KNS - General Partnership Deck

Question 1

1 Which property belongs to the partnership and which belongs to an individual partner? There are three rules for determining partnership property. What are they?

Answer 1

1. It is partnership property if it is acquired in the partnership’s name or in a partner’s name where it is APPARENT from the document that she is ACTING for the partnership (e.g. it mentions a partnership or says she is a partner.)
2. Legal presumption exists that it is partnership property if partnership funds are used.
3. Legal presumption it is a partner’s property if acquired in her name without partnership funds and there is no sign she is acting for a partnership.

Question 2

2 Polly bought a truck in her name with her own money. Her partnership uses the truck for deliveries. Does the truck belong to the partnership or does it belong to Polly?

Answer 2

It is presumed to belong to Polly under rule #3 (Legal presumption that it is a partner’s property if acquired in her name without partnership funds and there is no sign she is acting for a partnership.) assuming that there is no indication Polly was acting for the partnership when she bought the truck.

Question 3

3 What rights does the partnership have in partnership property?

Answer 3

The partnership rights in the partnership property are totally unrestricted (Duh! The partnership owns the property!)

Question 4

4 If a ford fusion is partnership property, may the partnership pledge it as collateral for a loan?

May a partnership creditor levy on/attach the ford fusion?

Answer 4

Of course, partnership can do whatever it wants with its own property.

Of course - a partnership creditor can seize partnership assets to satisfy the partnership’s debts.

Question 5

5 What rights does a partner have in partnership property?

Answer 5

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 which means the partnership itself, not the partners, owns the property!) A partner can simply use the partnership property for partnership purposes.

Question 6

6 Assume a truck is partnership property. May Polly use the truck on her vacation?

Can Polly pledge her interest in the truck as collateral for a personal loan? Can Polly devise her interest in the truck to her husband? Can Polly’s judgment creditor attach her interest in the truck?

Answer 6

Polly may not use the truck on her vacation unless the partnership consents because Polly does not own the truck, the partnership does.

NO! WHAT INTEREST? A partner has no interest in partnership property. Polly has no interest in the truck.

Question 7

7 What is the partner’s ownership interest in the partnership called?

Answer 7

A partner’s ownership interest in a partnership is called his “partnership interest.” (Just like a shareholder’s ownership interest in a corporation is called “stock.”) The partnership interest is the personal property of the partner. Although it is personal property, there are restrictions on what the partner can do with it.

Question 8

8 - A partner’s ownership interest in a partnership is called his “partnership interest.” (Just like a shareholder’s ownership interest in a corporation is called “stock.”) The partnership interest is the personal property of the partner. Although it is personal property, there are restrictions on what the partner can do with it.

What are the details of this? Three points:

Answer 8

1 - A partnership interest is comprised of 1. management rights (i.e. a partner’s right to participate in the management of the business, to obtain info about the partnership, and to be recognized as a partner) and 2. financial rights - (i.e. the partner’s right to receive his share of any profit distributions made by the partnership).

Question 9

9 - A, B, C, and D are partners in the ABCD partnership. B purports to sell his partnership interest to X. X demands to be recognized as a partner and seeks to participate in the management of the partnership. Is X a partner?

Answer 9

No. X is not a partner. X can only be admitted as a partner upon a unanimous partner vote, which did not occur. A partner cannot unilaterally transfer management rights. X is a mere transferee, which means that X is simply entitled to any profit distributions that would otherwise have been paid to B. B is still a partner with all the rights of a partner (other than the right to profit distributions).

Question 10

10 Can Polly unilaterally assign her financial interest in the partnership? Can Polly devise it to her husband? Can a judgment creditor of Polly attach (“Charge”) her financial interest in the partnership?

Answer 10

Yes. A partner’s financial rights are personal property and are unilaterally transferable (voluntarily of involuntarily) The transferee, however, does not become a partner, the transferee just gets any profit distributions that would have otherwise been paid to Polly.

Question 11

11 - What does the term “dissociate” refer to when talking about partnerships?

Answer 11

The term “dissociation” simply refers to a withdrawal. When a partner dissociates from a partnership, the partner WITHDRAWS or “bows out” of the partnership.

Question 12

12 The statute specifies various events of dissociation, including, among others, what four events of dissociation?

Answer 12

1. a partner giving notice to the partnership of his desire to withdraw (dissociation by express will).
2. a partner’s expulsion, death, or bankruptcy.
3. An agreed upon event. and
4. the appointment of a receiver for a partner.

Question 13

13 - When will a partner be deemed to have wrongfully dissociated?

Answer 13

The partner is deemed to have wrongfully dissociated if the dissociation is in breach of an express term in the partnership agreement. A dissociation is also wrongful in a term partnership if the partner withdraws, is expelled, or becomes bankrupt before the end of the term.

Question 14

14 - What is a partner who wrongfully dissociates liable for?

Answer 14

A partner who wrongfully dissociates is liable to the partnership for any DAMAGES caused by the dissociation.

Question 15

15 What is an at will partnership?

Answer 15

An at will partnership is one where the partners have not agreed to remain partners until the expiration of a definite term or the completion of a particular undertaking. It is the DEFAULT form of partnership and most partnerships are at will.

Question 16

16 What is a term partnership?

Answer 16

A term partnership is the opposite of an at will partnership. It is a partnership where the partners have agreed explicitly or implicitly to remain partners for a definite term or until the completion of a particular undertaking.

Question 17

17 - A partnership is formed with the agreement that it shall terminate after five years. What kind of partnership is it?

Answer 17

It is a term partnership because the partners have agreed to remain partners for a definite term.

Question 18

18 - A partnership is formed to construct an office building. What kind of partnership is it?

Answer 18

It is a term partnership because the partners have agreed to remain partners until a particular undertaking - the construction of the building - is completed. Also a term partnership because the partners have agreed to remain partners for a definite term - the time required to complete the construction of the building.

Question 19

19 - A partnership is formed to operate a linen supply business. What type of partnership is this?

Answer 19

It is an at will partnership because the partners have not agreed to remain partners for a definite term or until the completion of a particular undertaking. The partnership is simply conducting a business which may last indefinitely.

Question 20

20 - How many potential consequences of dissociation are there?

Answer 20

When a partner dissociates from a partnership, one of two statutory avenues is implicated and one of them must happen. The nature of the event of dissociation dictates which avenue is implicated.

Question 21

21 - When a partner dissociates from a partnership, one of two statutory avenues is implicated and one of them must happen. The nature of the event of dissociation dictates which avenue is implicated.

What are the two statutory avenues?

Answer 21

1. The first avenue provides that the partnership is dissolved and that its business must be wound up. This means that the partnership business will be liquidated (“Sold Off”).

OR

2. The second avenue provides that the partnership continues in existence with the dissociated partner becoming entitled to a buyout of his partnership interest.

Question 22

22 - In what situations is avenue #1, dissolution and winding up required?

Answer 22

Dissolution and winding up are required only in limited circumstances (e.g. event in agreement required winding up, business becomes illegal, issuance of a judicial decree, unanimous consent of the partners in a term partnership, expiration of a term partnership). Two circumstances are of particular importance.

A. In general, when a partner dissociates by express will - AKA partner voluntarily leaves, in an AT WILL partnership, the partnership is dissolved and its business must be wound up - very important!

B. In a term partnership, if one partner dissociates wrongfully, or if a dissociation occurs because of a partner’s death or bankruptcy, dissolution and winding up of the partnership are required only if, within 90 days after the dissociation, one half of the remaining partners agree to wind up the partnership.

Question 23

23 - What happens if a partner’s dissociation does not result in a dissolution and winding up?

Answer 23

If a partner’s dissolution does not result in a dissolution and winding up, the partner is entitled to receive a buyout of his partnership interest. The remaining partners may continue the business.

Question 24

24 - If a partner’s dissolution does not result in a dissolution and winding up, the partner is entitled to receive a buyout of his partnership interest. The remaining partners may continue the business.

But what happens if the dissociation is wrongful?

Answer 24

If the dissociation was wrongful, any damages to the partnership will be offset against the buyout price.

Question 25

25 - Does the dissociated partner have pre-dissociation liability?

Answer 25

Generally, a dissociated partner remains liable for pre-dissociation partnership obligations (a creditor can agree to release the withdrawing partner, however, from specific obligations.)

Question 26

26 - Does the dissociated partner have post-dissociation liability?

Answer 26

A dissociated partner may be liable for post-dissociation partnership liabilities incurred within two years after the dissociation (assuming that dissolution has not occurred.)

Question 27

27 - How can a dissociation partner protect himself from post dissociation liability?

Answer 27

He can protect himself by notifying creditors directly of his dissociation (effective immediately) or by filing a public statement of dissociation (becomes effective 90 days after filing). The partnership can make the filing as well.

Question 28

28 - Does a dissociated partner still have apparent authority?

Answer 28

Yes - the dissociated partner has apparent authority to bind the partnership for a period of time not exceeding two years after dissociation (assuming that dissolution has not occurred). The partnership can protect itself by notifying creditors directly of the dissociation (effective immediately) or by filing a public statement of dissociation (becomes effective 90 days after filing).

Question 29

29 - When dissolution and winding up occur, partnership assets must be applied to the _____________. If the assets are insufficient, individual partners are required to contribute in accordance with ______________________.

Answer 29

When dissolution and winding up occur, partnership assets must be applied to the

DISCHARGE OF PARTNERSHIP LIABILITIES.

If the assets are insufficient, individual partners are required to contribute in accordance with

THEIR LOSS SHARES. IF THERE ARE EXCESS ASSETS, THEY ARE DISTRIBUTABLE TO THE PARTNERS IN CASH IN ACCORDANCE WITH THEIR PROFIT SHARES.

Question 30

30 - What is the priority of distribution at dissolution? Note that each level must be fully satisfied before beginning the next level.

Answer 30

1. First, the partners must pay all creditors. Creditors include “outside creditors” (e.g. trade creditors, lenders, suppliers) and “inside creditors” (e.g. partners who loaned money).
2. Second, the partnership must repay all capital contributions paid into the partnership by partners.
3. Third, profits or losses, if any.

Question 31

31 - A and B dissolve the AyeBee Partnership. In winding up, they liquidate the partnership assets and have a total of $1 million to distribute. How should that amount be distributed if (1) the partnership owes $600,000 to trade creditors. (2) Partner A loaned the partnership $100,000 and Partner B made capital contributions of $200,000?

Answer 31

$1 million minus outside creditors ($600,000) and inside creditors ($100,000), then subtract $200,000 in capital contribution. That leaves $100,000 in profit that will, as a default matter, be shared equally by A and B.

Question 32

32 - Suppose that the AyeBee Partnership has only $700,000 to distribute?

Answer 32

This leaves a $200,000 shortfall. B is owed that money by the partnership. Each partner must contribute (“pay in”) their share of the loss. Assuming equal sharing, A pays $100,000 to the partnership, B pays $100,000 to the partnership, and the partnership pays that $200,000 to B. Effectively, A contributes $100,000 to partner B’s loss.

Question 33

33 - May a partner who dissociated participate in the winding up of the partnership’s business?

Answer 33

Partners who have not WRONGFULLY dissociated may participate in the winding up of the partnership’s business.

Question 34

34 - What happens to apparent authority after winding up?

Answer 34

Partners retain apparent authority to bind the partnership to a third party on new business even after an event requiring winding up. But the partnership can protect itself by notifying creditors directly of the dissolution (effective immediately) and in addition, any partner who has not wrongfully dissociated may file a public statement of dissolution (becomes effective 90 days after the filing).

Question 35

35 - A, B, and C are partners. On May 5, an event requiring dissolution of the partnership occurs. On June 1, A contracts with TP for new business (the contract does not involve winding up). Is the partnership liable to TP on the contract?

Answer 35

YEs, the partnership is liable to TP on the contract assuming that apparent authority was established.

Question 36

36 - Are the partners liable to TP?

Answer 36

Yes - the partners are jointly and severally liable for partnership obligations (but TP must exhaust partnership resources first)

Question 37

37 - Would the partnership be liable to TP if B had filed a statement of dissolution on May 6?

Answer 37

Yes, because a statement of dissolution does not become effective until 90 days after it is filed.

Question 38

38 - if the partnership is liable, does it have any rights against A?

Answer 38

Only if A knew about the dissolution when it entered into the contract.

Question 39

39 - A partnership has a two year term. May a partner dissociate before the term is up?

Answer 39

Yes, but the dissociation will be wrongful and the partner will be liable for damages since she agreed to stay for two years. The other partners can continue the business without dissolution and winding up; a buyout of the dissociated partner will be required.

Question 40

40 - A partnership is formed to buy a piece of land, subdivide it, and sell off the lots, Can a partner associate before the last lot is sold off?

Answer 40

Yes, but the dissociation will be wrongful. This is a term partnership because it is a partnership to accomplish a particular undertaking. The partner will be liable for damages since she agreed to stay until the undertaking was completed. The other partners can continue the business without dissolution and winding up - a buyout of the dissociated partner will be required.

Question 41

41 - A partnership is formed to operate a bar. May a partner dissociate after one week?

Answer 41

Yes - this is an at will partnership from which any partner may withdraw at any time without penalty. The dissociating party may compel dissolution and winding up of the partnership.

Question 42

42 - A partnership has a two year term. One of the partners dies. May the business continue, or must the partnership dissolve and wind up?

Answer 42

The business may continue unless, within 90 days after the dissociation, one half of the remaining partners agree to wind up the partnership. What if it was an at will partnership? This would not be considered a dissociation by express will, so the business can continue.