Reading one: 51-68 and Problem 2-1:
· Sole Proprietorship: performs three management functions
o They are the residual claimant and ultimate risk bearer after other employees and creditors have been paid
o They oversee the business and affairs of the firm, developing policies and directing their implementation
o They sit at the top of the firm’s day to day operating hierarchy, empowered to act on behalf of the firm in interactions with the firm’s employees, customers, suppliers and creditors.
· General Partnership: distribute ownership and management functions equally to each partner or to the partners as a group
o Because partners have equal rights in the mgmt and profits, general partnership law norms will be most efficient if partners make similar contributions of services and capital.
o If a partnership wishes to terminate its association with a partner, it may do so only by dissolving the partnership and paying the expelled partner the value of his interest.
o Unlimited personal liability: all partners are jointly and severally liable for all obligations of the partnership and there is no limit on this potential personal liability.
o Fiduciary Duty: mutual duty to act fairly and honestly.
§ Generally considered the defining characteristic of partnership law
· Joint venture: similar to a general partnership, but a less permanent and less complete merging of assets and interests.
o Def from FLa Tomato Pickers Inc v. Wilson: the legal relationship between two or more persons who in some specific venture seek a profit jointly without the existence between them of any actual partnership.
· Limited Partnership: is a business association composed of one or more general partners and one or more limited partners and that is formed by filing a certificate of limited partnership with the secretary of state in the jurisdiction chosen by the parties.
o Uniform Limited Partnership act of 2001:
o Separation of ownership and mgmt functions
· Limited Liability Partnership: makes limited liability available as an opt in default rule for firms operating as a general or limited partnership. Simply register with the secretary of state.
o Once created an LLP operates under general partnership law except for special statutory liability and asset distribution limiting provisions designed to protect third parties.
o Limited Liability Company: LLC members are not personally liable for the debts and obligations of the LLC that could not be satisfied out of the firm’s assets.
· Byker V. Mannes: Michigan.
o These parties shared equally in commissions, fees, and termination costs. They also personally guaranteed loans from several financial institutions.
o Some business transactions were performed without defendant’s knowledge
§ Plaintiff then approached defendant regarding equalizing payments.
o Uniform Partnership Act: defines partnership as an association of 2 or more persons which may consist of husband and wife, to carry on as co-owners, a business for profit…REGARDLESS of their subjective intent to be partners.
· Hyansky v. Vietri: Delaware. Documents indicate that there was a partnership.
o Defendant claims that the attorney mislead him
o Parole Evidence Rule: prevents the use of extrinsic evidence of an oral agreement to vary a fully integrated agreement that the parties have reduced to writing.
§ Factors to be assessed in ascertaining whether a contract is fully integrated include:
· Whether the writing was carefully and formally drafted,
· Whether the writing addresses the questions that would naturally arise out of the subject matter
· And Whether it expresses the final intentions of the parties.
§ Extrinsic evidence of an oral agreement contradicting the terms of the agreement may not be considered unless one of the exceptions to the application of the parole evidence rule applies.
· One of these exceptions is where fraud or misrepresentation is alleged….no misrepresentation by Hyansky
· Another is where mutual mistake occurred.
§ HERE: the fundamental inquiry in determining whether the parties created a general partnership is the intention of those parties, evidenced in the form of a partnership agreement is STRONG BUT NOT CONCLUSIVE.
§ The entire agreement and all the attendant circumstances must be taken into consideration in reaching a determination that a partnership has actually materialized.
· Motion for summary judgment denied
PROBLEM 2-1: Partnership or not?
· No written partnership agreement. No agreement to share losses.
· Dale knew Shady expected a partnership. Dale lead Shady to believe her attorney would set up the partnership agreement. Dale made excuses, rather than tell shady she did not want a partnership.
o Byker v. Mannes: The proper focus is on whether the parties intended to, and in fact did, carry on as co-owners of a business for profit, AND NOT on whether the parties subjectively intended to form a partnership.
§ Dale’s secret intent not to partner up is irrelevant because subjective intention doesn’t matter.
§ Shady and Dale intend to carry on as co-owners of a business for profit.
o Hynansky v. Veitri: The entire agreement and all the attendant circumstances must be taken into consideration in reaching a determination that a partnership has actually materialized.
§ Profits split 50/50.
§ They referred to each other as partner.
§ 6 elements necessary to establish a joint venture are all present.
· An intent to enter into a joint venture
· An agreement, express or implied, among members of a group
· Joint pecuniary interest in that purpose
· An equal right to vote in the direction and control of the group
· A right to share in the profit and a duty to share in the losses.
a. Governed by the revised uniform partnership act: all states. We will study FLA’s version, but there all pretty much the same.
b. What is a partnership and how does it come into existence? FRUPA
i. Defines the duties owed to partners
ii. When can one partner can bind a partnership?
2. A corporation is a fictional entity created by statute, which has perpetual existence.
i. Amalgamates capital and shields its owners from personal liability.
b. Fla business corporation act…based on the model business corporation act.
c. He says to study the statutes instead of a study aid.
d. We will study corporate form, creation, and consequences.
i. Board of directors have fiduciary duty to act with care and loyalty.
ii. Derivative action for breach of duty. Stock holders sue.
iii. Oppression of minority stockholders.
iv. Piercing the corporate veil- which is exposing corporations to liability.
3. Two states that are important FLA and Delaware.
a. 70% of fortune 500 companies and NYSE publicly traded companies are based in Delaware.
b. All states are guided by Delaware jurisprudence.
4. LLC: New. 1988. IRS changed tax regs. to give LLC’s preferential advantageous tax treatment.
a. Partnerships have advantageous tax structure, but they have liabilit
ii. For our purpose, joint ventures are governed by partnership law.
1. Partnership at will… they have not agreed to remain partners beyond the completion of a particular task.
a. A JV is a kind of partnership with narrower scope of Bzns.
READING for Class 2:
Sharing Profits and Losses:
· Common Law and Uniform Partnership act provide fallback rules governing a partner’s responsibility to share in any losses experienced by the partnership.
· Kovacik v. Reed: CA 1957
o Plaintiff was a sole proprietor who contracted with sears. Plaintiff invested 10K and they agreed to split the profits 50/50…defendant agreed to put in the labor.
§ This supports the presumption that this is a partnership 202.3.c
§ 202: 2 or more people engaging in a business as co owners for profit.
§ They are co-owners of an intangible community of economic interests
§ You can take a piece of the profits as a wage and be just an employee.
· Who has the control?
· It’s a subtle Fact question.
o Suit for dissolution of a joint venture, and accounting.
o Plaintiff was to supply money and Defendant supply labor to carry on the joint venture
§ Trial court erred in finding Defendant liable for a share of the financial losses.
§ Defendant never agreed to share losses, and refused to contribute or pay any loss.
§ Distinction between capital contribution and other contribution.
· Plaintiff is ignoring this contribution by the defendant for his labor.
· The partnership has no assets
· 8802 if you owe money to the partnership, you have to pay it back
· Plaintiff had to put in 10 k and he only lost 8k of his capital contribution to become part of the partnership. He didn’t lose extra. It was just his contribution.
o Both of them lose their capital contributions… one labor, one money.
o GENERAL RULE: 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
§ 810.3 Relations are governed by RUPA if there is not language to the contrary in the partnership agreement
· There are some things you cannot waive in RUPA.
§ 401 says each partner is chargeable with losses
o HERE IN THIS CASE: one partner or joint venture contributes money capital as against the other’s skill and labor, all the cases cited hold that neither party is liable to the other for contribution for any loss sustained.
§ In the event of a loss each loses his capital: one his $$ and one his labor
§ By agreeing to share the profits 50/50, the parties have agreed, their contributions are equal.
§ Where a partnership is between one who contributes cash and one contributes sweat, each loses their contribution.
· The partnership loss was less than the original capital contribution