Fiduciary Duties and Property Issues

Question 1

What are the 4 Fiduciary Duties that a Partner Has to the Partnership?

Answer 1

1) Duty of Loyalty — This duty requires each partner:

• To account to the partnership for any benefit derived by the partner in conducting the partnership business, using the partnership’s property, or appropriating a partnership opportunity
• To refrain from dealing with the partnership in the conduct of its business as (or on behalf of) a party having an interest adverse to the partnership
• To refrain from competing with the partnership in the conduct of its business.

2) Duty of Care: The duty of care requires each partner to refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.

3) Duty of Disclosure: A partner also has a duty to provide complete and accurate information concerning the partnership. R.U.P.A. provides that each partner and the partnership shall furnish to a partner:

• Without Demand — Any information concerning the partnership’s business and affairs reasonably required for the proper exercise of the partner’s rights and duties
• On Demand – Any other information concerning the partnership’s business and affairs (except to the extent the demand or the information demanded is unreasonable or otherwise improper under the circumstances).

4) Duty of Obedience: The duty of obedience requires the partner to obey all reasonable directions of the partnership and not act outside the scope of his or her authority.

Question 2

What Duties Can and Cannot Be Eliminated?

Answer 2

Duties that MAY NOT be Limited — Duties of loyalties or care MAY NOT be eliminated

Duties that MAY be Limited — Duty of disclosure may be eliminated

Question 3

What are the Two Main Property Classifications?

Answer 3

Partnership Capital: The property or money contributed by each partner for the purpose of carrying on the partnership’s business.

Partnership Property: Everything the partnership owns, including both capital and property subsequently acquired in partnership transactions.

Question 4

What are the RUPA Rules for Determining Partnership Property?

Answer 4

The R.U.P.A. has a number of provisions concerning ownership of titled property (both titled personal property and real property)

1) Property Deemed to Be Partnership Property: Titled property is partnership property if the property is acquired:

• In the partnership’s name
• In a partner’s name where it is apparent from the document that they are acting for a partnership (for example, it mentions a partnership or says they are a partner).

2) Property Presumed to Be Partnership Property: The property is rebuttably presumed to be partnership property if it was purchased with partnership funds, regardless of in whose name title is held.

• “Partnership funds” includes not only the partnership’s cash, but also the partnership’s credit.

3) Property Presumed to Be Partner’s Separate Property: The property is rebuttably presumed to be a partner’s property if:

• It’s held in the name of one or more partners
• The instrument transferring title gives no sign that they’re acting for a partnership
• Partnership funds were not used to acquire the property

Question 5

What are the Common Law Criteria for Untitled Property?

Answer 5

The RUPA provisions don’t govern untitled property. Courts will use the following common law criteria:

1. Acquisition of the property with partnership funds
2. Use of the property by the partnership in conducting the partnership’s business
3. Entry of the property in the partnership books as a partnership asset
4. A close relationship between the property and the business operations of the partnership
5. Improvement of the property with partnership funds
6. Maintenance of the property with partnership funds

Question 6

What are the Rights in Partnership Property?

Answer 6

The Partnership’s Rights: The partnerships rights in partnership property are totally unrestricted

A Partner’s Rights: A partner is not a co-owner of partnership property and has no interest in partnership property which can be transferred. (The partnership is an entity; the partnership itself, not the partners, owns its property.) A partner can simply use partnership property for partnership purposes.

Question 7

What is the Partner’s Ownership Interest in the Partnership?

Answer 7

A partner’s ownership interest in a partnership is called his partnership interest. The partnership interest is the personal property of the partner. Although it is personal property, there are restrictions on what a partner can do with it.

Comprised of Management Rights and Financial Rights: A partnership interest is comprised of:

1. Management Rights (a partner’s right to participate in the management of the business, to obtain information about the partnership, and to be recognized as a “partner”)
2. Financial Rights (the partner’s right to receive his share of any profit distributions made by the partnership)

Question 8

What are the Rules for Transfer of Management Rights and Financial Rights?

Answer 8

No Unilateral Transfer of Management Rights: Unless otherwise agreed, a partner cannot unilaterally transfer his management rights and thereby make the transferee a “partner.” The default rule for the admission of a new partner is that it requires a unanimous vote of the existing partners.

Unilateral Transfer of Financial Rights Permitted: Unless otherwise agreed, a partner can unilaterally transfer his financial rights. The transferee merely has the right to receive profit distributions from the partnership that would have otherwise gone to the partner.

• The transferee is NOT a partner; the transferor is still a partner and retains all of their management rights