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Business Associations
Rutgers University, Newark School of Law
Garten, Helen A.

PARTNERSHIPS

Formation

UPA § 6 & § 101(6) Partnership Defined
1. A partnership is an association of two or more persons to carry on as co-owners of a business for profit
· Formed by conduct, NOT by intent

UPA § 7 & § 202 Formation of Partnership
(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.

(c) [generally, sharing of gross returns or part ownership do not in themselves establish a partnership]

Partnership Creation Through Conduct
· NO CAPITAL CONTRIBUTION REQUIRED TO BE A PARTNER
· P’ship comes into existence by operation of law without filing any formal papers
· calling yourself a p’ship does not create a p’ship
o burden of proof for a p’ship is on the person claiming the existence of one
· è Sharing of profits does not dispositively indicate the existence of a P’ship
· § 202(c)(3) & no obligation to share in losses suggests no P’ship
· Fenwick v. Unemployment Compensation Board
o just because there was a K identifying a P’ship and that someone shares in a profit does not mean that they are a partner
o in this case, an employee was receiving $15 p/week and 20% of net profits
o crt found no p’ship because D was in sole control of the business
§ D fronted all the capital investment and was solely liable for all the debts
· since there is no filing of formal papers, we have to look at certain conduct:
· Right to share in profits (not dispositive ie. bank loan)
· Obligation to share in losses (risk) (***)
· Sharing of ownership and control of the partnership property and business (***)
· § 18(e) “All partners have equal rights in the management and conduct of the P’ship business.”
· Intention of parties
· Community of power in administration (control over management)
· Language in the agreement (how rights are allocated)
· Conduct of the parties toward third parties
· Rights of the parties upon dissolution
· “if you act like a partner, you may be treated as one”
· if no express agreement, default rule is to look at profits. If no profit agreement, then we assume equal allocation.
*** = key factors

Partnership Creation By Estoppel
§ 16 Partner by Estoppel : A person who represents himself, or permits another to represent him, to anyone as a partner in an existing partnership or with others not actual partners, is liable to any such person to whom such a representation is made who has, on the faith of the representation, given credit to the actual or apparent partnership.
· if a person holds themselves out as a partner in receiving credit, they are treated as a partner (Young v. Jones) PWC Case
· the key to partnership by estoppel is CREDIT
· Only protects third-persons who, in reliance upon the representations as to the existence of the P’ship, gave credit to that P’ship
§ like Promissory Estoppel – look for detrimental reliance
· Public Policyà to protect 3rd parties (creditors) who do not have actual knowledge that the Partner is acting outside of the scope of his authority in binding the P’ship and relies to his detriment on the representation of such a P’ship.
§ Do not want to impose a duty of inquiry on the creditor
· HOWEVER, 1996 Revised UPAà shifted the law in favor of P’ships by allowing them to file Statements of P’ship Authority § 303 – thereby allegedly placing creditors on constructive notice of individual partners’ ability to bind
è Not adopted by many states

Partners Compared With Lenders
· Generally, we don’t consider lenders as partners
· § 202(c)(3)(i): A person who receives a share of the profits of a business is presumed to be a partner in the business, unless the profits were received in payment of:
(i) of a debt by installment or otherwise
· Public Policyè Banks won’t lend if they face P’ship liability for simply trying to protect their investment
a. if banks are held out as partners, their liability increases and there is less incentive to lend
· A Partnership is created through conduct, irregardless of a P’ship Agmt
· Martin v. Peyton

Group of lenders lent P’ship a great deal of money
Subject to the Note, the lenders retained the power to

retain 40% of profits
be advised as to the conduct of the business
inspect the books and
veto any business transactions that may be speculative or injurious

The lenders were not considered partners because they did not retain the

ability to initiate any transaction as a partner could or
bind the firm by any action of their own
§ 9(1) & § 301(1) Partner Agent of P’ship provides partners the power to bind the P’ship

§ èin this case, the Court found these provisions to be proper lender safeguards
for their loan, not the level of control required for finding of a partnership

Partnership Liability
· All partners are individually liable for the obligations of the P’ship

§ 13 P’ship Bound by Partner’s Wrongful Act
· P’ship is equally liable for any wrongful act or omission of any partner acting in the ordinary course of business (within the scope) of the P’ship that causes injury to a non-partner

§ 14 P’ship Bound by Partner’s Breach of Trust
· P’ship is liable for individual acts of partners that breach the trust of third parties – (a) misappropriation of funds by individual partner or (b) misappropriation of funds by P’ship

§ 15 Nature of Partner’s Liability
(a) Jointly and severally for acts under §§ 13 & 14

§ 305 Partnership Liable for Partner’s Actionable Conduct
· Combines §§ 13-15

§ 306 Partner’s Liability
(a) all partners are liable jointly and severally for all obligations of the P’ship
(b) partners are not liable for P’ship conduct that occurred prior to the P’ship

The Right

sure could opportunity be equalized
· Joint adventurer (partner) only needs to act reasonably in the course of disclosureè advise co-adventurer of new opportunity.
· Meinhard v. Salmon
§ Coadventurers in a joint venture, are treated as co-partners
· despite that fact that D received funding from P to lease a building, the court found these co-adventurers in this joint venture as co-partners
· D was to pay 40% of the net profits for the first 5 years and 50% thereafter
· further, each party would have to bear the losses equally
· D, however, had the sole power to “manage, lease, underlet and operate the building
§ An opportunity was presented to D with 4 months left on the lease for a much greater area at a much greater price
· D did not disclose the new deal to P and excluded him from any opportunity to benefit from the lease extension
DISSENTà the joint venture between P and D was limited in scope and time. Express terms of the agmt ended May 1, 1922. Any equity P had was in the lease itself, not the renewal

IF YOU ON SEVERING THE P’SHIP YOU MUST DISCLOSE UPON DEMAND
· A partner has the duty to:

§ 20à “render on demand true and full information of all things affecting the partnership to any partner or legal representative of any deceased partner”

§ 403(c)à “Each partner and the P’ship shall furnish to a partner, and to the legal representative of a deceased partner
(1) w/o demand, any information concerning the P’ship’s business and affairs reasonably required for the proper exercise of the partner’s rights; and
(2) (2) on demand, any other information concerning the P’ship w/in reason

Meehan v. Shaughnessy

· Ps severed their P’ship with law firm
· law firm claims that Ps did not disclose their intent to sever the P’ship when asked and acted improperly in withdrawing cases and clients from the firm and inducing other members to join them
· HELDà M&B breached fiduciary duty by not disclosing intent to sever
· “Fiduciaries may plan to compete with the entity to which they owe allegiance, ‘provided that in the course of such arrangements they do not otherwise act in violation of their fiduciary duties.’”
· M&B repeatedly denied direct questions as to their intent to leave the firm, thereby breaching their duty to render true and full info on demand
Court held that M&B’s notice to clients did not clearly present the clients