Financial Rights and Obligations and Liability

Question 1

Sharing Profits and Losses

Answer 1

• unless otherwise agreed, profits are shared EQUALLY among the partners (by number)
• unless otherwise agreed, losses are shared in the same manner as profits

Question 2

Liability to Third Parties

Answer 2

• Revised Uniform Partnership Act (RUPA) generally provides that each partner is an agent of the partnership for the purpose of its business
• authority of a partner to bind the partnership when dealing w/ third parties roughly follows agency law

Question 3

Liability of the Partnership in Tort

Answer 3

• partnership is liable for loss or injury caused to a person as a result of the tortious conduct of a partner (or an employee) acting a) in the ordinary course of business of the partnership or b) with authority of the partnership

Question 4

Liability of the Partnership in Contract

Answer 4

• partnership is liable for ALL contracts entered into by a partner a) in the scope of partnership business OR b) with actual or apparent authority of the partnership

Question 5

Actual Authority - Basic Concept

Answer 5

• authority a partner reasonably believes they have based on the communications between the partnership and the partner
• can come from a partnership agreement or a vote of the partners
• majority vote of the partners is required to authorize ordinary business; unanimous for extraordinary acts

Question 6

Statement of Partnership Authority

Answer 6

• actual authority can be created by partnership’s filing of a statement of partnership authority w/ the secretary of state
• grants or limits partner’s authority to enter into transactions on behalf of the partnership
• effect depends on whether transaction involves real property or not

Question 7

Statement of Partnership Authority - Transactions Involving Real Property

Answer 7

• grants + restrictions on partner authority to transfer partnership real property in the statement are binding on third parties if the statement is also recorded in the county in which the property is located
• third parties are benefitted by filed grants of authority (unless they have actual knowledge that partner lacked authority) + burdened by filed restrictions on authority

Question 8

Statement of Partnership Authority - Transactions Not Involving Real Property

Answer 8

• grants of partnership authority in the statement are binding on the partnership
  -> unless 3rd party has actual knowledge of lack of authority
• restrictions on partner authority in the statement are NOT binding on 3rd parties though -> 3rd parties deemed to have constructive knowledge of only GRANTS of authority, not filed restrictions
• 3rd parties benefitted by filed grants but NOT burdened by filed restrictions

Question 9

Apparent Authority

Answer 9

• under RUPA, partner = agent of the partnership -> has apparent authority to bind partnership to:
  a) transactions w/in the ordinary course of the partnership’s business OR
  b) business of the kind carried out by the partnership (unless 3rd party aware of lack of authority)

Question 10

Authority + Contracts Within Scope of Business

Answer 10

• partners have apparent authority to bind the partnership to ANY contract WITHIN the scope of the business
• if contract is OUTSIDE the scope of the business, partnership NOT bound unless there’s actual authority

Question 11

Limitation on Apparent Authority in Partnerships

Answer 11

• partnership NOT bound by partner’s act if partner lacked actual authority + person w/ whom partner dealt either knew or received notification of such fact
  -> under RUPA, knowledge means subjective knowledge (what the person actually knew -> should’ve known is irrelevant)
  -> Under RUPA, notification effective when it comes to person’s attention or when duly delivered (can’t rely on apparent authority if notification delivered, even if you never read it)

Question 12

Transfer of Partnership Property

Answer 12

• any partner may transfer property held in name of the partnership
• if held in name of one or more partners, transfer by titleholders is effective
• if transferring partner lacked authority, partnership may recover the property from initial transferee but NOT subsequent BFP
• if partnership’s interest is not indicated in the instrument transferring the property, the transfer may be made by those in whose names the property is held
  -> if transferee gives value w/o notice of lack of authority, they take free of partnership interest

Question 13

Liability of the Partners

Answer 13

• each partner is jointly + severally liable for all obligations of the partnership (tort or contract)
• BUT pl must first exhaust partnership resources before trying to collect from partner’s individual assets
• judgment not personally binding on a partner unless they have been served + creditor has exhausted partnership assets, or exhaustion is excused by agreement or court order or b/c the partnership is bankrupt

Question 14

Extent of Liability

Answer 14

• each partner is personally + individually liable for the ENTIRE amount of partnership obligations
• entitled to indemnification from the partnership + potentially other partners in pro rata shares if partnership unable to indemnify

Question 15

Limiting Liability in a Partnership

Answer 15

• partners CAN’T limit third party’s rights w/o third party’s consent -> means one partner can’t agree w/ the others that third parties can’t sue the particular partner
• BUT such agreements may be valid among the partners themselves

Question 16

Liabilities of Admitted Partners

Answer 16

• newly admitted partner NOT personally liable for partnership obligations that arose before their admission
• can only lose the amount of their investment in the partnership

Question 17

Liabilities of Dissociating Partners

Answer 17

• outgoing or dissociated partner remains liable for obligations arising while they were a partner unless there’s been payment, release or novation

Question 18

Criminal Liability

Answer 18

• partners not criminally liable for crimes of other partners committed w/in scope of partnership business, unless other partners participated in the commission of the crime either as principals or accessories

Question 19

Notice

Answer 19

Under RUPA, partner has notice of a fact when the partner:
1) has actual knowledge of the fact
2) is notified of the fact OR
3) has reason to know of the fact based on the surrounding circumstances

• notice is effective if delivered to a place of business held out by partner as a place for receiving communications

Question 20

Imputation of Notice

Answer 20

• partner’s notice of a fact relating to the partnership is imputed to the partnership immediately unless the partner having notice is participating in a fraud against the partnership