Partnerships

Liquidation of Partnerships Hierarchy of Payment

(1) Third-party creditors (2) Capital accounts distributed to partners (3) Distribute profits or bear losses among partners

401(a)(1)&(2) Capital Accounts

(a) Each partner is deemed to have an account that is: (1) Credited with an amount equal to the money [or property] ... the partner contributes to the partnership and the partner's share of the profits; and ($/property partner contributed initially) + (partner's share of profits) (2) Charged with an amount equal to the money [or property] ... distributed by the partnership to the partner and the partner's share of the losses ($/property distributed/taken out) + (share of losses) Note: Capital investment is your return on investment, not your salary

Three Types of Fiduciary Breaches of Loyalty between Partners:

1. Competing with beneficiary 2. Usurpation of business opportunity 3. Self-dealing 4. Bad faith

General Partnerships

All partners have unlimited liability; business is ongoing in character

401(a) profits & losses

Default rule: profits are shared equally and losses follow profits. Thus, Profits" and "Losses" belong to partnership and are allocated to each partners capital account.

401(b) profits & losses

Each partner is entitled to an equal share of the partnership profits and chargeable with a share of the partnership losses in proportion to the partnership share of profits. Default rule: therefore if partner's don't change agreement, profits are split equally and losses are shared proportional to partner's share)

UPA §103(a)

Except as otherwise provided in (b), relations among & between the partners are governed by the partnership agreement.If the partnership agreement does not otherwise provide, this Act governs relations among & between partners. Therefore, all Article 4 rules are default rules that be changed by the "partnership agreement." THUS, Partners can vary: Relations among partners Relations between partners and partnership THUS, Partners CANNOT vary: Relations between partners and third parties Relations between partnership and third parties

Kovacik v. Reed RULE

General rule is a presumption towards sharing equally in the profits and losses of the venture. However, where one partner contributes the money capital and the other contributes the labor, all precedent holds that neither party is liable to the other for contribution for any loss sustained. Classic capital-labor dispute in liquidating a partnership. HERE: The court creates a common law exception to the UPA. Upon loss of the money the partner who contributed it is not entitled to recover any part of it from the party who contributed only services without being paid salary. The rationale of this rule is that where one party contributes money and the other contributes services, then in the event of a loss each would lose his own capital the one his money and the other his labor i.e. the labor of one partner is considered his capital investment.

Storch Test for permissible self dealing

In self-dealing the burden is on the fiduciary to establish "entire fairness" in the transaction. (1) Were the fees "reasonable"? (2) Fair dealing?

Meinhard v. Salmon RULE

NY Hotel case. Salmon owed fiduciary duty to Meinhard because partnerships are inherently fiduciary because they are special relationships that depend on trust. "Many forms of conduct permissible in a workaday world for those acting at arm's length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than morals of the marketplace. Not honesty alone, but the punctilio of an honor the most sensitive , is then the standard of behavior." Burden of Proof: Once fiduciary relationship is established the burden is on the fiduciary to show that he did not breach his fiduciary duty (Big advantage to π because ∆ has burden).

404(a) Fiduciary duties between partners

Partners owe the partnership and other partners the duty of loyalty and the duty of care.

Vigneau v. Storch Eng. RULE

The one absolute taboo is that a fiduciary may not engage in self-dealing (BUT THAT IS NOT TRUE). Court applies test: In self-dealing the burden is on the fiduciary to establish "entire fairness" in the transaction. (1) Were the fees "reasonable"? - Yes, the fees charges were the reasonable market price (2) Fair dealing? - No, because V. was acting secretly/fraudulently

The law of Partnerships

Uniform Paernership Act (1997)

§202(c)(3) presumption from profit-sharing

a person who receives a share of the profits of a business is presumed to be a partner in the business, UNLESS profits were received (i) of debt by installments (ii) as wages

UPA §202(a) Formation of Partnership

association of two or more persons to carry on as co-owners a business for profits forms a partnership, whether or not the persons intend to form partnership

Cardozo test for breach of loyalty

is there a nexus of relation between the business conducted by the manager & the opportunity brought to him as an incident of management? Applied to facts: The opportunity was brought to Salmon as manager, the new lease encompassed the old side & abutting property, therefore there was a close nexus of relation. Dissent: This was a joint venture "for a limited object, to end at a fixed time," therefore the fiduciary duties were more limited. The original lease was for only 20 years on one piece of property; the new lease is 2x the property, more money invested, and an 80 year lease; therefore there was not a sufficiently close nexus of relation.

Hynansky v. Vietri RULE

ong but not conclusive evidence of intent to carry on as co-owners in business for a profit. To prove the existence of a partnership, one must show the intent to divide the profits of the venture. When controversy is between two partners, as it is here, stricter proof of the intention to carry on as co-owners for profit is required.

Byker v. Mannes RULE

the element of "intent" is to "carry on as co-owners" (i.e. "intent to share profits") NOT the intent to be partners. HERE: Dispute over General partnership between π and ∆. ∆ claims not GP in Pier 1000 Ltd. π argues GP underlying all of their business ventures. The proper focus, in ascertaining the existence of a partnership, is on whether the parties intended to and, in fact did, "carry on as co-owners a business for profit" NOT subjective intent to form a partnership. Court applies UPA §202(a) formation of partnership & §202(c)(3) presumption of partnership