Partnership

Question 1

What are elements of partnership?

Answer 1

Partnership is an (1) association of (2) two or more persons to carry as (3) co-owners a business (4) for profit.

Question 2

What are the hallmarks of partnership?

Answer 2

the rights to (1) receive a share of the profits and (2) participate in managing and controlling the business.

Question 3

Identifying a partnership (four factors)

Answer 3

(1) Intent of the parties to enter into such a relationship
(2) Right to share in profits (presumption)
(3) Obligation to share losses
(4) Shared control of the business.

Question 4

What are typical lender protections?

Answer 4

Permission re: change in ownership/leadership

Inspection rights

Express limit on specific risky actions (through covenants)

Counseling on discrete matters and/or recommend consultants

Question 5

What are danger zone activities for lender-debtor type relationship?

Answer 5

Constant advising

Veto power over business decisions

Resignations/designating management

Assurances to other creditors (recall Cargill)

“contracting power”

Question 6

How to establish partnership by estoppel

Answer 6

(1) Representation (express or implied) of a partnership to a third party by or attributable to the alleged partner;
(2) Reasonable reliance in good faith by a third party that such partnership exists; and
(3) Third Party, who relies on this apparent partnership, changes position in reliance on the representation to its detriment.

Question 7

What is Partners’ Personal Liability

Answer 7

All partners are liable jointly and severally for all obligations of the partnership unless otherwise agreed by the claimant or provided by law.

A person admitted as a partner into an existing partnership is not personally liable for any partnership obligation incurred before the person’s admission as a partner.

Question 8

What are partnerships management and control rights?

Answer 8

(1) use partnership property for partnership business
(2) participate in the partnership decisions. Principle applies between partners (Summers)
(3) bind the firm as an agent. Principle applies to partner and third party (Nabico)

Question 9

What is partnerhip property? 3 rules

Answer 9

1) Any asset acquired in the name of the partnership, including:

• A transfer directly to the partnership in its own name
• A transfer to one or more partners acting in their capacity as partners and the name of the partnership appears on the transfer document.

(2) If the partnership is not named, property acquired by one or more partners is partnership property if the document transferring title indicates the buyer was acting in his capacity as a partner
(3) Property purchased with partnership funds is presumed to be partnership property

A partner may use or possess partnership property only on behalf of the partnership. NUPA 401(i)

A partner is not a co‑owner of partnership property and has no interest in partnership property which can be transferred, either voluntarily or involuntarily. NUPA 501.

Question 10

What is partnership management default rules?

Answer 10

Ordinary course of business → majority

Outside the ordinary course of business → unanimous

Amendment to the partnership agreement → unanimous

Question 11

How does partnership agreement derogate from statute?

Answer 11

• Use of executive committee
  
  • Used when constituents have:
    
    • Similar interests
    • Comparable information
    • Low collective action problems
  • Needed when constituents have:
    
    • Differing interests
    • Asymmetric information
    • Serious collective action problems (risk of hold up situation if interest are not homogenous)
• Use of majority approval for matters requiring unanimity per statute

Question 12

Each partner is a ……. of the partnership for the purpose of its business

Answer 12

Agent

Question 13

What is the nabisco rule? Exception?

Answer 13

The act of every partner, for apparently carrying on in the usual way the business of the partnership of which he is a member, binds the partnership.

Exception: Partner has no authority to act and third party has knowledge of this fact.

Question 14

All partners are agents of the partnership with power to bind the partnership. Who does this apply?

Answer 14

between partners and third party,

Question 15

All partners have equal rights to participate in the management of the partnership. Who does this apply?

Answer 15

Between partners

Question 16

What fiduciary duties do partners owe?

Answer 16

A partner owes to the partnership and the other partners the duties of loyalty and care. A partner shall discharge the duties and obligations under this [act] and under the partners agreement and exercise any rights consistently with the contracting obligation of good faith and fair dealing (duty of good faith: governs the duties that partners owe to each other.)

Question 17

What is default rule for duty of care?

Answer 17

A partner’s duty of care to the partnership and the other partners in the conduct and winding up of the partnership business is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law. ​

Question 18

Can the partnership agreement eliminate duty of care?

Answer 18

If not manifestly unreasonable, the partnership agreement may alter the duty of care, but may not authorize conduct involving bad faith, willful or intentional misconduct, or knowing violation of law, and alter or eliminate any other fiduciary duty.

RUPA’s standard for a partnership agreement’s reduction of a duty of care is the less demanding “unreasonably” standard.

Question 19

What is duty of loyalty for partnership?

Answer 19

An agent has a fiduciary duty to act loyally for the principal’s benefit in all matters connected with the agency relationship.

The fiduciary duty of loyalty includes

(1) to account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner:

(A) in the conduct or winding up of the partnership’s business;

(B) from a use by the partner of the partnership’s property; or

(C) from the appropriation of a partnership opportunity;

(2) to refrain from dealing with the partnership in the conduct or winding up of the partnership business as or on behalf of a person having an interest adverse to the partnership; and
(3) to refrain from competing with the partnership in the conduct of the partnership’s business before the dissolution of the partnership

• A partner’s taking for herself a business opportunity that belongs to the partnership (RUPA 404(b)(1)
  
  • Meinhard elements

(1) An opportunity presented to a partner because of her role as a partner in the venture;
(2) “Fitting of the Partnership”: The opportunity is one that the partnership would likely take advantage of. (Identify the opportunity. How close is it to the partnership’s purpose?)
(3) If 1 and 2 are met, the partner must disclose the opportunity to the partnership.

• A partner improperly profiting from a deal she or some related party made with the partnership (RUPA 404(b)(2))
• A partner’s competing with the partnership while still a partner (RUPA 404(b)(3)).

Question 20

What is holding of Meehan (“grabbing and leaving”)

Answer 20

MBC breached fiduciary duties by using their position of trust and confidence with some clients to “grab” them from PC. They did not disclose their plan to leave to the fellow partners (they lied to their partners). Wrong to commit unfairly prejudicial acts or take advantage of partner’s confusion or lack of full information.

Question 21

What is holding of Sidley & Austin?

Answer 21

Managing partners have no fiduciary duty to disclose changes in the partnership’s internal structure if the changes do not generate a profit or loss for the partnership. Sidley & Austin. ​

Question 22

What are possible breaches of duty of loyalty?

Answer 22

competing with the partnership

taking a business opportunity away from the partnership

acting in conflict of interest

using the partnership property for personal interest

Question 23

Can Partners Contract Out of Fiduciary Duties?

Answer 23

If not manifestly unreasonable, the partnership agreement may: […] (C) alter the duty of care, but may not authorize conduct involving bad faith, willful or intentional misconduct, or knowing violation of law. The partnership agreement may alter duty of loyalty to permit corporate opportunities.

Question 24

When is expelling a partner ok?

Answer 24

When a partner is involuntarily expelled from a business, his expulsion must be in good faith for a dissolution to occur without violating the partnership agreement.

Question 25

What are partnership capital rules?

Answer 25

• Each partner shares equally in the profits remaining after all liabilities, including those to partners are satisfied.
• Each partner must contribute towards the losses according to her share in profit. Default rule = losses shared in the same proportion as profits.

Question 26

What is rule for selling partnership rights?

Answer 26

• Transfer (assignment, not sale) of partnership interest is permissible and not per se case of dissociation of partner or dissolution of partnership.
• Transferable interest: “right to receive distributions from a partnership” (no control rights attached.
• Partners can transfer economic rights (i.e. profit and losses) without unanimous consent of other partners.
• Partners cannot transfer management rights without unanimous consent of other partners

Question 27

What is dissolution?

Answer 27

• Dissolution is the change in the relationship of the partners caused by any partner ceasing to be associated in the carrying on of the firm’s business.

Question 28

What are methods for dissolution?

Answer 28

• Partner’s withdraw (partnership at will)
• Events or circumstances in Partnership Agreement
• Judicial Dissolution
• Partnership for term
• Dissociation

Question 29

What is test for judicial dissolution?

Answer 29

• all confidence and cooperation between the parties has been destroyed or one of the parties by his misbehavior materially hinders proper conduct of partnership business. RUPA 801(4).
  
  • Test:
    
    • (1) Non-reconcilable differences in management of the partners; or
    • (2) One partner misbehaves; or
    • (3) Incapacity of one party
• Conflict between parties is not enough to justify judicial dissolution. Judicial dissolution is not available to the party at fault
• Partners can bid on the assets of the partnership in a liquidation sale.

Question 30

What is test for judicial dissociation?

Answer 30

• Judicial Decree Test. On application by partnership or another partner, the person is expelled as a partner by judicial order because the person:
  
  • (A) engages in wrongful conducts that damage the partnership’s business;
  • (B) has committed willfully or persistently a material breach of the partnership agreement or a duty or obligation under Section 409; or
  • (C) has engaged in conduct relating to the partnership’s business which makes it not reasonably practicable to carry on the business with the person as a partner

Question 31

What is a wrongful dissociation?

Answer 31

• Wrongful dissociation:
  
  • A dissociation is wrongful if, as in the prior paragraph, it breaches an express provision in the partnership agreement.
  • A partner’s dissociation is wrongful if the partnership agreement provides that that the partnership is to exist for a specific term or until the completion of a particular undertaking.
    
    • If an at-will partnership, partner can rightfully dissolve just by express will.
  • If a partner’s dissociation is wrongful, then any damages to the partnership caused by the wrongful dissociation reduces the buyout amount that partner receives from the partnership.