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Business Associations
University of Kentucky School of Law
Michael, Douglas

GENERAL PARTNERSHIPS

PARTNERSHIP FORMATION

A. Definition of a P-Ship – RUPA § 101(6) Elements are found in section 202.
An association of two (2) or more persons to carry on as co-owners of a business for profit

**Can opt out of al RUPA with exceptions found in RUPA (103)
RUPA is entirely a default rule (103(a)), unless it is non-waivable according to 103(b).

1. Elements

a. Association
§requires that the relationship be a consensual arrangement
§a P-Ship can be found if consented to relationship, even if didn’t want there to be a P-Ship
§look to see if parties intended the things which constitute a P-Ship (Hilco Prop.)
§Disclaiming Language – is not conclusive that a P-Ship didn’t exist

b. Co-Owners – 2 Vital Components

(1) Profit Sharing RUPA 202(c)
§ is prima facie evidence that person sharing is a partner
§ no inference will be drawn by court if receipt of profits is:
i payments of debts in installments
ii payments of wages of an ee
iii payments of rent to a landlord
iv as interest on a loan (even if amount varies on amount of profits)

example: Martin v. Peyton
D was to loan $2.5 million in securities, yet rejected option to join P-ship. D was to receive 40% of profits until principal returned. Could receive up to $500k of profits, but not less than $100k. Court said that even though wasn’t a loan of cash, the exchange of securities was in effect a loan, to which D was entitled to compensation w/out being liable as a partner.

§ profit sharing can occur simply b/c a person’s liability is reduced

example: 3 guys buy a horse. Each gets a breeding interest each year. The horse mgr is to sell three rights each year, the proceeds are to go to maintenance of the horse. Even though those proceeds don’t look like profits, they are because they are essentially passing to each person, and then automatically to reduce the partner’s liability.

§ profit sharing need not be equal among Ps if agreement specifies

(2) Joint Control (Rupa 202) official comment
§ look to see if partner had equal right to participate in mgt
§ note: control can be delegated in a p-ship (i.e. Managing Partner)
§ there are some Controls which may not be the same Control required to find a P-ship:
(1) Negative Control: used by a lender to safeguard loans given to a debtor (i.e. cannot mingle loan $ w/ other $, cannot resell loaned securities, etc.)
(2) Commercially Reasonable Control
i. Not indicative of ultimate control

c. Business(Rupa 101(1))
§ test: look to Degree of Activity Carried on or Contemplated

example: if 4 guys buy a horse, consider if the horse was lazy and bought for pleasure, or if it had a derby winner bloodline…which looks as if it was contemplated to make money

§ RUPA 202(c) provides rules in determining the existence of a P-Ship/business:
(1) Joint Tenancy/Co-ownership of Prop does not in itself establish a P-Ship
(2) Sharing of Gross Returns does not by itself
(3) Receipt of a share of the profits is prima facie evidence of being a partner in the business (exceptions below)

d. Profit
§ this is hardly ever an issue

OPERATION OF P-SHIPS

A. Legal Nature of P-Ships and Management of P-Ships

1. Legal Nature – Entity v. Aggregate
§ some debate as to whether a P-Ship is a legal person (i.e. Entity) or whether it is an aggregate of its members (Aggregate) RUPA treats as entity

§ a. Rupa just says entity

2. Management of P-Ship

a. Default Rules – One person/One Vote

(1) All Ps have equal rights in the mgt. and conduct of the P-Ship business even if Capital contributions disproportionate (RUPA § 401(f))
(2) No P is entitled to remuneration for acting in the P-ship business (RUPA § 401(h))
example: A, B, C start a company where A and B contribute $25 each and C contributes $50. C is the “general mgr.” He spends 20% of his time managing, but unless the agreement says other wise he is not entitled to be compensated for his services.
(3) if Difference Arisesas to Ordinary Matters connected w/ P-Ship business – may be decided by a MAJORITY of votes – (RUPA 401(j)
1. but if not in ordinary then (401(j)) says that ALL votes required
example: A, B, C have $10 in earnings. A wants half to be distributed and rest to go to investments. B and C want all distributed. All have equal right, but one person/one vote applies, and assuming ordinary matter, the majority wins.
(4) if Act in Contravention of Agreement b/n Ps – must have Consent of ALL
example: A P-Ship agreement stipulates that C had “discretion to manage p-ship and make cash distributions.” C wants to use ½ earnings to buy CPUs and other ½ distributed, yet A and B oppose C. A would have ability to do so … b/c the agreement allows this … one person/one vote opted out of.
(5) No new Ps w/out Consent of ALL (RUPA § 401(i))
(6) Ps can always have access and right to inspect books (RUPA 103, 403(b))
(7) Ps must render info of all things affecting P-ship if a P requests (RUPA 103)

b. Under a P-Ship Agreement

(1) No act in contravention of the agreement may be done rightfully w/out consent of all the Ps (RUPA § 401(j))

example: The agreement stipulates that the A is to have the “discretion ot manage the p-ship and make cash distributions.” A wants to invest profits into new CPU’s and make distributions w/ $5000. B and C want all money distributed. A would win b/c of the agreement, and it would require unanimous consent b/c likely in contravention of agreement

parent Authority
Ø exists if Principal’s words or conduct would lead a reasonable person in 3rd Party’s position to believe that the Principal had authorized the agent to act

· focus is on Principal’s words/actions and the 3rd Party’s interpretation
· this is a LOSS-ALLOCATION concept
· we put allocate the loss to the more blameworthy party

· RUPA (301) Partner is agent unless 3d party received notification that partner lacked authority for the purpose of the business.

d. Example – Owens v. Palos Verdos Monaco
Three Ps (A, B, C) wanted to sell land. A was instructed to go to meetings w/ 3rd party. The 3rd Party would call the other two, both said that A was their guy, and that he would handle it. Eventually, a K was signed by A and 3rd party. Then, B and C didn’t want to the K. There was both actual and apparent authority, thus the P-ship was bound.

3. Power of Position – Does Partner Status Generate Authority?

a. Actual – YES (generally)
· a Partner had reasonable grounds to believe that he may act on behalf of the P-ship
· BUT, the Partners or P-ship can agree otherwise

example: P-ship instructs A to engage in contract. The other two Ps then decide it is a bad idea. If both write a letter to A telling him not to, then actual authority is termination. If only one sends a letter, then likely that actual authority is not terminated b/c no entity action.

b. Apparent – YES (generally)
· by labeling a person a Partner, the 3rd Party has reasonable grounds to believe that he may act on behalf of the P-Ship
· BUT, a P-ship can limit a Partner’s apparent authority by informing the 3rd Party of the Partner’s limited authority

example: P-ship instructs A to engage in contract. The other two Ps then decide it is a bad idea. If both write a letter to 3rd Party telling him that A does not have actual authority then likely that apparent authority is terminated. If only one sends a letter, then likely that apparent authority is not terminated b/c no entity action. If two letter sent, but 3rd party does not read, it is likely that P-ship is not bound, b/c Apparent Authority is a risk allocation idea, and under these facts 3rd party is more blameworthy.