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Business Associations/Corporations
Rutgers University, Newark School of Law
Dickerson, Claire Moore

Partnership

UPA Sec. 6, 7, 202(a)
5 Elements of partnership

Must have association (voluntary and intended)

At least 2 ppl

To carry on as co-owners

profit sharing & joint control

UPA Sec. 7, 202 Profit sharing is prima facie ev of partnership. If profit sharing is a substitution for wages, no prima facie but can still have partnership.

A business – more than just an investment

For profit – excludes unions and not-for-profits.

Fenwick v. Unemployment Comp. Comm’n (1945) – Control

Existence of “partnership agreement” and secretary’s ability to examine books and right to profit share was insufficient to establish partnership where requisite control under co-ownership prong was lacking.

Joint Control

look at actions of parties.

owned by fenwick, contributed all capital, managed business, would take all assets on dissolution

firms usually have executive committee with managing control. Other partners are still co owners cause they delegated control to exec committee by virtue of joint agreement. At one point there was joint control, somewhat metaphysically.

no agreement to share losses, usually in p’nership p’ner is liable for entire losses of business. Need intention to share vistitudes (losses). Don’t actually have to have loss sharing. Fact sensitive, must look at actual intent

Martin v. Peyton (1927) – Control – Veto Power

Veto power and dismissal power owned by creditors in high-risk loan did not amount to control for purposes of establishing co-ownership in partnership.

If partnership, Payton (investor) will be liable for losses. “Litigation/ aggregation problem”.

Creditor lent KN&K money. Creditor claims that Payton is also liable for business debts b/c he is partner.

Lender had some control, but not different than what’s normal in industry. Handcuffs financially and otherwise.

UPA Sec. 7

Assuming arguendo that there is sharing of profits, its prima facie ev that you have partnership

If sharing of profits is in lieu of wages, no prima facie, but you might still have p’nership if have other elements.

Also, if in debt, if sharing of interest payments, under Sec. 202(c)(3) “presumed to be a partner”. Dropped prima facie language.

Joint control is to some extent motivated by policy. Don’t want to have lenders constantly liable for ppl they lend to. Otherwise they will be extremely cautious or charge huge interest rates to account for risk.

In Martin v. Peyton – loan’or had veto pwr over them changing industries, and could demand resignation of anyone w/ ownership in business. But crt said that doesn’t get you joint control. Only negative control. Couldn’t act, could only react.

Don’t want to be able to covert loans into p’nerships too easily.

What is case closer to, loan or business run together w/o meaningful ceilings. All on intent of parties. Must be sharing of visstitudes, good and bad.

Meinhart v. Salmon– Loyalty Duty requires disclosure of opportunities

Where defendant had sole management power over joint venture, he fails to meet duty of loyalty as “joint coadventurer” by not disclosing and sharing with plaintiff the opportunity for a new business venture stemming from an existing joint venture, despite the lack of an actual partnership.

Why Require Duty of Loyalty?

Liability
Efficiency

Meinhart funds w/ Salmon who leased from G. w/4mo left on lease, G re-leases to Salmon (probably didn’t know about Meinhart)

Fiduciary duty – finest loyalty. “the punctilio of an honor most sensitive”

Says Meinhart owes higher duty due to more control (aggregation of individuals)

No one will go into p’nerships to extend reach, if you don’t have this.

RUPA Sec. 404 duty of loyalty – must account to partnership (act as trustee), not supposed to take p’nership opportunity, refrain from dealing w/ p’nership in way adverse to p’nership, refrain from competing

But can limit duty under RUPA Sec. 103 to some extent by agreement.

Sec. 404(e) – p’ner does not violate duty or obligation of this act, including loyalty, merely b/c p’ner conduct furthers its own interest.

Recognition that self interest is motivation and a reliable one.

Putnam v. Shoaf – Entity Theory

According to entity theory of partnerships, interest in a partnership is owned as an undivided interest, and thus only interest in the partnership can be conveyed, not an interest in the property of the partnership.

Entity theory governs conveyance of interest in p’nership.

Transfering interest, transfers everything. The property is owned at the p’nership level, of which you have an interest. Individual p’ners don’t own specific parts of property.

So when Putnam conveyed interest, she lost her inchoate right to sue a fraudulent bookkeeper

If had been sole proprietorship, she would not have lost right.

Must have agreement of all p’ners to create a new p’ner.

Sec. 26 – Interest in P’ship – interest in p’ship is partner’s share of the profits and surplus and interest in personal property. Can convey personal property at will.

Sec. 27 – conveyance doesn’t change relationship among parties, doesn’t dissolve p’ship. Can transfer interest in p’nership. But to transfer MANAGEMENT RIGHTS, must have all p’ners approval.

To do something completely extraordinary (outside of original agreement), need approval of all p’ners (18h).

Sec. 502 – Financial relationship w/ business is personal prop and is transferable to anybody and can even be involuntarily transferred (creditors)

Sec. 401 (f) participation in management. Each p’ner has equal rights. Another person can’t become p’ner w/o all p’ners consent.

Sec. 601 – dissolution; 801 dissociation

If p’ner ship at will and P wants to leave, dissolution. So if dissolution, business must be wound up, can’t just be transferred like old statute.

Even if have p’ship for definite term or undertaking and someone leaves, dissolution will occur if other p’ners insist on it, otherwise no dissolution.

Dissociation – if P leaves, or event in pship that says P will be dissociated, explosion, becoming debtor in bankruptcy, all dissociation.

Sec. 801 – pship at will and P receives notice that someone dies, or goes into bankruptcy even for pship of definte term – dissociation, not dissolution. Unless p’ners say its dissolution.

For the most part, must be conscious decision of p’ners for dissolution. If not, p’nership remains.

Corporations

Liggette v. Lee
Brandeis’s Arguments
1. fed constitution does not confer right to engage in intrastate commerce
2. Right to form corporation is not inherent

The prevalence of the corporation in America has led men of this generation to act, at times, as if the privilege of doing business in corporate form were inherent in the citizen; and has led them to accept the evils attendant upon the free and unrestricted use of the corporate mechanism as if these evils were the inescapable price of civilized life, and, hence, to be borne with resignation.

Desire for equality of opportunity

(a) limitation in size
(b) limitation in power