Business Associations—Professor Dennis—Spring 2012
A) Partnership Formation
1) Uniform Partnership Act of 1914 § 6(1)
(a) A partnership is an association [(1) agreement, not contract, to associate – informal] of two or more persons [(2) at least two “persons” – persons has broad definition] to carry on an co-owners [(5) profit-sharing and joint control – tends to be the element that cases turn on] a business [(3) must be a business, not just investment] for profit [(4) anticipation of profit at moment of formation] (b) All facts and circumstances must be looked at in determining if the 5 Factors of partnership formation are met (Compare and Contrast UPA and criteria from Fenwick case)
2) Revised Uniform Partnership Act of 1997 § 202(a)
(a) “. . . [T]he association of two or more persons to carry on as co-owners for profit forms a partnership, whether or not the persons intend to form a partnership.”
(b) RUPA makes clear what was implicit in original UPA
(c) The two Acts are concurrent – simultaneously in effect across the US
(i) Dependant on whether states have adopted revised Act or not – NJ and Delaware follow the revised Act – NY/PA follow original Act – always look to jurisdiction!)
3) Partners Compared with Employees
(a) Fenwick v. Unemployment Compensation Commission
(i) There are several elements that the courts have taken into consideration in determining the existence or non-existence of the partnership relation:
(1) The intention of the parties
(2) The right to share in profits
(3) The obligation to share in losses
(4) Ownership and control of the partnership property and business
(5) Community of power in administration (control of management)
(6) The rights of the parties on dissolution
(ii) The “employee” had no authority or control in operating the business, she was not subject to losses, she was not held out as a partner. She got nothing by the agreement but a new scale of wages.
(iii) The Act further provides that sharing of profits is prima facie evidence of partnership but “no such inference shall be drawn if such profits were received in payment . . . as wages of an employee.”
(iv) Mr. Fenwick contributed all the capital, managed the business and took over all the assets on dissolution. Ownership was conclusively shown to be in him.
(v) Section 18 of the Uniform Partnership Agreement provides: “ The rights and duties of the partners in relation to the partnership shall be determined, subject to any agreement between them, by the following rules: . . . (e) All partners have equal rights in the management and conduct of the partnership business.
(vi) UPA § 31 provides, in part: Dissolution is caused: (1) Without violation of the agreement between the partners . . . (b) By the express will of any partner when no definite term or particular undertaking is specified.
(1) How might a lawyer provide for Fenwick to retain partnership property needing in business upon dissolution?
(2) UPA § 18 provides, in part, “(a) Each partner shall be repaid his contributions . . . and share equally in the profits and surplus.
(vii) Ways to get around joint control element
(1) Power of delegation in agreement after initial formation
(2) Joint consultation and voting based on share of business
1) Partners Compared with Lenders
(a) The question of who is a partner is important because of the default rule of partnership law that makes each partner potentially liable for all of the debts of the partnership.
(i) Rule-Partners face unlimited liability for the debts of the partnership
(b) Martin v. Peyton
(i) An agreement that provides a lending party a degree of control over certain business decisions in order to protect that lender’s assets does not render that relationship a business partnership if factors considered on the whole indicate that the other party to the agreement still maintains primary control over the business’s operation.
(ii) Here there was an objective manifestation of subjective intent not to join in partnership (contrast with RUPA)
(iii) Issues of control in this case
(1) Lender had certain veto powers, but did not have traditional powers of a partner such as the ability to initiate a transaction or bind the firm by any action of their own
(2) However, the turnover of management to Hall and the resignation letters effectively gave Lender substantial control over the organization
(3) However, all measures were in place to protect investment/loan
a. negative control
b. no affirmative ability to run the business
c. provisions and control in place solely to protect investment
(iv) Policy reasons for court’s ruling
(1) Not to discourage business lending
a. Business lending aids economic growth
b. Differentiation between investing and lending here
(2) If lenders thought they would be construed as partners and run risk of unlimited liability then there would be great disincentive to engage in business lending
B) The Fiduciary Obligations of Partners
1) The Relationship of Partners to the Partnership and to Each Other
(a) Meinhard v. Salmon
(i) Partners owe a fiduciary duty to other partners in opportunities and incidents having a nexus of relation to their business, even if the incident or opportunity arises in anticipation of the partnerships dissolution.
(ii) Partners owe a fiduciary duty to one another because of the high level of risk involved in their business together. Partners stand to lose so much and have the ability to impose such great harm on each other so the duty to each other must accord with that higher level of risk
(1) Managing co-adventurer or managing partner has an even higher level of duty because of the ability to impose even greater harm on the other partner(s)
(iii) Joint adventurers, like co-partners, owe to one another, while the enterprise continues, the finest duty of loyalty. Many forms of conduct permissible in a workaday world for those acting at arm’s length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.
(1) Joint venture is similar to a partnership but tends to be for a specific endeavor
(iv) According to Cardozo, the minimum that Salmon should have done is to disclose new lease offer (disclose the opportunity) and allow for him to compete if not maintaining venture relationship
(b) Fiduciary Duties
(i) Partners and joint adventurers have a fiduciary duty to each other
(1) extremely high level of duty, loyalty, and trust
(2) Even higher for someone who takes on role of managing partner
(3) May not take advantage opportunities related to business before the partnership dissolves without disclosure and opportunity to compete
(c) RUPA § 404 General Standards of Partner’s Conduct
(i) (a) The only fiduciary duties a partner owes to the partnership and the other partners are the duty of loyalty and the duty of care set forth in the subsections (b) and (c).
(ii) (b) A partner’s duty of loyalty to the partnership and the other partners is limited to the following:
(1) To account to the p
(i) Cannot create any kind of obstacles that prevent a creditor from recovering debt
(c) Any partner has the right to terminate the partnership at will (still has to be “winding up” period and settlement of debts)
E) Drafting a Partnership Agreement
1) Create a Tie-Breaker—can be a third-party or even a coin flip
2) Unanimous Consent Needed for Decision—must also notify all suppliers
3) Delegation of Certain Duties—management agreement
4) Create a Controlling Interest? (50.1%)
F) The Sharing of Losses
1) Kovacik v. Reed
(a) Absent an agreement to the contrary, where one partner or joint adventurer contributes the money capital as against the other’s skill and labor, neither party is liable to the other for contribution for any loss sustained. Thus, upon loss of the money the party who contributed it is not entitled to recover any part of it from the party who contributed only service.
(b) Where one party contributes money and the other contributes services, then in the event of a loss each would lose his own capital, the one his money and the other his labor. In such a situation the parties have, by their agreement to share equally in the profits, agreed that the values of their contributions the money on the one hand and the labor on the other were likewise equal.
(c) It is the general rule that in the absence of an agreement to the contrary the law presumes that partners and joint adventurers intended to participate equally in the profits and losses of the common enterprise, irrespective of any inequality in the amounts each contributed to the capital employed in the venture, with the losses being shared by them in the same proportions as they share the profits.
2) UPA 18(a)
(a) The rights and duties of the partners in relation to the partnership shall be determined, subject to any agreement between them, by the following rules:
(i) (a) each partner shall be repaid his contributions, whether by way of capital or advances to the partnership property and share equally in the profits and surplus remaining after all liabilities, including those to partners, are satisfied; and and must contribute toward the losses, whether of capital or otherwise sustained by the partnership according to his share in the profits.
3) UPA 40 (b)
(a) Subject to any contrary agreement, upon dissolution, liabilities of the partnership shall be paid in the following order:
(i) The owing to creditors other than partners
(ii) Those owing to partners other than for capital and profit
(iii) Those owing to partners in respect of capital
(iv) Those owing to partners in respect of profits
4) RUPA 401(b) (Re-adopts the loss sharing rule of UPA § 18(a))
(a) Each partner is entitled to an equal share of the partnership profits and is chargeable with a share of partnership losses in proportion to the partner’s share of the profits