Chapter 38: Operation of Partnerships and Related Forms

  1. Duties of Partners to the Partnership and Each Other
  2. Interest Adverse to the Partnership
  3. May not deal with the partnership when the partner has an interest (or represents those with an interest) adverse to the partnership
  4. A partner may not secretly profit by making a contract with the partnership
  5. Partners can only profit personally if they
  6. Deal in good faith
  7. Make a full disclosure of all of the facts affecting the transaction; and
  8. Obtain approval from other partners
  9. Remedy for a breach: return of the profit to the partnership
  10. Competing Against the Partnership
  11. May not compete against one’s partners without consent
  12. Remedy: recovery of the profits from competing venture
  13. Duty to Serve
  14. Partners must undertake their share of responsibility for running the day-to-day operations
  15. Partners may agree to relieve a fellow partner of the duty to serve
  16. Silent partners
  17. Merely contribute capital to the partnership
  18. Have the same liability as other partners
  19. Remedies for breach
  20. Assessing the partner for the cost of hiring a person to do the work; and
  21. Paying other partners additional compensation
  22. Duty of Care
  23. Liable for losses resulting from gross negligence, reckless conduct, intentional misconduct, or knowing violation of the law
  24. Must make an investigation before making a decision in order to have an adequate basis
  25. Decisions must be based on grounds to believe action is in the best interests of the partnership
  26. May be reduced or increased in the partnership agreement, but not eliminated
  27. Duty to Act with Actual Authority
  28. Duty not to go beyond
  29. Authority granted by the partnership agreement; or
  30. Authority normally held by partners in same position
  31. Responsible to partners for losses resulting from unauthorized transactions
  32. Duty to Account
  33. Must account for use or disposal of partnership funds and property as well as their receipt of property, benefit or profit without consent
  34. Duty to keep reasonable record of all business transacted for the partnership and make records available
  35. Right to be indemnified (paid back) for payments made from personal funds and for personal liabilities incurred during ordinary conduct of the business
  36. Other Duties
  37. To maintain the confidentiality of the partnership information
  38. Trade secrets
  39. Customer lists
  40. To disclose to other partners all information material to the business
  41. To inform partners of notices received, affecting the rights of the partnership
  42. Brosseau v. Ranzau: partner breached fiduciary duty by not forwarding rental income of partnership property to other partner
  43. Joint Ventures and Mining Partnerships
  44. Fiduciary duties also exist, like partnerships
  45. Remedies
  46. A joint venturer may seek an accounting to settle claims or may sue
  47. A mining partner may seek an accounting, and has a lien against partners’ shares, which can be enforced against purchasers
  48. Compensation of Partners
  49. RUPA
  50. A partner’s compensation is a share of the profits
  51. Not entitled to a salary or wages
  52. Profits and Losses
  53. Partners share profits equally in the absence of a contrary agreement
  54. Losses are shared in the same manner as profits in the absence of a contrary agreement
  55. If an agreement specifies how losses are shared, but not profits, profits are shared equally
  56. Each partner has unlimited personal liability to creditors
  57. Loss-sharing agreements between partners do not bind creditors
  58. Warren v. Warren: Oral agreement that partners would draw a reasonable compensation for actual services rendered was enforceable.
  59. Management Powers of Partners
  60. Individual Authority of Partners
  61. In partnership or LLP, every partner is a general manager
  62. RUPA: partnership is bound by the act of every partner apparently carrying on the ordinary course of the business
  63. Types of authority
  64. Actual
  65. Express

a)Agreement of partners obtained

1)Orally

2)In writing; or

3)By acquiescense

b)May give notice of a partner’s authority or limitation by filing a Statement of Partnership Authority or Statement of Denial

  1. Implied

a)Acts within the ordinary course of business

b)May not contradict express authority

  1. Apparent
  2. Acts that a third party can reasonably believe a partner has authority to do, often coincident to implied authority
  3. May remain even when a partner’s implied authority is restricted or eliminated
  4. May avoid by notifying third parties by filing a Statement of Partnership Authority or Statement of Denial
  5. Ratification: occurs when the partners accept an unauthorized act of a partner
  1. Special Transactions
  2. Power to Convey Partnership Real Property
  3. Must be expressly, impliedly or apparently authorized or ratified by the partnership
  4. A partner will have implied and apparent authority to sell real property if the partnership sells real property in the ordinary course of business
  5. No implied or apparent authority to sell the building where the partnership’s retail business is conducted – unanimous agreement required
  6. No implied or apparent authority to sell land held for investment not in the usual course of business
  7. Purchasers are held to have knowledge of a limitation of authority to convey real property contained in a properly filed Statement of Partnership Authority or Statement of Denial
  8. Borrowing Money
  9. Must have express, implied or apparent authority to borrow
  10. Trading partnership

a)In the regular business of buying and selling merchandise

b)Partner has implied and apparent authority to borrow

c)Includes businesses such as

1)General contracting

2)Manufacturing; and

3)Dairy farming

  1. Nontrading partnership

a)Has no substantial inventory and is in the business of providing services

b)Partner has no implied or apparent authority to borrow

  1. Implied and apparent authority exist if the partner’s borrowing is in the ordinary course of business
  2. Unless agreed, a partnership will not be liable for any loan whose amount is greater that the ordinary needs of the business
  3. Power to borrow usually includes power to grant the lender a lien or security interest in firm assets
  1. Issuing Negotiable Instruments
  2. A partner who has authority to borrow money also has authority to issue negotiable instruments, such as promissory notes
  3. A partner, whose name appears on a checking account signature card filed with the bank, has express authority to draw checks
  4. A partner without his or name on the signature card has apparent authority to draw checks with respect to unknowing third parties
  5. Negotiating Instruments: partners usually have implied and apparent authority to transfer or negotiate instruments on behalf of the partnership
  6. Admissions and Notice
  7. A partnership is bound by admission or representations made by partners concerning its affairs within express, implied or apparent authority of the partner
  8. Notice to the partner is deemed notice to the partnership
  9. Knowledge of material information relating to partnership affairs is imputed to the partnership
  1. Disagreement Among Partners: Ordinary Course of Business
  2. Each partner has one vote, regardless of size of interest or share of profits
  3. A vote of the majority of the partners controls on matters involving the ordinary course of business
  4. When Unanimous Partners’ Agreement Required
  5. RUPA: any partnership act not in the ordinary course of business must be approved by partners, absent an agreement to the contrary
  6. Joint Ventures and Mining Partnerships
  7. Mining partner has no implied authority to borrow money or issue negotiable instruments
  8. Like partners, may restrict or expand each other’s powers by agreement
  9. Effect of Partnership Agreement
  10. May modify the rules of management by unanimous agreement
  11. Removals or delegations of power will not limit apparent authority as to third parties without knowledge
  1. Liability for Torts and Crimes
  2. Torts
  3. Respondeat superior applies
  4. Liable jointly and severally for torts committed by a partner within the ordinary course of business
  5. Usually liable for negligence
  6. Not usually liable for intentional torts, unless
  7. Committed within the ordinary scope of business
  8. Committed within the ordinary authority of the partner
  9. One partner authorizes another to commit an intentional tort
  10. Remedies: partners may recover amount of their vicarious liability from the offending partner
  11. LLPs
  12. An innocent partner is not liable for the malpractice of another partner
  13. RUPA: LLP partners have no liability for other debts of the business
  14. LLP, itself, however, is liable for the torts of a wrongdoing partner or employee under respondeat superior
  15. Wrongdoing partner is also liable for own malpractice or negligence
  16. Supervising partner may have unlimited liability
  17. Crimes
  18. Partners are rarely criminally liable when a partner commits a crime in the course and scope of transacting business
  19. Partners who have participated in the criminal act are liable
  20. May also be liable when they know about the partner’s criminal tendencies
  21. Lawsuits By and Against Partnerships and Partners
  22. Generally, any partner has authority to initiate a lawsuit
  23. RUPA:
  24. A partnership may sue in its own name
  25. A partnership may be sued in its own name
  26. Partners can be sued individually on partnership obligations
  27. They are jointly and severally liable
  28. Judgments may be satisfied against the assets from partners, once the assets of the partnership are exhausted
  29. Paying partners may seek indemnification and contribution from others
  30. LLPs: only the LLP is liable on contractual obligation and may be sued

F.Moren v. JAX Restaurant

  1. A partner whose tort was committed in the ordinary course of business, under RUPA, bound the partnership and was owed indemnity for a negligence lawsuit
  2. Conduct that serves a partnership and a personal purpose can be found to be in the ordinary course of business