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Business Associations
Rutgers University, Newark School of Law
Dennis, Donna I.

Business Associations – PROF. DENNIS SPRING 2014 RUTGERS NEWARK

Partnerships

UPA of 1914 §6(1)

“A partnership is an association of two or more persons to carry on as co-owners a business for profit.”

(1) voluntary agreement, not contract, to associate

(2) at least two persons (human or business entity)

(5) profit sharing & joint control (most cases turn on these, defines co-ownership)

(3) must be a business, not just investment

(4) anticipation of profit

RUPA of 1997 §202(a)

“The association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership.”

General Partnership—Uniform Partnership Acts of 1914 & 1997 (latter used by 37 states, NY still uses the old version). Full personal liability.

Formation

Fenwick v. UCC—The sharing of profits does not alone create a partnership despite the parties’ intentions.

Elements of Partnership

1. Intent

2. Right to share profits

3. Obligation to share losses

4. Ownership and control of the partnership property and business

5. Community of power in administration/Control of management

6. Language in the agreement

7. Conduct of the parties to third persons

8. Rights of the parties on dissolution

Martin v. Peyton—An agreement that offers a degree of control by a first party to protect first party’s assets should not be considered a partnership if factors as a whole indicate that the other party still maintains day-to-day control of the business. (NY Case)

By finding the defendants lenders and not partners, the court wanted to encourage investments and not hinder businesses’ ability to secure loans.

Fiduciary Duty

Meinhard v. Salmon—Members of a partnership owed duty of loyalty to each other and so must disclose opportunities that arise in order for both to have an equal chance to take advantage of it. (NY Case)

The parties were involved in a joint venture, but they were not partners. Cardozo said partnerships involve certain fiduciary duties and these extend to joint ventures. Defendant didn’t engage in fraud; the violation of fiduciary duty doesn’t necessarily involve fraud. The initial reading of the case suggests that Cardozo was talking about mere disclosure, but there is also language suggesting that he meant disclosure and sharing. The aim of fiduciary duty of loyalty is to prevent partners from creating liability that will lead to personal losses for all partners.

RUPA §404

The duty is limited to opportunities you learn about through your partnership. If Salmon had found out about this opportunity by reading the paper and pursued it, then he would not have violated the fiduciary duty of loyalty.

Partnership Property & Transfer of Partnership Interest

Putnam v. Shoaf—A conveyance of partnership property by one partner held in the name of the partnership is made in the name of the partnership and not as a conveyance of the individual interests of the partners.

Partnership property rights are not separate from partnership interest (right to profits) and right to participate in the management. Once plaintiff left the partnership, she lost right to use partnership property.

UPA §18(e)—In the absence of agreement to the contrary, all partners have equal rights in the management and conduct of the partnership business.

UPA §18(h)—Any difference arising as to ordinary matters, connected with the partnership business may be decided by a majority of the partners.

Partner’s Authority/Liability

National Biscuit v. Stroud—Each partner has an equal right to the management of the business and any business performed under the scope of the partnership can only be contravened by a majority of the partners.

What either partner does with a third person is binding on the partnership. Here there is a stalemate because there are only two partners and there is no majority. In these situations, the partner can terminate the partnership. It would have been wise to have an arbitration clause. You can also bring a third person to break the tie. If you represent two people going into business together, you want to put a tie breaking mechanism into the agreement.

Private arrangements between partners cannot prejudice third parties. They can go after all partners despite such arrangements. The partners can sign an agreement saying that one will compensate the other for certain losses or claims against that. That doesn’t prevent third parties from suing.

Partnership Profit/Loss Share

Kovacik v. Reed—In a partnership wherein one partner contributes capital and the other labor, the partner contributing capital cannot hold the other accountable for money lost, just as the partner responsible for services cannot hold the other responsible for any losses he suffered.

It is not clear whether this is a partnership or joint venture. Reed, the partner providing solely services, said he never agreed to share the losses and refused to split the losses of the business. The court treats Reed’s labor as equal to Kovacik’s capital. Reed hasn’t been compensated for his labor, so they conclude he should not share the losses. The court tries to protect the partner with less sophistication.

UPA §18(a) & §40—Unless stated otherwise, profits are shared equally, and if the agreement is silent, losses are also shared equally. Losses follow profits, if it is 30%-70% profits, then that also applies to losses.

Corporations

Theories of the Corporation

1. Aggregate Theory: Shareholder Primacy

2. Artificial Entity Theory: State Regulatory Primacy

3. Real (Separate) Entity Theory: Director Primacy *Barlow case (Delaware courts usually side with this theory, although th

ntal) – If you go after the related corporations

Walkovszky v. Carlton—An individual can be held liable for the acts of a corporation through the doctrine of respondeat superior if it can be shown that the individual used his control of the corporation for personal gain. (NY Case)

Inadequate capitalization and inadequate insurance standing alone are not sufficient to pierce the corporate veil and make the individuals liable for the failings of the corporation.

Defendant would be held liable under the respondeat superior doctrine if he controlled the corporation for his personal benefit at the expense of the corporations benefit. Plaintiff did not offer proof to make that claim, and instead offered proof that the ten corporations operated as one large corporation.

Respondeat superior—In many circumstances, an employer is responsible for the actions of employees performed within the course of their employment.

In these cases, we have to look at Enterprise Liability (as one entity as in Walkovszky) and Piercing the Corporate Veil. What records would you request: 1) Bank records of corporation and individual stockholders, 2) Tax Filings, 3) Corporate Formalities: Certificate of Incorporation, Board Meetings, Corporate Minutes.

Things to watch out for not to pierce the corporate veil:

1) Don’t co-mingle personal and corporate funds

2) Issue stock certificates, even for a sole stockholder corp.

3) Adopt and comply with certificate of incorporation and bylaws

4) Appoint board of directors

5) Hold regular board of director meetings (annually can be sufficient)

6) Keep minutes of those meetings

7) Keep corporate financial books and records and keep them separately from personal records

8) Comply with any statutory insurance requirements

9) Take funds out of the corporation as salary or dividends, not haphazardly and as needed for personal matters

Sea Land Services v. Pepper Source—The veil of limited corporate liability will be pierced when the plaintiff proves that 1) there is a unity of interest between the individual and the corporation, and 2) to allow the limited liability would promote an injustice or sanction a fraud.

This test from Illinois is not the dominant test. All jurisdictional tests have something in common—the failure to follow corporate formalities will pierce the corporate veil.