Partnerships (Highs)

Question 1

General Partnership

Answer 1

• Is created when:
  
  1. two or more persons;
  2. as co-owners;
  3. carry on a business for profit.

*Intent to form a partnership is NOT required.

• A joint venture or sharing in gross profits DOES NOT automatically create a partnership.
• Creditor vs. Partner – A person who receives a share of the profits is presumed to be a partner UNLESS the payment is received in payment:
  
  1. of a debt;
  2. for wages as an employee or independent contractor;
  3. of rent;
  4. of an annuity or retirement benefit;
  5. of interest/loan charges; OR
  6. for the sale of goodwill of a business.

Question 2

Authority to Bind the Partnership

Answer 2

• A partner is an agent of the Pship, and generally has authority to bind the Pship for its business (including contracts).
  
  • To bind the Pship, the partner MUST have authority.
• Express Actual Authority – A partner receives such authority from the partners.
  
  • Differences among partners for Acts within the ordinary course of business→must be approved by a majority of the partners.
  • Acts outside the ordinary course of business → must be approved unanimously.
  • If Pship Agreement is silent → a partner has authority for usual & customary matters UNLESS he knows: (a) other partners might disagree, or (b) that consultation is appropriate.
• Implied Actual Authority (Incidental Authority) – A partner may take actions reasonably incidental or necessary to achieve the partner’s authorized duties.
• Apparent Authority – A partner has apparent authority for acts:
  
  1. conducted within the ordinary course of the Pship business; OR
  2. of the kind carried on by the Pship.
• BUT, a partner’s act will NOT bind the Pship when the:
  
  1. Partner lacked authority; AND
  2. Third-party knew (or received notice) of a lack of authority.

Ordinary Course of Business = normal and necessary for managing the business.

*For acts outside the scope of business→need a manifestation by Pship that partner had authority in order to be binding.

Question 3

Liability of General Partners

Answer 3

• Personal Liability→General partners are personally liable for ALL obligations of the Pship UNLESS: (a) otherwise agreed by claimant; or (b) provided by law.
  
  • UPA (1997) → partners are jointly and severally liable.
  • UPA (1914) → partners are jointly liable.
• Incoming Partners→Partners admitted into an existing partnership are NOT liable for obligations incurred prior to their admission.
  
  • BUT, incoming partners risk losing their capital contributions to the Pship
• Judgment Enforcement Against a Partner’s Personal Assets – A judgment against the Pship is NOT a judgment against the individual partner(s).
  
  • BUT, a judgment may be sought against the Pship and individual partners in the same action.
• Generally, a judgment creditor CANNOT levy execution of a judgment for a Pship debt against a partner unless:
  
  1. The partner is found personally liable;
  2. A judgment is rendered against the partner; AND
  3. Pship assets are exhausted/insufficient to satisfy the judgment.

Question 4

Duty of Care

Answer 4

• A partner owes the fiduciary duty of care to the Pship and other partners.
• Under RUPA, a partner only breaches the duty of care if he engages in:
  
  1. Grossly negligent or reckless conduct;
  2. Intentional misconduct; OR
  3. A knowing violation of law.
• If a partner breaches, he may be held personally liable to the Pship for any losses.
• A breach of the duty has been found in the following situations:
  
  • Violating an agreement or policy of the Pship.
  • Failing to thoroughly investigate facts before entering into contracts (if it’s gross negligence).
  • Acting outside the scope of Pship business without the consent of the other partners.

Question 5

Duty of Loyalty

Answer 5

• A partner owes the fiduciary duty of loyalty to the Pship and other partners. This requires a partner to act in the best interests of the Pship.
• Under RUPA, a partner must:
  
  1. Account for any property, profit, or benefit derived from Pship property or business (including refraining from appropriating Pship assets);
  2. Not have an interest adverse to the Pship (a conflict of interest); AND
  3. Not compete with the Pship (unless agreed otherwise).
• If a partner breaches, he may be held personally liable to the Pship for any losses.
• BUT, a partner is NOT liable if:
  
  1. He fully discloses information; AND
  2. Either:
     
     1. the Pship agreement is amended; OR
     2. all partners consent.
• If reasonable, the Pship agreement MAY eliminate or alter a duty of loyalty.
• Fiduciary duties apply during dissolution (except the duty not to compete).
• Partnership Opportunity→is one that:
  
  1. is closely related to the Pship’s existing or prospective line of business;
  2. would competitively advantage the Pship; AND
  3. the Pship has the financial ability, knowledge, and experience to pursue.

Question 6

Dissociation (Withdrawal of a Partner)

Answer 6

• A partner may dissociate (withdraw) from the Pship at any time upon notice.
• Dissociation Events – A partner becomes dissociated from the Pship upon:
  
  1. The partner providing notice of their express will to withdraw;
  2. The occurrence of an agreed upon event;
  3. Expulsion pursuant to the Pship agreement;
  4. Expulsion by unanimous vote if it’s (i) unlawful to carry on the business with that partner or (ii) he transferred all of his Pship interest (other than for security purposes);
  5. Judicial expulsion;
  6. Bankruptcy;
  7. Incapacity or death;
  8. Appointment of a personal representative or receiver; OR
  9. Termination of an entity partner (who is not an individual, pship, corporation, trust, or estate).
• Wrongful Dissociation – Dissociation is deemed wrongful if:
  
  1. It’s in breach of an express provision of the Pship agreement; OR
  2. Before the completion of an agreed upon term or undertaking.
• A wrongfully dissociated partner CANNOT participate in management or the winding up process.
• A partner may be liable to the Pship (and other partners) for damages caused by his wrongful dissociation.

Question 7

Dissolution of a General Partnership

Answer 7

• Dissolution Events – Unless agreed otherwise, dissolution occurs upon:
  
  1. Notice of a partner’s express will to withdraw;
  2. Occurrence of an agreed upon event;
  3. The business becoming unlawful; OR
  4. Judicial dissolution.
• Dissolution of a Pship for a Definite Term occurs:
  
  1. within 90-days after a partner’s dissociation by death or wrongful dissociation, if it’s the express will of at least half of the remaining partners to wind up (rightful dissociation constitutes the expression of the partner’s will to wind-up);
  2. upon the express will of all partners to wind up;
  3. upon the expiration of the term or completion of the Pship’s purpose.
• Does Dissociation Cause Dissolution?
  
  • Under RUPA (2013):
    
    • Dissolution may be rescinded by the affirmative vote or consent of ALL remaining partners to continue the business.
    • Buyout→In such instance, the dissociated partner is entitled to a buyout of their interest (value of interest = greater of liquidation or going concern value + interest).
    • Apply RUPA (2013) unless instructed otherwise.
  • Under RUPA (1997):
    
    • If wrongful dissociation→ALL remaining partners may waive their right to wind- up/terminate the Pship, and instead choose to continue the Pship by buying out the dissociated partner’s interest.
    • If rightful dissociation→The dissociated partner is allowed to vote on whether to waive winding-up and termination of the Pship. Regardless, the other partners MAY choose to continue the business for a reasonable amount of time.
  • Under UPA (1914) → The Pship MUST be wound up and terminated (regardless if rightful or wrongful).
    
    • But, all partners who did not wrongfully cause dissolution may choose to continue the business in the same name.