Partnership

Question 1

A partnership can be contractually bound when a partner acts with either actual or apparent authority. How can a partnership escape liability when a partner acts with apparent authority?

Answer 1

For a partnership to escape liability, the third party generally must possess actual knowledge of the partner’s lack of actual authority.

Question 2

What is the rule regarding use of partnership property?

Answer 2

A partner may use or possess partnership property only on behalf of the partnership. A partner who uses partnership property for personal benefit must compensate the partnership.

Question 3

Under what circumstances might a judicial expulsion of a partner occur?

Answer 3

An expulsion of a partner by a court order may occur because the partner has either:

(i) engaged in misconduct that adversely and materially affected the partnership business;
(ii) willfully and persistently caused a material breach of the partnership agreement; or
(iii) breached a duty owed to the partnership or other partners.

Question 4

When a partner dissociates from a partnership and that partner’s interest is purchased by the partnership, does the partner remain responsible for partnership obligations that occurred prior to dissociation?

Answer 4

When a partnership purchases a dissociated partner’s interest, the partnership must generally indemnify the partner against all partnership liabilities, whether the liabilities were incurred before or after the dissociation. An exception exists for liabilities incurred by the partnership due to the dissociated partner’s post-dissociation actions.

Question 5

What does a partner’s duty of care entail?

Answer 5

Under the duty of care, a partner is required to refrain from engaging in:

(i) Grossly negligent or reckless conduct;
(ii) Intentional misconduct; or
(iii) Knowingly violating the law.

Question 6

When is titled property in the name of an individual partner actually the property of the partnership?

Answer 6

Property titled in the name of an individual partner is partnership property when the instrument indicates either the named person’s capacity as a partner or the existence of the partnership. [Property purchased with partnership assets or by using partnership credit to obtain financing is presumed to be partnership property.]

Question 7

How is a judgment for a third party against a partnership usually satisfied?

Answer 7

A partnership creditor generally must first exhaust the partnership’s assets before levying on a partner’s personal assets.

Question 8

When a partner dissociates from the partnership, but the partnership is not dissolved, what happens to the partner’s interest?

Answer 8

When a partner is dissociated and the partnership is not dissolved, the partnership must buy out that partner’s interest. The dissociated partner’s interest is valued as if the partnership business was wound up on the date of dissociation. (The partnership is valued as the greater of the liquidation value of its assets or the value of the partnership as a going concern.)

Question 9

What are the procedures for converting a limited partnership into a partnership?

Answer 9

To convert a limited partnership into a partnership, all of the general and limited partners must approve the conversion. Once approved, the limited partnership must cancel its limited partnership certificate. The conversion takes effect upon the cancellation of that certificate.

Question 10

Which partners can make decisions as to matters in the ordinary course of business? Which partners can make decisions as to matters outside the ordinary course of business?

Answer 10

Absent a partnership agreement to the contrary, all partners have equal rights in the management and conduct of the partnership.

A majority of the partners can make a decision as to a matter in the ordinary course of business, but a decision as to matters outside the ordinary course of business requires the consent of all partners.

Question 11

What is a partnership? What’s the key test to ascertain whether a business arrangement is a partnership?

Answer 11

A partnership is an association of two or more persons to carry on a for-profit business as co-owners. The key test applied to ascertain whether a business arrangement is a partnership is whether there is a sharing of the profits from the business; if so, such an arrangement generally is presumed to be a partnership, and persons who share in the profits are partners. However, a partnership does not exist between persons when one person receives profits in payment of a debt.

Question 12

1. The issue is whether the conversion from a partnership to a limited liability partnership (LLP) relieves the LLP of obligations incurred by the partnership. (45%)

Answer 12

The filing of a statement of qualification, which transforms a partnership into an LLP, does not create a new partnership. An LLP is a partnership in which a partner’s personal liability for obligations of the partnership is eliminated. In other respects, an LLP is governed by the same rules as a partnership. Here, because Garden LLP is not a new partnership and is governed by the same rules as the old partnership insofar as they apply to partnership obligations, Garden LLP remains liable to the customer for the judgment against the partnership.

Question 13

2. The issue is whether the man and the woman can be held personally liable for obligations that pre-existed their conversion to an LLP. (35%)

Answer 13

A partner is jointly and severally liable for all partnership obligations. Though a limited partner in an LLP is not personally liable for an obligation of an LLP, limited liability partnership status is generally only effective on the date that the statement of qualification is filed with the state and not before. Under these facts, the $500,000 judgment was levied against Garden Partnership before the man and the woman took steps to qualify as an LLP. Therefore, the man and the woman will remain jointly and severally liable for the judgment.

Question 14

3. The issue is whether the investor who became a partner in an existing LLP can be held personally liable for the judgment incurred by the former partnership. (20%)

Answer 14

A person admitted as a partner into an existing partnership is not personally liable for any prior partnership obligations. However, any capital contribution made by an incoming partner to the partnership is at risk for the satisfaction of such partnership obligations. Here, the investor became a partner in an existing LLP after contributing $50,000 to the LLP. Therefore, though the investor has no personal liability for the prior partnership’s obligation, his $50,000 contribution may be reached.

Question 15

Duty of loyalty. Under the duty of loyalty, a partner is required to refrain from the following activities:

Answer 15

a. Duty of loyalty

Under the duty of loyalty, a partner is required to refrain from the following activities:

i) Competing with the partnership business;

ii) Advancing an interest adverse to the partnership; and

iii) Usurping a partnership opportunity or otherwise using partnership property or business to derive a personal benefit, without notifying the partnership.

Question 16

Duty of care

Answer 16

A partner is required to refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law. RUPA 404(c). A partnership agreement may not reduce this duty unreasonably. RUPA 103(b)(4).

Question 17

What’s a LLP?

Answer 17

A limited liaiblity partnership is a partnership in which a partner’s personal liability for obligations of the partnership is eliminated.

Question 18

A partner is an agent of the partnership for the purpose of its business and can contractually bind the partnership when the partner acts with either actual or apparent authority. A partner’s act that was authorized by the partnership binds the partnership. Actual authority includes both express authority and implied authority. Express authority can arise from the partnership agreement itself, an authorization of the partners, or a statement of authority filed with the state

Answer 18

A partner is an agent of the partnership for the purpose of its business and can contractually bind the partnership when the partner acts with either actual or apparent authority. A partner’s act that was authorized by the partnership binds the partnership. Actual authority includes both express authority and implied authority. Express authority can arise from the partnership agreement itself, an authorization of the partners, or a statement of authority filed with the state

Question 19

A partner owes the partnership and the other partners two fiduciary duties—the duty of loyalty and the duty of care. Under the duty of loyalty, a partner is prohibited from using partnership property or business to derive a personal benefit without notifying the partnership. Under the duty of care, a partner is prohibited from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law.

Here, the man breached both the duty of care and the duty of loyalty by knowingly exceeding his authority and incurring a $25,000 debt, misappropriating the funds for his own personal use, and misrepresenting the scope of his authority when the loan officer specifically asked if the man was authorized to borrow such a large amount on behalf of the LLP.

Answer 19

A partner owes the partnership and the other partners two fiduciary duties—the duty of loyalty and the duty of care. Under the duty of loyalty, a partner is prohibited from using partnership property or business to derive a personal benefit without notifying the partnership. Under the duty of care, a partner is prohibited from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of the law.

Here, the man breached both the duty of care and the duty of loyalty by knowingly exceeding his authority and incurring a $25,000 debt, misappropriating the funds for his own personal use, and misrepresenting the scope of his authority when the loan officer specifically asked if the man was authorized to borrow such a large amount on behalf of the LLP.

Question 20

This outline discusses the law of partnerships under the Revised Uniform Partnership Act of 1997 (RUPA), which governs partnerships (including limited liability partnerships) in most states. A few states have adopted more recent amendments to RUPA. A minority of states continue to follow the Uniform Partnership Act (1914). The minority rule is discussed if that approach has been tested in the past.

Answer 20

This outline discusses the law of partnerships under the Revised Uniform Partnership Act of 1997 (RUPA), which governs partnerships (including limited liability partnerships) in most states. A few states have adopted more recent amendments to RUPA. A minority of states continue to follow the Uniform Partnership Act (1914). The minority rule is discussed if that approach has been tested in the past.

Question 21

Can a partner disassociate from a partnership and when?

Answer 21

A partner has the power to dissociate from the partnership at any time, even if the dissociation is wrongful. For a partnership that is unlimited by time or undertaking, a partner’s dissociation is wrongful only when it is in breach of an express provision of the partnership agreement.

Question 22

A partnership at will is an open-ended partnership that does not have a fixed termination based on a period of time or particular undertaking. A partnership at will is dissolved when a partner chooses to dissociate from the partnership by giving notice of his withdrawal. A dissociated partner generally does not have the right to participate in the management or conduct of the partnership business. A partner’s duty not to compete terminates upon dissociation. The dissociated partner’s other duties of loyalty and care terminate with respect to post-dissociation events, unless the partner participates in winding up the partnership’s business if the partnership itself dissolves. Finally, a person who is winding up the partnership business may dispose of and transfer partnership property and may discharge the partnership’s liabilities.

Answer 22

A partnership at will is an open-ended partnership that does not have a fixed termination based on a period of time or particular undertaking. A partnership at will is dissolved when a partner chooses to dissociate from the partnership by giving notice of his withdrawal. A dissociated partner generally does not have the right to participate in the management or conduct of the partnership business. A partner’s duty not to compete terminates upon dissociation. The dissociated partner’s other duties of loyalty and care terminate with respect to post-dissociation events, unless the partner participates in winding up the partnership’s business if the partnership itself dissolves. Finally, a person who is winding up the partnership business may dispose of and transfer partnership property and may discharge the partnership’s liabilities.