Liabilities and profits Flashcards
Profit/Loss sharing Default Rules.
Default rule: Profits shared equally, losses follow profits.
PROFITS: Unless otherwise agreed, profits are shared equally among the partners (by number).
LOSSES: Unless otherwise agreed, losses are shared in the same manner as profits.
• Losses shared in same manner as profits. (if you agree to split profits, but have no agmt on losses… then losses will just follow your profit sharing arrangement).
** (if you agree to split losses, but have no agmt to profits… your profits will still be shared equally!).
So…
• If no agmt on profits, and no agmt on losses: Both shared equally.
• If Agmt on profits, but no agmt on losses: Losses follow the sharing of profits under the agmt.
• If Agmt on losses, but no agmt on profits: Profits shared equally, losses shared under the agmt.
Liability to third parties in
TORT
CONTRACT
Each partner is an AGENT of the partnership for the purpose of its business.
Pship = Principal under agency law
The authority of a partner to bind the partnership when dealing with third parties roughly follows agency law.
In a General Partnership, each Partner is Jointly and Severally liable for all obligations of the partnership, (so, one or more partners may be sued) for all obligations of the partnership, whether arising in tort or contract.
Partnership Liability to third parties in TORT
Liability of the Partnership in Tort
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….
- in the ordinary course of business of the partnership, or…
- with Authority of the partnership. (like respondeot superior - vicarious liability)
Whether an act occurs in the “ordinary course of business” is a question determined under agency principles.
Partnership Liability to third parties in CONTRACT
Liability of the Partnership in Contract
With respect to the partnership’s liability in contract, a partnership is liable for ALL CONTRACTS entered into by a partner…
- in the scope of partnership business or
- with ACTUAL or APPARENT authority of the partnership.
Authority in Partnership:
ACTUAL AUTHORITY
ACTUAL AUTHORITY
Actual authority is the authority a PARTNER reasonably believes they have based on the communications between the partnership and the partner.
- Actual authority can come from the partnership agreement or a vote of the partners.
- A majority vote of the partners is required to authorize ordinary business; a unanimous vote of the partners is required to authorize extraordinary acts.
• STATEMENT of Partnership Authority: Actual authority can also be created by the partnership’s filing of a statement of partnership authority with the secretary of state (for real property transfers, this must also be filed with the county recorder).
– effect differs depending on whether the trans- action involves a transfer of real property (below)
Authority in Partnership:
APPARENT Authority
APPARENT AUTHORITY: Partner = Agent under agency law.
• a partner is an AGENT of the partnership…
• … as agents of the partnership, partners have APPARENT authority to bind the partnership to any contract WITHIN THE SCOPE of the partnership business.
A partner has APPARENT authority to bind the partnership to transactions…
within the ordinary course of the partnership’s business, OR
business of the kind carried out by the partnership…
(UNLESS the third party is AWARE that the partner lacks actual authority to act).
— Business of the kind = transactions that would apparently be for carrying on biz of the kind run by the Pship.
• If a contract is outside the scope of partnership business, the partnership generally will not be bound unless the partner has actual authority.
• Limitation—KNOWLEDGE or Notification
A partnership will not be bound by a partner’s act if the partner lacked actual authority AND the person with whom the partner dealt either knew or received notification of such fact.
- knowledge Means subjective actual knowledge. (should have known is irrelevant).
- Notification: effective when duly delivered (doesnt have to be read).
• PARTNERSHIP AGREEMENTS CANNOT ENTER INTO AGREEMENT THAT CUTS OFF 3rd PARTIES RIGHTS - but see statements of Pship authority below…
STATEMENT OF PARTNERSHIP AUTHORITY:
Partnership’s filing of a statement of partnership authority with the secretary of state (for real property transfers, this must also be filed with the county recorder).
A statement of authority grants or limits a partner’s authority to enter into transactions on behalf of the partnership.
- Can create/destroy actual authority.
- Can create apparent authority
- Can destroy apparent authority for real property
- Cannot destroy apparent authority for other property
- Restrictions on partner authority in the statement are ONLY binding on third parties for REAL PROPERY; NOT binding on third parties for other property
Document filed publicly filed with Sec of State limiting partner’s authority to transfer real property…
are binding on third parties if the statement is also recorded in the county where the property is located.
Third parties are deemed to have constructive knowledge of the statement if secretary of state and county filings are made.
- Third parties are benefited by filed grants (unless they have actual knowledge that the partner lacked authority), are only burdened by real property restrictions, are not burdened by filed restrictions for other properrty (only actual knowledge of restrictions burdens them).
Transfers of Partnership Property
a. Partnership Interest Indicated
Any partner may transfer property held in the name of the partnership.
If partnership property is held in the name of one or more partners (who are identified as such) but the partnership is not named, transfer by the titleholders in their own names is effective.
In either case, if the transferring partner lacked authority, the partnership may recover the property from the initial transferee but not from a subsequent bona fide purchaser.
b. Partnership Interest Not Indicated
• If the 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 the transferee gives value without notice of lack of authority, they take free of the partnership interest.
Liability of partners
General Partnership: Each Partner is Jointly and Severally liable for all obligations of the partnership, (so, one or more partners may be sued) for all obligations of the partnership, whether arising in tort or contract.
• BUT, Partners are only liable as gaurantors - Plaintiff must first exhaust partnership resources before seeking to collect from an individual partner’s assets.
- A judgment is not personally binding on a partner unless they have been served and the creditor has exhausted partnership assets, or exhaustion is excused by agreement or court order or because the partnership is bankrupt.
EXTENT of liability:
• Each partner is personally and individually liable for the ENTIRE amount of partnership obligations.
• So where one partner pays the whole obligation of a partnership, they’re entitled to INDEMNIFICATION from the partnership.
• They may also require the other partners to contribute their pro rata shares of the payment if the partnership is unable to indemnify.
Limiting Liability to Third Parties: Partners cannot limit a third parties rights without a third party’s consent. So an agmt limiting liability to a third party won’t protect that partner, BUT it will allow that partner to bind the other partners so theyll have to indemnify that shielded partner.
Admitting New Partners…
Liability of new partners?
Default rule: UNANIMOUS vote required.
LIability: A newly admitted partner is not personally liable for partnership obligations that arose before their admission. They can only lose the amount of their investment in the partnership.
An incoming partner generally has no liability for obligations incurred before they became a partner.
Liabilities of Dissociating Partners
An outgoing or dissociated partner remains liable for obligations arising while they were a partner unless there has been payment, release, or novation.
An outgoing partner can also be liable for acts done after dissociation.
An outgoing partner generally remains liable for all partnership obligations incurred while they were a partner.
Criminal Liability
Partners will not be criminally liable for the crimes of other partners committed within the scope of the partnership business, unless the other partners participated in the commission of the crime either as principals or accessories.
Notice
A 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.
a. When Notification Effective
Notification is effective not only if and when it comes to a partner’s attention, but also when it is delivered to a place of business held out by the partner as a place for receiving communications.
b. Notice Imputed to Partnership
A 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.
