Themis Partnerships

Relations of Partner with Partnership and Between Partners

Partner as agent of P—a partner may enter into contracts with third parties on behalf of P Fiduciary duty—a partner owes a fiduciary duty to P and the other partners; must account to P for any benefit derived by the partner without the consent of the other partners Profits and losses 1. Dictated by agreement—the partnership agreement (PA) controls, if there is one; may specify a percentage for sharing profits that differs from the percentage for sharing losses 2. No agreement or agreement silent—the partners equally share profits; partners must contribute to P's losses according to each partner's share in the profits Partner's partnership interest—consists of the right to share in profits and surplus; treated as personal property; may be transferred to a third party at any time 1. Transfer to third party • Effect on partnership—does not automatically dissolve P as against other partners • Rights of transferee—the transferee has the right to receive profits and distributions from P to which the transferor partner would have been entitled o Not entitled to participate in the management or conduct of P's business, to access P's records, or to demand other information from P 2. Charging order—a creditor of a partner who has obtained a judgment against the partner may enforce the judgment against the partner's partnership interest by a judicial charging order; constitutes a lien on the interest Property ownership 1. General rule—all property acquired by P belongs to P and not the individual partners 2. Acquisition with P funds—property acquired with P funds is partnership property, unless a contrary intention is evident • Separate property v. P property—a question of intent; courts usually consider whether (i) the property is acquired or otherwise titled in P's name, (ii) property is listed as P's asset in P's books/records, (iii) P paid insurance premiums and taxes on the property, (iv) P paid rent to the contributing partner for the property, and (v) property was used for P's purposes 3. Real property in P name—may be acquired/conveyed in P's name 4. Rights of partner in P property—a partner is a co-owner with the other partners, holding as a "tenant in partnership" • Equal right to possess P property for P purposes • Cannot assign P property, unless all partners assign their right to the same property • P property is not subject to attachment/execution except for a claim against P • A partner's right in P property vests in the surviving partners upon the partner's death • P property is not subject to dower, curtesy, or allowances to surviving heirs 5. Use of P property—a partner may only use/possess P property on behalf of P; a partner must compensate P if he derives a personal benefit from the use/possession of P property Remuneration for services—absent an agreement to the contrary, a partner is not entitled to remuneration except for reasonable compensation for winding up P Indemnification—absent an agreement to the contrary, P must indemnify a partner who incurs personal liability in the ordinary course of conducting/preserving P's business or property Access to records—P must permit its partners to access all P records, unless an agreement states otherwise Management—partners have equal rights to the management and control of P's business (absent an agreement to the contrary); any differences as to ordinary matters of P's business may be decided by a majority; cannot take an act in contravention of any agreement between the partners without the consent of all partners

Partnership Changes (LPs)

Merger—any two or more LPs may be merged into one surviving LP Conversion—any two or more LPs may be converted into a newly formed LP Merger or conversion procedure—must be approved by ALL of the partners, unless PA specifies otherwise; LP must file a statement with the Department of State; merger/conversion takes effect upon filing of the statement, unless a later date is specified Liability of former general partner—a general partner who becomes a limited partner remains liable for any obligation incurred before the merger/conversion Effect on partnership—property owned by LPs before a merger/conversion remains vested in the resulting LP; legal proceedings against the original LPs continue as if no merger/conversion occurred

Dissolution and Termination

Events causing dissolution 1. Partners' act • Agreement of ALL partners • P for specific term/undertaking—dissolved when the term expires or the undertaking is completed • P with no specific term/undertaking—P may be dissolved by the express will of any partner 2. By law—an act makes it unlawful for P's business to be carried out, any partner or P enters bankruptcy, or the death of any partner 3. Court-ordered dissolution—a court must order dissolution if: • Partner's conduct prejudices carrying on of P's business; • P's business can only continue at a loss; • Partner willfully or continually breaches the PA; • Partner is unable/incapable of performing the PA; • Partner found by court to be mentally ill, of unsound mind, or otherwise incompetent; or • Any other equitable reason 4. Effect of dissolution on authority—a partner's authority to act on behalf of P is terminated, except as is necessary to wind up P's affairs Winding up 1. Persons who may wind up—partners who have not wrongfully dissolved P 2. Power of person winding up business—authority to settle/collect debts, assign claims, sell assets, and perform all existing contract obligations 3. Distribution of P's assets—creditors' debts are satisfied first, then the remaining assets are distributed in the following order: • Advances made by a partner above the amount specified in the PA • Partner contributions to capital • Remaining money distributed equally among the partners Continuation of partnership after dissolution Fixed term P—continuation after expiration of the term/undertaking results in an at-will P

Limited Partnerships (LPs)

Formation—must be formed by at least one general partner and one limited partner; limited partner's liability for P's debts is limited to her capital contribution to the LP; a certificate of limited partnership must be filed with the Department of State Limited partner—can only be admitted by written consent of all partners after creation, unless the PA provides otherwise; has the right to vote as permitted under the PA and the right to inspect business/financial records; can lend money and transact business like a non-partner with LP; not personally liable for LP's obligations General partner 1. Admission—can only be admitted according to terms of the PA, or if the PA is silent, with the written consent of all general partners and majority in interest of limited partners 2. Rights/powers of a normal partner 3. Contributions and distributions—may contribute to LP, share in its losses and profits, and receive distributions 4. Transaction of business with LP—may lend money and transact business with LP; owes a fiduciary duty to limited partners in such transactions 5. Liability to third parties—personally liable to third parties for obligations of LP 6. Termination of status—can withdraw from LP by giving written notice to other partners, or other events causing termination (e.g., death, bankruptcy, removal) Contributions—limited/general partners can contribute cash, property, or services, and are obligated to the LP with respect to any written, enforceable promise of a future contribution Profits/losses—may be allocated on any basis if in writing; otherwise, allocated based on each partner's contributions to the LP Distributions—may be allocated on any basis if in writing; otherwise, allocated based on the value of the contributions made by each partner Partnership interest—a partner's interest in LP is personal property that can be assigned in whole or in part; the assignee generally has rights only to receive the distribution to which the assignor partner would otherwise be entitled Termination—occurs after dissolution and winding up 1. Events causing dissolution—P dissolved upon the occurrence of a specified event, written consent of all partners, withdrawal of general partner, or judicial determination 2. Winding up—general partners wind up, but if none, then limited partners may; distribution of assets first to creditors and then to partners Limited partner's derivative action—a limited partner has the right to bring a derivative action on behalf of LP; must first make an effort to cause general partner to bring an action, unless futile

VI. Limited Liability Partnerships (LLPs)

Formation—must file a statement of qualification with the Department of State 6 | Partnerships | Themis Bar Review | Final Review Outlines Liabilities of partners and partnership—an LLP partner is not personally liable for the debts/obligations of the LLP that arise from the negligent or wrongful acts of other partners/agents, regardless of whether the obligation is based in contract or tort; a partner is liable for her own personal misconduct Liability of withdrawing partner—not personally liable for LLP's debts/obligations; may be held liable for withdrawal in violation of the PA or for breach of fiduciary duty; must file a statement of withdrawal with the Department of State

Partner Liability

Lawsuits between partners—a partner may only sue another partner when the suit is unrelated to P's business Accounting—an equitable proceeding for the purpose of obtaining judicial settlement of P's accounts 1. Final settlement—an accounting is generally held when there is a final settlement of P's affairs to convert any liabilities to the partners as individuals; a partner must seek an accounting and settle all P affairs before claims are settled 2. Other instances—an accounting may be held without a final settlement and dissolution when (i) a partner has been wrongfully excluded from P's business or possession of P property, (ii) one partner violated a fiduciary duty to P and received secret profits, (iii) at any time specified in PA, or (iv) other circumstances render it just and reasonable Joint and several liability—partners are jointly and severally liable for a partner's wrongful acts and breaches of trust as long as the partner was acting within the ordinary course of P's business; jointly liable for P's debts and liabilities (all must be served) 1. Newly admitted partner—liability for P obligations incurred before his admission must be satisfied out of P property 2. Retired/dissociated partner—continues to be liable for any P obligations incurred before retirement/dissociation Final Review Outlines | Themis Bar Review | Partnerships | 5 Indemnification—P must indemnify a partner if the partner is ordered to satisfy a debt incurred within the ordinary course of P's business (unless otherwise agreed) Criminal acts—a partner is not liable unless participation rises to level of a principal or accessory Contract liability—a partner is liable for contracts made by other partners in the ordinary course of P's business

Formation of a Partnership

Partnership (P) requirements 1. Intent—two persons must intend to carry on a business for profit as co-owners but do not need the specific intent to form a P; may be implied by the parties' conduct 2. Written agreement not required—an oral agreement is sufficient 3. Legality—purpose of P must be legal 4. Rules for determining the existence of a P • Key test—sharing of profits o Rule—if there is profit sharing, then the arrangement is presumed to be a P o Persons who share in the profits are presumed to be partners, unless payments are received in payment of a debt, as wages or rent, as an annuity to a surviving spouse, as interest on a loan, or as consideration on the sale of good will o If only gross returns are shared—no presumption of a P • Effect of joint ownership of property—does not, by itself, establish a P, even if joint owners share profits made from the use of the property • Sharing of losses—not required for the existence of P, but the absence of an agreement to share losses is evidence that the parties did not intend to form a P 5. Sub-partnership • Not a true partnership; an agreement between a partner and a third party to share in the partner's profits from the P • The third party does not become a member of P but has a contract claim against the partner for a share of P's profits Partnership by estoppel 1. Rule—created when a person represents himself as a partner or agrees to be held out as a partner, but no P exists or the person is not a partner; protects third parties who have been misled by the person or P 2. Liability of purported partner—for liability to be imposed, (i) there must be an oral, written, or implied representation that a person is a partner in an actual or purported P, (ii) the representation must be made by purported partner or with his consent, and (iii) a third party must have reasonably relied on the representation 3. Representations made in a public manner—a person who has represented or consented to a representation in a public manner that he is a partner is liable to the person relying on that representation, even if the representation was not communicated directly to that person 4. Purported partner as agent—an agent of those consenting to the representation; can bind them to third parties who reasonably rely on the representation 5. No duty to deny—merely being named by another is not enough to create liability

Effect of Partner's Relations with Third Parties on Partnership

Power of partner to bind P and other partners 1. Partner as agent of P—a partner can contractually bind P and the other partners if the partner acts with either actual or apparent authority within the scope of P's business, unless the partner has no authority to act and the third party has knowledge of that fact • Actual authority—may be express or implied o Express authority—can arise from PA or a majority vote of partners; unless PA states otherwise, unanimous vote of ALL partners is required to (i) submit to arbitration, (ii) assign P property to benefit creditors, (iii) confess a judgment, (iv) dispose of the goodwill of the business, or (v) perform any act that would make it impossible to conduct ordinary P business o Implied authority—based on a partner's reasonable belief that an action is necessary to carry out his express authority • Apparent authority—a partner must perform the unauthorized act in the ordinary course of P business; a third party with whom the partner was dealing cannot hold P liable if the third party had knowledge of the fact that the partner lacked authority • Conveyance of real property o Property held in P name—any partner has authority to transfer title unless the partner lacked actual or apparent authority; if the partner lacked authority, P may recover the property unless the transferee sold it to a holder for value without knowledge that partner exceeded authority Title to real property is in P's name but the conveyance was executed by partner in the partner's own name—P's equitable interest passes if the partner had authority o Title in partners' names Title in name of ALL partners—only a transfer by ALL partners passes both an equitable interest and legal title Title held in the name of one or more partners who transfer title in P's name— P's equitable interest passes as long as the partner(s) had authority Titleholders may transfer title in their own names if title is NOT held in all partner's names and there is no record showing the right of the P • Leases—a partner with apparent authority to execute leases on P's behalf may do so as long as the lease is within the normal scope of P's business 2. Third party's knowledge—if a partner acts without authority, P and the other partners are not bound by the acts if the third party had knowledge of the restriction on the partner's authority 4 | Partnerships | Themis Bar Review | Final Review Outlines 3. Partnership's knowledge or notice • Knowledge—information actually known; also includes knowledge of such other facts that show bad faith in the circumstances o Participating partner—if the participating partner gained notice or knowledge while a member of P, the knowledge is imputed to P; if gained while not a member of P, the knowledge is imputed to P only if the partner knew of the facts at time of the transaction o Non-participating partner—knowledge is imputed to P if, at the time of the transaction, the partner reasonably could and should have communicated the knowledge to participating partners (does not apply in case of fraud on P) • P's notice—notice to any partner relating to P's affairs operates as notice on P (except in case of fraud on P); a partner has notice when a person who claims the benefit of the notice (i) states the fact to the partner or (ii) delivers a written statement to the partner Wrongful acts 1. P liable • For a partner's wrongful act/omission committed while acting with the other partners' authority or in the ordinary course of P's business • For a partner's breach of trust 2. P not liable • Partner acts outside the scope of P's ordinary course of business and defrauds a third party • Third party knows a partner lacked authority for transaction • Partner intends to defraud P and the third party knows of the fraud