partnership part 3 Flashcards
Suits under UPA 1914
Partnership can’t sue or be sued in
partnership’s name
Suits under RUPA 1997
- partnerships can be sued
- partnerships as first resort (exceptions)
disclosing information
some courts say if a partnership couldnt afford to do oppertunity, may not need to
disclose the oppertunity
Who are the fiduciary duties owed to?
- partnership
- other partners
Who owes the fiduciary duties?
partners
Law of fiduciary obligations developed before and after UPA 1914 through case law
- Can’t use partnership assets for own benefit or private
advantage - No competition or rivalry with the partnership
- Can’t use knowledge or information which belongs to the firm
Every partner must account to the partnership for any benefit,
and hold as trustee for it any profits derived by him without the
consent of the other partners from any transaction connected with
the formation, conduct, or liquidation of the partnership or from any use by him of its property
-This section applies also to the representatives of a deceased
partner engaged in the liquidation of the affairs of the partnership
as the personal representatives of the last surviving partner
Records and Disclosure Duties
- Every partner shall at all time have access to and may inspect
the books - Partners shall render on demand true and full information
affecting the partnership
Duty of Loyalty
- Account to partnership and hold as trustee any property, profit or benefit in the conduct or
winding up of the partnership business or derived from partnership property, including
appropriation of partnership opportunity (RUPA 1997 §404(b)(1)) - No adverse interests in the conduct or winding up of the partnership (RUPA 1997 §404(b)(2))
- However, Partners can enter into loans and other transaction at arms’ length terms.
- Fair is fine
- No competing with the partnership before the dissolution
RUPA 1997
The only fiduciary duties are the duty of
loyalty and care
Duty of Care
No grossly negligent, reckless conduct, intentionally misconduct or knowing violations of
law in the conduct and winding up of the partnership
RUPA 1997 also lists these duties but doesn’t call them fiduciary duties
- good faith and fair dealings
- record keeping/information/disclosure
- dont be selfish, dont have to be selfless
Record keeping/information/disclosure
Not only provide information when asked but without demand
provide, any information concerning the partnership’s business and
affairs reasonable required for the proper exercise of the partner’s
rights and duties
RUPA duty
Don’t be selfish, don’t have to be selfless
Don’t violate duties/obligations merely because the conduct furthers
the partner’s own interest
Partnerships
Bottom line, comply withthese 4 duties
- Loyalty
- Care
- Good faith and fair dealing
- Record keeping/information rights/ disclosure
Watering down the duty of loyalty
- Can’t eliminate the duty of loyalty in the partnership agreement under the uniform act
- You can specify what activities do not violate the duty of loyalty if not manifestly unreasonable
- Authorization or ratification after full disclosure of material facts
- Elimination is fine with Delaware
Reducing the Duty of Care
- Partners may not unreasonably reduce the duty of
care (RUPA 1997 §103(b)(4)) - Cannot authorize conduct involving bad faith, willful or intentional misconduct, or knowing violation of law. (RUPA)
- Elimination is fine with Delaware
Good Faith and Fair Dealing Standards
- Can’t eliminate the good faith and fair dealing obligation in the partnership agreement (RUPA 1997 §103(b)(5))
- You can prescribe standards by which to measure the obligation of good faith
and fair dealing if the standards are not manifestly unreasonable (RUPA 1997 §103(b)(5)) - Can’t eliminate even in Delaware (Del. Code tit. 6, § 15-103(f))
Restrictions on Access to Books and Records
- Can’t unreasonably restrict access to books and records (RUPA (1997) §
103(b)(2)) - Under RUPA 1997 the affirmative duty to provide information without being asked can be waived
- Elimination, on its face, is fine with
Delaware (Del. Code tit. 6, § 15-103(f)) ( but would refusing access to books be good faith and fair dealing?)
May partners compete with one another, and with the partnership, if the partnership agreement permits such competition?
Yes. In general, partners have a fiduciary duty not to compete with one another, unless the partnership agreement permits it.
Can you rent out to a partner below market value?
No, would be a violation of duty of loyalty bc taking money away from the partnership
negligence needed for a current partner to be liable
not normal negligence, need gross negligence
Do you have fiduciary duties to former partners?
no only current partners
At-will Partnerships vs. Partnerships for a
Definitive Term
- At-will partnerships – no discussion of end point
- Partnerships for a definitive term – ending at a
particular time or when a certain task has been
accomplished
Dissociation Circumstances
- At will – notice to the partnership of a
partner’s express will to withdraw - Previously agreed upon event set forth in the
partnership agreement occurs - Expulsion pursuant to the partnership
agreement - Expulsion via court order due to misconduct
- Partner files for bankruptcy
- Partner dies or become incapacitated (natural
and business versions)
A partner who wrongfully
dissociates is liable to the
partnership and the other
partners for damages.
Wrongful dissociation
- Breaches an express provision of the
partnership agreement - If the partnership is for a definite term or a
particular undertaking and before that term
or undertaking is complete
Power vs. Right to Dissociate
You have the power to
dissociate, you might not
have the right.
What to ask if it is a at-will partnership dissociation
Did it breach an
express
provisions in the
partnership
agreement?
5 questions to ask if it is a definitive term dissociation
- Did it breach an express provisions in the partnership agreement?
- Did the partner get expelled via court order?
- Did Partner withdraw by choice (except if dissociating because another partner died or wrongfully dissociated)?
- Did the partner file for bankrupcy?
- If the Partner is an entity, did it willfully dissolve or terminate?
Liability for Obligations Incurred Prior to Dissociation
Dissociation alone does not discharge a partner’s liability for partnership obligations incurred prior to the dissociation.
- Can work with creditors and partners
to get a release (RUPA 1997 §703(c)) - If a creditor has notice of the
dissociation and agrees to material
alterations without the dissociating
partner’s consent the dissociating
partner is not liable. (RUPA 1997
§703(d))
General Rule: Partners are not personally liable for obligations incurred prior to their admission as a partner.
Exceptiom
Can always agree to be bound in exchange for
purchasing someone’s partnership interest
Generally, a partner who dissociates is not liable for
partnership obligations incurred after the dissociation.
Exception?
Still liable for up to 2 years if a 3rd party does business
with the partnership and reasonably believes the
dissociated partner is still a partner.
Can file a statement of dissociation
Same rules for authority of a dissociating partner.
Buyout of Dissociated Partner’s Interest
Partnership has to “cause” the buyout the dissociated partner.
- Partnership can buy
- Other partners can buy
- 3rd party can bu
Buyout of Dissociated Partner’s Interest
Buyout price is greater of
- their fictional share of the sale of the assets
- their fictional share of the sale of the business
Buyout of Dissociated Partner’s Interest
Wrongful Dissociation and the Buyout
- Damages for wrongful dissociation (if applicable) are deducted from the buyout price (RUPA
1997 §701(c)) - If the partnership was for a definite term or a particular undertaking, the buyout is held and
accrues interest until the term or undertaking is complete unless a court finds paying the
buyout ahead of time would not cause undue hardship. (RUPA 1997 §701(h))
To have a wrongful dissociation for an at-will partnership, you only need to
break an express provision of the partnership agreement
Default rule is any Partner may dissolve an at-will partnership at
any time by choosing to dissociate
* This is the rule in Delaware
* Some states have modified this to let a majority buy out the partner and continue the partnership
* Can modify automatic dissolution in partnership agreement
A partnership is dissolved (regardless of at-will status) if:
- Any event agreed to in the partnership agreement occurs (RUPA 1997
§801(3)) - The business of the partnership becomes unlawful (90 day waiting period)
(RUPA 1997 §801(4)) - Judicial determination (RUPA 1997 §801(4))
A partnership for a definite term or particular
undertaking is dissolved by
- The expiration of the term or the undertaking
- Unanimous agreement
- If half of the remaining partners agree within 90
days of wrongful dissociation or dissociation due
to death
Dissolved partnership don’t automatically stop. They have to
wind-up the business.
Partners (minus one who wrongfully dissociates) can waive their right to have the partnership’s business
wound up, and continue operating.
Steps in Winding-Up
- Decision to Dissolve
- Assets are sold
- Creditors are paid (inside and outside)
- Capital accounts are settled up
- Rest is split
