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The NY Bar Exam > Partnership > Flashcards

Flashcards in Partnership Deck (51):
1

Partnership– General Definition

A partnership is an ass'n of two or more competent persons to carry on as co-owners a business for profit. Partnership law is based on the law of contract and agency.

2

Partnership - Entity Treatment

A partnership is treated as a legal entity for some purposes but not others. For example, the debts of the partnership are debts of individual partners, but title to land may be in the partnership name and the partnership may be sued in its own capacity.

3

Formation: Capacity to Form

Anyone capable of entering into a binding contract may enter into a partnership. A would-be partner who lacks capacity is liable only to the extent of his capital contribution.

4

Formation: Formalities

Generally, no formalities are required to form a partnership. The partnership agreement can be express or implied (i.e., established solely through the conduct of the parties).

A writing is ONLY required if the agreement cannot be performed within a year (violation --> partnership at will).

5

Formation: Legality of Purpose

A partnership will be VOID if the purpose of its existence is illegal

6

Formation: Consent of Partners

No one can become a partner without express or implied consent of all partners, unless otherwise agreed.

7

Proof of Partnership Existence

The express intent of the parties governs. If the intent is not expressed, look to: (1) TITLE (in partnership's name, or individual's name?) (2) Designation of the entity by the parties; (3) amount of activity involved in the enterprise undertaken by the parties (more --> more likely to be a partnership); (4) sharing of gross returns; (5) sharing of profits (prima facie evidence of a partnership unless repayment of debt, etc.); and (6) sharing of losses (absence of agreement to share losses is evidence that the parties did not intend to form a partnership).

8

Partnership by Estoppel

1. Liability of Person Held Out as Partner: when a person represents himself, or permits another to represent him as a partner, he will be liable to third parties who extend credit to the partnership in reliance on the representation.
2. Liability of Person Who Holds Another Out As Partner: when a person holds another out as a partner, he thereby makes that person his agent to bind him to third parties. IF there is a partnership, only those who know of or consent to this holding out will be bound.
Partnership by estoppel does not concern liability as between would-be partners, but rather extends to third-party dealings (i.e., liability of estopped parties to third persons).

9

Partnership Property

Partnership CAPITAL is the property/money contributed by each partner for the purpose of carrying on the partnership's business. Partnership PROPERTY is, broadly, everything the partnership owns, including capital and property subsequently acquired in partnership transactions

10

Partnership Property: What's Includable

Controlling factor is partners' intent to devote the property to partnership purposes, but there is no restriction on what can be included. Consider:
- Source of the funds;
- Use of the property;
- Improvement, if any, by the partnership;
- Relation of the property to the business;
- Title to the property;
- Treatment of the property in the partnership books; and
- Payment of maintenance costs and expenses by partnership

11

Partner's Rights in Partnership Property

Partners interest in any specific item of p-ship property is a tenancy in partnership. These rights include:
- right of possession for pship purposes;
- Not assignable, mortgageable, attachable, or subject to individual claims of any partner; and
- Right of ownership vests in surviving partners after p's death
- Partners have NO RIGHT to use other than for the benefit of the pship

12

Partner's Interests in the Partnership

COMPARE with partner's rights in partnership property:
P's share of profits + surplus = personal property, assignable without dissolving partnership and attachable.
- But P cannot sell his p status without unanimous consent of other partners.

13

Fiduciary Duties of Partners

Owed to the partnership. Profits belong to the partnership, and one partner will not be permitted to gain for himself at expense of pship.

14

Management Rights

All partners have equal rights in management of pship business absent agreement to the contrary.

15

Distributions

Absent agreement to contrary, each p shares equally in profits + surplus after liabilities, including those to partners, are satisfied. Each p must contribute to the pship losses according to share of profits.
- e.g., equally, if sharing equal in profits (default rule). If agreement modifies sharing of profits, sharing of losses follows.

16

Remuneration of Partners

Generally, no right to remuneration for services rendered to pship absent agreement to contrary. However, surviving p is entitled to remuneration for services performed while winding up pship business.

17

Breach of Agreement to Work for Pship

A partner who impliedly or expressly promised to devote time to pship business and fails to do so may be charged in an accounting for damages caused to the pship.

18

Indemnification

A partnership must indemnify every partner with regards to payments made and personal liability reasonably incurred in ordinary and proper conduct of business or for preservation of business property.

19

Contribution

Where one P has been required to pay or satisfy more than her share of pship debt she may require pro rata contribution from other Ps

20

Books and Information

Must be kept at principal place of business. Each partner has right to inspect and copy; upon demand, each p must render true and full information of all things affecting pship.

21

Legal Actions Between Partners

General rule: p cannot sue or be sued by pship; nor may one p sue another p on matters related to pship business (unless no complex accounting is required).

Actions for Accounting: an equitable proceeding whereby liabilities of pship/partners are converted into liabilities between Ps individually, and action lies to recover the balance due any partner. These generally arise at winding up, but also in actions for wrongful exclusion, to recover secret profits, in accord with pship agreement, or any other circumstance the court deems just and reasonable.

22

Partners as Agents

Partners are the agents of the pship for purpose of pship business, and can act in contract, tort, or breach of trust. Partners may have actual authority b/c of partnership agreement, majority vote of partners, or a unanimous vote of partners. However, unanimous vote of parters is required for certain actions (e.g., actual authority required):
- submission to arbitration
- assignment of pship property to creditors
- confession of judgment
- disposition of pship's goodwill
- business other than that contemplated by pship agreement

23

Selling of Real Property/mortgages

- Title of real property held in pship name may be conveyed by one partner, but if p lacked actual or apparent authority, may be recovered unless subsequently acquired by BFP
- Title in name of fewer than all partners: conveyance by titleholders in own names is effective, but same rights of recovery as above if titleholders lacked actual/apparent authority.
-Title in name of all partners can only be conveyed by all partners.

24

Notice of Dissolution

Where dissolution is caused by the act, death, or bankruptcy of a p, the acts of other partners will bind the pship as if it were not dissolved until the other partners have NOTICE or KNOWLEDGE of the act, death, or bankruptcy.

25

Fraud on Third Party

Within scope of pship business -- partnership held liable by act of one partner

Outside scope - pship will not be held liable, generally

26

Fraud on Partnership

If p seeks to defraud pship as part of a transaction with a third party and that party is aware of the fraud, the pship is not liable to the third party.

27

Breach of Trust

Pship is liable if partner misapplies money or property of a third person received by him within the scope of his apparent authority.

28

Liability of Partners

Civil: a partner's liability includes liability under contracts within scope of business or expressly authorized; as well as tort liability within ordinary course.
- Joint and several
- Personally and individually liable for entire amount
- Incoming partner: liable for prior pship obs only to the extent of capital contributions
- Retiring p liable for acts done after retirement until he gives notice of withdrawal. Remains liable for partnership obs arising while he was a partner unless there is payment, release, or novation.
Criminal: ps will not be criminally liable for crimes of other partners committed in scope of pship business unless they participated as principals or accessories.

29

Dissolution and Termination

1. Act of partners (agreement, mutual assent, expulsion of partner, or express will of any one partner);
2. Operation of law (death, illegality, bankruptcy of partner);
3. Decree of equity court (breach of pship agreement, unprofitability, misconduct, incompetence, other circumstances rendering dissolution equitable)

30

Notice of Dissolution

Proper notice to Ps terminates apparent authority to bind pship after dissolution. Personal notice is required to those who are CREDITORS at time of dissolution and to those who have extended credit in the past. Publication notice will suffice for other third parties. Failure to give notice binds partners personally to third parties who extended credit to the partnership in dissolution (but invisible partners, entirely inactive, my escape this liability).

31

Transacting Business After Dissolution

Generally, p has no authority to act as agent for partnership after dissolution. However, a partner does have authority to wind up pship's affairs, only transactions designed t oterminate business (old business not new business). Old business = assigning claims; selling pship assets; paying creditors; collecting debts; performing contracts made prior to dissolution; distribution remainder of the business.
Partner will be individually liable for NEW business: extending time on debt; entering into new contracts; increasing any obligation of pship, even by one cent (except necessary contracts).

32

Partner who wrongfully dissolves

Partner who wrongfully dissolves partnership may not wind up its business

33

Distribution of Assets (Order, Contribution,and Insolvency)

1. Outside creditors;
2. Partners' advances;
3. Partners' contributions;
4. Surplus or profits.
IF the partnership assets are insufficient to pay pship liabilities, the shortfall is a loss that must be shared among partners.
Where a Partner is forced to pay more than his share of debts, entitled to contribution.
Where pship and partner are insolved:
- partnership creditors have priority
- separate creditors of partner have corresponding priority with respect to partner's individual assets

34

Continuance of business after disolution

The remaining partners have a right to continue the business after dissolution if:
- Partner dissolves partnership in contravention of the agreement;
- Partner is expelled according to terms of agreement;
- Partners agree to continue.
If there is continuation without settlement of missing partner's share he may receive value of his share plus interest or a share of the profits attributable to the use of his property in the partnership for that period.

35

REGISTERED LIMITED LIABILITY PARTNERSHIP

RLLP. A general pship engaged in professional services. Ps are generally not personally liable for obs of the pship, except for obs arising out of the partner's own negligent/wrongful act or act of peson on partner's direct supervision and control, while rendering personal services on pship's behalf.
FORMATION - file cert of registration with dep't of state,including statement of profession; eligibility; and that pship is filing a registration for RLLP status.

36

LIMITED PARTNERSHIP

1 or more general partners who manage the business and 1 or more limited partners. Created under Revised Uniform Limited Partnership Act (RULPA).
Formation - cert of LP filed with dep't of state with pship name; county located; designation of sec of state as agent for service of property; duration of pship, and names/address of general partners and designated agent.
This is the only way an LP can be created; can't just say "I'll be a limited partner"
Name of pship must contain "LP"and may not contain name of a limited partner unless it is also the name of a general parner, or the business ahd been carried on under that name before admission of limited partner. A violation of this rule may render limited partner liable to creditors.

37

Liability of Partners under Limited Partnership

General: subject to all liabilities of partner in general partnership, including personal liab for partnership obs

Limited: not personally liable beyond contribution, EXCEPT:
- when also a general partner;
- participates in control of business and person dealing reasonably believes LP is a GP;
- knowingly permits her name to be used improperly in partnership name

REMEMBER A LIMITED P CAN LOSE HER LIMITED LIABILITY AS BY RUNNING THE DAY TO DAY AFFAIRS.

38

Rights of Partners under LP

General and limited partners have following rights:
- share profits and losses according to agreement (absent agreement, divides in proportion to contribution)
- assign interests in pship (but assignee cannot exercise rights of partner)
- transacti business with pship
- withdraw from pship (GP written notice; LP six months written notice unless otherwise provided);
- apply for dissolution when not reasonably practicable to carry on business.
General partners only:
- right to manage partnership and all other rights of rgular partners
Limited Partners only:
- vote on specific matters but not participate in control of business;
- obtain pship info, including inspection of books

39

One who erroneously believes self to be limited partner

Can avoid being held liable as GP if, on ascertaining her mistake, she causes an appropriate cert of partnership to be filed or withdraws from pship by providing the partnership with written notice of withdrawal. The person will still be liable as a gp to any third party who in good faith believed she was a GP and transacts business with partnership before appropriate cert is filed.

40

Dissolution under LP

Occurs:
- at time specified in certificate; or
- upon event triggering dissolution in certificate; or
- upon written consent of all gen partners and majority of each class of limited partners; or
- withdrawal of a GP absent special considerations; or
- entry of decree of judicial dissolution

41

Distribution of Assets under LP

- First to creditors including partners who are creditors to satisfy liabilities of partnership
- Second to partners and former partners to satisfy unpaid distributions
- Third to partners to return contributions
- Fourth to partners to divide profits

42

LLCs

PURPOSE: entity distinct from members, taxed like a partnership but offers members limited liab like corporate shareholders.
- LLC member must adopt written operating agreements
Formation: filing articles of org with dep't of state and publishing a summary of the articles once a week for six consecutive weeks.
A partnership may convert into an LLC if it meets these same reqs and files a cert of conversion with dep't of state.
- Management presumed to be all member absent contrary provision.

43

Liability of LLC members

No personal liability

44

LLCs: distributions and sharing of profit, loss

Allocated on basis of contributions unless otherwie provided

45

Nature of interest in LLC

no interest in specific property of LLC. A membership interest in the LLC is personal property.

46

Transferring Interest in LLC

An assignment of member's interest only transfers the member's right to receive profits and losses; management rights are not transferred.
One can become a member only by consent of majority in interest of the members (not including the transferor's interest) unless otherwise provided in the operating agreement.

47

Derivative Actions in LLCs

Members of LLC can bring derivative suits on behalf of LLC even in absence of statutory authorization

48

Withdrawal from LLC

A member may not withdraw from LLC prior to dissolution and winding up unless permitted by operating agreement.

49

Dissolution of LLC

Unless agreement provides otherwise, LLC is dissolved and its affairs wound up when
- specified duration experies;
- circumstances in operating agreement cause disolution to occur;
- majority in interest vote or consent in writing to dissolve;
- not by operation of law unless specified in operating agreement

50

Merger of LLC

may merge with or consolidate into one or more LLCs

51

Professional Service Limited Liability Companies

PLLC: one or more individuals authorized to practice a profession.One or more PLLC members must be licensed to render services in NY. In certain health and other designated professions, ALL must be licensed. PLLC may engage in other business as long as authorized by law.
- No personal liability except to the extent of his own negligent or wrongful act or acts of those under direct supervision and control.
- Transfer of interest: generally only to another professional eligible to become member. If a member is disqualified to practice his profession, or dies, PLLC must within 6 months purchase that member's interest or permit transfer to another professional eligible to become a member.