I. PARTNERSHIPS
A. What is a Partnership? And Who Are the Partners?
1. Partnership Defined
RUPA § 101(6): “Partnership” means an association of two or more persons to carry on as co-owners a business for profit formed under § 202, predecessor law, or comparable law of another jurisdiction.
UPA § 6: A partnership is an association of two or more persons to carry on as co-owners a business for profit.
2. Formation of Partnership
RUPA § 202:
(a) Except as otherwise provided in subsection (b), 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.
(b) An association formed under a statute other than this [Act], a predecessor statute, or a comparable statute of another jurisdiction is not a partnership under this [Act].
(c) In determining whether a partnership is formed, the following rules apply:
(1) Joint tenancy, tenancy in common, tenancy by the entireties, joint property, common property, or part ownership does not by itself establish a partnership, even if the co-owners share profits made by the use of the property.
(2) The sharing of gross returns does not by itself establish a partnership, even if the persons sharing them have a joint or common right or interest in property from which the returns are derived.
(3) 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:
(i) of a debt by installments or otherwise;
(ii) for services as an independent contractor or of wages or other compensation to an employee;
(iii) of rent;
(iv) of an annuity or other retirement or health benefit to a beneficiary, representative, or designee of a deceased or retired partner;
(v) of interest or other charge on a loan, even if the amount of payment varies with the profits of the business, including a direct or indirect present or future ownership of the collateral, or rights to income, proceeds, or increase in value derived from the collateral; or
(vi) for the sale of the goodwill of a business or other property by installments or otherwise.
3. UPA § 7. Rules for Determining the Existence of a Partnership.
In determining whether a partnership exists, these rules shall apply:
(1) Except as provided by section 16 persons who are not partners as to each other are not partners as to third persons.
(2) Joint tenancy, tenancy in common, tenancy by the entireties, joint property, common property, or part ownership does not of itself establish a partnership, whether such co-owners do or do not share any profits made by the use of the property.
(3) The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived.
(4) The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, but no such inference shall be drawn if such profits were received in payment:
(a) As a debt by installments or otherwise,
(b) As wages of an employee or rent to a landlord,
(c) As an annuity to a widow or representative of a deceased partner,
(d) As interest on a loan, though the amount of payment vary with the profits of the business,
(e) As the consideration for the sale of a good-will of a business or other property by installments or otherwise.
4. Person Defined
RUPA § 101: “Person” means an individual, corporation, business trust, estate, trust, partnership, association, joint venture, government, governmental subdivision, agency, or instrumentality, or any other legal or commercial entity.
UPA § 2: “Person” includes individuals, partnerships, corporations, and other associations.
5. Nature of Partner’s Liability
UPA § 15: All partners are liable
(a) Jointly and severally for everything chargeable to the partnership under sections 13 and 14.
(b) Jointly for all other debts and obligations of the partnership; but any partner may enter into a separate obligation to perform a partnership contract.
6. UPA § 18. Rules Determining Rights and Duties of Partners.
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:
1) 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 must contribute towards the losses, whether of capital or otherwise, sustained by the partnership according to his share in the profits.
2) The partnership must indemnify every partner in respect of payments made and personal liabilities reasonably incurred by him in the ordinary and proper conduct of its business, or for the preservation of its business or property.
3) A partner, who in aid of the partnership makes any payment or advance beyond the amount of capital which he agreed to contribute, shall be paid interest from the date of the payment or advance.
4) A partner shall receive interest on the capital contributed by him only from the date when repayment should be made.
5) All partners have equal rights in the management and conduct of the partnership business.
6) No partner is entitled to remuneration for acting in the partnership business, except that a surviving partner is entitled to reasonable compensation for his services in winding up the partnership affairs.
7) No person can become a member of a partnership without the consent of all the partners.
8) Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners; but no act in contravention of any agreement between the partners may be done rightfully without the consent of all the partners.
7. UPA § 19. Partnership Books.
The partnership books shall be kept, subject to any agreement between the partners, at the principal place of business of the partnership, and every partner shall at all times have access to and may inspect and copy any of them.
To Summarize: A PARTNERSHIP is an association of two (2) or more persons who want to carry on as co-owners as business for profit.
· There is no definitive test which courts apply to determine whether a PARTNERSHIP exists. Courts look to all the attendant facts and circumstances.
· See Wood v. Phillips, 2001 WL 1637293 (Ala. 2001) (no settled test for determining the existence of a partnership; determination is made by reviewing all the attendant circumstances, including the right to manage and control the business).
· When examining the facts and circumstances, courts look at the following elements:
Sharing of Profits (Reward)
Sharing of Losses (Risk)
Right to Manage (Control) the business
Intent of the Parties (express and implied)
Contribution of Capital (cash or other property) to the business
If all the factors indicate PARTNERSHIP, it is easy (and probably not challenged). However, what happens when some of the factors indicate PARTNERSHIP but other factors indicate other types of relationships?
Overall, it comes down to a case-by-case determination. While courts will often assert that no one element is controlling, the statute makes clear that profit sharing is prima facie evidence of partnership. See UPA § 7(4), RUPA § 202(c)(3).
In other words, if the parties do not share profits there can be no PARTNERSHIP.
Example 1
X, a third party, entered into a contract with a business (run by ANT). X would like to collect the money owing under the contract, unfortunately, the business is not paying, and ANT has no money. X knows that BUG (who has money) has a business relationship with ANT. Can X recover the money from BUG?
X will allege that the business relationship between ANT and BUG is a PARTNERSHIP If ANT and BUG are PARTNERS, BUG is personally liable for the debts of the PARTNERSHIP .
BUG may claim that the business relationship she has with ANT is not a PARTNERSHIP, rather that ANT runs a SOLE PROPRIETORSHIP, and the relationship with BUG is that of:
EMPLOYER (Principal) — EMPLOYEE (Agent)
DEBTOR — CREDITOR
LESSEE — LESSOR
If the Court finds that:
There is a PARTNERSHIP, BUG is liable for the debt even though it was an INADVERTENT PARTNERSHIP.
ANT employed BUG, there is an AGENCY relationship. BUG (agent/employee) is NOT liable for ANT’s debt (her principal/employer).
ANT and BUG had a DEBTOR – CREDITOR relationship, BUG (creditor) is not liable for ANT’s debt (debtor).
ANT and BUG had a FRANCHISEE – FRANCHISOR relationship. BUG (franchisor) is not generally liable for the debts of ANT (the independent franchisee).
ANT and BUG and a LESSEE – LESSOR relationship, BUG (lessor) is not liable for ANT’s debt (lessee).
Example 2
1. CAT and DOG have a profitable business relationship.
2. CAT, wanting a bigger share of the profits, may claim she is a PARTNER and is therefore entitled to share profits with DOG.
3. DOG, on the other hand, may claim
a. he is a SOLE PROPRIETOR employing CAT, or
b. he is a SOLE PROPRIETORSHIP that borrowed money from CAT with a fixed rate of return establishing a DEBTOR – CREDITOR relationship.
4. If the Court finds that there is:
a. a PARTNERSHIP, absent an express agreement otherwise, CAT and DOG share profits equally.
5. On the other hand, if the Court find there is
a. an AGENCY relationship, CAT is an AGENT and not entitled to share profits.
b. a DEBTOR – CREDITOR relationship, CAT is not entitled to more than the fixed rate of return agreed upon in the debt contract.
c. a FRANCHISEE – FRANCHISOR relationship, CAT is not entitled to more than the fixed license fee agreed upon in the franchise contract.
B. Partners Compared Wit
not bind the firm by any action of their own, they were held to be merely creditors and not partners
1) Ct held not partners, even though
a. they could fire partners
b. they had opportunity to join firm as partners
c. they could veto any business and inspect the partnership books
2) -Ct held these to be merely measures of protection for their investments, and not evidence of partnership
3) -how protect the investment?
a. -more frequent reports
b. -require that all money flow through lender
c. -watch things on daily basis – if risky transactions are taken, then loan becomes due and payable immediately
4) -UPA §7(4) (p. 39) Rules For Determining the Existence of a Partnership
5) -How diff from Cargill : M/P all control by lender were negative controls – attempts to control speculative acts, not for gen benefit of business but for benefit of creditor: to ensure repayment. In Cargill, affirmative controls
The Fall of KNK: Martin v. Peyton
The year is 1921…
…Knauth, Nachod & Kuhne (KNK), a banking and brokerage partnership, is in financial difficulties.
A well-connected KNK partner, John R. Hall, calls some friends…
Payton, Perkins and Freeman (PPF).
The Fall of KNK: Martin v. Peyton
Hall’s goal
Money, and quickly…
PPF’s goals
Help Hall
Make a profitable investment
The deal’s terms:
Hall gets $2.5 million in marketable securities;
PPF get:
Collateral: KNK’s speculative stock of securities
Dividends on the securities PPF lends;
40% of KNK’s profits, with min. & max. caps;
Option to join the firm;
Inspection and veto rights; duty on KNK to consult with them;
Hall is to manage KNK. All other partners must agree to be bought out.
Do KNK and PPF have the same incentives re managing KNK?
No. KNK is playing with other people’s money. If they make a fortune, they get most of the profits. If they lose the money… well, PPF should have known they were taking a risk…
Does PPF realize this is a high-risk deal? What do they do?
Hefty compensation (if things go well) – The high return on the deal is aimed to compensate for the risk;
Dividends
40% of profits
Option to buy into firm
Mechanisms to minimize risk:
Collateral (Why don’t they get better collateral?)
Control: Inspection and veto rights, consultation rights (How can they enforce these rights?)
Placing their pal Hall in charge of KNK.
Hall let his friends at PPF down. Despite the terms of the agreement, he speculated in foreign currency, lost large amounts of money, and KNK became insolvent.
KNK’s creditors claim that PPF are partners in KNK (they share profits and the terms of the agreement may amount to shared control).
How does this case compare with Cargill?
The court decides they were not partners, but it’s a close call. How much did PPF think they were risking in this venture?
$2.5 million.
How much were they actually risking?
2. Southex Exhibitions v. Rhode Island Builders Assn. p. 102 (Trade Show Promoter Case)
Partnership Existence: Totality of Circumstances Test.
Π asserts partnership based on 1974 Agreement
Factors FOR Partnership
1) 55% – 45% profit sharing
2) mutual control over operations such as:
a. show dates
b. admission proces
c. choice of exhibitors
d. partnershp bank accounts
3) Respective contributions of valuable property to the partnership by the partners
4) Partners are designates as such in the agreement
5) Sharing profits (prima facie evidence)
Factors AGAINST Partnership
1) No partnership tax returns
2) Sherman (manager of SEM) referred to himself as producer – not partner
3) Title is just “agreement”
4) No partnership name
5) No jointly owned property
6) Only made reference to “partner” once in contract
7) Agreement for term
8) Management control to SEM mostly
