Partnerships

Question 1

Partnership analysis steps

Answer 1

1. Is there a partnership based on the totality of the circumstances?
2. If partnership exists, fiduciary duties are triggered
3. All partners have the authority to bind partners
4. Can a partnership continue?

Question 2

Partnership totality of the circumstances factors

Answer 2

1) Intent of parties to enter partnership
2) Right to share profits (prima facie evidence of partnership – rebuttable, not dispositive factor)
3) Obligation to share losses
4) Shared control of the business

Question 3

In re: Marriage of Hassiepen

Answer 3

After plaintiff sought revised child support based on the new business of her ex and his girlfriend, the court held that the business was a partnership, court held that there was a Partnership based on economic substance (e.g. g/f provided start-up capital, profits were in a joint checking acct, g/f not paid separately, g/f performed key duties like scheduling and accounting).

Question 4

Partnership vs. Contract

Answer 4

Shared property ownership alone d/n establish a partnership, even if profit sharing exists; shared returns alone ≠ partnership.

Question 5

Southex Exhibitions Inc v. Rhode Island Builders Ass’n

Answer 5

Southex alleged it est. partnership w/ RIBA re: homeshow. Court held that the xontract did not est. partnership even though it had these terms: 55-45% profit split, mutual control over biz ops & bank accts, respective contributions of property by partners. Ct found no intent to create partnership, no shared decision-making, no shared losses.

Question 6

Profit sharing

Answer 6

You presume a partnership unless profits are pmt for debt, services rendered/wages, rent, annuity/retirement/ health benefit to deceased or retired partner’s beneficiary, or for sale of goodwill or other property in installments.

Question 7

Brodsky v. Stadlen

Answer 7

Atty Brodsky was not partner of Diana Enters. playwrights. Profit sharing existed, but no liability for losses, advanced cash to partnership was loan, and d/n contribute capital to enters.

Question 8

Partnership by Estoppel Elements

Answer 8

(1) Representation (words or conduct) by alleged partner of a partnership to 3d party
(2) Reasonable reliance/belief in good faith by 3d party that the partnership exists
(3) 3d Party must suffer loss in reliance on partnership.

Question 9

Young v. Jones

Answer 9

Plaintiffs tried to argue that PW-Bahamas and PW-US were partners because he couldn’t tell the difference between the parties based on the general marketing tools that the entities used the same logos. PWC Bahamas and PWC-US were not partners b/c PWC-US d/n assert such partnership existed. Plaintiffs relied on shared branding.

Question 10

Martin v. Peyton

Answer 10

Partnership does not exist in this case because the actions taken were just methods of securing the loan. These were normal types of agreements to ensure that the loan would be repaid. Profit sharing was tied to the repayment of the obligation. It was simply a mechanism that the parties contracted for the repay the loans that were financed.

Question 11

Batman v. IRS

Answer 11

Partnership b/w father & minor son was a sham (tax scheme) not true partnership. Family can be in partnerships, but this was a unilateral transaction to place assets in son’s name but father managed and controlled biz as before.

Question 12

Joint Venture vs. Partnership

Answer 12

Same elements and fiduciary duties but a joint venture is limited in duration.

Question 13

Partnership agreements and fiduciary duties

Answer 13

1. Partnership agreements may modify duty of loyalty and specify activities outside that scope and modify duty of care.
2. cannot authorize bad faith, willful misconduct, or knowing violation of law.
3. May include mechanism to punish partners who act beyond authority

Question 14

Partnership Duty of Loyalty

Answer 14

1. Account to partnership for any property, profit, or benefit derived, incl. appropriation of a partnership opportunity;
2. No dealing w/ those who are adverse to partnership incl. self-dealing;
3. No competing w/ partnership before dissolution

Question 15

Examples of breaches of partnership duty of loyalty

Answer 15

1. competing w/ partnership,
2. taking biz opp. away from partnership;
3. conflict of interest;
4. using partnership property for personal gain

Question 16

Meinhard v. Salmon

Answer 16

Salmon had duty to inform Meinhard of expanded lease renewal opportunity b/c old lease was encompassed in new lease and both were for purpose of flipping property.

Question 17

Proper conduct for partners as they depart

Answer 17

Proper conduct for partners: Solicit other partners to leave, contact clients b4 leaving if departure/contacts disclosed to firm, remind clients of right to have counsel of their choice, locate space, financing, etc.

Question 18

Partnership Duty of Care

Answer 18

1. Refrain from grossly negligent or reckless conduct, intentional misconduct, or knowing violation of law.
2. Ordinary negligence not included (it’s an inherent risk which biz can manage).

Question 19

Partnership obligation of good faith and fair dealing

Answer 19

Can be defined by the partnership agreement. There is not an obligation to remain partners.

Question 20

Bohatch v. Butler & Binion

Answer 20

New partner reports old partner for suspected overbilling. Firm withholds whistleblower’s year-end partnership distribution, asks her to leave, then expels her. Court held that the duty to not expel Bohatch in bad faith only really means that they can’t expel her purely for self-gain. She could recover for breaches of the contract notice (lost earnings)

Question 21

Four Part Partnership Test

Answer 21

1. Intent
2. Profit
3. Losses
4. Control

Question 22

Prohibitions of Self-Dealing and Conflicts of Interest

Answer 22

Ex of self-dealing: Real-estate developer partner hires his own construction company to flip the property instead of bidding other construction cos. (This could be cured if there was a fairness in process and there was disclosure)

Question 23

Concepts of Agency in Partnership

Answer 23

1. Each partner is an agent of the other and of the partnership.
2. Generally, partners may bind p-ship in contract (either actual or apparent authority).
3. Partner’s tortious conduct in partnership biz can result in vicarious liability.
4. Each partner is a fiduciary – to other partners and the partnership.

Question 24

Partnership Management Default Rules

Answer 24

1. Each partner has equal right to manage regardless of contribution.
2. Share in profits and losses.
3. No right to compensation for services done on behalf of partnership.
4. Indemnification from personal liabilities for ordinary course of biz.
5. Right of reimbursement for contributions above agreed upon.
6. Can transfer or assign interest in partnership (only profit/loss not mgmt.)
7. Binding partnership in contract for ordinary course of business
8. Each partner is agent of partnership

Question 25

Default Rules of Partnership shares of Losses and Profits

Answer 25

1. All partners share profits equally regardless of capital contribution.
2. Losses shared in same manner as profits.

Question 26

Nabisco v. Stroud

Answer 26

Stroud is in a partnership with Freeman to own a grocery store. Stroud told Freeman he would not be personally liable for bread sold to the grocery. He didn’t want the partnership to buy more bread. Nabisco sold bread to the store for $170. The communication to Freeman was not enough, nor was it a valid restriction of the authority – there was no majority vote. So the majority was not met. (If there were three partners and two of them told Freeman not to purchase, you would likely need to prove that Nabisco had proper notice of this.)

Question 27

RNR Investments Lt’d Partnership v. Peoples First Comm. Bank

Answer 27

RNR partner borrowed for biz from bank beyond authorization in p-ship agreement of $650K. RNR argued bank was negligent in failing to inquire if partner had authority; Ct rejected because Third parties d/n have a duty to investigate a partner’s actual authority if partner acting w/in usual line of biz.

Question 28

Summers v. Dooley

Answer 28

Trash collector partners disagreed about hiring 3d man. Dooley refused to consent, so Summers hired on his own dime, then sued Dooley for expenses b/c Dooley benefitted from profit of 3d man. HELD: Summers not entitled to reimbursement. Partners are equal managers.

Question 29

Solving Deadlock

Answer 29

(1) Agreement or mediation;
(2) Mutually accepted neutral advisor (not binding, no voting rights);
(3) Dissolution if not solved in a certain time;
(4) Coin flip;
(5) Auction of p-ship interest.

Question 30

Transferring Partnership Interest

Answer 30

1. Transferrable interest includes share of profits/losses and right to receive partnership distributions
2. Default Rule: Only right to p-ship profit can be freely transferred.
3. Transferring profit/loss share d/n transfer personal liability.

Question 31

Events Causing Dissociation from Partnership

Answer 31

1. Knowledge or notice of partner’s will to w/draw.
2. Event agreed to in p-ship agreement (e.g. expiration of term, marriage).
3. Partner’s expulsion pursuant to p-ship agreement. (by majority, special cmte)
4. Partner’s expulsion by unanimous vote of other partners. (default rule)
5. Judicial order b/c partner engaged in serious misconduct or breached fiduciary duty
6. Debtor in bankruptcy
7. Death or incapacitation

Question 32

Effects of Dissociation

Answer 32

1. Dissociated partner’s right to participate terminates (unless wind-up needed).
2. Partner’s duties and obligations end for events post-dissociation. Remains liable for duties incurred prior to dissociation.
3. Duty of loyalty & care only continue regarding matters arising prior to dissociation.
4. Beware! Dissociated partner can still bind partnership if has apparent authority (partnership d/n give notice). A firm can sue dissociated partner, but still bound under apparent authority.

Question 33

Giles v. Giles Land Co.

Answer 33

Family sought judicial dissociation of son Kelly from p-ship. Kelly threatened & berated family members, blocked acquisition of land and transition of biz to LLC. HELD: Judicial dissociation was warranted. Irreparable deterioration of a relationship is sufficient to order dissociation or dissolution. Kelly was not entitled to a a buyout that he would normally be entitled to because of the damage he caused.

Question 34

Two Procedures for Dissociation

Answer 34

1. Dissociated partner’s interest is bought-out by remaining partners who wish to continue biz.
2. Partnership is dissolved and liquidated.

Question 35

When a dissociated partner is bought out…

Answer 35

1. Dissociated partner can still bind p-ship for up to 2 years if other party still reasonably believes still a partner.
2. Statement of dissociation must be filed w/ Sec. of State.
3. Continued use of dissociated partner’s name d/n make them liable.
4. Creditors of a former partnership automatically become creditors of new partnership. (departing partner remains liable on all obligations incurred prior to departure unless creditor releases them.)

Question 36

Pav-Saver Corp. v. Vasso Corp.

Answer 36

P-ship agreement had express term that dissolution only proper if both parties agreed & express term for how damages were to be calculated. Ct enforced p-ship agreement term. Pav-Saver requested dissolution and to have patent back. Vasso won in court by enforcing express partnership agreement language.

Question 37

Rights of Partners who do not wrongfully cause dissociation

Answer 37

(1) damages for breach of agreement,
(2) right to carry on biz in same name or manner if they buy-out wrongful partner.

Question 38

Rights to partners who wrongfully cause dissociation

Answer 38

Entitled to a fair valuation of biz (which excludes value of goodwill).

Question 39

Distribution of Assets Upon Dissolution

Answer 39

1. To creditors other than partners (external creditors)
2. Internal creditors
3. To partners for capital contributions (partner accounts)
4. To partners for their share of profits. (default rule is equal split)
5. If losses, the share of losses req’d from a partner follows the share of profits they would have earned.

Question 40

Owen v. Cohen

Answer 40

Owen contributed $ to p-ship and took $50/wk salary. Cohen humiliated Owen, tried to push him out, and appropriated funds for himself w/o Owen’s knowledge. Owen has power to dissolve but files for judicial dissolution b/c unclear issues for court:
(1) Was Owen’s $ a loan (so internal creditor) or start-up capital contribution? HELD: Loan.
(2) Was partnership at will or for term? HELD: For term b/c parties intended relationship would continue until loan was paid back.
HELD: Court ordered dissolution b/c relationship was irreparable.

Question 41

Collins v. Lewis

Answer 41

Cafeteria 50-50 partnership w/ losses capped to Collins who fronted $ & Lewis as manager. Terms of capital repayment to Collins in agreement. Collins got tired of delays and need for additional capital, so he called bank for favor to call in loan repayment by Lewis. Jury found for Lewis, denied Collins’ petition to dissolve. HELD: Lewis was a capable manager save Collins’ interference therefore no right for judicial dissolution.

Question 42

Kessler v. Antinora

Answer 42

House-building partnership agreement contemplates split profits, but not losses. Kessler fronts $, gets 60% profit. Antinora supplies labor, gets 40% profit. Kessler sues Antinora for loss on sale of house. HELD: P-ship agreement controls – Kessler cannot recover losses from Antinora b/c agreement is silent on split losses. Antinora lost $ on all his labor. Labor is presumed to be equivalent to capital provided in a partnership.

Question 43

G&S Investments v. Belman

Answer 43

25.5% partner Nordale begins using cocaine and frightens tenants by acting irrationally, so G&S (owns 51%) files for dissolution. Nordale dies after filing, so G&S amends to dissociate his estate (agreement allowed p-ship to continue in event of one partner’s death) and invoke buyout provision in agreement. HELD: Partnership agreement’s buyout provision was activated.