Partnerships (Day 2)
Partnership in Commendam--Form Requirements
(1) A contract for a partnership in commendam must be in writing and filed with the secretary of state. (2) The partnership name must clearly reflect that it is a partnership in commendam, and it must not suggest that any partner in commendam is a general partner. (3) The partnership contract must describe the contribution of each partner in commendam and its value or how it is to be valued. (4) The contract should also state the time or circumstances upon which the contribution is to be made or the services are to be performed; if it fails to do so, the contribution is due on demand. If any of the foregoing requirements are not met, partners in commendam are liable to third persons in the same manner as general partners.
Cessation of Membership
A partner ceases to be a member of the partnership upon death, interdiction, bankruptcy, seizure of his interest, expulsion, withdrawal, or in accordance with the partnership agreement. A seizure of a partner's interest causes cessation of membership if the seizure is effected under a writ of execution and is not released within the 30 days. The cessation is retroactive to the date of seizure. Expulsion: A partner may be expelled for just cause. Unless otherwise agreed, a MAJORITY of the partners must agree on an expulsion. Withdrawal: If the partnership is constituted for a TERM, no partner is allowed to withdraw from the partnership without the consent of the other partners UNLESS one of the other partners has failed to perform a material obligation. (e.g., failure to pay a promised contribution may or may not be a material failure; arranging for a private self-dealing relationship is a clear material failure to fulfill one's fiduciary duty to the partnership). A partner may withdraw from a partnership WITHOUT A TERM at any time provided that he gives notice in good faith at a time that is not unfavorable to the partnership. Effect on Partnership--the Partnership does not terminate when a parter ceases his membership unless only one partner is left. If all but one of the partners have withdrawn, the partnership ceases and automatically becomes a sole proprietorship. Effect on Former Partner--Upon properly ceasing to be a member of the partnership, the former partner (his successor or the seizing creditor) is entitled to be paid the value of his interest in the partnership on the date of cessation. If not paid immediately, former partner is entitled to interest on the amount owed. If the partnership still exists, the amount must be paid in money. If there is no agreement as to the amount to be paid, any party may seek judicial determination.
Partnership in Commendam--Liability as General Partner
A partner in commendam becomes liable as a general partner if she: (1) permits her name to be used in the business dealings of the partnership; (2) participates in the management or administration of the partnership; or (3) conducts business with third parties on behalf of the partnership. However, such liability will be only to persons who transact business with the partnership reasonably believing, based on the partner in commendam's conduct, that the partner in commendam is a general partner. EXCEPTIONS: Several activities are permitted that will not result in liability as a general partner: (i) consulting with and advising partners on business matters of the partnership; (ii) acting as surety; (iii) approving or disapproving of amendments to the agreement; (iv) voting on important matters such as alienation or encumbrance of substantial assets, changing the nature of the business of the partnership, admitting or expelling partners, etc.
Partnership in Commendam--Liability as Partner in Commendam
A partner in commendam must agree to make a contribution (it can be cash, any type of property, or performance of non-managerial services but NOT promises of future managerial services). The partner in commendam is thereafter only liable for partnership debts up to the extent of the contribution (whether or not actually paid to the partnership). Partners in commendam are not personally liable for partnership debts.
Liability of Partners
A partner is personally liable for her virile share of the partnership's liability that a creditor could not collect from partnership assets. A partner is liable to the partnership for any amount that she agreed to contribute, and courts have consistently held that a third party creditor that cannot collect from the existing partnership assets may sue to enforce/collect the unpaid contribution. Although a partner does not owe a duty of care to the partnership for negligent conduct resulting in partnership liability, a partner does owe a duty of loyalty to the partnership to act in the best interests of the partnership. A partnership who breaches this duty may become liable to indemnify the partnership for its liability to a third party caused by the partner's breach. A partner who breaches her fiduciary duty to the partnership by taking a business opportunity that rightfully belongs to the partnership must account to the partnership for any profits derived therefrom.
Assignment of Partnership Interest
A partner may assign or share her partnership interest with a third-party non-partner, but that does not make the third party a partner without the unanimous consent of the other partners.
Obligations of Partners Toward Each Other
A partner owes a fiduciary duty to the partnership and to the other partners, meaning that a partner may not appropriate any partnership asset for his own personal profit or act as a partner in a manner contrary to the best interests of the partnership. If a partner violates his fiduciary duty, the partnership may recover damages for the harm suffered or recover profits that accrued to the partner from his breach. A partner may share her interest in the partnership with a third person (who does not become a member of the partnership) but the partner is liable for any damages the third person causes the partnership. A partner who acts in good faith may be a creditor of the partnership. A partner has the right to inform herself of the partnership business and consult any records. A contrary agreement among the partners is null.
Partnership in Commendam--Definition
A partnership in commendam is a partnership with one or more general partners and one or more partners in commendam who have limited powers, rights, and liability.
Definition of Partnership
A partnership is a juridical person, distinct from its partners, created by written or oral contract between two or more "legal persons" to combine efforts and/or resources, and to collaborate at mutual risk for common profit or commercial benefit.
Liability of a Partnership
A partnership is primarily liable for partnership debts. Each partner is secondarily liable for her virile share (i.e., proportionate interest) but may plead "discussion" of the partnership's assets if sued individually. "Discussion" means the partner can require the creditor to seize specifically identified partnership assets to satisfy the debt before seizing the partner's personal assets. In addition, partners are jointly (not solidarily) liable. Note: A partner who is sued in her capacity as a partner is not entitled to any indemnification or reimbursement of litigation expenses, whether successful in the defenses of the claims or not.
Termination of a Partnership
A partnership terminates by unanimous consent, a judgment of termination, bankruptcy of the partnership, reduction of the partnership to one member, on expiration of its term, the attaining of or the impossibility of attaining the object of the partnership, or in accordance with provisions of the partnership agreement. Upon termination, the authority of the partners to act as mandataries ceases except as to acts necessary for liquidation. A partner who has no knowledge of the termination can still bind the partnership. Termination does not affect the rights of third persons who in good faith (without knowledge of the termination) transact business with the partnership.
Registered Limited Liability Partnership--Liability
An LLP insulates in partners from personal liability for the "debts and obligations arising from errors, omissions, negligence, incompetence, or malfeasance [i.e., the torts] committed in the course of the partnership business by another partner..." An LLP does NOT protect an individual partner from personal liability for (1) her virile share of other partnership debt and obligations (e.g., contract obligations); or (2) partnership debts resulting from the partner's own actions of any type, including negligence.
Liability of General Partners v. Liability of Partners in Commendam - In Sum
Each general partner is secondarily liable for her virile share of the partnership's debts. To the extent partnership assets cannot cover the partnership debts, each GP can then be sued by the creditor(s) for her pro rata share of the unpaid debts. A commendam partner is not personally liable for any of the debts of the commendam partnership--that is, the CP is only liable for partnership debts to the extent of his contribution UNLESS he permits his name to be used in the business dealings of the partnership, participates in the management or administration of the partnership, or conducts business with third parties on behalf of the partnership.
Partner is a Mandatary of the Partnership
Each partner is a mandatary of the partnership and may bind the partnership as to all matters in the "ordinary course of business" EXCEPT a partner (as mandatary) may not alienate, lease or encumber the partnership's immovables. A provision in the partnership agreement or a resolution by a majority of the partnership that a partner is not a mandatary does not affect the rights of third persons who in good faith (without knowledge of the limitation) transact business with the partner (i.e., the partnership is still liable to them). BUT, in such cases (where a partner transacts business with a third party in excess of his actual authority to do so), the partnership may recover any damages suffered from the obligating partner who exceeded his authority.
Contributions of Partners
Each partner must make a contribution of economic value, which includes a promise for future services. Each partner owes the partnership what he has agreed to contribute. If a partner fails to make the contribution, a third-party creditor of the partnership may sue to enforce the obligation to contribute.
Al and Ben formed a partnership. Al agreed to contribute $50k and Ben would do the construction. The partnership signed a K with a subdivision developer to build ten homes. Al did not make his monetary contribution and said he wouldn't be able to for 3-4 months. The lack of $ caused the partnership to breach the construction K. Under what circumstances can Ben create a new business entity for the purpose of taking over the construction K?
First, Ben must withdraw from the partnership. While Al and Ben are partners, they are fiduciaries of each other. At the core of their fiduciary duties is loyalty to the partnership. Partners may not act in a manner inconsistent with the best interests of the partnership, and setting up a competing business while still partners would almost certainly breach that duty. Ben should be able to withdraw. There is no evidence that the partnership is for a term so the only limits on his ability to withdraw are that he must act in good faith, and may not withdraw at a time that would be unfavorable to the p'ship. Since the p'ship will not be able to conduct business for several months regardless of Ben's action, Ben's withdrawal is not directly harming the P'ship in any way. Once Ben is no longer a partner (he is no longer a fiduciary to Al and the p'ship) so he may set up a competing business. BUT, he cannot automatically take over the construction K. The construction K is an asset of his p'ship with Al, and seizing it would violate a duty that he incurred prior to his withdrawal from that p'ship. However, Ben does have a good argument here that he is not seizing an opportunity from his old p'ship because the partnership is unable to exploit that opportunity. Al hasn't made his contribution and can't make it for a couple of months and the lack of funds caused the breach. Because of the p'ship's inability to perform, Ben would have a good argument that the opportunity to build 10 homes for the developer ceased to be a partnership opportunity.
Ownership of Immovables
For the partnership to own immovable property, the partnership agreement must be in writing at the time of the acquisition. Otherwise, the property is owned in indivision (i.e., jointly) by the partners. The partnership does not own immovable property with respect to the rights of third parties unless the partnership agreement is filed with the secretary of state. If the agreement is not filed, third parties can treat partnership immovable as the partners' individual property. If immovable property is acquired in the name of a partnership that has not yet been created and that partnership subsequently is created and the written agreement is filed with the secretary of state, the partnership's existence will be deemed retroactive to the date of the acquisition of the immovable property. However, such retroactive effect will not prejudice the rights of any third party that validly acquired rights in that property between the date of acquisition of the property and the actual creation of the partnership.
Registered Limited Liability Partnership--Formation
In order to form a RLLP, the business must first be a partnership, which is then converted into an RLLP by filing an annual application, along with a filing fee, with the secretary of state that states: (i) the name of the a partnership, which must include the words "registered limited liability partnership or the abbreviation L.L.P." as the last words/letters; (2) the address of its principal office; (iii) the NUMBER of partners; and (iv) a brief statement of business in which the partnership engages.
Participation of Partners
Partners share equally in profits, losses and distribution of assets unless otherwise agreed. If the partnership agreement states the extent of each partner's participation in only one of the three categories, then the same rules applies to the other two categories unless the agreement expressly provides otherwise as to those other two categories. Note: A provision that a partner does NOT share equally in the partnership's losses does not affect third persons. Such an agreement is binding, however, as between the partners.
Partnership in Commendam v. RLLP
Partnership in commendam makes certain partners (the commendam partners) not liable for the partners debts, while the general partners are all liable just as they would be in a regular partnership. The RLLP isolates ALL partners from tort obligations by another partner.
Short Answer - List the minimum info that must be included in articles of partnership in order to establish a partnership in commendam.
The articles (i) must be in writing, (ii) must include a name that clearly reflects that the partnership is a partnership in commendam, (ii) must not suggest that an in commendam partner is a GP, and (iv) must describe the contribution of each of the in commendam partners, and the value of the contribution or how it will be valued. This document must also be filed with the secretary of state.
Formation of a Partnership (Short Answer)
The p'ship is the default form of organization and does not require any filings or formalities to create. All of the necessary elements to the formation of a partnership between them were satisfied. They mutually consented to a relationship that involved combining their resources and efforts in determined proportions to collaborate at mutual risk for their common profit or benefit. They made a proper contribution as consideration for their partnership interest, because a promise to make a contribution is acceptable consideration in the partnership context and is enforceable by the partnership.
Formal Requirements of a Partnership
There are generally no formal requirements for formation of a partnership. A partnership agreement can be oral or written. The parties to the relationship must only intend to create the relationship; a partnership may be inferred even if the parties did not consciously consider or intend it to be a partnership. If a written partnership agreement is filed, it must be filed with the secretary of the state and must include: (i) the name of the partnership (if no name is expressly adopted, the business must be conducted in the name of all the partners); (ii) the partnership's address; and (iii) each partner's name and address. Note: A partnership must have a written partnership agreement before it can own immovable property.
Decisions Affecting the Partnership
Unless otherwise agreed, unanimity is required to (i) amend the partnership agreement; (ii) admit new partners; and (iii) terminate the partnership. Unless otherwise agreed, decisions affecting the management of the partnership are made by a majority of the partnership votes. Note: Unless otherwise agreed, each partner has one vote regardless of their contribution.
Liquidation
Upon liquidation, the creditors of the partnership are paid in the following order of priority: 1) secured creditors; 2) unsecured non-partner creditors; 3) unsecured partner-creditors; 4) capital contributions of each partner are restored; and finally 5) the surplus, if any, is divided proportionately.
