v. Salmon

1) Rule: Co-adventurers, like partners, have a fiduciary duty to each other, including sharing in any benefits that result from the parties' joint venture 2) Reasoning: As sharers in a joint venture, co-adventurers owe each other a high level of fiduciary duty. A co-adventurer who manages a joint venture's enterprise has the strongest fiduciary duty to other members of the joint venture. Here, the fiduciary duty was breached when ∆ kept the transaction from the π which prevented the π from enjoying an opportunity that arose out of their joint venture

Martin v. Payton

1) Rule: If a lender/creditor's compensation is dependent on a percentage of the profits, provision must be made to define what the profits are in order to declare the creditor a partner 2) Reasoning: In order for a written contract between parties to create a partnership the writing must be complete, and express in good faith the full understanding and obligation of the parties. The profit was interest to be repaid on a loan. The defendants stayed in control of the business the entire time so the court held that the plaintiff was not responsible for debts and obligations of the defendant because they were not partners. They did not share in the profits and retained no control.

Beckmann v. Farmer

1) Rule: In determining partnership intent, look for the presence or absence of the attributes of co-ownership, including profit and loss sharing, control, and capital contributions. A partner "must contribute toward the losses, whether of capital or otherwise, sustained by the partnership according to his share in the profits. 2) Reasoning: The parties held themselves out to be partners; they had a drafted partnership agreement but never signed. The parties clearly intended to provide for profit sharing, which is prima facie evidence of partnership. But provided for a monthly salary - evidence of a non-partnership. Court stressed that a partnership can exist absent the four traditional factors

Duty of Disclosure (Walter v. Holiday Inns)

1) Rule: In order to set aside the sale of a partnership interest on the grounds of breach of fiduciary duty, it is essential that the misrepresentation or concealment should be... in regard to a fact material to the conduct. Materiality must be evaluated in the context in which statements or omissions occurred 2) Reasoning: The test for materiality is that, "even if a partner was subject to a duty of full disclosure and failed to disclose every fact in connection with a particular transaction, there is no liability unless the non-disclosed facts were such as might be expected to have induced action or forbearance by thee other partners - that is, were material.

Schymanski v. Conventz

1) Rule: In the absence of an agreement to such effect, a partner contributing only personal services is ordinarily NOT entitled to any share of partnership capital pursuant to dissolution. Personal services, may, however, qualify as capital contributions to a partnership where an express or implied agreement to such effect exists 2) Reasoning: Under appropriate circumstances, personal services of a partner also may constitute a capital contribution to the partnership. The exception to the general rule stated above provides that there must be an express or implied agreement to give effect to such. In the absence of such agreement to provide for such compensation, remuneration for a partner's services performed in the course of partnership affairs is prohibited by statutes.

Dreifurst v. Dreifurst

1) Rule: Unless otherwise agreed, a partner is entitled to sale of partnership assets upon the dissolution and winding up of partnership. Any partner who has not wrongfully dissolved the partnership has the right to wind up the partnership and force liquidations; he has a right to force a sale, unless otherwise agreed to 2) Reasoning: Under the UPA §§29 & 30, when a partner ceased to be associated in the carrying on of the partnership's business, the partnership is dissolved, but continues on until the winding-up of the partnership is complete. UPA §38(1) states that, unless otherwise agreed, upon lawful dissolution of a partnership, any partner may have partnership property applied to any debt owed to a creditor, and may be paid any surplus amount owed to him in cash.

Admitting New Members (Rapport)

1) Rule: Unless the parties have agreed otherwise, a person cannot become a member of a partnership without consent of all the partners whereas an assignment of a partnership interest may be made without consent, but the assignee is entitled only to receive the profits of the assigning partner 2) Reasoning: Without consent of all the partners, the plaintiffs pursuant to the terms of the agreement had the right to assign their interests or a portion of their interests, to their children, but such an assignment does not make the children partners. Partnership law provides that subject to any contrary agreement between the partners, "no person can become a member of a partnership without the consent of all the partners." "...an assignee of an interest in the partnership is not entitled 'to interfere in the management or administration of the partnership business' but is merely entitled to receive 'the profits to which the assigning partner would otherwise be entitled'."

Partnership by Estoppel (Cheesecake)

1) The third party must show they reasonably relied, to their detriment, they held themselves out to be a partnership 2) When a person, by words spoken or written or by conduct, represents himself, or consents to another representing him or anyone, as a partner in an existing partnership or with one or more persons not actual partners, he is liable to any such person or to whom such representation has been made, who has, on the faith of such representation, *given credit to the actual or apparent partnership*, and if he has made representation or consented to its being made in a public manner he is liable to such person i. When a partnership liability results, he is liable as though he were an actual member of the partnership ii. When no partnership liability results, he is liable jointly with the other persons, if any, so consenting to the contract or representation as to incur liability, otherwise separately 3) There is a distinction between representation made in a public manner and private i. If the representations is privately made, it may be taken advantage of only by persons to whom it was made; if it was publicly made, anyone can make use of it

Financial Rights and Accounting: Profits and Losses

Default UPA§18(a) and RUPA §401(b) Profits: partners share equallyLosses: Partners contribute according to their share of the profits The default partnership rule is that losses are apportioned among the partners in the same manner as profits. Thus, if there is an agreement as to profits but not losses, losses follow profits. If there is no agreement of any kind, both profits and losses are split equally among the partners

Dissociation under RUPA

Dissociation is used in lieu of dissolution to denote the change in the relationship caused by a partner's ceasing to be associated in the carrying on of the business. 1) The dissociation of a partners does not necessarily caused a dissolution and winding up 2) Partner is entitled by default to their share/value of the partnership including good will 3) A dissociated partner remains a partner for some purposes and still have some residual rights, duties, powers, and liabilities Section 602(a) - a partner may dissociate from a partnership at any time, whether it is rightful or wrongful It is wrongful in a partnership for term or particular undertaking when: a. The partner withdraws by express will b. The partner is expelled by court order for misconduct c. The partner becomes a debtor in bankruptcy d. A partner that is not a natural person is expelled or otherwise dissociated because it willfully dissolves or terminates Section 601(5) - a court may expel a partner for misconduct when: a. The partner has engaged in wrongful conduct that adversely and materially affects the partnership b. The partner commits a willful and persistent breach of the partnership agreement or a duty owed to the partners or partnership under RUPA §404; or c. The partner engages in conduct relating to the partnership business that makes it not reasonably practicable to carry on the business in partnership with him

Duty of Loyalty Enea v. Superior Court (DoL)

Enea v. Superior Court 1) Rule: Mere anticipation of eventual capital gains as the main economic benefit to be derived from the partnership venture has no tendency whatsoever to entitle the individual partners to divert their own advantage benefits that would otherwise flow to the partnership 2) Reasoning: Partners may not rent partnership property to themselves at less than the fair market rental value. It is well established that partners must carry out the business of the partnership with the loyalty and care of a fiduciary, and may not take advantages for themselves at the expense of the partnership

Rights of Partners' Creditors

General Rule: a creditor has the capacity to seize any property that a person has the right to assign RUPA §504(a): creditor may obtain a "charging order" against the partner's interest in the partnership Permits creditor to receive any partnership distributions that partner would otherwise be entitled (like garnishment) UPA: A judgment creditor can cause a dissolution of the partnership by putting the debtor-partner into bankruptcy UPA §40(h): partnership creditors have priority with respect to partnership assets, and the partner's separate creditors have priority with respect to the partner's individual asset RUPA: A debtor-partner's bankruptcy merely dissociates them from the partnership

Ownership Interests and Transferrability

Partnership Property UPA §8(1) provides that "all property originally brought into the partnership stock or subsequently acquired by purchase or otherwise, on account of the partnership is partnership property (2)Establishes a presumption that property bought with partnership funds is partnership property Reflects the aggregate theory that the partnership cannot own its property directly RUPA Recognizes the partnership as an entity and provides that the partnership rather than the individual partners, owns partnership property §501 provides that "a partner is not a co-owner of partnership property and has no interest in partnership property which can be transferred, either voluntarily or involuntarily §204(a) provides that property is deemed to be partnership property when acquired: (a) in the partnership's name; or (b) in the name of one or more partners if the document transferring title to the property references the acquiring partner's status as a partner or the existence of a partnership Otherwise, property is presumed to be a partner's individual property

Fiduciary Duties

Pre-RUPA law on fiduciary duties is mostly common law. UPA §21. Partner Accountable as a Fiduciary expressly refers to a partner's fiduciary duties Every partner must account to the partnership for any benefit, and hold as trustee for it any profits derived by him without the consent of the other partners, from any transaction connected with the formation, conduct, or liquidation of the partnership or from any use by him of its property RUPA §404 codifies the law of partner fiduciary duties iThe only fiduciary duties a partner owes to the partnership and the other partners are the duty of loyalty and the duty of care 404(b)(1) and (2) applies only to the "conduct" and "winding up" of the partnership business RUPA declines to impose fiduciary duties on partners during the formative stages because of concern the duty of loyalty could be inappropriately extended to the pre-formation period when the parties are really negotiating 404(c) - partner's fiduciary duty of care 404(d) - obligation of good faith and fair dealing good faith is adjudged subjectively, fair dealing implies an objective component 404(e) - a partner does not violate any duty or obligation...merely because the partner's conduct furthers the partner's own interest 404(f) - permits a partner to "lend money to and transact other business with the partnership, and as to each loan or transaction the rights and obligations of the partner are the same as those of a person who is not a partner, subject to other applicable law.

Partner's Ability to Bind Partnership after Dissociation

RUPA, simpler than UPA Partnership bound by a partner's act after dissociation if: a. The act is appropriate for winding up the business, or b. The act would have bound the partnership before dissociation + third party has no notice of the dissociation No loss of good will as a result of wrongful dissociation (unlike UPA)

Kessler v. Antinora

Rule: Where one partner or joint adventurer contributes the money capital as against the other's skill and labor, neither party is liable to the other for contribution for any loss sustained Reasoning: Upon loss of the money the party who contributed it is not entitled to recover any part of it from the party who contributed only services. The general rule of partnership law provides that in the absence of an agreement, "the law presumes that partners and joint adventurers intended to participate equally in the profits and losses of the common enterprise, irrespective of any inequality in the amounts each contributed to the capital employed in the venture, with the losses being shared by them in the same proportions as they share profits." *Service Only Partner Exception - partner providing services does not share in the losses RUPA overrides this

Duty of Loyalty Singer v. Singer

Singer v. Singer 1) Rule: A partner had a fiduciary duty not to compete with other partners, or with the partnership itself, in the absence of a partnership agreement stating otherwise 2) Reasoning: Where the partnership agreement permits it, partners may directly compete with one another, and with the partnership itself. In general, partners have a fiduciary duty not to compete with one another, unless the partnership agreement permits it.

Test for Partnership by Estoppel

Statutory test for partnership by estoppel requires that: (1) credit must have been extended on the basis of the partnership representations or (2) that the alleged partner must have made or consented to representations being made in a public manner whether or not such representations were actually committed to the person extending the credit RUPA §308(a) makes clear that proof of reliance is required whether misrepresentation of partnership status is made in a private or public manner

Business Judgment Rule

To bring a case for breaching their fiduciary duties, a plaintiff must first show the court that the business judgment rule should not apply in this case. Presumption that in making a business decision, partner acted in good faith and in the honest belief that the action taken was in the best interests of the company. If the decision turns out badly: As long as not pursuing own self-interest, most courts will not insist he should've known what was going to happen before it actually occurred.

Duty of Care

UPA does not define RUPA: Partner's duty of care to the partnership and other partners in the conduct...of the partnership business is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law. The duty of care is breached by at least gross negligence or recklessness or intentional misconduct

Management & Control

UPA §18(h) provides that, although ordinary partnership matters are decided by a majority vote of the partners, acts in contravention of a partnership agreement require unanimous consent. Unanimous consent is also required under UPA for amendments to partnership agreement and for acts taken outside of the ordinary course of the partnership's business RUPA explicitly requires unanimous consent in both area

Duty of Disclosure

UPA §20: Partners shall render on demand true and full information of all things affecting the partnership to any partner - only when asked RUPA §403: (c) each partner shall furnish to a partner without demand, any information concerning the partnership's business and affairs reasonably required for the proper exercise of the partner's rights and duties under the partnership agreement or this act In NEW YORK you have an affirmative duty of disclosure

What A Partnership Is

UPA §6(1) & RUPA §202(a) A partnership is an "association of two or more persons to carry on as co-owners a business for profit" Four Factors that determine the existence of a partnership (1) An agreement to share profits The most important indicator of partnership status UPA §7(4) An agreement to share profits is prima facie evidence of the existence of a partnership RUPA §202(c)(3): A person who receives a share of the profits of a business is presumed to be a partner in the business UPA and RUPA make exceptions if profits are distributed as: (a) payment of a debt; (b) wages to an employee or rent to a landlord; (c) an annuity to a widow or representative of a deceased partner; (d) interest on a loan; (e) consideration for the sale of the goodwill of a business or other property (2) An agreement to share losses (3) Mutual right of control or management of the enterprise (4) A community of interest in the venture

Partnership Liability to Third Parties in Contract (Burns)

UPA §9(1) provides that "Every partner is an agent of the partnership for the purpose of its business, and the act of every partner, including the execution in the partnership name of any instrument, for apparently carrying on in the usual way of business of the partnership of which he is a member binds the partnership, unless the partner so acting has, in fact no authority to act for the partnership in the particular matter, and the person with whom he is dealing has knowledge of the fact that he has no such authority" i. To show that a business is carrying on in the usual way of business, look at the other businesses of the same nature - aka industry standard ii. An act may be necessary for the carrying on of the business of a partnership, but when done by one partner the firm cannot be bound by it, UNLESS he has express or implied power to do the act iii. The principle for imposing liability on the non-acting party, be the partner or ordinary principal, is that he has "held out" the actor as being empowered to perform acts of the nature of the act in question. "Holding out" is established by showing that the principal placed the agent in a position which ordinarily carries with it generally recognized power.

After Dissolution

Winding up: Settling Up Occurs by default Sale of business as going concern, or Pile of money in the partnership and the proceeds must be distributed Order of priority a. Third party creditors b. Partners who made loans (partner creditors) c. Capital contribution distributed d. If money left over split between the partner e. Sale of assets aka liquidation Continuation of Business Continuation agreement must be unanimous and must include the consent of any departing partners After dissolution, the partners in the old partnership remain responsible for pre-dissolution liabilities New partner is not personally liable for pre-existing partnership obligations

Statutory and Voluntary Dissolution under UPA

§29: "The dissolution of a partnership is the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on as distinguished from the winding up of the business" Grounds for Dissolution: Statutory (Involuntary) May be dissolved by judicial decree Partner may petition in certain enumerated circumstances Court may order dissolution if "other circumstances render a dissolution equitable" An assignee of a partner's partnership interest or a charging order foreclosure purchaser may obtain judicial dissolution Grounds for Dissolution: Voluntary (Automatic) Default rule - a partnership is terminable at will by any partner UPA §31(1)(b) If partners agree formally or informally that partnership will continue for a definite term of particular undertaking: The partnership terminates when the term expires or the undertaking is complete The partnership can be dissolved prior by unanimous consent of all partners who have neither assigned their interests nor had them subjected to a charging order Partnership is automatically dissolved by: (a) any event that makes it unlawful to carry on the partnership business; (b) the death of any partner; (c) the bankruptcy of any partner or the partnership