Partnership FIDUCIARY DUTIES & PROPERTY ISSUES

Question 1

Partnership Fiduciary Duty

Answer 1

Partners in general partnerships owe fiduciary duties of
loyalty and care to each other and to the partnership.
They also owe a statutory duty of disclosure.

Question 2

DUTY OF LOYALTY:

Answer 2

This duty requires each partner:

1. to account to the partnership for any benefit derived by the partner in conducting the partnership business, using the partnership’s property, or appropriating a partnership opportunity;
2. to refrain from dealing with the partnership in the conduct of its business as (or on behalf of) a party having an interest adverse to the partnership; and
3. to refrain from competiting with the partnership in the conduct of its business.

Question 3

DUTY OF CARE:

Answer 3

This duty requires each partner to refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.

You can make a negligent decision and not be in violation

Question 4

DUTY OF DISCLOSURE:

Answer 4

This is a statutory duty rather than a fiduciary one
(although some judicial opinions treat it as fiduciary in nature). The partnership statute states that each partner and the partnership shall furnish to a partner:

1. without demand, any information concerning the partnership’s business and affairs reasonably required for the proper exercise of the partner’s rights and duties; and
2. on demand, any other information concerning the partnership’s business and affairs (except to the extent the demand or the information demanded is unreasonable or otherwise improper under the circumstances).

Note: A partnership agreement may not eliminate the duties of loyalty or care.
The duty of disclosure may be eliminated.

Question 5

PROPERTY ISSUES in short

Answer 5

Which property belongs to the partnership and which belongs to an individual partner?

Question 6

RULES FOR DETERMINING PARTNERSHIP PROPERTY

Answer 6

1. It is partnership property if it is acquired in the
   partnership name or in a partners name where it is apparent from the document that she is acting for a partnership (e.g., it mentions a partnership or says she is a partner).
2. It is presumed to be partnership property if partnership funds are used.
3. It is presumed to be a partner’s property if
   acquired in her name without partnership funds and there is no sign that she is acting for a partnership.

Question 7

RIGHTS IN PARTNERSHIP PROPERTY
1. THE PARTNERSHIP:

Answer 7

Rights are totally unrestricted. (The partnership owns the
property!)

Question 8

RIGHTS IN PARTNERSHIP PROPERTY - A Partner

Answer 8

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

Question 9

THE PARTNER’S OWNERSHIP INTEREST IN THE PARTNERSHIP:

Answer 9

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 a partner can do with it.

Question 10

A partnership interest is comprised of:

Answer 10

1. management rights (i.e., a partner’s right to participate in the management of the business, to obtain information 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 11

What can and can’t a partner unilateraly transfer in managment and financial rights?

Answer 11

1. Unless otherwise agreed, a partner cannot unilaterally transfer his management rights and thereby make the transferee a “partner.” The default rule for the admission of a new partner is that it requires a unanimous vote of the existing partners.
2. Unless otherwise agreed, a partner can unilaterally transfer his financial rights. The transferee merely has the right to receive profit distributions from the partnership that would have otherwise gone to the partner. The transferee is not a partner; the tranferor is still a partner and retains all of the management rights of a partner.

Question 12

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 (vote, request information, etc). Is X a partner?

Answer 12

No. X can only be admitted as a partner upon a unanimous partner vote, which did not occur. A partner cannot unilaterally transfer managment 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 of the rights of a partner (other than the right to profit distributions).