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Business Associations > Partnerships > Flashcards

Partnerships Flashcards

1
Q

Definition (3 elements)

OVERVIEW /partnerships

A

A partnership is
an association of two or more persons
to carry on as co-owners of a business
for profit.

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2
Q

HYPO: “Let’s go to the movie together” = partnership?

OVERVIEW /partnerships

A

No, what kind of question is this

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3
Q

HYPO: “Let’s make a movie together” = partnership?

OVERVIEW /partnerships

A

Yes, and i kinda get why you did this but still don’t think it was entirely necessary…

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4
Q

association between/among partners

OVERVIEW /partnerships

A
  • Needs to be voluntary
  • Doesn’t need to be with knowledge/intent to form a partnership
  • Doesn’t need to be in the form of a contract
  • Doesn’t need to be between/among individuals (“persons” = may involve any two entities that are considered “persons” under law)
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5
Q

Features indicating a partnership

CHARACTERISTICS OF TYPICAL /partnerships

A
  • A partnership cannot be another entity (such as an LLC).
  • Owners in a partnership generally make some contribution (which need not be monetary) in exchange for their share in the partnership.
  • Partners generally share the profits of the business.
  • Partners generally share the risk of financial loss.
  • Partners jointly share the management, but equal votes or control is not necessary.
  • Note, other individuals can be hired who are not partners (e.g., associates).
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6
Q

Features not indicating a partnership

CHARACTERISTICS OF TYPICAL /partnerships

A
  • AKA features that might be present but do not necessarily create a partnership without more
  • Joint ownership alone does NOT automatically mean that a partnership exists.
  • Neither sharing gross returns nor giving capital to an enterprise, independently, is sufficient to create a partnership.
  • Sharing profits in a business
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7
Q

Evidentiary effect of sharing profits in a business

CHARACTERISTICS OF TYPICAL /partnerships

A

= prima facie (rebuttable presumption) evidence that a partnership exists
EXCEPT where those profits are received as
(a) debt service,
(b) wages,
(c) rent, or
(d) annuity.

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8
Q

Best test to evaluate whether partnership exists

CHARACTERISTICS OF TYPICAL /partnerships

A

ask the question: “Is it the intent of the parties to carry on, as co-owners, a definite business?”
(question of whether endeavor is a partnership = question of fact, must evaluated factual circumstances)

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9
Q

5 factors to determine whether a relationship is a partnership or an employer-employee relationship
CHARACTERISTICS OF TYPICAL /partnerships

A
  1. The intent of the parties (not definitive)
  2. The language of the agreement, if any;
  3. The conduct of the parties toward third parties;
  4. The treatment of the returns of the business (evaluating whether there is a sharing of profits and losses)
  5. Who bears the risk of financial loss.
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10
Q

Liabilities

ATTRIBUTES OF /partnerships

A
  • Each partner is jointly and severally liable for the debts of the partnership.
  • This feature of general partnerships means that if the partnership’s assets are not sufficient to cover a debt, the partners are personally liable for that debt.
  • In addition, each partner has the power to independently create obligations and liabilities for the partnership.
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11
Q

Control

ATTRIBUTES OF /partnerships

A
  • Each partner has the ability to participate in the control and management of the partnership.
  • Under the revised Uniform Partnership Act (1997) (“RUPA”), each partner is entitled to one vote, regardless of how much capital he or she contributed.
  • Alternative voting standards may be established by agreement among the partners.
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12
Q

Returns

ATTRIBUTES OF /partnerships

A
  • In a partnership, profits are shared equally among partners.
  • When a partnership is dissolved, the money is divided up among the partners.
  • Most states provide that profits are allocated evenly among the partners, regardless of how much money was contributed by each partner.
  • The partners can also change this feature by an agreement to allocate profits based on the amount contributed to the partnership or using some other measure they might determine appropriate.
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13
Q

Tax treatment

ATTRIBUTES OF /partnerships

A
  • Partnerships are not taxed on their income.
  • Instead, the tax responsibility (or credit, as the case may be) for the profits or losses of the partnership is “passed through” to the partners to include on their respective “personal” tax returns.
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14
Q

Fiduciary duties

ATTRIBUTES OF /partnerships

A

Partners owe fiduciary duties to each other and to the partnership

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15
Q

Source of law

DEFAULT RULES /partnerships

A

Partnerships are generally governed by state law.
Most states have adopted some version of RUPA, and the rules in each state’s adopted version of RUPA outline the rules that will govern partnerships.
These respective codified versions of RUPA are also referred to as the partnership “default rules” because these rules typically apply if the partnership is not governed by a partnership agreement, or if the partnership agreement does not cover a particular area.

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16
Q

Purpose

DEFAULT RULES /partnerships

A

The default rules are intended to fill any (and all) gaps in the partnership agreement.
most provisions of RUPA may be modified by agreement among the partners (BUT certain areas may not)

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17
Q

8 key examples of unmodifiable aspects of partnership

DEFAULT RULES /partnerships

A

a partnership agreement may NOT

  1. Unreasonably restrict a partner’s access to books and records of the partnership;
  2. Eliminate the general duty of loyalty (although specific exceptions may be approved) (but DE permits the elimination of liability for breach of fiduciary duties, including the duty of loyalty, if specified in agreement–partners still subject to obligation of good faith and fair dealing)
  3. Unreasonably reduce the duty of care;
  4. Eliminate the obligation of good faith and fair dealing (although certain reasonable standards by which the performance of this duty is measured may be established);
  5. Vary the power of a partner to dissociate;
  6. Vary the right of a court to expel a partner under specific circumstances;
  7. Vary the requirement to wind up the partnership business in certain circumstances; or
  8. Restrict the rights of third parties under RUPA.

(set forth in section 103 of RUPA)

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18
Q

Use of default rules

DEFAULT RULES /partnerships

A

just the rules that apply in the absence of a partnership agreement

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19
Q

Definition

JOINT VENTURES /partnerships

A

= business endeavor undertaken by two or more parties

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20
Q

scope/time

JOINT VENTURES /partnerships

A

typically have a limited scope and are usually for a limited time.

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21
Q

Joint ventures v. partnerships

JOINT VENTURES /partnerships

A
  • Some distinguish between JV limited scope/time
  • BUT if any joint endeavor, regardless of name, represents an association of two or more persons to carry on as co-owners a business for profit = will be treated as a partnership
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22
Q

partnership by estoppel

PARTNERSHIP BY ESTOPPEL /partnerships

A

if A, B, and C are partners, and X is not a partner, X still can be held liable as a partner IF X acts (or fails to act) in a way that leads third parties to reasonably believe X is a partner
= the most common situation when someone who isn’t a partner might still be responsible for partnership debts

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23
Q

Creating liability

PARTNERSHIP BY ESTOPPEL /partnerships

A
  1. Non-partner must make some manifestation that creates an impression that allows others outside the partnership to reasonably believe that X is a partner, AND
  2. the third party, claiming partnership by estoppel, must rely on that impression to his or her detriment.
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24
Q

3 requirements

PARTNERSHIP BY ESTOPPEL /partnerships

A

Partnership by estoppel requires

  1. Actual reliance
  2. The reliance must have been reasonable
  3. Some manifestation by the alleged partner
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25
Q

Actual reliance

PARTNERSHIP BY ESTOPPEL /partnerships

A

The party claiming partnership by estoppel needs to actually rely on the manifestation.
(AKA not enough for the party to claim that he, she or it would have relied on the manifestation)

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26
Q

Reasonable reliance

PARTNERSHIP BY ESTOPPEL /partnerships

A

The third party may not assert that partnership by estoppel exists because (for example) the third party thought X looked like A, B, or C, so the third party assumed they were partners, EVEN IF the third party truly did make that assumption

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27
Q

Manifestation by alleged partner

PARTNERSHIP BY ESTOPPEL /partnerships

A
  • The alleged partner must act or fail to act in some way, which conveys the (albeit incorrect) message that such individual or entity is a partner.
  • Even if the manifestation is not made directly to the third party, it must be traceable back to some action or inaction of the alleged partner.
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28
Q

Definition

APPARENT AUTHORITY OF PURPORTED PARTNER /partnership by estoppel

A
  • situations in which a partnership may be held liable for the actions of a non-partner (“non-partner” is treated as though he or she had the authority of an actual partner to bind the partnership)
    = partnership that
    creates the (albeit incorrect) appearance that an outside non-partner is in fact a partner
  • may be held liable for
    the actions of that non-partner taken on behalf of the partnership
    IF the third party dealing with the non-partner reasonably believes that the non-partner is a partner
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29
Q

Requirements

APPARENT AUTHORITY OF PURPORTED PARTNER /partnership by estoppel

A

For apparent partner to be able to bind partnership, requires

  1. partnership must have done (or failed to do) something to make it appear that there was a partnership with the non-partner
  2. a third party must have reasonably believed that the “non-partner” had the authority to act on behalf of the partnership in the transaction in question
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30
Q

Distinction between partnership by estoppel

APPARENT AUTHORITY OF PURPORTED PARTNER /partnership by estoppel

A
  1. one involves the possibility that a non-partner will be held liable as a partner by estoppel
    = issue in partnership by estoppel is reasonable understanding of the third party (AKA the understanding of the third party must be traceable back to something the non-partner did or failed to do to create that understanding)
  2. other involves the ability of a non-partner to bind the partnership
    = issue in the apparent authority of a purported partner is (although still interested in the reasonable understanding of 3P) it must be traceable back to something the partnership did to create that understanding PLUS no requirement that the party claiming apparent authority show detrimental reliance
  3. not necessarily reciprocal concepts, exist independently of one another
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31
Q

Two general duties

OVERVIEW /fiduciary obligations of partners

A
  1. Duty of loyalty

2. Duty of care

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32
Q

4 obligations

DUTY OF LOYALTY /fiduciary obligations of partners

A

The duty of loyalty encompasses the obligation of each partner =

  1. To account to the partnership for profits, property, or benefits from the conduct (or winding up) of partnership business or the use of partnership property;
  2. To refrain from acting as or on behalf of a party with an adverse interest to the partnership (e.g., avoiding conflicts of interest);
  3. To refrain from competing with the partnership in the subject matter of the partnership business;
  4. To perform all duties to the partnership and the other partners consistent with the obligation of good faith and fair dealing.
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33
Q

Meinhard v. Salmon (N.Y. 1928)

OPPORTUNITIES /fiduciary obligations of partners

A
  • seminal case about the rights of other partners in a partnership opportunity and the right and/or ability of one partner to seize an opportunity that might rightfully belong to the partnership
  • Judge Cardozo coined the famous punctilio of honor phrase = “Many forms of conduct permissible in a workaday world for those acting at arm’s length, are forbidden to those bound by fiduciary ties…. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior”
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34
Q

duty to not take opportunities that belong to the partnership for their personal benefit
OPPORTUNITIES /fiduciary obligations of partners

A
  • Part of duty of loyalty
  • Key Q = what is the nature of the opportunity
    1. If opp is just info about the potential to profit in an enterprise outside the scope of the partnership business = disclosure alone might be sufficient
    2. if biz opp falls within scope of partnership’s biz = disclosure alone is probably NOT enough
    3. If opp belongs to the partnership, no partner may take the partnership opportunity for him or herself
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35
Q

What should managing partner do when faced with a new opportunity that arises out of/relates to the partnership business?
OPPORTUNITIES /fiduciary obligations of partners

A
  • First, disclose the business opportunity to the other partners;
  • Second, decide whether or not to act on behalf of the partnership and take the opportunity
  • NOTE = partners owe a fiduciary obligation to partnership, decision by any partner whether or not to take advantage of the opportunity must be made in good faith
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36
Q

what is it

DUTY OF CARE /fiduciary obligations of partners

A
  • encompasses the standard by which a partner must evaluate and make partnership decisions
  • partner typically does not violate his duty of care for mere negligence
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37
Q

RUPA standard for duty of care

DUTY OF CARE /fiduciary obligations of partners

A

section 404(c) of RUPA = a partner must not engage in:

  1. gross negligence
  2. reckless conduct
  3. intentional misconduct
  4. knowing violation of the law
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38
Q

Other obligations

DUTY OF CARE /fiduciary obligations of partners

A

every partner has the obligation to discharge his or her duties to partnership/other partners (and to exercise any rights under partnership law/agreement) consistent with the obligations of good faith and fair dealing

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39
Q

General rule

ABILITY TO WAIVE /fiduciary obligations of partners

A
  • While waiver/limitations of duties is permissible, there are limitations regarding the extent to which fiduciary duties may be waived
  • Generally (variation among states), partners are permitted to waive specific duties, but not general duties (like duty of loyalty)
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40
Q

Blanket waivers of rights

ABILITY TO WAIVE /fiduciary obligations of partners

A

Even when permitted by statute, courts tend to frown upon blanket waivers of rights, such as the duty of care and the duty of loyalty

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41
Q

Permissible waiver of duty of loyalty

ABILITY TO WAIVE /fiduciary obligations of partners

A
  • can waive SPECIFIC ACTIONS that would otherwise fall under the duty of loyalty
  • BUT Many states require = waiver not be “manifestly reasonable”
  • EXAMPLE = right to start a competing business
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42
Q

Ratification as effective waiver

ABILITY TO WAIVE /fiduciary obligations of partners

A
  • Partner’s ability to ratify an action that would otherwise violate a duty
  • to be effective, the partners ratifying an action must be fully informed
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43
Q

Distinction between waiver v. ratification

ABILITY TO WAIVE /fiduciary obligations of partners

A
  • waiver usually occurs before the fact
  • ratification occurs after the fact (theoretically a more informed action)
  • Because it occurs after an action has been taken, ratification almost always involves a specific action (= thus may encompass broader actions than might be allowed in a more general waiver)
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44
Q

2 central concepts in partnership cases of attorneys leaving firms
ATTORNEYS & DUTIES TO THEIR FIRMS /fiduciary obligations of partners

A
  1. what lawyers may do with regard to the cases and clients of a firm they are leaving while preparing to leave that firm and after leaving that firm
  2. what, if anything, the lawyers who leave the firm are entitled to receive with regard to work that remains at the firm and what, if anything, the departing partner’s former partners are entitled to receive with regard to clients/cases that accompany the departing partner
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45
Q

3 key ABA guidelines for best practices when leaving a firm
ATTORNEYS & DUTIES TO THEIR FIRMS /fiduciary obligations of partners

A
  1. Notice must be mailed to each client with whom the lawyer had an active attorney-client relationship.
  2. The notice should not encourage the client to sever relations with the firm.
  3. The notice should be brief, dignified, and not disparage the former firm.
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46
Q

4 examples of improper actions when leaving a firm

ATTORNEYS & DUTIES TO THEIR FIRMS /fiduciary obligations of partners

A
  1. Communicating with clients before giving notice to the firm that they are leaving
  2. Taking client files
  3. Lying
  4. Not letting clients know they have a choice about whether to stay with the firm or move with the departing attorney
    NOTE = planning to do something is not a breach (yet)
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47
Q

4 examples of acceptable actions when leaving a firm

ATTORNEYS & DUTIES TO THEIR FIRMS /fiduciary obligations of partners

A
  1. Looking for and obtaining office space
  2. Setting up a merger or an affiliation with another firm
  3. Negotiating with partners (this is distinct from negotiating with associates to join the departing group which might be questionable)
  4. Reminding clients that they have a right to choose their lawyer
    NOTE = planning to do something is not a breach (yet)
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48
Q

2 examples of gray area actions when leaving a firm

ATTORNEYS & DUTIES TO THEIR FIRMS /fiduciary obligations of partners

A

= might get attorneys into trouble but not per se improper
1. Contacting clients after notice to the firm, but before leaving
2. Talking to associates about accompanying the lawyer
NOTE = planning to do something is not a breach (yet)

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49
Q

3 times a partner may be expelled from partnership (under RUPA)
EXPULSION /partnerships

A
  1. Pursuant to the partnership agreement
  2. By unanimous vote of the other partners if it is unlawful to carry on the partnership business with that partner, if there has been a transfer of all (or substantially all) of the partner’s transferable interest, or if the partner to be expelled is another entity that is ending its existence
  3. By judicial determination if certain circumstances are satisfied involving the wrongful conduct of the partner to be expelled
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50
Q

Use of RUPA provisions

EXPULSION /partnerships

A
  • may be altered = if the partners agree, the partnership agreement may make it much easier (or more difficult) to expel a partner
  • Typical partnership agreements will provide for expulsion under certain circumstances
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51
Q

Agreement expulsion provisions

EXPULSION /partnerships

A
  • Generally, agreement provisions are permissible
  • NOTE = even permissible expulsion provisions (and all partnership rights/remedies) must be exercised consistent with the obligation of good faith and fair dealing
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52
Q

HYPO: If the partnership agreement allows for the expulsion of any partner for any reason upon a vote of a majority of the other partners, is it permissible to expel a partner who swears too much?
EXPULSION /partnerships

A

yes

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53
Q

HYPO: If the partnership agreement allows for the expulsion of any partner for any reason upon a vote of a majority of the other partners, is it permissible to expel a partner because there will be fewer partners to share in the firm profits?
EXPULSION /partnerships

A

nope

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54
Q

Exercise of expulsion power

EXPULSION /partnerships

A
  • if the power to expel is exercised in bad faith or for predatory reasons = duty of good faith and fair dealing present in every partnership agreement is violated, giving rise to an action for damages the affected partner has suffered as a result of his or her expulsion
  • REGARDLESS of whether a partner is expelled under RUPA or pursuant to the partnership agreement
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55
Q

2 sets of rights

NATURE OF PARTNERSHIP INTEREST /partnerships

A

Partnership interests are comprised of two sets of rights =

  1. “economic rights”
  2. “management rights”
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56
Q

Economic rights

NATURE OF PARTNERSHIP INTEREST /partnerships

A

include the right to receive money that is distributed from the partnership to the holder of the economic right

57
Q

Management rights

NATURE OF PARTNERSHIP INTEREST /partnerships

A

include the right to vote and participate in management of the partnership

58
Q

Transferability of rights

NATURE OF PARTNERSHIP INTEREST /partnerships

A

Generally, economic rights are transferable and management rights are not (UNLESS the other partners consent)

59
Q

Transfer of economic rights

NATURE OF PARTNERSHIP INTEREST /partnerships

A
  • When a partner transfers economic rights, the recipient (transferee) has the right to obtain money (or other distributions) that otherwise would have been paid by the partnership to the transferor partner
  • NOTE = economic rights do NOT entitle the holder
    1. to any right in any of the specific property of the partnership (fun fact: no single partner has an interest in, or right to, any specific property owned by the partnership)
    2. to the right to vote or
    3. to become a partner merely by holding economic rights in the partnership
60
Q

3 ways transferees may obtain an economic interest

NATURE OF PARTNERSHIP INTEREST /partnerships

A
  1. By a voluntary transfer by the transferor partner;
  2. By an involuntary transfer by the transferor partner, which may occur due to the enforcement of a judgment against him or her; or
  3. By the death of the transferor partner.
61
Q

Transferor’s rights upon transfer of economic rights

NATURE OF PARTNERSHIP INTEREST /partnerships

A

the transferor will often still hold management rights in the partnership

62
Q

Issue with transferee’s lack of management rights

NATURE OF PARTNERSHIP INTEREST /partnerships

A
  • PROBLEM = dynamic can create difficult situations for the transferee b/c the transferee does not have the right to vote or even to enforce fiduciary obligations that might be owed to the transferor partner; transferee is, therefore, dependent on the transferor to enforce certain fiduciary protections and to vote in the transferor’s interest
  • EXAMPLE = In the case of an involuntary transfer or the death of the transferor, the “support” of the transferor is not available to a transferee; thus, the transferee is often at the mercy of the remaining partners and can only receive a share of the funds, if any, that the partnership decides to distribute
  • NOTE = these restrictions may be altered by the partnership agreement that could provide for free transferability or for a different vote on the admission of a new partner
63
Q

Can transferee of partnership interest become a new partner?

NATURE OF PARTNERSHIP INTEREST /partnerships

A
  • A transferee of a partnership interest may not become a new partner without the vote of all of the other partners in the partnership.
  • NOTE = these restrictions may be altered by the partnership agreement that could provide for free transferability or for a different vote on the admission of a new partner
64
Q

Authority to bind

RIGHTS OF PARTNERS IN MANAGEMENT /partnerships

A
  • Any partner has the authority to bind the partnership in the ordinary course of business (UNLESS partnership agreement says otherwise)
  • BUT approval of a majority of the partners typically is required for decisions made by the partnership relating to the day-to-day operations of the partnership business
65
Q

Default voting rule

RIGHTS OF PARTNERS IN MANAGEMENT /partnerships

A

standard default rule = that each partner will have one vote, regardless of the amount of money he or she contributed to the partnership

66
Q

Requisite approval

RIGHTS OF PARTNERS IN MANAGEMENT /partnerships

A
  • Matters relating to the day-to-day operations of the partnership business = typically requires majority approval
  • Matters outside the ordinary course of business (like selling all of the partnership assets) = typically requires unanimous approval
67
Q

Difficulties with even # of partners

RIGHTS OF PARTNERS IN MANAGEMENT /partnerships

A
  • EXAMPLE = if there are two partners who each own 50% of the partnership, and one wants to stop doing business with a certain supplier, the consent of the other partner would be required.
  • The other partner’s consent is necessary because, even though this matter is in the day-to-day business of the partnership, it would require a majority vote, and 50% is not a majority.
68
Q

Partner’s ability to bind partnership when lacking actual authority
RIGHTS OF PARTNERS IN MANAGEMENT /partnerships

A
  • Because any partner has the right to bind a partnership, one partner might be able to act with apparent authority to bind the partnership.
  • If such an act was in violation of the partnership agreement, the partnership would have a claim against the partner who acted without actual authority.
  • However, the partnership might still be bound if the third party reasonably believed that the partner was acting with actual authority.
69
Q

Reasonableness of 3P reliance

RIGHTS OF PARTNERS IN MANAGEMENT /partnerships

A
  • because unanimity is required for matters outside the ordinary course of business, it is less reasonable for a third party to rely on the apparent authority of a partner purporting to act on behalf of the partnership with regard to a transaction outside of the ordinary course of business.
  • EXAMPLE = if a “rogue” partner attempting to act with apparent authority tried to sell all of the assets of the partnership, and the third party knew or should have known that the attempted sale involved all of the assets of the partnership, it might not be reasonable to rely on the rogue partner’s authority because the third party should have known that unanimous consent is required for such an action.
70
Q

3 phrases of partnership endings

DISSOLUTION & DISSOCIATION /partnerships

A

When a partnership ends, it goes through three “phases” =

  1. dissolution
  2. winding up
  3. termination
71
Q

dissolution phase

DISSOLUTION & DISSOCIATION /partnerships

A

signals the end of the prior constitution of the partnership

72
Q

winding up phase

DISSOLUTION & DISSOCIATION /partnerships

A
  • a neutral period prior to termination when the partnership must conclude its business, sell its assets, pay creditors, and make distributions to its partners
  • Once the winding up phase has been concluded = partnership is terminated (BUT partners may vote before then to continue the partnership rather than proceeding to termination, requires vote of all partners)
  • NOTE, during this phase, partnership may not embark upon new business
73
Q

Partner leaving a firm prior to the adoption of RUPA

DISSOLUTION & DISSOCIATION /partnerships

A

whenever a partner left a firm, it was deemed to be a “dissolution,” and the remaining partners could vote to either continue the partnership or wind up and terminate the partnership.

74
Q

Dissociation

DISSOLUTION & DISSOCIATION /partnerships

A

AKA withdrawn

  • Introduced by RUPA to apply to partners who withdraw or otherwise terminate their partner status
  • When a partner leaves a firm, either voluntarily or involuntarily (by expulsion or even death) = dissociation, doesn’t necessarily trigger dissolution
75
Q

Wrongful dissociation

DISSOLUTION & DISSOCIATION /partnerships

A
  • If the partner does not have the right to leave the partnership, the dissociation is “wrongful,”
  • the dissociated partner might be liable to the partnership for damages.
76
Q

Examples of wrongful dissociation

DISSOLUTION & DISSOCIATION /partnerships

A
  1. if the partnership is for a term (like 5 years) or an undertaking (like buying, repairing, then selling house), dissociation prior to the completion of the term or the undertaking would be “wrongful.”
  2. any dissociation in violation of the partnership agreement would be “wrongful.”
77
Q

At-will partnership

DISSOLUTION & DISSOCIATION /partnerships

A
  • neither for a term or an undertaking is considered “at-will”
  • partner may dissociate from an at-will partnership at any time (provided the partnership agreement does not provide otherwise)
78
Q

Entitlement of dissociated partner

DISSOLUTION & DISSOCIATION /partnerships

A

Whether or not the dissociation was wrongful, the dissociated partner is entitled to receive funds that represent his or her share of the partnership (minus any damages)

79
Q

Key Qs for dissociation

DISSOLUTION & DISSOCIATION /partnerships

A

1) to what amount is the dissociated partner entitled, and

2) when is it due

80
Q

To what amount is dissociated partner entitled

DISSOLUTION & DISSOCIATION /partnerships

A

Although partnership agreements may, and often do, provide differently, under RUPA dissociated partners are usually entitled to the greater of their share of the “going concern” value of the partnership or the liquidation value of the partnership.

81
Q

Going concern value

DISSOLUTION & DISSOCIATION /partnerships

A

the value of the partnership as an operating entity (without the dissociated partner)

82
Q

Liquidation value

DISSOLUTION & DISSOCIATION /partnerships

A

the value one could get for selling all of the assets of the business

83
Q

When is it due

DISSOLUTION & DISSOCIATION /partnerships

A

at-will = shortly after dissociating

term/undertaking = not until the end of the term or the completion of the term/undertaking (BUT common exception to delay IF the dissociated partner can show that payment for his or her share would not create a hardship for the partnership)

84
Q

Formula for dissociated partner’s share

DISSOLUTION & DISSOCIATION /partnerships

A

The general rule, unless it is altered by the partnership agreement, is that a dissociated partner is entitled to receive:
- The value of its partnership interest (measured as the greater of their share of the going concern value or the liquidation value of the partnership); minus
- The dissociated partner’s share of any liabilities; minus
- Any damages for wrongful dissociation; plus
Interest paid from the date of dissociation to the date of payment;
- Payable within 120 days provided the partnership is at-will or at the end of the term or undertaking, unless payment would not create a hardship for the partnership.

85
Q

Change of status

LIABILITIES FOR DEPARTING PARTNERS /partnerships

A
  • When partners dissociate, they are no longer partners in the partnership.
  • Because they have changed status, they are not personally liable for debts of the partnership that arise following dissociation.
86
Q

Exception to liability limitation

LIABILITIES FOR DEPARTING PARTNERS /partnerships

A
  • May have liability to any third party who does not have actual or constructive notice of the partner’s dissociation and enters into a transaction with the partnership within two years after the dissociation in reliance upon that third party’s reasonable belief that the dissociated partner is a partner.
  • only applies if the third party did not have notice (regardless of his reasonable belief) of the partner’s dissociation OR is not deemed to have constructive notice based on a notice of dissociation
87
Q

Incentive of exception to liability limitation

LIABILITIES FOR DEPARTING PARTNERS /partnerships

A
  • This structure provides an incentive for dissociated partners to provide notice of their dissociation to third parties.
  • ALSO dissociated partner might also have apparent authority to bind a partnership = provides additional incentive for the partnership to provide notice of the dissociation to third parties.
88
Q

Liability to creditors

LIABILITIES FOR DEPARTING PARTNERS /partnerships

A
  • The dissociated partner is still liable to creditors of the partnership for partnership debts that arose prior to the dissociation.
  • This might seem unfair if the dissociated partner’s share of these liabilities has already been deducted from any payments to the dissociated partner.
  • However, the law does not allow an agreement between the partnership and a departing partner to alter a third party’s claim or potential claim.
  • Therefore, the dissociated partner remains personally liable for pre-dissociation debts, even after receiving payment for his or her interest from the partnership, but the dissociated partner has the right to seek indemnification from the partnership and, ultimately, from the partners for any claims made against that dissociated partner, following the purchase of that dissociated partner’s interest in the partnership.
89
Q

General rule

LIABILITY FOR NEW PARTNERS /partnerships

A

New partner ONLY personally liable for new debts that are incurred once that person joins the firm

(Of course, any capital contribution made by the new partner will be subject to a judgment against the partnership irrespective of whether it arises out of an event that occurred before the new partner joined the firm)

90
Q

General rule

OBLIGATIONS TO DISSOCIATED PARTNERS /partnerships

A

In general, once a partner has dissociated from a partnership, that partner no longer has an ownership interest in the partnership, and, therefore, is no longer owed any fiduciary duties by the partners or the partnership.

91
Q

Exception

OBLIGATIONS TO DISSOCIATED PARTNERS /partnerships

A

in certain situations, the dissociated partner might still claim that he or she is owed limited fiduciary duties

92
Q

Example of exception

OBLIGATIONS TO DISSOCIATED PARTNERS /partnerships

A
  • when there is a delay in the buyout of a dissociated partner’s interest in the partnership and the final buyout price will be determined by the future earnings of the partnership
  • BUT dissociated partner (even one with some continuing interest in the partnership) might also only be entitled to the rights of a transferee of an economic interest and would not be entitled to fiduciary claims relating to alleged mismanagement of the partnership
  • depends on the specific facts of the buyout/language of partnership agreement/jurisdiction
93
Q

Fiduciary duties during winding up

OBLIGATIONS TO DISSOCIATED PARTNERS /partnerships

A

partners are owed certain fiduciary duties during the winding up of the partnership business

(RUPA § 404)

94
Q

burden of proof

PROVING PARTNERSHIP EXISTENCE /key principles

A

The burden of proof to prove that a partnership exists is preponderance of the evidence standard, this burden is on the person attempting to prove that the partnership exists

95
Q

Partnership Factors

OVERVIEW /key principles

A
  1. The intention of the parties
  2. The right to share profits from the partnership
  3. Obligation to share losses/liability
  4. Ownership/control over partnership property/business
  5. Power to administer business affairs
  6. Language in the agreement
  7. Conduct towards third parties
  8. Rights upon dissolution
96
Q

Disclosure of information

PARTNERSHIP AGREEMENTS /key principles

A

While the UPA generally requires complete disclosure of all information material to the partnership’s business operations, the partnership agreement may temper this requirement

97
Q

What partnership agreements CAN do

PARTNERSHIP AGREEMENTS /key principles

A
  • Identify reasonable types of activities that do not violate duty of loyalty.
  • Authorize/ratify procedures (after full disclosure of material facts).
  • Narrow and contract away the duty of loyalty (but if K says nothing about it the court will read it into the K).
  • Reasonably reduce duty of care.
  • Prescribe reasonable standards of good faith and fair dealing.
  • Require notice to be in writing.
98
Q

What partnership agreements can NOT do

PARTNERSHIP AGREEMENTS /key principles

A
  • Unreasonably restrict books & records access.
  • Eliminate duty of loyalty w/o expressly stating/defining it in the K (but you can call it back and define it).
  • Unreasonably reduce duty of care (must do the job w/ reasonable diligence).
  • Partake in grossly negligent or wrongful conduct.
  • Eliminate good faith and fair dealing obligation.
  • Vary the rights and duties of the partnership.
99
Q

5 key

PARTNERSHIP TYPES /key principles

A
  1. general partnership
  2. limited partnership
  3. limited liability partnership
  4. fixed-term partnership
  5. partnership by estoppel
100
Q 
General Partnership (GP)
PARTNERSHIP TYPES /key principles
A
  • Default form
  • A partnership in which all partners participate fully in running the business and share equally in profits and losses (though the partner’s monetary contributions may vary)
  • Unlimited liability
101
Q 
Limited Partnership (LP)
PARTNERSHIP TYPES /key principles
A
  • Allows people to passively invest, without a GP
  • Partnership is composed of one or more persons who control the business and are personally liable for the partnership’s debts (GP), and one or more persons who contribute capital and share profits but who cannot manage the business and are liable only for the amount of their contribution (limited partners)
  • The chief purpose is to enable persons to invest their money in a business without taking an active part in managing the business, and without risking more than the sum originally contributed, while securing the cooperation of others who have ability and integrity but insufficient money
  • Liability: LP’s are not personally liable (same as shareholders in a corporation)
102
Q

Limited Liability Partnership (LLP)

PARTNERSHIP TYPES /key principles

A
  • Limited liability for all partners
  • A partnership in which a partner is not liable for a negligent act committed by another partner or by an employee not under the partner’s direct supervision
  • 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 acting as a partner
103
Q

Fixed-Term Partnership

PARTNERSHIP TYPES /key principles

A
  • A partnership formed for a definite period of time

- When the term expires, the partnership automatically ends

104
Q

Partnership by Estoppel

PARTNERSHIP TYPES /key principles

A
  • A partnership implied by law when one or more persons represent themselves as partners to a third party who relies on that representation
  • A person who is deemed a partner by estoppel become liable for any credit extended to the partnership by a third party
105
Q

Joint Venture

FIDUCIARY OBLIGATIONS OF PARTNERS /key principles

A
  • Treated as a partnership BUT for a limited purpose and for a limited duration
  • Like partners, joint adventurers owe one another the duty of loyalty

FOUR elements =

  1. Contribution by the parties of money, property, time or skill in come common undertaking but the contributions need not be equal or of the same nature;
  2. Proprietary interest and right of mutual control over engaged property;
  3. Express or implied agreement to share profits and sometimes losses; AND
  4. Express or implied agreement to form a joint venture
106
Q

Meinhard v. Salmon

FIDUCIARY OBLIGATIONS OF PARTNERS /key principles

A
  • Members of a partnership owe a duty of loyalty to one another and so must disclose opportunities arising related to the partnership so that both have an equal chance to take advantage of it.
  • – Like partners, joint adventurers owe one another a duty of loyalty; partnership principles apply.
  • The duty of loyalty is breached when a partner appropriates the benefit of the partnership w/o making any disclosure to the other party.
  • – This was a breach of loyalty b/c Salmon failed to disclose the secret negotiations and also appeared to be the owner to be acting on his own behalf even though the owner came to Salmon in his capacity as partner.
  • – Not honesty alone but the punctilio of honor the most sensitive
  • The duty of loyalty required a good faith disclosure.
107
Q

Grabbing and Leaving

FIDUCIARY OBLIGATIONS OF PARTNERS /key principles

A

A partner must render on demand true and full information of all things affecting the partnership to any partner

108
Q

Meehan v. Shaughnessy

FIDUCIARY OBLIGATIONS OF PARTNERS /key principles

A
  • Re: grabbing and leavings
  • A partner has a fiduciary duty to render on demand true and full information of all things affecting the partnership to any partner.
  • There is a duty to disclose all of the options available to your clients.
  • Meehan and others breached their fiduciary duty of good faith and loyalty to their partners by inducing the partnership’s clients to withdraw their business from the partnership w/o ample time for the partnership to compete to retain the business.
  • They should have given the clients a fair and real opportunity to choose who was going to represent them
109
Q

general rule

PARTNERSHIP PROPERTY /key principles

A

The general rule under the UPA is that the partner’s property rights include

(a) rights in specific partnership property,
(b) interests in the partnership, and
(c) the right to participate in the partnership’s management

110
Q

elements of partnership property

PARTNERSHIP PROPERTY /key principles

A

Partnership Property if it was purchased:

  • in the partnership name,
  • under his capacity as a partner, and
  • was purchased with partnership assets
111
Q

@ end of partnership

PARTNERSHIP PROPERTY /key principles

A

At the end of the partnership, each partner has the right to receive the value of any property whose ownership the partner transferred to the partnership

112
Q

right to dissolve - rules

PARTNERSHIP DISSOLUTION /key principles

A
  1. The power to terminate the partnership always exists, but not always the legal right to dissolve
  2. Generally, the partners may dissolve a partnership by unanimous consent
    - In the absence of unanimity, a partner may seek judicial dissolution for a number of reasons
113
Q

dissolution made be made by partnership agreement

PARTNERSHIP DISSOLUTION /key principles

A
  • Under the IPA, there is a default partnership agreement when a partnership does not write one
  • However, you can deviate from the UPA by writing your own partnership agreement
114
Q

dissolution made be made by end of the term

PARTNERSHIP DISSOLUTION /key principles

A
  1. Generally, any party may ask for dissolution
    (Unless it is a partnership for a term, so the partnership cannot dissolve before the term ends without breaking the partnership agreement)
  2. Operation of Law, OR
  3. Judicial/Court Ordered
115
Q

Disassociation

DISSOCIATION v. DISSOLUTION /key principles

A
  • 1997: basically not you can be voted out of the partnership, but the partnership still exists
  • Allows a partner to withdraw or be expelled without having to completely dissolve the partnership
116
Q

Disassociation - terms of agreement

DISSOCIATION v. DISSOLUTION /key principles

A

Partnership expulsion is virtually always guided by the terms of the partnership agreement

  • Partners can contract through terms and conditions however they want to
  • Most well-drafted partnership agreements provide the manner in which a partner can be expelled and the rights to be afforded the partner upon expulsion
117
Q

Disassociation - absence of agreement

DISSOCIATION v. DISSOLUTION /key principles

A

In absence of an agreement; however, the law generally requires only that the partnership act in good faith
(No notice or cause is generally required, although proof of bad faith by the partnership can create a cause of action for damages)

118
Q

Disassociation - Ex. Lawlis v. Kightlinger & Gray

DISSOCIATION v. DISSOLUTION /key principles

A

Lawlis was expelled properly b/c the partnership agreement provided for involuntary expulsion of a partner w/o cause and further, although the agreement said no chance they gave him one any way.

119
Q

Disassociation - effect

DISSOCIATION v. DISSOLUTION /key principles

A

If you are disassociated, you have no opportunity to buy back into the business

120
Q

Disassociation - judicial determination

DISSOCIATION v. DISSOLUTION /key principles

A

(2 alternatives)

  1. The existence of a partner engaged in wrongful conduct that adversely and materially affected the partnership business
  2. The existence of a partner engaged in conduct relating to the partnership business, which makes it not reasonably practicable to carry on the business in the partnership with the partners
121
Q

Disassociation - judicial alternative 1

DISSOCIATION v. DISSOLUTION /key principles

A
  1. The existence of a partner engaged in wrongful conduct that adversely and materially affected the partnership business

Bad faith example:

  • One partner dissolves the partnership to force a sale when they know the other partner cannot afford to bid on the partnership’s assets
  • Dissolution being filed gives the court jurisdiction
122
Q

Disassociation - judicial alternative 2

DISSOCIATION v. DISSOLUTION /key principles

A
  1. The existence of a partner engaged in conduct relating to the partnership business, which makes it not reasonably practicable to carry on the business in the partnership with the partners

Ask: what is your partners’ conduct likely to do to the economic interests of the partnership

123
Q

Giles v. Giles Land Company

DISSOCIATION v. DISSOLUTION /key principles

A
  1. Under Kansas law, dissociation is appropriate if a partner engaged in conduct relating to the partnership business that makes it not reasonably practicable to carry on the business w/ the partner.
  2. Must be so bad it is threatening, abusive, extreme lack of trust
124
Q

Judicial Sale

DISSOLUTION CONSEQUENCES /key principles

A
  • Any partner may bid on the partnership assets at a judicial sale upon dissolution
  • Unlike instances when partners freeze out another partner and seize partnership assets or opportunities without the other partner’s knowledge, all parties have equal purchasing power in a judicial sale
  • If one partner is deprived of the opportunity to compete for business assets, the other partners have breached their fiduciary duties
125
Q

Majority Rule

SHARING THE LOSSES /key principles

A
  1. UPA § 401(b): profits are shared equally and losses are shared in proportion to each partner’s share of the profits
  2. Generally, when there is no explicit agreement as to losses, losses are to be divided equally between partners without regard to the amount each partner contributed to the venture
    - That rule though, is only applied in cases where each of the partners contributed capital to the enterprise
    - In cases where one party contributed only labor and the other capital, the rule is not applied because the partner contributing labor takes a loss in the form of his lost labor
  3. Monetary losses will be apportioned equally between partners who make capital contributions:
126
Q 
Content
BUYOUT AGREEMENT (buy-sell agreement) /key principles
A

Buy-sell Agreement should contain:

  1. Trigger events: what is going to trigger this agreement (at will or is it some external event)
  2. Should there be an option or obligation to buy or sell (right of first refusal is an option)
  3. What price: how to you go about the evaluation
  4. What the method of payment will be used
  5. Protections from the debts of the enterprise
127
Q 
Capital Account - definition
BUYOUT AGREEMENT (buy-sell agreement) /key principles
A

A partner’s capital account is calculated by adding up the cost basis of all contributions the partner has made to the partnership, then subtracting all distributions the partner received

  • Calculated on a “cost-basis”
  • NOT calculated by fair market value of their contributions
128
Q 
Capital Account - formula
BUYOUT AGREEMENT (buy-sell agreement) /key principles
A

= total amount of partner’s contributions

(Partnership profits
MINUS partnership losses
MINUS any distributions received
= capital account)

129
Q 
Liquidated Damages
BUYOUT AGREEMENT (buy-sell agreement) /key principles
A
  • An amount contractually stipulated as a reasonable estimation of actual damages to be recovered by one party if the other party breaches
  • If the parties contract to have agreed on liquidated damages, the sum fixed is the measure of damages for a breach, whether it exceeds or falls short of actual damages
130
Q

Liability

LIMITED PARTNERSHIPS /key principles

A
  1. These principles are for investor partners who don’t want to risk their personal assets
  2. General partnership: unlimited liability for GP’s
  3. Limited partnerships: LP’s are not liable (only contribute capital) but always have one GP who is (same as shareholders in a corporation); permits the capital investment to b the limit of what’s at risk
    - UNLESS, you start participating in management, you may lose your shield to liability (this prevents limited partnerships from stepping on toes and having control like a general partner, but without the liability of a general partner)
131
Q

Holzman v. De Escamilal

LIMITED PARTNERSHIPS /key principles

A
  • re: liability
  • A limited partner is not L as a general partner unless, in addition to exercising his rights and powers as a limited partner, he takes control of the business.
  • Therefore, to hold a limited partner L for the partnership’s debts, a court must draw a line between activities in control of the business and those in control of the limited partner’s investment.
  • Activities that are NOT sufficient to hold limited partner L as a general partner:
    1. Consulting w/ general partners,
    2. Acting as a general partner’s agent,
    3. Voting or conferring on business decisions that relate to financing or dissolution, or
    4. Deciding on a change in the business.
132
Q

RUPLA § 303(a)

LIMITED PARTNERSHIPS /key principles

A

however, if the limited partner takes control of the business and is not also a general partner, the limited partner is liable only to persons who transact business with the limited partnership and who reasonably believe, based upon the limited partner’s conduct, that the limited partner is a general partner

(Typically, only general partners will have liability)

133
Q

Limited Partnership is an Entity

LIMITED PARTNERSHIPS /key principles

A
  • Formed under the auspices of a state statute by filing of a specified public document with a specified public official, AND
  • Structured under that statute to allow one or more managing owners (general partners) to run an enterprise and build on money and other property contributed by those owners and one or more essentially passive owners (limited partners)
134
Q

In re: El Paso Pipeline Partners, L.P. Derivative Litigation

LIMITED PARTNERSHIPS /key principles

A
  • re: standards for good faith
    1. Under Delaware law, the standard of good faith for a fiduciary requires a subjective belief that the determination is in the best interests of the limited partnership.
    2. A bad faith determination is a determination that is objectively, egregiously, unreasonable.
  • A reasonable disagreement does not amount to bad faith.
  • This determination should be based on the information the entity making the determination had at the time.
    3. This decision is a reminder that, although contractual flexibility afforded to Delaware limited partnerships can be used to provide general partners w/ significant protections, there is still room for courts to scrutinize compliance w/ contractual standards.
    4. The value the court used is fair market value –> the price that the asset would have been agreed upon between two willing parties (a buyer and a seller) who are not compelled to buy or sell.
135
Q 
2 conclusions from class five
KEY PRINCIPLES /review of slides
A
  1. Partnerships are distinguishable from contractor/contractee relationship based on terms of the arrangement, including sharing of profits and loss, intended duration, and exclusivity of arrangement
  2. An individual who represents him/herself as a partner can be liable to third parties who, on the faith of the representation, believed such individual to be a partner in the partnership
136
Q 
2 conclusions from class six
KEY PRINCIPLES /review of slides
A
  1. Partnerships (for a common purpose until such time that the parties terminate) and joint ventures (for a specific purpose until such purpose is accomplished) are distinguishable based on the nature of their relationship, but both are governed by partnership principles
    - – Including obligations regarding fiduciary duties among partners
  2. Partners have a fiduciary obligation to one another to be fair, honest, and forthcoming of information necessary to the partnership
    - – Including information regarding potential exiting of the partnership
137
Q 
2 conclusions from class seven
KEY PRINCIPLES /review of slides
A
  1. Unless such action is prohibited under law, partnerships are permitted to handle expulsion of individuals in the partnership under the partnership agreement, even if such expulsion is a “guillotine method” (see Lawlis)
  2. Partners typically have equal rights and duties to bind the corporation, unless such duties are expressly and specifically limited
    - – Must be actually limited and known to a 3rd party
138
Q 
5 conclusions from class eight (and nine)
KEY PRINCIPLES /review of slides
A
  1. Partners typically have equal rights and duties to bind the corporation, unless such duties are expressly and specifically limited
    - – Must be actually limited and known to a 3rd party
  2. Partners can vest control in an executive committee, so long as expressed in the agreement
  3. To the extent that one partner’s actions make ongoing operations of the partnership not reasonably practicable, one partner can seek judicial dissolution
    - – Note that simply losing money is not enough
  4. Partners can also be dissociated for wrongful conduct and business will continue
  5. Absent language regarding how a company will wind up operations, courts will divide assets based on equity and depending on whether one party was the bad actor

Business Associations (7 decks)

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