Partnerships Flashcards
Factors to determine who is a partner:
(1) Capital investment - a capital contribution is not required
(2) Control - the right to control may be enough, even if control is never exercised [Owners usually have the right to control operations.]
(3) Profit - a person who is entitled to receive a share of the firm’s profits is presumed to be a partner (“prima facie evidence”). [Most important factor!]
An association of two or more persons to carry on as co-owners a business for profit, whether they intended to form this or not.
Partnership
Rob Camiletti’s bakery owes Pillsbury money, but Rob & the firm are broke. Pillsbury claims Rob’s main squeeze, Cher, is a partner because she gets 20% of the profits. Is this true?
Cher is presumed to be a partner because she shares in profits; BUT she can rebut with other evidence (i.e., can’t control).
Rob Camiletti’s bakery owes Pillsbury money, but Rob & the firm are broke. Pillsbury claims Rob’s main squeeze, Cher, is a partner because she gets profits as wages, rent, repayment of a debt, or interest on a loan. Is this true?
No presumption in any of these cases; BUT Pillsbury can try to show from other evidence that Cher is.
Rob Camiletti’s bakery owes Pillsbury money, but Rob & the firm are broke. Pillsbury claims Rob’s main squeeze, Cher, is a partner because she gets 20% of gross receipts. Is this true?
No presumption; BUT Pillsbury can try to show from other evidence that Cher is.
Is a writing required to form a partnership?
Partnership law does NOT require one, but the Statute of Frauds may.
Ice T and Ice Cube form a partnership to record two rap albums. Is a writing required?
No
Ice T and Ice Cube form a partnership to last for 2 years. Is a writing required?
Yes, because falls within the Statute of Frauds (can’t be performed in 1 year).
Is a Registration Statement required to form a partnership?
A partnership MAY file a registration statement with the Department of State, but it’s a prerequisite to filing other statements.
If no partnership was formed, parties may still be liable as _______________ to protect reasonable reliance by third parties.
Purported partners
Grace applies to a bank for a loan. Will lets Grace say he’s her partner, even though he’s not. Is Will liable to the bank if it loans money to Grace based on her statement?
Yes. Will let Grace hold him out as her partner, therefore he is liable AS IF he really were. She created the impression.
Grace applies to a bank for a loan. Will lets Grace say he’s her partner, even though he’s not. Can the bank recover from Grace if it loans money to her based on her statement?
Yes. The one who does the holding out is liable.
Grace applies to a bank for a loan. Will lets Grace say he’s her partner, even though he’s not. Can Grace’s other creditors recover from Will based on the statement?
Only if Will let Grace make the statement publicly.
If property is acquired in the partnership’s name or in a partner’s name if the instrument transferring title indicates he is acting for a partnership (e.g. mentions “a partnership” or representative capacity).
Property is partnership property
If partnership funds are used to pay for property.
Property is presumed to be partnership property
If property is acquired in his name without partnership funds and there is no sign he’s acting for a partnership.
Property is presumed to be a partner’s property
AB Partnership acquired a truck in A’s name. A paid with her own money. The partnership uses the truck for deliveries. Is the truck partnership property or A’s separate property?
Presumed to belong to A under Rule 3 if instrument doesn’t indicate A was acting in representative capacity.
Partnership’s rights in partnership property
Totally unrestricted [it owns the property!]
If the partnership owns a truck, may the partnership pledge it as collateral for a loan?
Yes, the partnership can do what it wants with its own property.
If the partnership owns a truck, may a creditor of the partnership attach it?
Yes, the partnership creditor can get at partnership property.
Partner’s rights in partnership property
Very limited! He can use it only for partnership purposes, unless the other partners consent. That right can’t be transferred.
If the partnership owns a truck, may A use it on her vacation?
No, unless B consents (belongs to the partnership NOT partners).
A and B form a partnership. They acquire a truck in the partnership’s name and use it for deliveries in the regular course of business. Which of the following is true?
(A) A has the right to use the truck for both business and personal purposes.
(B) A has the right to sell his one-half interest in the truck.
(C) Personal judgment creditors of A may attach A’s one-half interest in the truck.
(D) None of the above
(D) None of the above
Partners only right in partnership property is to use for partnership business.
The right to receive a share of the profits (e.g., a 25% stake).
A partner’s economic interest in the partnership
Is a partner’s economic interest in the partnership transferable?
Yes. A conveyance redirects the flow of profits; it does NOT confer any other rights or impose any obligations.
A and B form a partnership. The partnership owns a truck. Bank obtains a judgment against A for defaulting on a personal loan. Which of these statements is correct?
(A) Bank may attach the truck
(B) Bank may attach A’s interest in the truck
(C) Bank may attach A’s interest int he partnership
(D) None of the above
(C) Bank may attach A’s interest in the partnership
Can attach to economic interest in partnership itself like it can attach to A’s other financial assets.
A, B, and C are partners. B assigns his interest in the partnership to D. The partnership loses $50,000 in an ill-fated venture. Which of the following is correct?
(A) B must share in the loss
(B) D must share in the loss
(C) Neither B nor D must share in the loss
(D) Both B and D must share in the loss
(A) B must share in the loss
All an assignment does is redirect the flow of share of profits, NOT obligations. B is still responsible for the partnership’s losses.
Can partners waive access to books, duties of loyalty and care, or the power to dissociate or expel a partner?
No
Rachel, Phoebe and Monica form the RPM Partnership. Rachel contributes 60% of the capital; the others contribute 20% each. Unless otherwise agreed (“UOA”), how will profits be split?
Equally, NOT in proportion to capital contribution.
Rachel, Phoebe and Monica form the RPM Partnership. Rachel contributes 60% of the capital; the others contribute 20% each. Unless otherwise agreed (“UOA”), how will they share the losses?
Unless otherwise agreed, in the same proportion as profits (so equally!). But, they can agree to split profits and losses differently.
Rachel, Phoebe and Monica form the RPM Partnership. Rachel contributes 60% of the capital; the others contribute 20% each. If they agree Rachel won’t bear any loss, is she free from liability to a third party?
No! Partners cannot limit rights of 3rd parties without that party’s consent, BUT effective among partners themselves.
Monica runs RPM. Is she entitled to compensation?
No! Only when winding up partnership affairs at the end of the partnership’s life.
Rachel gets 60% of profits; Phoebe and Monica get 20% each. Rachel votes against selling goods to Charlie Sheen. Phoebe & Monica vote in favor. What result?
Unless otherwise agreed, majority rules, so sale approved 2 to 1. However, unanimity is required for acts outside the ordinary course of business AND to amend partnership agreement.
Phoebe pays out $10,000 on a debt owed by RPM. What are her rights against RPM?
Right to be paid back (indemnified) PLUS interest.
Partners owe the partnership certain duties. Partners cannot eliminate these duties but may determine the applicable standard if reasonable:
(1) Care: No grossly negligent or reckless conduct or intentional misconduct.
(2) Loyalty: Must account for profit from use of partnership property and cannot compete before dissolution without full disclosure of all material facts.
(3) Good faith and fair dealing
(4) Information: Must provide without demand information a partner needs to exercise her rights, and on reasonable demand any other information.
Does a transferee have the right to inspect books and to demand an accounting?
Transferee has no right to inspect and can get an accounting only on dissolution.
Rachel and Monica want to admit Ryan Reynolds as a partner. Phoebe objects. Result?
Unless otherwise agreed, requires unanimous assent so Ryan not admitted.
If Ryan is admitted as a new partner, is he liable for debts the partnership had previously incurred?
Yes, BUT he is cut some slack because he wasn’t around when the debts incurred. He can lose economic interest in the partnership but nothing more (no personal liability).
He will be liable for future debts like the rest.
If Phoebe retires from RPM, will she still be liable for RPM’s outstanding debts?
Yes! Unless released by the creditor.
What type of authority?
P tells A to act on P’s behalf.
Actual Authority
What type of authority?
P leads T to believe A has authority to bind P even though A has no actual authority. It protects T’s reasonable reliance.
Apparent Authority
Key fact: T’s reasonable belief must be created at least in part by P, and not by A alone. Otherwise, it wouldn’t be fair to P.
Frodo tells Paris Hilton, “If you want to buy the ring, see Gandalf.” Frodo has never given Gandalf authority to sell it. If Paris contracts with Gandalf to buy the ring, is Frodo bound?
Yes. Because Frodo lead Paris to believe Gandalf has the authority. Apparent authority.
Gandalf, in Frodo’s presence, tells Paris he’s Frodo’s agent, even though he has no actual authority. Frodo says nothing to contradict him. If Paris contracts with Gandalf for the ring, is Frodo bound?
Yes. Frodo’s silence in the face of Gandalf’s statement. Created apparent authority (reasonable for Paris to believe).
Apparent authority can linger even after actual authority has been terminated if:
T is not aware of the termination.
Beavis, Butthead’s office manager, bought goods from KMart without permission. Butthead paid, but told Beavis not to do it again. Beavis does it anyway. Did he have actual authority to buy more?
No. Butthead told him not to.
Beavis, Butthead’s office manager, bought goods from KMart without permission. Butthead paid, but told Beavis not to do it again. Beavis does it anyway. Did he have apparent authority to buy more?
Yes! Look at it from KMart’s perspective: Beavis had bought supplies from them before and Butthead had paid for them, so it’s reasonable for KMart to think Beavis is authorized to do it again (as long as KMart did not know about the prohibition).
Beavis, Butthead’s office manager, bought goods from KMart without permission. Butthead paid, but told Beavis not to do it again. Beavis does it anyway. How can Butthead destroy this apparent authority?
Butthead can tell KMart Beavis has no authority to bind him.
Note: It is harder to destroy apparent authority since it can exist in the minds of many 3rd parties.
Hannah and Jess are partners. Hannah hires a lawyer for the partnership over Jess’s objection. Jess consistently objects to using partnership funds to pay the lawyer. Which of the following is true?
(A) Hannah can bind the partnership, and thus hire the lawyer only if she is managing partner.
(B) Hannah can bind the partnership on partnership affairs, and thus hire the lawyer.
(C) Hannah cannot hire the lawyer without Jess’s consent.
(D) Hannah and Jess should dissolve their partnership if they cannot agree on the lawyer.
(B) Hannah can bind the partnership on partnership affairs, and thus hire the lawyer.
Because had statutory actual authority to do so.
May be created by the partnership agreement, a majority vote of partners or the statute, which makes every partner an agent for carrying on business in the usual way [but can be negated by partners].
Actual Authority
Look at the partner’s title and past conduct.
Apparent Authority
Lebron knows that Monica is RPM’s managing partner and has signed contracts for RPM before. Rachel and Phoebe forbid Monica to sign new contracts, but she signs one with Lebron anyway. Did Monica have actual authority to bind RPM to Lebron?
No. Partner majority told her not to - deprived of statutory authority.
Lebron knows that Monica is RPM’s managing partner and has signed contracts for RPM before. Rachel and Phoebe forbid Monica to sign new contracts, but she signs one with Lebron anyway. Did Monica have apparent authority to bind RPM to Lebron?
Yes. Because Lebron knew she was managing partner and had done before. Reasonable for Lebron to do again.
