Partnership Flashcards
(31 cards)
What are elements of partnership?
Partnership is an (1) association of (2) two or more persons to carry as (3) co-owners a business (4) for profit.
What are the hallmarks of partnership?
the rights to (1) receive a share of the profits and (2) participate in managing and controlling the business.
Identifying a partnership (four factors)
(1) Intent of the parties to enter into such a relationship
(2) Right to share in profits (presumption)
(3) Obligation to share losses
(4) Shared control of the business.
What are typical lender protections?
Permission re: change in ownership/leadership
Inspection rights
Express limit on specific risky actions (through covenants)
Counseling on discrete matters and/or recommend consultants
What are danger zone activities for lender-debtor type relationship?
Constant advising
Veto power over business decisions
Resignations/designating management
Assurances to other creditors (recall Cargill)
“contracting power”
How to establish partnership by estoppel
(1) Representation (express or implied) of a partnership to a third party by or attributable to the alleged partner;
(2) Reasonable reliance in good faith by a third party that such partnership exists; and
(3) Third Party, who relies on this apparent partnership, changes position in reliance on the representation to its detriment.
What is Partners’ Personal Liability
All partners are liable jointly and severally for all obligations of the partnership unless otherwise agreed by the claimant or provided by law.
A person admitted as a partner into an existing partnership is not personally liable for any partnership obligation incurred before the person’s admission as a partner.
What are partnerships management and control rights?
(1) use partnership property for partnership business
(2) participate in the partnership decisions. Principle applies between partners (Summers)
(3) bind the firm as an agent. Principle applies to partner and third party (Nabico)
What is partnerhip property? 3 rules
1) Any asset acquired in the name of the partnership, including:
- A transfer directly to the partnership in its own name
- A transfer to one or more partners acting in their capacity as partners and the name of the partnership appears on the transfer document.
(2) If the partnership is not named, property acquired by one or more partners is partnership property if the document transferring title indicates the buyer was acting in his capacity as a partner
(3) Property purchased with partnership funds is presumed to be partnership property
A partner may use or possess partnership property only on behalf of the partnership. NUPA 401(i)
A partner is not a co‑owner of partnership property and has no interest in partnership property which can be transferred, either voluntarily or involuntarily. NUPA 501.
What is partnership management default rules?
Ordinary course of business → majority
Outside the ordinary course of business → unanimous
Amendment to the partnership agreement → unanimous
How does partnership agreement derogate from statute?
- Use of executive committee
- Used when constituents have:
- Similar interests
- Comparable information
- Low collective action problems
- Needed when constituents have:
- Differing interests
- Asymmetric information
- Serious collective action problems (risk of hold up situation if interest are not homogenous)
- Used when constituents have:
- Use of majority approval for matters requiring unanimity per statute
Each partner is a ……. of the partnership for the purpose of its business
Agent
What is the nabisco rule? Exception?
The act of every partner, for apparently carrying on in the usual way the business of the partnership of which he is a member, binds the partnership.
Exception: Partner has no authority to act and third party has knowledge of this fact.
All partners are agents of the partnership with power to bind the partnership. Who does this apply?
between partners and third party,
All partners have equal rights to participate in the management of the partnership. Who does this apply?
Between partners
What fiduciary duties do partners owe?
A partner owes to the partnership and the other partners the duties of loyalty and care. A partner shall discharge the duties and obligations under this [act] and under the partners agreement and exercise any rights consistently with the contracting obligation of good faith and fair dealing (duty of good faith: governs the duties that partners owe to each other.)
What is default rule for duty of care?
A partner’s duty of care to the partnership and the other partners in the conduct and winding up of the partnership business is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.
Can the partnership agreement eliminate duty of care?
If not manifestly unreasonable, the partnership agreement may alter the duty of care, but may not authorize conduct involving bad faith, willful or intentional misconduct, or knowing violation of law, and alter or eliminate any other fiduciary duty.
RUPA’s standard for a partnership agreement’s reduction of a duty of care is the less demanding “unreasonably” standard.
What is duty of loyalty for partnership?
An agent has a fiduciary duty to act loyally for the principal’s benefit in all matters connected with the agency relationship.
The fiduciary duty of loyalty includes
(1) to account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner:
(A) in the conduct or winding up of the partnership’s business;
(B) from a use by the partner of the partnership’s property; or
(C) from the appropriation of a partnership opportunity;
(2) to refrain from dealing with the partnership in the conduct or winding up of the partnership business as or on behalf of a person having an interest adverse to the partnership; and
(3) to refrain from competing with the partnership in the conduct of the partnership’s business before the dissolution of the partnership
- A partner’s taking for herself a business opportunity that belongs to the partnership (RUPA 404(b)(1)
- Meinhard elements
(1) An opportunity presented to a partner because of her role as a partner in the venture;
(2) “Fitting of the Partnership”: The opportunity is one that the partnership would likely take advantage of. (Identify the opportunity. How close is it to the partnership’s purpose?)
(3) If 1 and 2 are met, the partner must disclose the opportunity to the partnership.
- A partner improperly profiting from a deal she or some related party made with the partnership (RUPA 404(b)(2))
- A partner’s competing with the partnership while still a partner (RUPA 404(b)(3)).
What is holding of Meehan (“grabbing and leaving”)
MBC breached fiduciary duties by using their position of trust and confidence with some clients to “grab” them from PC. They did not disclose their plan to leave to the fellow partners (they lied to their partners). Wrong to commit unfairly prejudicial acts or take advantage of partner’s confusion or lack of full information.
What is holding of Sidley & Austin?
Managing partners have no fiduciary duty to disclose changes in the partnership’s internal structure if the changes do not generate a profit or loss for the partnership. Sidley & Austin.
What are possible breaches of duty of loyalty?
competing with the partnership
taking a business opportunity away from the partnership
acting in conflict of interest
using the partnership property for personal interest
Can Partners Contract Out of Fiduciary Duties?
If not manifestly unreasonable, the partnership agreement may: […] (C) alter the duty of care, but may not authorize conduct involving bad faith, willful or intentional misconduct, or knowing violation of law. The partnership agreement may alter duty of loyalty to permit corporate opportunities.
When is expelling a partner ok?
When a partner is involuntarily expelled from a business, his expulsion must be in good faith for a dissolution to occur without violating the partnership agreement.
