General Partnerships

Question 1

What is the general definition of partnership?

Answer 1

• “an association of two or more persons to carry on as co-owners a business for profit.”
• all partners are agencys

Question 2

What is the rule for partnerships in New york?

Answer 2

• cannot be formed by only one person
• Person includes:
  
  • human beings
  • other business entities
• Cannot be formed for non-profit purposes
  
  • profit motive
• Must be formed voluntarily by all partners

Question 3

What are joint venture?

Answer 3

• particular kind of association formed for a single transaction
• NY partnership law applies to these

Question 4

How may the partnership agreement be expressed?

Answer 4

• orally
• in writing
• by conduct
• If SILENT
  
  • NY partnership law is the default

Question 5

What are the fundamental principals of partnerships?

Answer 5

• All partners have the right to control the business
  
  • unless specified otherwise is in agreement
  • one partner per vote
• All partners have unlimited personal liability for all partnership debts
• All partners are jointly & severally liable for debts & obligations of the partnership
  
  • whether incurred by tort or K
  • incoming & exiting partners may have different liability
• Any partner can exit the partnership BUT may not have the contract right

Question 6

What are the tax benefits of a partnership?

Answer 6

• No tax at the entity level
  
  • pass through

Question 7

How is a partnership formed?

Answer 7

• No formalities
  
  • does not have to be in writing
  • no filing required
• CREATION requires:
  
  • intent of 2 or more ptys to create a profit
    
    • true sharing of profits is prima facie evidence of intent to form a partnership
      
      • be caringful not salary, etc
• Must be in writing if SOF requires it to be
  
  • EXCEPTION - NY says it can be oral
• After agreement, need unanimous of all existing partners to become a member or to amend partnership agreement

Question 8

How is property of the partnership treated?

Answer 8

1. If belonging ot the partnership = subject to reach of creditors
2. Property can bebrought in dring formation as partner contribution
3. Property acquired with partnership funds is partnership property unless there is a contrary intent
4. Real property may be acquired in the partnership name
   
   • thus only can be conveyed in the partnership name
   • Conveyed by:
     
     • any partner w/authority unless otherwise stated in the partnership agreement
5. All partners are co-owners of any property held by the partnership
   
   • not a specific interest
6. Partner has equal right to possession the property for partnership purposes but no right for personal purposes unless consent of all
7. Partner right in specific property is not assignable except in connection of the assignment of the rights of all the partners in that property
   
   • Partner right is not subject to attachment/execution personal creditors except on a claim against the partnership

Question 9

HYPO

Patsy and Paul jointly operate the P&P Deli as a general partnership on the Upper East Side together. When the deli runs into credit problems with their main meat supplier, Patsy agrees to pledge 1,000 shares of a corporation she owns as collateral for their meat bill. The supplier agrees to use the shares as collateral, but only if they are put in the name of the partnership. Patsy agrees and has the shares reissued in the name of the partnership. Several years later, and well after the liquidity crisis, Patsy wants to withdraw from the partnership and wants to take back and sell those stock shares so that she can open a restaurant on Staten Island. Paul objects, claiming that the stock belongs to the partnership. Who owns the shares?

Answer 9

• The partnership owns the shares absent some specific agreement
• she can claim for the value but cannot get the shares back

Question 10

What are the rights of a partner?

Answer 10

• Property rights:
  
  • right as a co-owner with partners as a tenant in partnership in specific partnership property
  • economic interest in the partnership
    
    • his share of profit or losses
      
      • NOTE - this is transferrable; can transfer income
  • right to participate in management
    
    • NOT transferrable w/o the unanimous consent of all of the other partners

Question 11

HYPO

Parker and Pike agreed to jointly lease and manage the Hotel Bentley for the term of 20 years. During that period of time, Pike entered into separate dealings for real estate contiguous to the hotel. Although the hotel was modestly profitable, Pike was able to generate huge profits on the other properties because of the significant traffic the hotel generated. Parker subsequently filed an action against Pike, saying his other businesses were improper. How would a court rule?

Answer 11

• Seems like it is a joint venture
• Partner has a duty to present opptys to the partnership before taking them first for himself
• Assume, he did not present the oppty
• Look to see if this was a partnership oppty
• Will be liable to other ,partner

Question 12

What is the relationship between partners?

Answer 12

• Partners have a fiduciary duty to each other
  
  • trust & confidence
• Each partner owes a duty of loyalty to each other

EXAMPLE:

The court held that the defendant breached his fiduciary obligations to his business partner by engaging in self-dealing that placed his personal interests in conflict with those of the partnership. Thus, the partner was entitled to recover his share of funds acquired by the defendant [Reiff v. Shifrel, 702 N.Y.S.2d 362 (2d Dept. 2000)].

Question 13

What is the duty of accounting between partners?

Answer 13

• partners have a duty to account for any benefit & hold in trust any transaction connected w/the formation, conduct or liquidation of the partnership
• Any partner shall have the right to a formal accting to partnership affairs:
  
  • if partner is wrongfully excluded from the partnership business or possession of its property by the co-partners
  • the right exist under the terms of any agreement
  • have the right whenever other circumstances render it just & reasonable

Question 14

HYPO

Pauline became suspicious of how Patrick was handling the finances of their lace curtain distribution business, which was a general partnership. When Pauline asked to know if they were making money and where all the revenues went, Patrick handed Pauline a copy of the most recent bank statement. Was that an adequate accounting?

Answer 14

• No, a partnership have to keep accurate and thorough books and she is entitled to see all the money coming in and out

Question 15

What is the relationship of non-competition between partners?

Answer 15

• a partner may not compete with the partnership w/o consent of all the partners
  
  • in essesnce waiveing duty of loyalty
• If so, must acct for all profits he derives
  
  • means the partnership does not have to suffer a lost

EXAMPLE:

Think back to the law firm teaching example where the associate was working at the law firm by day and teaching law at night. This is also a duty of loyalty problem, broadly construed. Provided that the firm has hired the exclusive right to the associate’s legal services, the associate would be competing here and must account to them for all profits derived.

Question 16

What is the relationship of management between partners?

Answer 16

• all partners have equal management right & conduct of the partnership
  
  • one partner = one vote; can contract around it
• If partners in disagreement, must be determined whether
  
  • the matter is in the ordinary course of the partnership business
    
    • IF YES = need majority to approve
  • matter contradicts the partnership agreement, outside the ordinary course of the partnership business
    
    • IF YES = need unanimous consent of all partners

EXAMPLE:

A two-person partnership is operating a small bakery. The daily purchase of bread is within the ordinary course of business. If the bakery’s real estate rises in value, the partnership could sell off part of the real estate to a developer, keeping just enough for the bakery. This is not within the ordinary course of business. This decision would require the unanimous consent of the partners (note in a two person partnership, a majority of the partners is two).

Question 17

What happens when there is a deadlock?

Answer 17

• creates problems

EXAMPLE:

The bakery has been ordering bread from the same source for a long time. Partner A wants to keep the same supplier, but Partner B wants to change. Since the purchase of bread is within the ordinary course of business, the decision to change suppliers requires a simple majority of the partners. But since this is a two person partnership, a majority requires both partners.

We would need a majority of partners [both A and B] to vote for the change- without that, the change can’t happen and the bakery stays the course with the existing supplier.

Question 18

What are partners entitled to access & inspet?

Answer 18

• the partnership records &/or make copies

Question 19

Whar is required for indemnification between partners

Answer 19

• partnership must indemnify every partners in respect to:
  
  • payments made & personal liabilities reasonable incurred by him in the ordinary & proper conduct of his business

Question 20

Are partners entitled to compensation?

Answer 20

• No, unless otherwise agreed
• EXCEPTION
  
  • reasonable compensation for his services for ending & shutting down the partnership affairs

Question 21

How are payments or advances beyond the amount of capital agreed to contribute treated?

Answer 21

• Partner is entitled to interest from the date of the payment/advance
  
  • in essence a loan
• Capital contribution cases
  
  • receive interest from the date when repayment should have been made b/c it is a contirubtion until it should of been repaid, then it is a loan

Question 22

What is the relationship between Partners & 3rd Pty?

Answer 22

• every partner is an agent of the partnership for carrying out the business
  
  • look to see if the agreement limited authority
• act of a partner in carrying out the partnership will bind the partnership
  
  • UNLESS:
    
    • The partner has no actual authority AND
    • The person with who the partner is dealing has actual knowledge of this lack of authority
• If a partner acts outside of those acts apparently related to carrying out the partnership business, the partnership will be bound only if the other partners authorized the partner by giving him actual authority
• Cannot dispose of the goodwill of the business w/o the unanimous agreement of all the partners

Question 23

HYPO

Petus was an equal partner in the Runny Faucet Bar and Grill, a general partnership located about two hours away from his home in Dutchess County. When the cost of driving to the business began to outstrip his share of profits, Petus decided to sell the business to the hotel from which the partnership rented the space. The other partners, who lived nearby, objected. Is Petus’s action binding?

Answer 23

• No b/c it is outside the ordinary course of business and requires unanimous consent
• reasonable that the hotel would know that

Question 24

How are new partners treated for a partnership?

Answer 24

• new partner only liable for the extent of his capital contribution for debts that arised before he joined
• Any debts that arise after he joined, the new partner will be jointly & severally liable
  
  • and has unlimited personal liablity

EXAMPLE:

A new partner makes a $100,000 capital contribution to join a law firm. The partner could lose that $100,000, but won’t be personally liable for obligations of the firm incurred prior to when he became a partner beyond that $100,000.

Question 25

What is the liability of partners who leave a business?

Answer 25

• protected from new liabilities incurred by the partnership after the partner leaves
• Retain liability for obligations they had @ time they left the partnership

Question 26

How does the knowledge or notice to one partner effect the partnership

Answer 26

• Knowledge or notice toone partner = knowledge or notice to the partnership

Question 27

Is the partnership bound by the wrongful acts of a partner?

Answer 27

• Yes, b/c the partners are jointly & severally liable for wrongful acts/omission of any partner acting in:
  
  • the ordinary course of the partnership business
  • withthe authority of his partners

EXAMPLE:

Paul is a partner in a law firm. Paul commits malpractice. As the tortfeasor, Paul is personally liable for that tort. And since he was acting in the scope of the partnership business, the partnership also has liability for his bad act.

Question 28

Is there respondeat superior in partnerships?

Answer 28

• Generally no, b/c partners are not considered employees but co-owners of the business
  
  • will pick up liability for the torts done in the ordinary course of the partnership business or with the consent of the partners

Example:

In Guild v. Herrick [51 N.Y.S.2d (1944)], the court held that where some members of a stockbrokerage firm knew or should have known that customers’ securities were being improperly manipulated in the course of the partnership business, the other partners could not escape liability.

Question 29

How are profits and losses treated in a partnership?

Answer 29

• DEFAULT - all partners split profits equally
  
  • split losses like profits
• Can contract around this

Example:

A, B, and C are partners in a general partnership and have no agreement as to profits and losses. Since they have no other agreement in place, A, B, and C will split profits equally and losses like profits, and so each will take 1/3 of the profits and 1/3 of the losses.

Example:

A, B, and C are partners in a general partnership and have no agreement as to profits and but agree to split losses 25% for A, 25% for B and 50% for C. This loss provision is binding, but A, B, and C will each still take 1/3 of the profits.

Question 30

How do you assign partnership interest?

Answer 30

• MAY transfer economic interest in the partnership
• MAY NOT transfer status as a partner w/o the unanimous consent of all the partners

EXAMPLE:

In ABC partnership, partner C cannot sell his interest to a total stranger and walk away, and as a result force A and B to work with and have unlimited personal liability for the acts of a total stranger.

Question 31

HYPO

Pedro, a cricket player of significant stature, decides to open a Caribbean-themed restaurant on the Bowery. The bank agrees to lend Pedro the money needed to start the restaurant but only if he pledges the proceeds of the memorabilia business he runs with Paco, which is a general partnership. Paco objects to the pledge, claiming that the bank would be able to exert pressure on Paco and Pedro to make the memorabilia business more profitable and, hence, disrupt his otherwise nice existence. Can Paco prevent Pedro from pledging his profits from their general partnership?

Answer 31

• No, b/c Pedro has the right to pledge his right to receive partnership income = his economic interest

Question 32

What is the dissolution process for a partnership?

Answer 32

• Dissolution is the change in the relationship of the partners caused by:
  
  • aby partner ceasing to be associated in the carrying on of the business
    
    • anytime the guest list changes, joins, dies, leaves
• Dissolution - designates the point in time when the partners cease to carry on the business together
• TWO CHOICES:
  
  1. Winding up - the process of settleing after dissolution
     
     • Termination - the poijnt in time when all the partnership affairs are wind up
  2. Reconstitution the partnership - the remaining partners can continue the existence of the partnership for the remainder of the partnership term

Question 33

How is dissolution caused?

Answer 33

1. Events that do not violate the partnership agreement
   
   • specified term or event in the agreement
   • partnership @ will
     
     • express will of any partner
   • the agreement of the parties
   • explusion of any partner from the business as provided in the partnership agreement
2. Events in contravention of the partnership agreement
   
   • act in violation of the partnership agreement
     
     • circumstances do not permit a dissolution under any other provision but there is a breach of the partnership agreement
3. Any event that makes it unlawful for the business of the partnership to be carried on or the members to carry it on
4. the death of any partner
5. the bankruptcy of any partner or the partnership
6. decree of the court dissolving the partnership for equitable reasons

Question 34

When can the court grant a decree of equitable dissolution of a partnership?

Answer 34

1. the business of the partnership can only be carried on @ a lost
2. a partner has been declared incomeptent in a judicial proceeding or is shown to be of unsound mind
3. a partner becomes in any other way incapable of perform his duties under the partnership agreement
4. a partner has been guilty of such conduct as tends to effect prejudicially the carrying on of the business
5. a partner willfully or consistently commits a breach of the partnership agreement or otherwise so conduct himself so that it is not reasonably to carry on the business with him

Question 35

HYPO

Phil operated a small widget business by himself until he took Phoenix on as a partner in order to gain the necessary capital for expansion. The two famously disagreed on just about everything, and Phil decided he wanted to end the partnership. Soon thereafter, Phoenix filed a court action, seeking a judicial sale, so that he could buy out Phil and retain the good will of the partnership. The court denied Phoenix’s motion, saying that the goodwill of the business belonged to Phil and ordered Phil to merely pay the cash value of Phoenix’s share upon Phoenix’s withdrawal from the partnership. If Phoenix appeals, what result is likely?

Answer 35

• the decision will be upheld
• if it was Phil that withdraw then the result would be the opposite

Question 36

Can a partner stlll bind the partnership after dissolution?

Answer 36

• Yes, only when engaging in acts appropiate for winding up the partnership affairs
• Dissolution does not end the liability of the partners
  
  • they are still unlimitedly personally liable for the debts of the partnership
  • just stops the ability to get into new K beside those for winding up purposes

Question 37

HYPO

Paper Co. decided to end its partnership with the Philip Morris Co., in which they had jointly developed special filter papers and then sold them to other tobacco companies outside the United States. Paper Co. properly dissolved the partnership, with Paper Co. taking a cash share and Philip Morris taking the assets and continuing the business on its own. The next year, Philip Morris lost a multi-billion-dollar class-action case for the failure of the filter paper to prevent lung cancer in smokers. What responsibility will Paper Co. have for the damages?

Answer 37

• Paper Co. is still liable to the 3rd party but can seek an indemnification from Phillip Mprris

Question 38

What is the process for winding up?

Answer 38

• Process by which:
  
  • partnership assets sold
  • partnership debts are paid
    
    • if debts exceed assets, partners have to put money back in
  • balance left, if any, distributed to the partners

Question 39

How are the liabilities of the partnership paid during winding up period?

Answer 39

• Paid in this order:
  
  • Outside creditors first
    
    • a creditor not a partner
  • Inside creditors
  • Return of capital contribution
  • Divide up the surplus or deficit

Question 40

HYPO

Paxton and Presley are equal partners in Fun-Time Video, having bought out their former third partner Pablo two years ago. Realizing that the video rental business is unlikely to be lucrative going forward, the two decide to shut down. At the time they shut down, the business owes $2,000 in rent; $2,000 for videos it had purchased in the past six months; $2,000 remaining on buying out Pablo; and $2,000 on a one-year-old business loan. The business has only $6,000 remaining. How will the debts be settled?

Answer 40

• The $6 will cover the outside creditors
• for the $2K to Pablo, it depends on whether they owe him personally or the partnership owes him
  
  • either way they each would need to put in $1K to cover the $2K owed to Pablo

Question 41

Recap:

Question 3

Bill and Steve are partners in DotCom Co., a stockbrokerage firm run as a general partnership. Warren is a client of the partnership. Bill fraudulently converted some of Warren’s securities to pay for his daughter’s island wedding. When Warren sues the partnership, and both Bill and Steve for the conversion, a judgment in his favor can be satisfied out of

A) Bill’s partnership assets alone.

B) Bill’s partnership and personal assets alone.

C) Bill’s and Steve’s partnership assets alone.

D) Bill’s and Steve’s partnership and personal assets.

Answer 41

D) Bill’s and Steve’s partnership and personal assets.

Question 42

Recap:

Question 4

Ginger, Lee, and Walt were general partners in a partnership. On January 1, 2008, the partnership incurred a debt to Tyler due on June 1, 2008. On May 1, 2008, Walt retired from the partnership and Xavier became a general partner. Tyler received notice of the change in general partners. When the debt to Tyler comes due, it can be satisfied out of

A) the partnership assets and personal assets of Ginger, Lee, and Walt.

B) the partnership assets and personal assets of Ginger, Lee, and Xavier.

C) both of the above.

D) neither of the above.

Answer 42

A) the partnership assets and personal assets of Ginger, Lee, and Walt.

If there was information about Xavier’s capital contribution, then Xavier would be liable up to his capital contribution