Partnerships MEE

Question 1

Partnership requirements

Answer 1

• Intent—two or more persons or entities must intend to carry on a for-profit business as co-owners but do not need the specific intent to form a P
• Partnership agreement (PA)—to conduct a for-profit business as co-owners; can be implied by conduct in the absence of a written or oral agreement
• Statute of Frauds—a written agreement is not required for formation, but a contract that cannot be performed in one year must be in writing per the Statute of Frauds
• Extensive activity—a court will consider the amount of related activities directed toward achieving a business’s end goal when determining whether a P exists
• Profit sharing test:
  o Rule—if there is profit sharing, it is presumed to be a P
  o Exceptions—sharing profits does not create a presumption of a P in six statutorily enumerated circumstances: debt payments; interest or loan charges; rent; wages; goodwill payments from the sale of a business; and annuities or other retirement or health benefits

Question 2

Partner by estoppel

Answer 2

• Case 1: P does not exist but a person is treated as a partner of a purported P
  Case 2: P exists and a person who is not a partner of P is treated as a partner of P
• Elements—a person may be treated as a purported partner if:
  o There is a representation (oral, written, or implied by conduct) that a person is a partner in a P
  o The person makes or consents to the representation
  o A third party reasonably relied on the representation, and
  o The third party suffered damages as a result of that reliance
• Liability
  o If P is liable, purported partner liable as if she were a partner
  o If P is not liable, purported partner jointly & severally liable with those who consented to the representation.
• No duty to deny the representation; merely being named by another is not enough to create liability
• It is not a defense that the purported partner was unaware that he had been held out as a partner to the specific third party if the representation was made in a public manner
• Purported partners are agents of the person making the representation

Question 3

Nature of partnership

Answer 3

• Separate legal entity—a P may hold property and can sue and be sued
• Partners are not protected from personal liability for the P’s obligations
• If there is a formal PA, it generally governs when there is a conflict between the PA and RUPA

Question 4

Partner as agent to P

Answer 4

a partner can commit the P to binding contracts with third parties

Question 5

Fiduciary duties between partners

Answer 5

• Duty of loyalty
  o Rule—no competing with P business, advancing an interest adverse to the P, or usurping a P opportunity
  o Exception—the PA can designate certain activities as not violating the duty (but cannot eliminate the duty altogether) and may provide a safe harbor allowing the other partners to authorize or ratify a transaction between a partner and the P after full disclosure of material facts
• Duty of care
  o Duty to refrain from engaging in grossly negligent or reckless conduct, intentional conduct, or a knowing violation of the law
  o The PA may not unreasonably reduce this duty
• Dissociation/dissolution—upon a partner’s dissociation or the P’s dissolution, the duties do not apply unless the partner is engaged in winding up the P’s business
• Good faith and fair dealing—The PA cannot eliminate this obligation but can prescribe reasonable standards

Question 6

Profits and losses

Answer 6

—if there is no PA or the PA is silent, each partner is entitled to an equal share of profits and losses; if the PA only specifies the division of profits, then losses are shared in same manner as profits

Question 7

Partner’s account

Answer 7

—contains the partner’s contributions to the P and the partner’s share of the profits (less distributions, losses, and liabilities)

Question 8

Distributions

Answer 8

—a partner cannot demand a profit distribution but is entitled to have her account credited with her share of profits

Question 9

Partnership interest

Answer 9

• Personal property interest—consisting of the rights to share in the P’s profits and losses and to receive distributions
• Transfer to third party
  o Rule—a partner can transfer all or part of the P interest (absent a restriction in the PA); the transferor partner retains all rights and duties of a partner (except for an interest in the distributions); transfer does not cause dissolution or dissociation
  o Transferee rights
   Right to receive distributions, to seek judicial order for dissolution, and to an accounting upon dissolution
   No right to participate in the management or conduct of P business, access the P’s records, or demand other information

Question 10

Property ownership

Answer 10

• Rule—all property acquired by the P belongs to the P and not to the individual partners; property may be acquired and titled in the name of the P or in the name of one or more partners who indicate their capacity as partners or the existence of the P
• Intent of partners controls—property is presumed to be P property if it was purchased with P assets or if P credit is used to get financing; but if ownership is unclear, consider other factors such as property’s use, tax treatment of the property, and the source of funds to maintain or improve the property

Question 11

New partner

Answer 11

—an incoming partner must secure the consent of all existing partners

Question 12

Management rights

Answer 12

—each partner has equal management rights and actual authority to conduct usual and customary P matters, unless there is reason to consult other partners

• A majority of partners needed to make ordinary P business decisions; the consent of all partners is required for matters outside the ordinary course of the P’s business and for amendments to the PA

Question 13

Remuneration

Answer 13

—none, except for reasonable compensation for winding up the P’s business or when partners agree to it

Question 14

Reimbursement and indemnification

Answer 14

—a P must reimburse a partner for loans made in furtherance of P business; and the P is required to indemnify partners for personal liability incurred in the ordinary course of P business

Question 15

Use of P property

Answer 15

—a partner cannot derive a personal benefit from the use or possession of P property; the partner must compensate the P for such use or possession

Question 16

Access to records

Answer 16

—a P must permit its partners and agents to access all P records

Question 17

Lawsuits

Answer 17

a P may sue a partner for breach of the PA or for violating a duty owed to the P; a partner may sue the P or another partner to enforce the partner’s rights under the PA or RUPA

Question 18

Events causing dissociation

Answer 18

o Partner’s notice of withdrawal

o Partner’s expulsion due to the PA, unanimous vote of the other partners, or the partner’s bankruptcy

o Partner’s death

o Appointment of a guardian for the partner or a judicial determination of the partner’s incapacity to perform his duties under the PA

o Termination of an entity partner

Question 19

Wrongful dissociation

Answer 19

—a partner is liable to the P and the other partners for damages caused by wrongful dissociation

o P unlimited by time or undertaking—a partner’s dissociation is wrongful only when it is in breach of an express provision of the PA

o P for a definite term or undertaking—a partner’s dissociation is wrongful if, before the expiration of the term or completion of the undertaking, the partner withdraws, is expelled by court order, is a debtor in bankruptcy, or is not an individual, trust, or estate and the partner willfully dissolved or terminated

Question 20

Effect of dissociation

Answer 20

o A dissociated partner is not permitted to participate in the management or conduct of P business

o A partner’s duty not to compete terminates upon dissociation; the partner’s other duties of loyalty and care terminate with respect to post-dissociation events

o An ongoing P must buy out the dissociated partner’s P interest

o Indemnification—the P must indemnify a dissociated partner against all P liabilities, whether incurred before or after the dissociation

o Dissociated partner’s liability—a dissociated partner is generally liable for P obligations incurred before the dissociation

o Post-dissociation action—a dissociated partner can bind himself and the P to a transaction if the other party (i) reasonably believes the dissociated partner is a partner, (ii) does not have notice of the dissociation, and (iii) is not deemed to have knowledge of the dissociated partner’s lack of authority; liability is limited to transactions within two years of the partner’s dissociation

Question 21

Power to bind the P

Answer 21

• Partner as agent of the P—a partner can contractually bind the P when the partner acts with actual or apparent authority

o Actual authority—includes both express authority and implied authority
 Express authority—can arise from the PA, the authorization of the partners, or a statement of authority filed with the state
 Implied authority—based on a partner’s reasonable belief that an action is necessary to carry out his express authority

o Apparent authority—a partner must perform the unauthorized act in the ordinary course of P business; the third party with whom the partner was dealing cannot hold the P liable if the third party knew or was notified that the partner lacked authority

o Transfer of titled P property—in some circumstances, a partner has authority to transfer titled P property
 P property held in the P’s name—a partner has the authority to execute an instrument of transfer in the P’s name
 P property held in a partner’s name—a partner has the authority to execute an instrument of transfer in one or more partners’ names
 Recovery of P property from transferee (P property transferred without authority)—recoverable if the P interest was indicated in the transfer instrument through which the P acquired the property or if the transferee was aware that the property belonged to the P and that the partner executed the transfer without authority

o P’s knowledge and notice—absent fraud, a partner’s knowledge or notice of a fact relating to the P is generally immediately imputed to the P

o A person who owns all partners’ interests in the P effectively has title to all of the P property and has the power to transfer title to himself

• Statements of P authority and denial—to clarify the existence and scope of a partner’s authority, statements of P authority and denial may be filed with the state

Question 22

Effect of partner’s tortious acts

Answer 22

the P is liable for a partner’s tortious acts committed in the ordinary course of the P business or with P authority

Question 23

Liability to third parties

Answer 23

• P obligations—a P is subject to suit for its obligations; partners are jointly and severally liable for all P obligations
• Effect of judgment—a judgment against a P is first satisfied from the P’s assets, and then the partners’ personal assets
• Criminal liability—a P can be convicted of a crime and a penalty levied on P assets

Question 24

Conversion

Answer 24

1. P to limited partnership (LP)—the conversion must be approved by all of the partners of the P, and the P must file the articles of conversion with the state; former general partners remain liable for pre-conversion obligations
2. LP to P—the conversion must be approved by all of the general and limited partners, and the LP must cancel its LP certificate; partners remain liable as limited partners for preconversion LP obligations and are liable as general partners for post-conversion P obligations
3. Effect on the P—a conversion has no effect on the P as an entity (e.g., property owned by the P remains owned by the P; legal proceedings by or against the P continue as if the conversion had not occurred)

Question 25

Merger

Answer 25

1. Plan—a plan of merger must set forth the names of the original and surviving entities, the type of entity the surviving entity will be, the terms and conditions of merger, the manner of converting interests and obligations of the merging entities into interests and obligations of the surviving entity, and the address of surviving entity
2. Approval—all partners of a general P must approve; as required by law or as specified in the PA for limited Ps
3. Effect—all parties other than the surviving entity cease to exist;

Question 26

Termination of partnership

Answer 26

(i.e., dissolution and winding up)

Question 27

Events causing dissolution

Answer 27

• P at will (open-ended P with no fixed termination)—dissolved when a dissociating partner gives notice of withdrawal
• P for a term or undertaking—dissolved when (i) the term expires or the undertaking is completed; (ii) all partners agree to dissolve the P; or (iii) a partner is dissociated due to death, bankruptcy, or other event and at least half of the remaining partners agree to dissolve the P within 90 days
• Any P—dissolved upon: the occurrence of an event agreed to in the PA; an event that makes it unlawful for P business to be continued; or a judicial determination

Question 28

Winding Up

Answer 28

• A person winding up the P business may dispose of and transfer P property and may discharge the P’s liabilities; the person may distribute P assets to settle the partners’ accounts
• After dissolution, the P is bound by a partner’s act that is appropriate for winding up the P as well as any act undertaken by a partner that would have bound the P before dissolution, if the other party does not have notice of the dissolution (each partner is liable to the other partners for his share of P liability)
• Creditors have priority over partners to the P’s assets

Question 29

Continuation of P after dissolution

Answer 29

—before winding up is complete, the P may resume carrying on its business as if dissolution had never occurred

Question 30

LLP

Answer 30

an LLP partner is not personally liable for an LLP obligation; he is only personally liable for his own personal misconduct; revocation of the state’s qualification of LLP status will have same effect as cancellation

Question 31

Limited Partnership - Rule

Answer 31

must be formed by at least one general partner and one limited partner; limited partner’s liability for P debts is limited to her capital contribution to the P; and a limited P is not formed if a certificate of limited P is not filed

Question 32

LP - Limited partner

Answer 32

—an investor who contributes capital in exchange for a proportionate share of the LP’s profits; can only be admitted by written consent of all partners after creation; has the right to vote as permitted under the PA and the right to inspect business and financial records; can lend money and transact business like a non-partner with the LP; and is generally not personally liable for LP obligations unless the limited partner is also a general partner or participates in the control of the business

Question 33

LP - General Partner

Answer 33

• Rule—can only be admitted by written consent of all partners after creation; has the rights and powers of a partner in a P without limited partners; may contribute to LP, share in its losses and profits, and receive distributions
• Liability to third parties—personally liable to third parties for obligations of the LP
• Termination of status—can withdraw from the LP by giving written notice to the other partners; other events may cause a general partner’s termination

Question 34

LP - Contributions

Answer 34

partners can contribute cash, property, or services, and are obligated to the LP with respect to any written, enforceable promise of a future contribution

Question 35

LP - Profits and Losses

Answer 35

—may be allocated on any basis if in writing; otherwise based on each partner’s P contributions

Question 36

LP - Distributions

Answer 36

may be allocated on any basis if in writing; otherwise based on how profits/losses are shared

Question 37

LP - Assignment of P interest

Answer 37

a P interest in an LP is personal property that can be assigned in whole or in part; the assignee generally has rights only to receive the distribution to which the assignor partner would otherwise be entitled

Question 38

LP - termination

Answer 38

occurs after dissolution and winding up

• P is dissolved upon the occurrence of a specified event, written consent of all general partners and limited partners owning a majority of distribution rights, withdrawal of a general partner, or a judicial determination
• Winding up—general partners wind up, but if none, then limited partners may; distribution of assets first to creditors and then to partners

Question 39

LP derivative action

Answer 39

a limited partner has the right to bring a derivative action on behalf of the LP