Partnerships

Question 1

What are the benefits of the partnership entity?

Answer 1

Simple to form
Flexible in their organization
Favorable tax treatment (not taxed as separate business entities)

Question 2

What are the 2 big issues with general partnerships?

Answer 2

1. Inadvertent partnerships: they are so simple to form that people may have formed a partnership without being aware that they have formed a partnership.
   No written documents are needed to form one and no documents need to be filed with the state.
2. No Limited Liability: partners are personally liable for the debts of the partnership’s obligations!
   What does personal liability mean? They can go after each partner’s individual assets, even if they are not part of the business.

Question 3

What is the definition of a general partnership?

Answer 3

“The association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership.” Revised Uniform Partnership Act 202(a)

Question 4

What does “association” within the context of a general partnership require?

Answer 4

“Association” connotes both voluntariness and intent.
Courts recognize that the parties need not intend to form a partnership, but courts will inquire whether the parties intended to form a relationship with the attributes of a partnership.

Question 5

Can a partnership be created by just one person?

Answer 5

no

Question 6

What is the scope of “carry on buissness”?

Answer 6

To “carry on a business” implies continuity of operations, more than a single transaction.
“Business” includes every trade, occupation, and profession. RUPA § 101(1).
However, courts typically call associations for a single transaction a “joint venture,” and sometimes apply partnership rules to those.

Question 7

What is the implication of “co-owners”?

Answer 7

“Co-ownership” means more than joint ownership. RUPA § 202(c)(1).
Co-ownership implies the power of ultimate control of the business (i.e., they each participate in management decisions).

Question 8

What is the consequence of the venture not being designed to operate “for profit”?

Answer 8

If no one has a contractual right to the firm’s net income, then courts will not consider it a partnership (as is the case with non-profits).

Question 9

John and Sally enter into an agreement to form an entity where each person will share in the expenses and profits of the business. One part of the operating agreement says that the agreement “does not create a general partnership.” Does that disclaimer preclude the court from finding that a general partnership was created?

Answer 9

No. Statements disavowing an intention to enter into a partnership are not binding if the parties intend to do the things which constitute a partnership under RUPA 202(a).

Question 10

Alice and Bob decide to form a general partnership so they they can start a law firm together. They build a website, start advertising, and create business cards. But before they can get around to drafting a partnership agreement, Bob finds a great piece of property that would be the perfect location for their law firm. So Bob signs the lease on behalf of the partnership. Is Alice bound by the terms of the lease that Bob signed for the law firm?

Answer 10

Probably. One partner may be bound to third parties by the act of another partner, so in the absence of other facts suggesting that this lease signing was beyond the scope of the partnership, Alice would be bound.

Question 11

Is a partnership a separate entity (entity theory) or an aggregate of individual partners, with the partnership having no separate legal status (aggregate theory)?

What is the difference between common law and contemporary law positions?

Answer 11

Under the common law, partnerships were usually treated as aggregates.
This meant that property was owned by the individual partners as a group, so if one partner left, the property needed to change hands, the name of the partnership had to change, etc.

Under contemporary law (RUPA)

A partnership is an entity distinct from its partners.
Partnership property is the property of the entity, and not of the individual partners.
Under RUPA, the departure of a partner does not cause a dissolution of the partnership.
RUPA provides for the merger or conversion of partnerships into limited liability entities if the partners so choose.

Question 12

What was the rule and test developed out of the Holmes and Learner case?

Answer 12

Rule: While splitting profits is prima facie evidence of a partnership, an express agreement to divide profits is not a prerequisite to prove the existence of a partnership.
Test: When an oral partnership arrangement is alleged, the court will look to see if that oral agreement was “sufficiently definite” to allow it to be enforced.
The court held that the oral partnership agreement between the parties was sufficiently definite to allow it to be enforced.
The agreement was reflected in Lerner’s statements: “We will hire other people to work for us. We will do everything we can to get the company going , and then we’ll be creative, and other people will do the work, so we’ll have time to continue riding the horses.”
Plus, Holmes worked for nearly a year without pay, which the court said helped to confirm the oral agreement.

Question 13

What are the 6 duties agents owe their principles?

Answer 13

Performance of contract obligations
Duty of Care
Duty of Competence
Duty of Diligence
Duty of Disclosure
Duty of Loyalty

Question 14

What are the principles duties to their agent?

Answer 14

(1) performance of contract obligations, (2) indemnification, sometimes, and (3) good faith and fair dealing.

Question 15

What does the duty of loyalty include?

Answer 15

a duty not to communicate confidential information of the principal for the agent’s own purposes or those of a third party (RTA 8.05),
a duty not to compete with the principal in any matter within the scope of the agency relationship (RTA 8.04),
a duty not to act as an adverse party to the principal in a transaction connected with the agency relationship (RTA 8.03), AND
A duty not to acquire a material benefit from a third party in connection with transactions on behalf of the principal (RTA 8.02)

Question 16

What are the 2 remedies for a principle whose agent breached their duty of loyalty?

Answer 16

(1) Damages
(2) Disgorgement of profits

Question 17

What was the holding of the Food Lion Case?

Answer 17

Did the reporters breach a duty of loyalty to Food Lion?
Held: Dale and Barnett breached their duty to their employer (Food Lion) by promoting the interests of their other employer (ABC) to the detriment of Food Lion with “the requisite intent to act against the interests of [Food Lion]”

Question 18

John holds two jobs in order to help pay for his family’s expenses. He regularly works at Food Lion from 8 a.m. to 4 p.m. but then works from about 7 p.m. to 2 a.m. as a bar tender at a local bar serving beer. Food Lion is open from 7 a.m. to 10 p.m. each night. Over his year holding these two jobs, John’s performance drops at Food Lion because he is often overly tired and just trying to do the best he can.
Does Food Lion have a valid claim against John for breaching his duty of loyalty to Food Lion?

Answer 18

No. The court in Food Lion actually limited its holding and said, “An employee does not commit a tort simply by holding two jobs or by performing a second job inadequately.

Question 19

What is a non-compete agreement? When does an agent’s duty usually end?

Answer 19

An agent’s duty as agent ends the day the agency relationship ends (default rule).

Employers, subject to applicable legal requirements (e.g., California prohibits non-compete agreements, subject to a few exceptions), protect themselves from competition with their former employees by requiring a non-compete agreement as a condition of employment.

Non-compete agreements are generally enforceable so long as they are “reasonable”
Limited in time
Limited in space
Limited in scope of work

Question 20

Art, an Architect, works for an architecture firm for his day job. But he also consults and does ”side architecture projects” at night, during his off-time, he says.
Can Art do this? Does it matter that the projects are not at night and not on “firm time”?

Answer 20

No. He can’t do this because the duty of loyalty requires that the agent (Art) put the principal’s interest (the firm’s interest) first. And doing side projects would compete.

Question 21

What could Art do?

Answer 21

He could negotiate in his contract with the firm about his ability to consult during off hours.

Question 22

What does “attribution” mean for agency law?

Answer 22

It means whether an agent’s acts can be attributed to the principal to make the principal vicariously liable for those acts.

Question 23

What are outward looking consequences for principle entering into an agency?

Answer 23

Vicarious liability for the acts of the agent
The principal can be required to perform/fulfill contracts that the agent entered into on the principal’s behalf.

Question 24

What are the 3 tiers of Agent authority?

Answer 24

Express actual authority (RTA 2.01, 2.02)
P manifests to A that it wishes A to so act (subject to A’s reasonable belief)
Implied actual authority (RTA 2.01, 2.02)
Covers all things necessary or incidental to exercise express actual authority (subject to A’s reasonable belief)
Apparent authority (RTA 2.03)
Even in absence of actual agency relationship or actual authority, if a third party reasonably believes – based on manifestations by the principal – that the Agent is authorized to act on their behalf, then principal may be liable for A’s acts

Question 25

What is Actual authority by an agent? How is it created?

Answer 25

RTA 2.01 (Actual Authority)
An agent acts with actual authority when, at the time of taking action that has legal consequences for the principal, the agent reasonably believes, in accordance with the principal’s manifestations to the agent, that the principal wishes the agent so to act.
RTA 3.01 (Creation of Actual Authority)
Actual authority is created by a principal’s manifestation to an agent that, as reasonably understood by the agent, expresses the principal’s assent that the agent take action on the principal’s behalf.
How can a principal manifest assent?
A person manifests assent or intention through written or spoken words or other conduct. (RTA 1.03)

Question 26

During Covid, Detroit Mercy Law (principal) tells Trudeau (agent): please teach Business Associations to the dual students in the Spring of 2021. The principal’s expectation is that Trudeau, the agent, will offer in-person instruction. But Trudeau’s expectation is that he will offer online, synchronous instruction.

Whose expectation prevails in this situation?

Answer 26

It depends on whether the agent’s belief is reasonable, based on P’s manifestations.
This could focus on the fact that other courses were held online, that no messaging indicated that there would be a switch to in-person instruction, etc.

Question 27

What is the scope of actual authority?

Answer 27

An agent has actual authority to take action designated or implied in the principal’s manifestations to the agent and acts necessary or incidental to achieving the principal’s objectives, as the agent reasonably understands the principal’s manifestations and objectives when the agent determines how to act

Question 28

What was the holding of Castillo v Case Farms of Ohio?

Answer 28

The housing and transportation issues are well within the implied authority of ATC because these are “necessary components” of Case Farms’ recruitment process which relied on a workforce primarily migrating from out of state.
It was “essential to the success” of Case Farms’ hiring practices to assist out-of-state workers with housing.
Because of this, Case Farms was liable for the actions of ATC that violated the Migrant and Seasonal Agricultural Worker Protection Act.

Question 29

T/F If ATC was operating outside of its actual authority, then Case Farms couldn’t be held vicariously liable for ATC’s acts

Answer 29

FALSE. “One person may bind another in a transaction with a third person, even in the absence of actual authority, when the third person reasonably believes – based on ‘manifestations’ by the purported principal – that the actor is authorized to act on behalf of the purported principal”

This is Apparent Authority

Question 30

What is apparent authoirty?

Answer 30

RTA 2.03 Apparent Authority
Apparent authority is the power held by an agent or other actor to affect a principal’s legal relations with third parties when a third party reasonably believes the actor has authority to act on behalf of the principal and that belief is traceable to the principal’s manifestations.
Even in absence of actual authority, if third party reasonably believes – based on manifestations by the purported P – that A is authorized to act on behalf of purported P, then purported P may be liable for A’s actions.

Question 31

I ask my cousin by email: “Please cat sit for me this week. You’ll need to take the cats to their vet checkup. No need to buy food.”
I tell the vet by email: “Cats are with my cat sitter, my cousin, this week. He’ll be bringing my cat to the appointment.”
At the appointment, Cousin buys cat food and has the vet bill me.

Am I liable to pay for the cat food?

Answer 31

Yes, if vet reasonably believes based on my manifestations that my cousin has the authority to buy cat food on my behalf (RTA 2.03)

Question 32

What is the general rule for the management of general partnerships?

Answer 32

In the absence of an agreement to the contrary, all partners have equal rights in the management and conduct of the partnership business. RUPA §401(h)
Partnership agreements often spell out these issues.
For example, imagine how hard would it be for Jones Day to have all its partners vote on each issue (it’s a law firm with 4500 people)

Question 33

What is required when partners disagree over issues in the regular course of business?

Answer 33

If partners disagree about ordinary matters within the scope of the partnership business, the vote of a majority of partners controls.RUPA §401(k).

Question 34

What is required when partners disagree over extraordinary issues or amending the partnership agreement or adding new parters?

Answer 34

Unanimous consent of other partners is required to add partners or amend the partnership agreement. RUPA § 401
Unanimity is required for “extraordinary acts” that are unusual and not in the ordinary course of business (i.e. letting a partner buy a personal vehicle.)

Question 35

What are the main partnership fiduciary duties?

Answer 35

Duty of loyalty includes, but is not limited to:
(1) anti-theft duty
(2) prohibition against self-dealing
(3) prohibition against competing against the partnership

Question 36

What was the holding of Meinehard v Salmon?

Answer 36

Salmon’s failure to include Meinhard in the second lease was a breach of fiduciary duty to Meinhard because the second lease was “an incident of” the first lease, and Salmon stole a jointly-owned opportunity by not disclosing it to Meinhard

Question 37

Park and Blaylock continue to work in their law firm partnership. In the course of their work on estate planning, both Park and Blaylock routinely interacted with Hunter, a serial entrepreneur and founder of several successful software companies. During a meeting between Blaylock and Hunter, Blaylock complained about the lack of a cost-effective electronic document management system for small law firms. Over the course of several meetings, Hunter and Blaylock refined an idea for a new software program that they called eKabinett. Hunter and Blaylock formed and self-financed a company to develop and commercialize the software. Employees of the company visited Park & Blaylock and other small law firms to observe document flow. Blaylock spent many hours working on eKabinett, and his billable hours declined by approximately 15% over a three-month period compared to the same period in the prior year. Blaylock used eKabinett at Park & Blaylock and charged the firm only $500 for the software (market price was $5,000). Hunter and Blaylock’s company became very profitable but neither Park nor Park & Blaylock (the partnership) received any revenue from the venture.
Did Blaylock breach his duty of loyalty as specified by RUPA to the partnership or to Park?

Answer 37

3: Any self-dealing accusation regarding selling the software to the firm would likely fail because he charged the firm only $500 and not $5000, so it can be argued the firm benefited v other law firms.

Three possible problems:
(1) Blaylock may have appropriated an opportunity that rightfully belonged to the partnership, or
(2) Blaylock may have improperly used partnership property (specifically, Blaylock’s billable hours reducing).
(3) Blaylock may have engaged in self-dealing by charging his firm for the software that he (a partner) helped develop.

Remaining problems:
(1) Blaylock may have appropriated an opportunity that rightfully belonged to the partnership, or
(2) Blaylock may have improperly used partnership property (specifically, Blaylock’s billable hours reducing).

For #1 & 2, the real issue hinges on the scope of the partnership venture. Does the law partnership capture all law-related business activity or is it related more strictly to the practice of law?

Question 38

What are the 2 tests to determine the scope of a partnership?

Answer 38

The “line of business” test asks whether the partnership has sufficient experience and ability in the particular field to exploit the opportunity, and

The “interest or expectancy” test asks whether the opportunity would further the established business on the partnership.

Question 39

What was the holding from Gibbs v Breed, Abbot & Morgan?

Answer 39

The court concluded that the information provided to Chadbourne in the personnel memo was confidential; therefore, Gibbs and Sheehan had a duty of loyalty to prevent disclosure of that information. Instead, they collected and disseminated the information without the knowledge of the firm.
The court said they could approach partners about leaving the firm, but employees are treated differently.
Rule: Recruiting of staff before withdrawal is only allowed after the firm has been given notice of the attorney’s intent to leave.

Question 40

How are profits and losses allocated between partners?

Answer 40

The default rule of partnership law contemplates equal sharing of profits and losses (unless the partnership agreement says otherwise)
Note: This contrasts with the default rule of corporate law allocating profits according to the amount invested and limits responsibility for losses to the assets invested.

Question 41

Who is responsible to pay partnership liabilities to third parties?

Answer 41

Partners in a general partnership are personally liable for the obligations of the partnership
Contrast this with limited liability, which generally removes this worry corporate shareholders, founders, etc.

Question 42

What is a capitol account?

Answer 42

It is an account that tracks each partners’ ownership claims against the partnership.

Question 43

How is the ownership claim within a capitol account calculated?

Answer 43

Contributions made by each partner to the partnership (can be $ or in-kind contributions, like land, buildings, equipment, etc).
Each partner’s share of profits or losses from partnership operations;
Any withdrawals of funds from the partnership;
Each partner’s gains or losses upon sale of partnership assets.

Question 44

What is a capitol contribution?

Answer 44

Capital contributions are money or assets given to the partnership by a partner.

Question 45

Are loans capitol contributions?

Answer 45

no

Question 46

Is labour a capitol contribution?

Answer 46

Labor (amount of work put in) is not considered a capital contribution.
But the partnership agreement can stipulate for more compensation for a partner who puts in more labor. But it’s not the default rule.

Question 47

What is a surplus as it relates to partnerships?

Answer 47

Once the partnerships debts have been paid, any remaining amount is called a surplus and belongs to the partners.

Question 48

How are withdrawals done from the capitol account?

Answer 48

The sharing of profits and losses is usually just a bookkeeping transaction. No money changes hands with these.
When a partner takes money from the partnership, it is called a draw or withdrawal from the capital account.
This is how partners usually get paid. They set up periodic draws throughout the year that are kept track of in the partner’s capital account.
The partnership agreement usually discusses how much a partner can draw against their capital account in a given period.

Question 49

How are gains and losses distributed amongst partners in a GP?

Answer 49

For partnership gains: Each partner receives the amount in their capital account PLUS an additional amount equal to their share as a partner.
Again, the default rule is equal sharing, but it is often altered by the partnership agreement.

For partnership losses: Each partner would receive what is in their capital account MINUS an amount equal to their share as a partner.
Note: Partners are entitled to be repaid for their capital contributions to the partnership, but this amount is already reflected in their capital account.

Question 50

Is getting in a car accident on the way to court in the ordinary course of business for a law firm partner?

Answer 50

Yes. But what if the partner got in a car accident while driving on vacation in Northern Michigan?

Question 51

What is the difference between joint and joint and several liability?

Answer 51

Joint liability = each is individually liable for whatever debt or obligation they have together.
Joint and several liability = each of the partners could be responsible for paying the entire judgment; it becomes the responsibility of the partner who third party recovered from recover from other partners.
Note: For circumstances requiring joint liability, plaintiff is required to join all partners as defendants
Rule: Creditors can bring claims against the individual partners and/or the partnership. (The UPA required you to exhaust partnership assets before suing the partners).

Question 52

Are former partners liable for debts of their firm?

Answer 52

Holding: Partners who have left a partnership are liable for debts incurred while partners.
Even if a claim for malpractice does not occur until after the partner has left, if the act or omission giving rise to the claim occurred while a partner, that person is liable.
Partners cannot escape liability by leaving the partnership.
The partnership cannot release the offending partner from liability to a third party by assuming the debt/obligation. Only the third party can do that.

Question 53

What is the Definition of an LLP?

Answer 53

RUPA 306(c)
An obligation of a partnership incurred while the partnership is a limited liability partnership, whether arising in contract, tort, or otherwise, is solely the obligation of the partnership. A partner is not personally liable, directly or indirectly, by way of contribution or otherwise, for such a partnership obligation solely by reason of being or so acting as a partner.
Available in all 50 states – usually limited to professional firms
Requires registration with the state

Question 54

How does agency law fit into partnerships?

Answer 54

Under RUPA § 301(1), every partner is an agent of the partnership (i.e., every partner has actual authority) for the purpose of conducting the partnership business.

Question 55

How does apparent authority fit within partnerships?

Answer 55

Under RUPA § 301(1), the partnership is bound by any partner’s action that is “for apparently carrying on in the ordinary course the partnership business or business of the kind carried on by the partnership.”

Question 56

John & Omar formed a partnerships to practice law. The partnership was thriving, until Omar went to the local Bentley dealer and bought a Bentley for himself, telling the dealer to bill the partnership for the expense. The dealer knows that this type of arrangement is unusual, but allowed it anyway, because Omar is such a good negotiator.
Does Omar have the apparent authority to bind the partnership?

Answer 56

Probably not. A partner’s apparent authority does not exist when the third party knows that the partner has no actual authority and when the act of the partner is “not apparently for the carrying on of the business of the partnership in the usual way.” RUPA § 301(2)
Note: If the partnership is bound under principles of apparent authority, the partner who acted without actual authority is liable to other partners for damages.

Question 57

What is the general rule of partnership management?

Answer 57

In the absence of an agreement to the contrary, all partners have equal rights in the management and conduct of the partnership business. RUPA §401(h)
Partnership agreements often spell out these issues.
For example, imagine how hard would it be for Jones Day to have all its partners vote on each issue (it’s a law firm with 4500 people)

Question 58

You and three colleagues form a general partnership (law firm). You are trying to decide on the name of the law firm. The partnership name lists your names alphabetically. Two partners would like to revise the partnership name so that the last names are listed in order of capital contribution. Two partners (including you) are don’t want the change. Your partnership agreement is silent on the issue. Which naming order prevails?

Answer 58

The name will remain the same despite if this is considered an extraordinary act because there is not a majority supporting the change if this were ordinary & extraordinary acts require unanimity.

Question 59

Is filing a lawsuit within the ordinary course of business for a partnership? Vechitto case)

Answer 59

Holding: The filing of a lawsuit is not within the partnership’s ordinary course of selling frozen treats. Therefore, the partnership lacked standing to bring suit because the suit had not been approved by all members of the partnership.
The court noted that according to the complaint, the partnership’s primary purpose was to engage in the sale of ice cream and frozen ice.
Further, according to the partnership agreement the purpose of the partnership was to carry on the business of selling ice cream and frozen ice, and any other business the partners shall agree upon.
The court found that the partners had not agreed to any further business that would include the filing of lawsuits.

Question 60

What is the rule for 2 person partnerships?

Answer 60

Rule to know: Partners cannot change the status quo except by majority vote, unless the partnership agreement provides otherwise

Question 61

You and two others enter into a partnership to start a law firm. Since you are lawyers, you create a detailed partnership agreement that outlines everything. One of the clauses in the agreement says that “no partner has a duty of loyalty to one another or the partnership.”
Is this clause removing the duty of loyalty valid?

Answer 61

No. RUPA 103(b)(3) allows this duty to be modified but does not allow it to be eliminated by contract.
Note: In practice, duties of loyalty are only modified for specific instances, like when a partner wants to engage in a transaction that might be a conflict of interest. Courts will allow this as long as there is full disclosure of the conflict to the other partners.