Closely Held: Partnerships
RNR Invs. Ltd. P'ship v. Peoples First City Bank: Issue and Rule
Can a partner bind the partnership in the ordinary course of business, if the partner lacks actual authority but the third party has no knowledge of the limitation? A partner has apparent authority to bind the partnership to a contract in the ordinary course of its business, unless the third party has actual knowledge that the partner lacks authority.
National Biscuit Company v. Stroud: Issue and Rule
Can one general partner restrict another partner from conducting business on behalf of a two-person partnership? In a general partnership with two partners, each party has the power to bind the partnership in matters pertaining to the partnership's business. The court cites to RUPA s306(a): "all partners are liable jointly and severally for all obligations of the partnership unless otherwise agreed by the claimant or provided by law.", RUPA s491(f): :"Each partner had equal rights in the management and conduct of the partnership business."; And the court cites the rule discussed in Summers v. Dooley, which is the predecessor to RUPA s401(j): "A difference arising as to a matter in the ordinary course of business of a partnership may be decided by a majority of the partners. An act outside that ordinary course of business of partnership... may be undertaken only with the consent of all of the partners."
National Biscuit Company v. Stroud: FACTS
D and Freeman formed a general partnership to sell groceries. The partnership agreement did not limit either partner's authority to conduct ordinary business on behalf of the partnership. Several months before the partnership was dissolved, D told one of P's officials that he would not be personally liable for any bread sold to the partnership. Freeman subsequently ordered more bread on behalf go the partnership, and P delivered that bread to the partnership. Shortly thereafter, the partnership was dissolved, and D refused to pay for the bread delivered at Freeman's behest. P sued the partnership and D for the price of the bread. The trial court found in favor of P.
Meinhard v. Salmon: Dissent
D did not breach his fiduciary duty to P. The joint venture's purpose was to exploit the first lease exclusively, for a limited duration of 20 years. D fulfilled his duty to P by managing the Hotel property and distributing P's share of the profits during the term of the first lease. D's fiduciary duty to P was restricted to matters pertaining to the first lease, and ended when the lease expired.
Meinhard v. Salmon: FACTS
D executed a 20-year lease for the Bristol Hotel which he intended to convert into a retail building. Concurrent with his execution of that lease, D formed a join venture with P. The joint venture's terms provided that P would pay D half the amount required to manage and operate the property, and D would pay P 40% of the net profits for the first five years, and 50% thereafter. Both parties agreed to bear any losses equally. The joint venture lost money during the early years, but eventually became vey profitable. During the course of the Lease another lessor acquired rights to it. The new lessor, who also owned tracts of nearby property, wanted to lease all of that land to someone who would raze the existing buildings and construct new ones. When the lease had four months remaining, the are lessor approached D about the plan. D executed a 20-year lease for all of new lessor's property through D's company. D did not inform P about the transaction. Approximately one month into the new lease, P found out about it, and demanded that it be held in trust as an asset of the joint venture. D refused, and P filed suit. The referee entered judgment for P, giving him a 25% interest in the lease. On appeal, the appellate division affirmed, and upped P's interest to 50%.
Fairway Dev. Co. v. Title Ins. Co. Of Minn.: FACTS
D issues a title guaranty insurance policy that agrees to pay the "named insured" for any loss sustained by reason of any defects in title to a piece of real property. Subsequently, an easement was discovered permitting a gas transmission company to maintain a gas line over the property. P sued D for breach of K b/c of this defect of title. D said there can only be recovery by "the named party guaranteed." It aid that it originally guaranteed a general partnership, which it referred to as "Fairway Development I," consisting of three partners. Each of these three contributed to partnership's capital and shared equally in partnership profits and losses. D argued that Fairway Development I dissolved on May 20, 1981, when two of the partners "sold and transferred their respective undivided one-third interests in the partnership to the remaining partner, and a third-party purchaser." D argued that a new partnership resulted from this sale, called Fairway Development II, and thus liability does not extent to it. P says the intent of the parties was clear: what D calls Fairway Development II was intended to continue the business of Fairway Development I.
Moren v. Jax Rest.: facts and procedure
D was a partnership. One of the partners, Nicole, completed her day shift an picked up her two year old son. Later that afternoon, she returned to the restaurant after leaning that her sister and partner, Amy, needed help. She brought the child to the restaurant and her husband said he would pick him in 20 min. To keep the child from running around the restaurant, she brought him back into the kitchen, where his hand was crushed in a dough pressing machine. The son, through his father, sued the partnership, but did not sue Nicole or any other partner individually. In addition, the partnership filed a third-party complaint against Nicole, arguing that, if it were liable, it was entitled to sue Nicole for indemnity or contribution on account of her negligence The District Court rejected the partnership's argument that its obligation to compensate the child is diminished in proportion to Nicole's predominating negligence as a mother, even though, as a business owner it is responsible for her conduct. The Dc granted summary judgment to Nicole on the partnership's third-party compliant against her. It said that she had no obligation to indemnify the partnership so long as the injury occurred while she was engaged in the ordinary course of the partnership's business
Martin v. Peyton: Issue and Rule
Do agreements intended to protect the financial interests of creditors necessarily make them partners of a debtor firm? In order for a creditor to be a partner in a firm, the creditor must be closely enough associated with the firm so as to make it a co-owner carrying on the business for profit.
When does the definition of partnership matter?
1. Many cases involve third parties who want to rely on the "joint and several" liability that one partner has for the obligations of the partnership; and 2. Other cases involve disputes about the rights and obligations between or among the purported partners or their partnership
Functions of Capital Accounts
1. To guide the distribution of what is inside the partnership 2. To reflect that a partner whose capital account is negative, must contribute that amount to the partnership so it can be distributed to return capital. RUPA s807(b) provides on winding up: "A partner shall contribute to the partnership an amount equal to the excess of the charges over the credits in the partner's account..."
RUPA s103: Effect of Partnership Agreement; Nonwaivable Provisions
103(a): the partnership agreement controls the relations among the partners. But except for the few rules in 103(b), the partners can contract around any of the RUPA default rules. 103(b) The partnership agreement may not: (3) eliminate the duty of loyalty under s404(b) or 603(b)(3), but: (i) the partnership agreement may identify specific types or categories of activities that do not violate the duty of loyalty, if not manifestly unreasonable; or (ii) all of the partners or a number of percentage specified in the partnership agreement may authorize or ratify, after full disclosure of all material facts, a specific act or transaction that others would violate the duty of loyalty. (4) unreasonably restrict the duty of care (5) eliminate the obligation of good faith and fair dealing under s404(d), but the partnership agreement may prescribe the standards by which the performance of the obligation is to be measured, if the standards are not manifestly unreasonable NOTE the degrees of prohibition, ranging from rules the agreement may not "vary," to rules the agreement may not "unreasonably restrict," to those that may not be "eliminated."
RUPA s305: Partnership Liable for Partner's Actionable Conduct
305(a): "A partnership is liable for loss or injury caused to a person, or for penalty incurred, as a result of a wrongful act or omission, or other actionable conduct, of a partner acting in the ordinary course of business of the partnership or with authority of the partnership.." Partnership is liable to third parties Permits partners to sue the partnership for loss or injury without the need to also seek a dissolution of the partnership or an accounting. In effect, a partner may proceed as a third party. Imposes vicarious liability on the partnership for "no-fault" torts of its partners.
RUPA s305(b): Liability upon Receipt of Money of Property
305(b) contains a special rule of partnership liability in the event money or property was transferred to a partner or the partnership: "If, in the course of the partnership's business or while acting with authority of the partnership, a partner receives or causes the partnership to receive money or property of a person not a partner, and the money or property is misapplied by the partner, the partnership is liable for the loss Unlike the general rule of 305(a), the word ordinary does not appear before the word course above
Debt
A bank or other investor may lend money to a business. The borrower will have to pay back the lender the principal (the original amount) plus a fixed or floating-rate interest. HOWEVER, a lender may want want a "piece of the action" to compensate it for the use of its money and its risk of the loss. OR, a lender may insist upon a fixed rate of interest plus some additional piece of the action (cash flow or equity buildup). Martin v. Peyton involves "interest" that is a share of profits. Also involves May loans, particular form private equity firms, provides that their position as creditor may be converted into an equity ownership in the "borrower"
RUPA s401(j): Partner's Rights and Duties
A difference arising as to a matter in the ordinary course of business of a partnership may be decided by a majority of the partners. An act outside the ordinary course of business of a partnership and an amendment to the partnership agreement may be undertaken only with the consent of all the partners Comment: "It is not intended that subsection (j) embrace a claim for an objection to a partnership decision that is not discovered until after the fact. There is no cause of action based on that after-the-fact second-guessing."
National Biscuit Company v. Stroud: Analysis and Holding
Each partner has an equal right in the management and conduct of a partnership, and differences within a partnership are decided by a majority of the partners. However, when there are only two partners there can be no majority, and neither partner can prevent the other from binding the partnership in the ordinary course of business. Freeman's purchase of bread was a binding transaction, done pursuant to the partnerships business. D, as Freeman's sole co-partner, had no authority to negate Freeman's purchase. The partnership sold the bread that Freeman bought, and consequently D, as well as Freedman, benefited from that purchase. The judgment of the trial court is affirmed.
RUPA s 202(c)(v) debts
No presumption of partnership if the payments were received as "interest or other charge on a loan, even if the amount of payment varies with the profits of the business, including a direct or indirect present or future ownership of the collateral, or rights to income, proceeds or increase in value derived from the collateral.
Debt and Equity
Partnerships "usually have a group of owners who have a hand in controlling and managing the business." It is a "business norm" that characterizes many partnerships. Reflects some of the default rules in RUPA Some partners will contribute services rather than a capital contribution or a loan to the partnership
RUPA s 101(10): Definition of "Persons"
Person' means an individual, corporation, business trust, estate, trust, partnership, association, joint venture, government, governmental subdivision, agency or instrumentality, or any other legal or commercial entity.
RNR Invs. Ltd. P'ship v. Peoples First City Bank: FACTS
RNR investments (D) was created to purchase and develop a parcel of land. D's written partnership agreement restricted general partner Bernard's (GP) capacity to commit the partnership to expense beyond what was approved in the budget. Specifically GP was prohibited from exceeding the budget by more than 10% for any line item, without prior written consent of the limited partners. Roger obtained the approval of the limited partners to seek $650,000 in financing for construction. Without consulting the limited partners, GP entered into a construction loan agreement and mortgage with People's First Bank (P) in the amount of $990,000. P had no knowledge of the partnership agreement's restrictions. D defaulted on the loan, and P sued D in foreclosure. The trial court granted summary judgment to P, rejecting D's arguments that P had a duty to discover the limitations of the GP's authority.
General Standards of Partners Conduct: RUPA s404(b): The Duty of Loyalty
The duty of loyalty is in turn "limited to the following:" 1. "to account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner in the conduct and winding up of the partnership business or derived from a use by the partner of partnership property, including the appropriation of a partnership opportunity;" 2. "to refrain from dealing with the partnership in the conduct or winding up of the partnership business as or on behalf of a party having an interest adverse to the partnership;" and 3. "to refrain from competing with the partnership in the conduct of the partnership business before the dissolution of the partnership."
Gildon v. Simon Prop. Group, Inc.
Gildon is cited for the proposition that a partner may be sued for the partner's own wrongdoing (rather than on the basis of liability for a partnership obligation), with execution levy, without pursuing the partnership or assets. "Pursue Partnership Assets first" rule: "Applying well settled rules of statutory construction and common sense, and considering the RUPA as a whole, a better reading of [s307(d)] is that when a plaintiff sues the partnership, he or she cannot enforce the judgment against a partner who is not personally liable without first exhausting partnership assets. But a plaintiff need not sue a partnership as a precondition for proceeding against a partner. This is so because nothing in the statute requires the plaintiff sue the partnership in addition to an individual partner..." "s307(d) simply restricts a plaintiff's post judgment execution remedies." "By its terms, s307(d) limits only post-judgment relief. On the other hand, the official comment states that "the law of pre-judgment remedies already adequately embodies the principle that partnership assets should be exhausted before partners' assets are attached or garnished. More fundamentally, despite the broad declaration of the joint and several liability of partners, s307(d) treats partners as analogous to guarantors"-Weidner RUPA does not say that a partner may defend an action on the ground that no judgment has been had against the partnership. Section 307(d) states only that a partner may resist execution levy on the ground that no judgment based on the same claim has been had against the partnership."
Equity
The provides of funds directly invests in, "contributes to the capital" of, a partnership, corporation, or llc, becoming a partner, shareholder, or member.
Bob Keatinge (Weidner's friend) KEY difference between UPA and RUPA
The transition from UPA to RUPA was about going from "an aggregation that is sometimes an entity to an entity that is sometimes an aggregate."
Bauer v. Blomfield Co.: Dissent
The trial court should be reversed because there are material questions of fact outstanding. Alaska law reads an implied covenant of good faith and fair dealing with regard to other partners and their assignees. The majority holding permits partners to gratuitously or maliciously withhold profits from an assignee. Because P is entitled to good-faith treatment from the partnership, factual questions exist s to whether the decision to pay the partner out of partnership profits was made in good faith. Therefore the D's summary judgment motion should be denied
The Dissociation of a Partner
Under RUPA, the "cessation go association" in the carrying on of the business is called a "dissociation" Some will trigger a "dissolution and winding up" (liquidation). Others will trigger a right to be bought out. A dissociation will cause a "dissolution and winding up if it is one of the dissociations listed in s801, which lists "Events causing dissolution and Winding Up Partnership Business" If a dissociation is NOT caused by an event listed in s801, yje continuing partnership must buy out the dissociating partner pursuant to s701(a): "If a partner is dissociated from a partnership without resulting in a dissolution and winding up of the partnership business under s801, the partnership shall cause the dissociated partner's interest in the partnership to be purchased for a buyout price determined pursuant to subsection (b).
The Partnerships Property
Under UPA s24: "The property rights of a partner are (1) his rights in specific partnership property; (2) his interest in the partnership; and (3) his right to participate in management." UPA s25(1) in regard to a partner's right in specific partnership property states: "A partner is co-owner with his partners of specific partnership property holding as a tenant in partnership." UPA shifts from the usual incidents of coronership and put control in the partnership. By contrast, under RUPA: - s201(a): "A partnership is an entity distinct from its partners" -s203: "Property acquired by a partnership is property of the partnership and not of the partners individually."
Comments on RUPA Rules to Determine formation of partnership
"Like its predecessor, RUPA makes no attempt to answer in every case whether a partnership is formed." Whether the relationship is more properly characterized as between for example employer and employee, is left to the trier of fact "As under the UPA, a person may function in bother partner and non partner capacities." One can be a member of partnership, and separately rent the partnership money and charge it interest as if I were a third party."
RUPA s 101(6) Partnership
"Partnership' means an association of two or more persons to carry on as co-owners a business for profit formed under Section 202, predecessor law, or comparable law of another jurisdiction" "Formation" is new "Association" in general, means a voluntary coming together
RUPA s 601 Lists the various ways in which a partner can dissociate
-When the partnership gets notice that a partner expresses a will to withdraw; -An event the partnership agreement says causes a dissociation; -A partner's expulsion pursuant to the Partnership Agreement; -A partner's expulsion by unanimous vote of the other partners on certain specified events; -A partner's expulsion by a court; -A partner's death; -The partner becoming a debtor in bankruptcy, etc.
Ways to conceive a Partnership
As an Aggregate (early law, UPA) AS an entity (alternative view, RUPA)
Partnership by Estoppel/Purported Partner
As in agency by estoppel, people who rely to their detriment on a falsely created belief that they are dealing with someone is a member of a partnership, may recover for a loss in reliance "Full contractual liability-damages to vindication an expectation interest- appears to be available, but the doctine is otherwise somewhat narrower than agency by estoppel because it requires overt conduct or consent." Martin v. Peyton: "only those who are partners between themselves may be charged for partnership debts by others. There is no exception. Now and then a recovery is allowed where in truth such relationship is absent. This is because the debtor may not deny the claim." The first sentence reflects the UPA rejection of the doctrine of "partnership as to third persons." RUPA continues this objection with RUPA s 308(e)
Meinhard v. Salmon: Analysis and Holding
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. The second lease was an extension of the subject matter of the first, in which P had a substantial investment. D was given the opportunity to enter into the second lease because he managed the Bristol Hotel property. Because D's opportunity arose as a result of his status as the managing co-adventurer, he had a duty to tell P about it. D breached his fiduciary duty by keeping his transaction from P, which prevented P from enjoying an opportunity that arose out of their joint venture. "The trouble about his (d) conduct is that he excluded his coadventurer from any chance to compete" Accordingly, the judgment of the appellate division is affirmed, with a slight modification. This court holds that a trust attaching to the shares of stock would be granted to P, with the parties dividing the shared equally, but with D receiving an additional share. The additional share enables D to retain control and management of the second property, which according to the joint venture D was to have for the entire length of the joint venture
Bauer v. Blomfield Co.: Analysis and Holding
Assignees have no right to share in the management and control of the partnership; they simply have the right to receive the business profits to which the assignors would have been entitled. Partners do not owe assignees a duty of good faith and fair dealing, because Alaska's version of the UPA was intended to protect non-assigning partners from interference by third parties. In this case, P simply acquired the right to receive the Holden's are of partnership profits, When the partners decided to pay the other partner's fee from partnership income, there were no longer any profits that could be distributed. Since the Holdens would not have been entitled to a distribution, neither was Bauer. Bauer cannot interfere with partnership management or override a decision to apply profits in a particular manner. "We are unwilling to hold that partners owe a duty of good faith and fair dealing to assignees. To do so would undermine the clear intent of the partnership act" The trial court's ruling granting summary judgment in favor of the defendants is therefore affirmed.
RUPA s 202(c) "determining whether a partnership is formed"
"(1) joint tenancy, tenancy in common, tenancy by the entireties... or part ownership, does not by itself establish a partnership, even if the co-owners share profits made by the use of property." (This leaves open a passive co-ownership of real estate that does not rise to partnerships) "(2) The sharing of gross returns does not by itself establish a partnership, even if the persons sharing them have a joint or common right or interest in property from which the returns are derived." (Shopping center leases frequently require a retail tenant to pay a fixed rent in addition to a percentage of the tenant's gross receipts.) "(3) A person who receives a share of the profits of a business is presumed to be a partner in the business, unless the profits were received in payment: (i) of a debt, by installments or otherwise; (ii) for services as an independent contractor or of wages or other compensation to an employee; (iii) of rent; (iv) of an annuity or other retirement or health benefit to a beneficiary representative, or designee of a deceased or retired person; (v) of interest of other charge on a loan, even if the amount of payment varies with the profits of the business, including a direct or indirect present or future ownership of the collateral, or rights to income proceeds, or increase in value derived from age collateral; or (vi) for the sale of the goodwill of a business or other property by installments or otherwise
RUPA s204(a & b) discussing when property is deemed to be partnership property
"(a) Property is partnership property if acquired in the name of: 1. the partnership; or 2. one or more partners with an indication in the instrument transferring title to the property of the person's capacity as a partner or of the existence of a partnership but without an indication of the name of the partnership." "(b) Property is acquired in the name of the partnership by a transfer to: 1. the partnership in its name; or 2. one or more partners in their capacity as partners in the partnership, of the name of the partnership is indicated in the instrument transferring title to the property." The general rule, at least among the partners, is that their intention controls whether property is partnership property or separate property.
RUPA s204(c & d) Presumptions about whether property is either partnership property or separate property
"(c) Property is presumed to be partnership property if purchased with partnership assets, even if not acquired in the name of the partnership or of one or more partners with an indication in the instrument transferring title to the property of the person's capacity as a partner or the existence of a partnership." "(d) Property acquired in the name of one or more of the partners, without an indication in the instrument transferring title to the property of the person's capacity as a partner of the existence of a partnership and without use of partnership funds, is presumed to be separate property, even if used for partnership purposes." ONE CAVEAT: "Under s302(b), partnership property held in the name of individual partners, without an indication of their capacity as partners or of the existence of a partnership, that is transferred by the partners on whose name title is held to a purchaser without knowledge that it is partnership property is free of any claim of the partnership."
RUPA s 602(a) Power to dissociate
"A partner has the power to dissociate at any time, rightfully or wrongfully, by express will pursuant to Sections 601(1)."
General Standards of Partners Conduct: RUPA s404(c): Duty of Care
"A partner's duty of care to the partnership and the other partners... is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law."
RUPA s 308, Hillman, Weidner and Donn's take
"A person may be held to have consented to a representation even if there is no direct evidence that the person authorized it. Even if a business is formally owned by a corporation or by a limited liability company expressions of ownership by a shareholder or by a member, either written or oral, may be considered as evidence of consent to a representation that the shareholder or member is a partner. In once case, a court noted that frequent presence at a business, with free access to the business office, and the perceptions the employees of the business, were evidence of consent to a representation that the person was a partner."
RUPA s 308(a) Purported Partner
"If a person purports to be a partner, or consents to being represented by another as a partner, in a partnership or with one or more persons not partners, the purported partner is liable to a person whom the representation is made, if that person, relying on the representation, enters into a transaction with the actual or purported partnership." Comment: "As under the UPA, there is no duty of denial, and thus a person held out by another as a partner is not liable unless her actually consents to the representation." The persons being protected are those who enter into transactions in reliance on the representation. MADE IN A PUBLIC MANNER?? (still (a)) "If the representation, either by the purported partner or by a person with the purported partner's consent, is made in a public manner, the purported partner is liable to a person who relies upon the purported partnership is liable to a person who relies upon the purported partnership even if the purported partner is not aware of being held out as a partner to the claimant." "If partnership liability results, the purported partner is liable with respect to that liability as if the purported partner were a partner. If no partnership liability results, the purported partner is liable with respect to that liability jointly and severally with any other person consenting to the representation."
Extraordinary Grants of Authority to a Partner (RUPA s303(d)(1 &2))
(1) Except for transfers of real property, a grant of authority contained in a filed statement of partnership authority is conclusive in favor of a person who gives value without knowledge to the contrary (2) A grant of authority to transfer real property held in the name of the partnership contained in a certified copy of a filed statement of partnership authority recorded in the office for recording transfers of that real property is conclusive on favor of a person who gives value without knowledge to the contrary
General Standards of Partners Conduct: RUPA s404(a)
(a) The only fiduciary duties a partner owes to the partnership and the other partners are the duty of loyalty and the duty of care set forth in subsections (b) and (c)
General Standards of Partners Conduct: RUPA s404(d) and (f)
(d) A partner shall discharge the duties to the partnership and the other partners [under RUPA or the agreement] and exercise any rights consistent with the obligation of good faith and fair dealing. (f) A partner may 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.
General Standards of Partners Conduct: RUPA s404(e): Possibly not a fiduciary???
(e) A partner does not violate a duty or obligation [Under RUPA or the agreement] merely because the partner's conduct furthers the partner's own interest. Comment: "A partner as such is not a trustee and is not held to the same standards as a trustee. Subsection (e) makes clear that a partner's conduct is not deemed to be improper merely because it serves the partner's own individual interest. The partner's rights as an owner and principal in the enterprise ... must always be balanced against his duties and obligations as an agent and fiduciary. For example, a partner who, with consent, owns a shopping center may, under subsection (e), legitimately vote against a proposal by the partnership to open a competing shopping center."
The Partner's Transferable Interest
A partner may not transfer all of his or her interest in the partnership. Specifically, they may not transfer either her right to manage or control the business or her right to have access to information or books or records. This is because the other partners cannot be forced to accept an unwanted partner. The relationship is so consequential that the law will not force partners to accept new members. The basic and historic rile of deletes person arum, or "right to choose the person," is reflected in RUPA s401(i): "A person may become a partner only with the consent of all of the partners." The basic policy judgment is confirmed and enlarged upon in RUPA s502 and 503 -502: "The only transferable interest of a partner in the partnership is the partner's share of the profits and losses of the partnership and the partner's right to receive distributions. The interest is personal property." -s503(a)(3): A transferee is not entitled to participate in management or even in the conduct of the partnership business, nor entitled to access to information about partnership transactions or the partnership books or records. -503(b) provides that a transferee is entitled: 1. to receive, in accordance with the transfer, distributions to which the transforor would otherwise be entitled; 2. to receive upon the dissolution and winding up of the partnership business, in accordance with the transfer, the net amount others distributable to the transferor; and 3. to seek under s801(6) a judicial determination that is equitable to wind up the partnership business -503(f): "A transfer of a partner's transferable interest... in violation of a restriction on transfer contained in the partnership agreement is ineffective as to a person having notice of the restriction at the time of transfer."
Martin v. Peyton: Analysis
A partnership is not formed unless two or more parties are closely associated so as to be co-owners carrying on a business for profit. When, as here, creditors have executed loan documents with a debtor firm that contains provisions for the collection of collateral, this court must examine the extent to which those documents associate the creditor with the business operations of the firm. In this case, no partnership was formed. The agreement providing for appointment of two of the lenders as trustees, for example, does not indicate a partnership. The trustees were in charge only of transactions affecting their collateral, and they were prohibited from commingling the collateral with KN&K's other securities. Similarly, Hall's life insurance and management power does not imply an association with KN&K because Hall was trusted by the other lenders to keep an eye on KN&K and work to ensure that it was run efficiently enough to return to profitability and pay back the lenders. And, the trustees' veto power does not indicate a partnership, as it gave them the ability only to safeguard against bad investments concerning their collateral. The trustees has no authority to initiate transactions on half of KN&K, nor bind the firm by their actions. Further, the assignment of firm interest to the lenders is not indicative of a partnership, because the intent was to protect the firm's profits, which represented the lenders' compensation for the loan. The indenture was basically a mortgage, containing the terms of KN&K performance of the loan. The indenture did not contain any terms of partnership. The option's provision giving Hall the right to demand the resignation of KN&K members was unusual, but as the intent was to protect the lenders against speculative transactions that could render the option itself worthless, it does not show that a partnership was formed. Questions of whether a partnership is formed between various entities are a matter of degree, to be determine on a case-by-case basis. In this case, the loan documents do not show that a partnership existed between the lenders and KN&K. The judgment of the trial court is affirmed.
Extraordinary Restrictions on a Partner's Authority (RUPA s303(e))
A person not a partner is deemed to know of a limitation on the authority of a partner to transfer real property held in the name of the partnership if a certified copy of the filed statement containing the limitation on authority is of record in the office for recording transfers of real property. There is no similar rule for restrictions on the authority of a partner apart from real estate transfers In the case of dissociation or dissolution, other statements may be filed to wind down a partner's authority to bind the partnership
Dissociation v. Dissolution
Although UPA s 17(a) states that a "conveyance by a partner of disinterest in the partnership does not of itself dissolve the partnership," this language only was intended to refer to a situation in which the conveyance was not intended to end the relation. Comment to 17(a): "These authorities on the whole state that the mere assignment dissolved the partnership. Many such assignments, however, are merely by way of collateral security for a loan, the assigning partner in no wise intending to end the partnership relation." Under RUPA, when a partner leaves the partnership (or a member leaves a LLC), the departure is called "dissociation." RUPA provides a switchboard: -Some dissociations cause a dissolution, which is the commencement of the winding up, or liquidation, of the partnership's business. -Many dissociations will not cause a dissolution, but will give a departing partner the right to be bought out. A partner dissociating from a term partnership may not trigger a winding up but had the right to be bought out. One basic purpose of RUPA was to assure theoretical and legal stability for partnerships that have contracted for stability.
RUPA s 202(b) formation of partnership
An association formed under a statute other than this [Act], a predecessor statute, or a comparable statute of another jurisdiction is nor a partnership under this [Act]. -Because limited partnerships are "formed" under the Revised Uniform Limited Partnership Act, they are not "partnerships" under RUPA - However, RULPA s 1105 provides that RUP applies "in any case not provided for" in RULPA (such as the limited liability partnerships provisions.)
Fairway Dev. Co. v. Title Ins. Co. Of Minn.: Court's Analysis
Court held for the D, stating that Fairway Development II had no standing to sue D for breach of K. "It is a fundamental principle of law that any change in the personnel of a partnership will result in its dissolution." Referring to UPA, court stated that Ohio follows "the common law aggregate theory of partnership, under which a partnership is regarded as the sum of the persons who comprise the partnership, versus the legal entity theory of partnership, under which the [partnership], like a [corporation], is regarded as an entity in itself.." The documentation set forth by P was not the best for their case: there was reference to the commencement of a new partnership. However, court did not refer to UPA s 29 which defines dissolution in aggregate terms: "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."
RUPA s 202(a) formation of partnership
Except as otherwise provided in subsection (b), the association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intended to form a partnership
RUPA s 306(a)
Except as otherwise provided in subsections (b) [dealing with readmission obligations] and (c) [dealing with limited liability partnerships], all partners are liable jointly and severally for all obligations of the partnership unless otherwise agreed by the claimant or provided by law. The part of RUPA the "lenders" in Martin v. Peyton are trying to avail themself of.
RUPA 308(e) elimination of the "partnership as to third persons" doctrine
Except as otherwise provided in the [purported partner rules], persons who are not partners as to each other are not liable as partners to other persons. Nevertheless, despite this provision, and its predecessor in the UPA, some courts continue to state that a higher standards applies to establish a partnership if no third-party climate is involved. "Where the suit is between the parties as partners, stricter proof is requires of the existence of a partnership than where the action is by a third person against either actual partners or persons sought to be charged as partners." That is, it is easier for third parties to establish a partnership.
RUPA s 603 What rules apply to a dissociation
If a partner's dissociation results in a dissolution and winding up, then the winding up rules apply. WHEREAS, if a partner's dissociation does not result in a dissolution and windup, the buyout rules apply
RUPA s 308(b) Purported Partner
If a person is thus represented to be a partner in an existing partnership, or with one or more persons not partners, the purported partner is an agent of persons consenting to the representation to bind them to the same extent and in the same matter as if the purported partner were a partner, with respect to persons who enter into the transaction in reliance on the partnership. If all of the partners of the existing partnership consent to the representation, a partnership act or obligation results. If fewer than all of the partners of the existing partnership consent to the representation, the person acting and the partners consenting to the representation are jointly and severally liable." Official comment: "If all of the partners of an existing partnership consent to the representation, a partnership obligation results. Apart from Section 308, the firm may be bound in other situations under general principals of apparent authority or ratification."
Bauer v. Blomfield Co.: Issue and Rule
Must a partnership consider the objections of an assignee when making decisions regarding income distributions? An assignee has no right to interfere in the management of the partnership and therefore cannot compel the partnership to distribute income in a particular fashion.
Summers v. Dooley: Analysis and Holding
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. When a partnership consists of only two partners, one partner cannot unilaterally bind the partnership by incurring expenses over the objection of the other. In this case, P hired the additional worker after D clearly expressed his objection. Under these circumstances, it would be unfair for D to be forced to pay an expense that P incurred for his own benefit, rather than for the benefit of the partnership. "Business decisions must be decided by a majority of the partners provided no other agreement between the partners speaks to the issues." (unanimously if there are only two partners) AND "if the parties are equally divided, those who forbid the change must have their way." "One of the partners continually voiced objection to the hiring of the third man. He did not sit idly by and acquiesce... Under these circumstances, it is manifestly unjust to permit recovery of an expense which was incurred individually and not for the benefit of the partnership but rather the benefit of one partner." The judgment of the trial court is affirmed
Partner's Liability for Partnership Obligations
In most cases, the partnership pays its bills and satisfies its other obligations. If a general partnership is insolvent, however, the partners themselves bear the risk of insolvency, not third party creditors. The general partnership is the only business form in which all the owners and operators are responsible for the obligations of the organization. Under UPA, the individual partners were "jointly and severally" liable for partnership torts. If any partner committed a tort in the course of partnership business, the partnership was liable and recovery could be had directly against any partner. By contrast, partners were only "jointly" liable for the partnership's contract and other obligations. (For K claims against the partnership, third parties would ordinarily need to sue all the partners individually and then could recover against all of them individually. Though procedurally more complicated the results were very similar to join and several liability; any solvent partners could be fully responsible for the obligations of the partnership. RUPA simplies partner liability, declaring that the partners are "jointly and severally liable" for partnership obligations. RUPA s306(a) provides: (a) except as otherwise provided, all partners are liable jointly and severally for all obligations of the partnership unless otherwise agreed by the claimant or provided by law. (b) A person admitted as a partner into an existing partnership is not personally liable for any partnership obligation incurred before the person's admission as a partner. HOWEVER, RUPA s307 adds additional rules to make partnership creditors pursue partnership assets before pursing the separate assets of individual partners. Partnership assets are the primary fund for repayment. Therefore, the creditor must pursue them before pursuing an individual partner's separate assets. RUPA 307(a) provides: "An acting may be brought against the partnership and, to the extent not inconsistent with [the readmission loss rule and the llp rule], any or all of the partners in the same action or in separate actions. RUPA s307(c): "A judgment against a partnership is not by itself a judgment against a partner. A judgment against a partnership may not be satisfied from a partner's assets unless there is also a judgment against the partner."
Meinhard v. Salmon: Issue and Rule
Is a co-adventurer required to inform another co-adventurer of a business opportunity that occurs as a result of participation in a joint venture? Co-adventurers, like partners, have a fiduciary duty to each other including sharing in any benefits that result from the parties' joint venture
Summers v. Dooley: Issue and Rule
Is a partner who refused to hire an additional employee liable to a co-partner for expenses incurred in hiring a new worker? Looked to UPA--> default rile said that a difference as to ordinary matters "may be decided by a majority of the partners. In a general partnership, each partner has an equal right in managing the partnership business.
"Joint Venture"
Is considered a partnership if it falls within the definition of partnership. Some courts say that the law of partnership directly controls joint ventures whenever they fit within the definition of partnership. Others don't quite say that JVs are partnerships and instead say the law of partnership applies by analogy to joint ventures. The general idea is that a "joint venture" is a relationship more limited in time or scope than a partnership. There is, however, no separate statute on JVs, and no reason RUPA should not apply, provides there is a co-ownership of a business for profit.
Partnership
Law's default category for those who co-own a business without adopting some other form. There I son need for a formal filing to create a partnership. A business operating without legal formation is either a sole proprietorship or a partnership.
Unincorporated nonprofit organization
NOT a partnership under RUPA, even if it qualifies as a business because it is not a "for profit" organization.
Sole proprietorship
One individual making a profit. True even if one is requires to obtain licenses to do business. True even if one hires employees to work for her.
Summers v. Dooley: FACTS
P and D were co-partners in a trash collection business. Both partners operated the business. The partners agreed that when one partner was unable to work, he could hire a replacement at his own expense. Several years after the formation of the partnership, P asked D if he would agree to hire an additional employee. D refused, but P hired the worked anyway and paid him out of his own pocket. In spite of the fact that the new worker was a good employee, D would not agree to pay him out of the partnership funds. P sued D, seeking reimbursement for the expenses P incurred in hiring the new employee. The trial court granted P only partial relief, which he appealed.
Moren v. Jax Rest.: Rules
RUPA 305(a): "A partnership is liable for the loss or injury caused to a person... as a result of a wrongful act or omission, or other actionable conduct of, a partner acting in the ordinary course of business of the partnership or with authority of the partnership." RUPA 301(2): "An act of a partner which is not apparently for carrying on in the ordinary course the partnership business or business of the kind carried on by the partnership binds the partnership only if the act was authorized by the other partners." RUPA 401(c): A partnership shall reimburse a partner for payments made and indemnify a partner for liabilities by the partner in the ordinary course of the business of the partnership or for the preservation of its business or property." "Under the plain language of the UPA, a partner has a right to indemnity from the partnership, but the partnership's claim of indemnity from a partner is not authorized or required."
What is a partner was joined in the suit and there is a judgment against the partner? (Partner's Liability for Partnership Obligations)
RUPA 307(d) only clicks in AFTER the partnership creditor has obtained a judgment against the partner: "A judgment creditor of a partner may not levy execution against the assets of the partner to satisfy a judgment based on a claim against the partnership unless the partner is personally liable for the claim under Section 306 and [one of 5 listed conditions is present]. In each of these 5 situations, it is appropriate to go directly after the partner's separate assets either because the partnership assets have already been pursued with no or limited success, the partnership is bankrupt, the partners have agreed to be pursued directly or the law so provides, partnership assets "are clearly insufficient", exhaustion is not feasible, or a court concludes it is equitable.
RUPA s 308(e) and Partnership as to Third Persons
RUPA 308(e) is intended to eliminate the doctrine of "partnership as to third persons:" -(e) "Except as otherwise provided in subsections (a) and (b), persons who are not partners as to each other are not liable as partners to other persons." Nevertheless, despite this provision, and its predecessor in UPA, some courts continue to state that a higher standard applies to establish a partnership if no third-party claimant is involved. (EX: where the suit is between the parties as partners, stricter proofs required of the existence of a partnership than when the action is by a third person against either actual partners or persons sought to be charged as partners.) That is, it is easier for third parties to establish a partnership
RUPA s 303: Statement of Partnership Authority
RUPA introduced an unprecedented system of option statements that can be filed. The most important statement, especially for transfers of real property, is the Statement of Partnership Authority. s303(a) indicates that it is an option for the "partnership" to file "a statement of partnership authority" with the Secretary of State s303(b) indicates that certain information must be in the statement. There is a "disclosure tax" on the exercise of the option to file. The statement must either name all the partners or it may list an agent who "shall maintain a list of the names and mailing addresses of all of the partners and make it available to any person on request for good cause shown." s303 distinguishes between extraordinary restrictions on a partner's authority and extraordinary grants of authority.
Acts Outside the "Ordinary Course"
RUPA leaves it to the court to decide what acts are outside the "ordinary course" of a partnership business, and hence, outside the scope of a partner's authority. UPA listed matters that require unanimous consent (hence were not considered "ordinary" matters): 1. Assign the partnership property in trust for creditors or on the assignee's promise to pay the partnership debts; 2. Dispose of the good will of the business; 3. Do any other act that would make it impossible to carry on the ordinary business of the partnership; 4. Confess a judgment (a written agreement by a D accepting the agreed-upon damages it must pay to P and agreeing that the statement may be filed as a judgment if D does not pay); and 5. Submit a claim or liability in arbitration or reference
Partnership as an Entity
RUPA official adopts RUPA s 201(a): A partnership is an entity distinct from its members Ex: A partnership is a separate legal personality for purposes of suit. A partnership may sue and be sued in the name of the partnership Partners may come and go without dissolving the entity HOWEVER, RUPA also reflects certain aggregate characteristics of a partnership. (1). A partner owes fiduciary duties to the partnership and to the other parties (by contract, in a public corporation, one shareholder is generally not under a fiduciary duty to other shareholders) (2) Partners are jointly and severally liable for the contracts and torts of the partnership. (Makes partnership look less like a separate entity than a corporation or LLC. HOWEVER, can avoid that kind of liability by filing a statement of qualification to become a limited liability partnership (llp)
Partnership Accounts
The "guts" of RUPA's default or "off the rack" partnership agreement are contained in RUPA s401, which begins with a rudimentary system for keeping accounts: "(a) Each partner is deemed to have an account that is: 1. credited with an amount equal to the money plus the value of any other property, net of the amount of any liabilities, the partner contributes to the partnership and the partner's share of the partnership profits; and 2. charged with an amount equal to the money plus the value of any other property, net the amount of any liabilities, distributed by the partnership to the partner and the partner's share of the partnership losses." "(b) Each partner is entitled to an equal share of the partnership profits and is chargeable with a share of the partnership losses in proportion to the partner's share of the profits."
Bauer v. Blomfield Co.: FACTS
The Holdens were partners in Blomfield Company/Holden Joint Venture (d), along with 3 Blomfields and a Monsarrant (d). The Holdens assigned "all their right, title, and interest" in the partnership to Plaintiff. For a time, P received the monthly share of partnership income to which the Holdens would have been entitled. However, the partners soon ceased making income distributions, deciding instead to use income to pay a fee owed to a partner. The fee arose from a unanimous agreement of the partners that predated the Holdens' assignment. P sued the partnership and all the partners except the Holdens, claiming that his right to partnership income had been violated. Trial court granted summary judgment in favor of D, and P appealed.
RUPA s 301: Partner Agent of the Partnership
The basic provision on partner authority: "Subject to the effect of a statement of partnership authority under Section 303: (1) Each partner is an agent of the partnership for the purpose of its business. An act of a partner, including an execution of an instrument in the partnership name, for apparently carrying on in the ordinary course of the partnership business or business of the kind carried on by the partnership binds the partnership, unless the partner had no authority to act for the partnership in the particular matter and the person with whom the partner was dealing knew or had received a notification that the partner lacked authority. [a third party's mere notice of a lack of authority is not enough to prevent the partnership from being bound to the third party by a partner apparently carrying on in the ordinary course] (2) An act of a partner which is not apparently for carrying on in the ordinary course the partnership business or business of the kind carried on by the partnership binds the partnership only if the act was authorized by the other partner." S 301 sets out the general power of a partner, as an agent of the firm, to bind the partnership to third parties. "The effect of s 301(1) is to characterize a partner as a general managerial agent having both actual and apparent authority coextensive in scope with the firm's ordinary business, at least in the absence of a contrary partnership agreement." The power of a partner to bind the partnership to third parties can be expanded or contracted, within limits, by the filing of a statement of partnership authority. Whether, as among themselves, a partner has the right to bind the partnership to third parties, is a matter for the partnership agreement. "Under UPA s 9(1) and (4), only a person with knowledge of a restriction a partner's authority is bound by it. Section 301(1) provides that a person who has received a notification of a partner's lack of authority is also bound. The meaning of 'received a notification' is explained in s 102(d): you received a notification when it comes to your attention or "is duly delivered at the person's place of business or at any other place held out by the person as a place for receiving communications." "Thus, the partnership may protect itself from unauthorized acts by giving a notification of a restriction on a partner's authority to a person dealing with that partner. A notification may be effective upon delivery, whether or not it actually comes to the other person's attention. To that extent, the risk of lack of authority is shifted to those dealing with partners." Binding third parties simply by receipt of a notification of a partner's lack of authority is consistent with the rules declaring the effectiveness of statements of partnership authority (RUPA s 303), of dissociation (RUPA s 704) and of dissolution (RUPA s 805). A third party is not bound by a restriction on authority merely by her "notice" (reason to know) of it. Part of RUPA's off the rack partnership agreement is the default rule in RUPA s 401(j), discussing the rights of the partners as among themselves: "A difference arising as to a matter in the ordinary course of business of a partnership may be decided by a majority of the partners. An act outside the ordinary course of business of a partnership and an amendment to the partnership agreement may be undertaken only when the consent of all the partners." Under general agency principles, the partners can subsequently ratify a partner's unauthorized act. RUPA s 104(a): unless otherwise displaced by RUPA, "the principles of law and equity" supplement RUPA
Martin v. Peyton: Facts
The brokerage firm of Kn&K made a series of bad investments, which resulted in the firm suffering severe financial difficulties. In order to save KN&K, one of the partners, Hall, entered into a transaction with Defendant and other persons for a loan of $2,500,000 worth of securities to KN&K. In return for the loan, the lenders were to receive 40% of Kn&K's profits until the debt was repaid. The transaction was based on three documents: an agreement, indenture, and option. The agreement provided that: (1) two of the lenders were appointed "trustees" who were to be informed of transactions affecting them, paid dividends and income from those transactions, had the power to buy and sell their loaned securities and substitute those securities with those of equal value, but could not commingle those securities with KN&K's other securities, and were requires to keep the securities valued at a certain level; (2) Hall was given the power of directing the management of KN&K until the loan was repaid, and his life was to be insured for $100,000 with the insurance policies given to the trustees as additional collateral; (3) the trustees were to be kept informed of the important matters of KN&K's business, could inspect the books, and had the power to veto certain business decisions that could affect their collateral; and (4) each KN&K member was to assign their interest in the firm to the trustees, member could receive a loan from KN&K, the members' draw amount was fixed, and no other distribution of profits could be made. The indenture was basically a mortgage on the collateral delivered by KN&K to the trustees. The option: (1) gave the lenders the opportunity to but into KN&K by buying 50% or less of the members' interest at a listed price; (2) enabled the formation of a corporation to replace KN&K if its members and lender agreed; and (3) provided for the resignation of any KN&K member at the demand of Hall. Plaintiff, a creditor of KN&K, sued the lenders, claiming that their transaction with KN&K as illustrated by the documents made them partners in that firm and thereby liable for KN&K's debts. The trial court held that the lenders were not partners of KN&K.
Moren v. Jax Rest.: Analysis
The court appears to say that indemnity is a one-way street. That is although there is a statutory provision for the partnership to indemnify a partner; there is no reciprocal statutory provision for a partner to indemnify the partnership. Seems odd for the court to say the partnership "owes indemnity to her for her negligence." The partnership loses in its lawsuit to recover from her indemnity or contribution for the damages it had to pay because of her negligence ------------------------------------- The court did not discuss RUPA 404(c): A partner's duty of care to the partnership and the other partners in the conduct and winding up of the partnership business is limited to refraining from engaging in grossly negligence or reckless conduct, intentional misconduct, or knowing violation of law.
Moren v. Jax Rest.: Ordinary Course arguments
The court decided she was acting in the ordinary course of the business, however did not reach whether she was acting "with authority of the partnership." Ordinary course inquiry is similar to "scope of employment" inquiry Partnership argued that she was engaged in a personal mission, and not acting in the ordinary course when she brought her son into the kitchen. Court said her act is within the "ordinary course" even if the "predominate emotive of the partner was to benefit herself to third persons."
Partnership as Aggregate (early law)
Traditionally, and under the UPA, a partnership was viewed as an aggregate. "A partnership is just the aggregate of their members" Under the aggregate conception, a partnership is a unique aggregations of individuals, and hence "dissolves" whenever one of the partner leaves and whenever a new partner joins. HOWEVER, UPA also reflected certain entity characteristics. Its rules on the ownership of partnership property, for example, are stated in aggregate terms but reach the same result as an entity theory
RNR Invs. Ltd. P'ship v. Peoples First City Bank: Analysis
Under the doctrine of apparent authority, when a partner engaged with a third party in the ordinary course of business, the partner's actions bind the partnership, unless the partner lacked actual authority and the third party actually knew or had received notice of the lack of authority. Third parties are entitled to assume that authority exists where it appears to. Third parties are not required to seek out the partnership agreement or investigate other possible limitations on a partner's authority. Here, GP's dealings with P were clearly in the ordinary course of D's business, because D's sole business purpose was real estate development. GP, therefore had apparent authority to enter into the transaction with P, even though he lacked actual authority due to the restrictions in the partnership agreement. Since P lacked actual knowledge of the restrictions, it was entitled to assume that GP had the authority he claimed to have. Therefore, D is bound to the contract with P. The partnership could have protected itself by either (1) notifying a third party of a partner's lack of authority [if it is aware of the situation], or (2) filing a statement of partnership authority restricting a partner's authority. Summary judgment in favor of P is affirmed.
Automatic "Sunset" of a Statement of Partnership Authority (RUPA s303(g))
Unless earlier canceled, a filed statement of partnership authority is canceled bu operation of law five years after the date on which the statement, or the most recent amendment, was filed with the [Secretary of State].