Baumer Outline
I.
Distinguishing Between Partnership and Corporation
A.
Liability
1.
Partnership
a)
Liability of a partner is limitless, where each partner is personally liable for all
the debt of the Partnership.
b)
Personal liability, where partner could be stuck w/ 100%
liability if he has “deep pockets.”
c)
Liability is NOT limited to initial investment (unlike a
LLP)
2.
Corporation:
a)
Shareholders and Managers are not personally liable for corporate debts because a
corporation is a separate entity.
(1)
Exception: Piercing the Corporate Veil for Managers,
Directors, Officers (but not Shareholders)
b)
Shareholders liability is limited to the initial investment
in corporation – “Liability Shield” (They still stand to lose a small amount of
money)
B.
Management & Control
1.
Partnership: Each partner has equal powers in Management,
and can effectively bind his co-partners to the Partnership business, unless the Partnership Agreement
provides otherwise.
2.
Corporation: Board of Directors elected by the
Shareholders to make the decisions (centralized control)
a)
Shareholder have virtually no power over management
decisions (except to select/remove directors)
b)
Shareholders cannot bind the Corporation.
C.
Transferability
1.
Partnership:
a)
A Partner cannot transfer a P interest w/o the unanimous
consent of the other partners.
b)
Difficult to transfer P interest due to liability factor
c)
Dangerous due to general agency and liability of
Partnerships (all partners
are liable) – requires confidence in other partners.
2.
Corporation (publicly held): Ownership is divided into shares (stock)
that can be freely transferred.
D.
Continuous Existence
1.
Partnership: Absent an agreement to the contrary, a P is
dissolved upon the death, bankruptcy, or withdrawal of any partner. (Except in California, of course)
2.
Corporation: Unless specifically limited in the articles,
a corporation exists perpetually, until dissolved in accordance w/ statute.
II.
General Partnerships
A.
Formation of a Partnership (is there a partnership)
1.
Uniform
Partnership Act (UPA) § 15006
a)
Partnership =
“association of 2 or more persons to carry on as co-owners a business for
profit”
b)
General Characteristics of a Partnership
(1)
Sharing of Profits
(2)
Sharing Control
(3)
Participation in Management
(4)
Joint/Several Liability
c)
Hypothetical
Illustration: A is a mechanic and
B contributes capital to buy and rebuild a car. While rebuilding the car, it rolls off and injures C. Is B liable?
(1)
Business: Can be one transaction – Yes.
(2)
Co-Owners: Are they co-owners or was it a loan? If it was a loan, then under 15007, this
alone is insufficient to form a partnership even if they share in the profits
(3)
Co-ownership hangs on the notion of management and control.
In the hypothetical, B had some control by deciding what car to buy.
2.
Need
for a Written Agreement
a)
General Rule: No
written agreement needed to form a Partnership.
(1)
Required: Intent to make an association for profit; no
mutual consent is needed. (They don’t even need to thing they are
partners!)
(2)
Participation in the control of the enterprise tends to show
intent of Partnership.
b)
UPA governs as the default provision
(1)
Some provisions are not subject to contrary agreement.
B.
Determining the Existence of a Partnership UPA § 15007
1.
Generally,
Profit sharing alone is prima facie evidence that a person is a partner § 7(4)
a)
In KAUFMAN,
the court found the existence of a Partnership even though KB had only small
control because of the existence of shared profits.
b)
For Profit Control, Courts Examine:
(1)
Is there a sharing of profits?
(2)
If yes, is it an ordinary customary relationship for
that type of relationship?
(a)
Yes = no partnership.
(b)
No = probably a
partnership because the focus is control.
2.
Exceptions
(Not a partner when):
a)
Receipt of the profit-share is payment for debt, wages,
rent, annuity, interest on loan where the amount varies with the profits of the
business or consideration for sale.
b)
Joint Tenancy and Tenancy in Common do not automatically
create a partnership (even if there is a sharing of profits) – the focus is
control factor.
C.
Inadvertent Partnerships:
Even if the written agreement states that the parties will not be
partners, a partnership may still exist.
1.
Intent
– Courts will usually give weight to intent, but for formation of partnership
all that is needed is §6.
2.
Control
– Court looks to see if D has enough
control to be a Partner (i.e. veto, sharing profits)
a)
MARTIN – Here, even though D shared in profits and had veto power,
the court did not find the existence of a partnership because his actions were
only safeguards for the loan.
(1)
Where a person shares in profits, but delineates in
agreement that he is not a partner and
has no degree of control over Partnership decisions, Courts will be reluctant
to find a Partnership because the control
factor is the essence of Partnership (They will compare to the ordinary
business community for customs.)
b)
Typical Safeguards for Lender-Debtor Relationship even
though they may impact control:
(1)
Provision on the Use of Proceeds
(2)
Right to Inspect Books
(3)
Limited Ability of Borrower to Incur Additional Debt
(4)
Provision stating Change in CEO makes entire loan amount due
and payable immediately
(5)
Limits on Distributions of Assets, Dividends, etc.
D.
Liability of General Partnerships (§13 – 16)
1.
§ 13: If a partner acts in the “Ordinary
Course of Business” [ OR ] with permission of other partners and
causes injury, then the entire Partnership is liable. (And so is the partner who screwed up!)
2.
§ 14: Liability
for Partners, misapplication of money or property
3.
§ 15: Partners are Liable Jointly &
Severally. Personal Liability of
Partners is Limitless
4.
General
Liability Theories:
a)
Common Law – Aggregate
of members, each partner has to be sued individually.
b)
UPA - An association to some degree, yet also a
separate entity (i.e. Separate entity in property ownership and an Aggregate
for Taxes)
E.
Sharing of Profits and Losses (§18) – Absent contrary Agreement
1.
§ 18(a): Each partner shall be repaid his
contributions, and share equally in the profits; and each must contribute
towards the losses sustained by the Partnership according to his share in the
profits.
a)
Equal Rights to per capita share of profits regardless of
contribution to partnership.
b)
Absent Specific Agreement, Losses are split in the same
proportion as the profits.
c)
No partner is entitled to remuneration for services, unless
there is a winding up of Partnership affairs - § 18(f) {Partners may want negotiate for salary in
writing}
2.
RICHERT – Joint
Logging Venture Case
a)
Since there was no contrary agreement, UPA controls
apply. Court found that when
Partnership ends, the capital contributions of each General Partner must first
be repaid before profits may be distributed.
Then, Profits, Losses and Dividends may be divided according to the UPA
or Partnership Agreement.
b)
Hypothetical Illustration:
R & H agree to form a Partnership and R invests cash into the
Partnership and the Partnership buys timber.
The Cash Investment by R is an expense of the Partnership.
3.
Determining
Profits & Losses pursuant to § 18(a)
a) Ending the
Business
|
|
Partner A |
Partner B |
Partner C |
|
Capital
Account |
30k |
10k |
10k |
|
Profit
Share % |
50% |
25% |
25% |
|
Profit/Loss
= 60 |
+30k |
+15k |
+15k |
b) Not Ending,
but Suffering a Loss
|
|
Partner A |
Partner B |
Partner C |
|
Capital
Account |
60k |
25k |
25k |
|
Profit
Share % |
50% |
25% |
25% |
|
Profit/Loss
= -10K |
(5K) |
(2500) |
(2500) |
c) Agreement as
to Profits, no Agreement as to Losses:
§ 18(a) states that if there is no agreement as to apportionment of
losses, than losses are distributed in same proportion as profit.
|
|
Partner A |
Partner B |
Partner C |
|
Capital
Account |
200K |
50K |
50K |
|
Profit
Share % |
1/3 |
1/3 |
1/3 |
|
Profit/Loss
= -300K |
100k (from
B & C) |
(50k) |
(50k) |
d) No Agreement
as to profits: § 18(a) states both
profits & losses are shared equally
|
|
Partner A |
Partner B |
Partner C |
|
Capital
Account |
60k |
25k |
25k |
|
Profit
Share % |
50% |
25% |
25% |
|
Profit/Loss
= -10K |
(5k) |
(2500) |
(2500) |
4.
Effect
on 3rd Party Creditors
a)
Any partnership agreements between the partners does not
affect 3rd Party rights. All
partners are still Jointly & Severally Liable.
b)
Hypothetical Illustration:
A & B have a Partnership Agreement.
B invests 0, gets 50% of profits and 0% of loses. The Agreement is only effective between the
partners, so B would be just as liable as A.
However, B can sue A under the agreement.
F.
Fiduciary Relationship of Partners.
1.
General Rule: Co-partners owe to one another, while the enterprise continues,
the duty of the finest loyalty.
2.
MEINHARD v.
SALMON
– S Breached Fiduciary Duty by accepting a new lease agreement. Since S was given the opportunity for the
lease agreement the via Partnership, S had the duty to disclose it to his
partners.
3.
Scope of Partnership: Defining the scope of the Partnership
business will make it much easier to define the fiduciary obligations. (because this allows the court to ask if the
Partnership business gave way to the opportunity). Courts may still use a subjective view of equity if there is a
dispute.
a)
Hypothetical
Illustration 1: A manages apt. building.
A finds another building for sale and decides to buy & manage it for
himself. A invites B to invest and B
does. 2 years later, A gets other
investors to purchase another building.
Did A breach fiduciary duty to B by not giving B an opportunity to
invest? –Yes.
b)
Hypothetical
Illustration 2: Real Estate Broker A asks B to join in investing in
property and fixing it up for re-sale.
This was A’s business in the past. 2 years later, A starts another
Partnership for the same arrangement. breach fiduciary duty to B by not giving
B an opportunity to invest? – No, B has notice of A conducting this type of
arrangement.
c)
Analysis: In Hypo 2,
the expectations of B would be that
A would have similar ventures since that was A‘s Business (not so in #1). Some Courts have held that in Hypo 2, B
should understand that A would have other ventures so no breach of fiduciary
duty.
4.
UPA § 21
a)
§ 21
Fiduciary Duty: Partners must
account to the Partnership for any benefits & profits received, and hold as
trustee for it any profits derived by him w/o consent of the other partners.
(1)
General
Partner takes Cash from Partnership, gambles and wins: Partner must share winnings with Partnership
unless he had consent.
(2)
General
Partner takes Cash from Partnership, gambles and loses: Too bad, losses aren’t shared with
Partnership.
b)
BASSAN – General
Partner sold property to the Partnership at FMV, not to the detriment of the
Partnership but without explicit approval of all partners. Narrow view: One can’t profit from ANY transaction as a partner unless one has
specific express consent of the other partners even if the result is a windfall
to the other partners.
c)
§19
Partnership Books: Partnership Books
shall be kept at the Partnership’s place of business and they can be inspected
by the partners at any time.
d)
§ 20
Disclosure: General Partner must disclose true and full
info on demand to other General Partners, of all things affecting the
Partnership
e)
§ 22: Partners right to formal accounting exist if
he’s wrongfully excluded, it’s terms of agreement, § 21, or just and reasonable
under the circumstances.
5.
Revised
UPA (not the applicable law in
California) & Fiduciary Duty – Fiduciary Duty is divided into 2 types:
a)
Duty of
Loyalty
– duty not to compete with the enterprise—once cannot get in conflict with
one’s own enterprise without proper approval.
(1)
The Act provides that the duty of loyalty is non-waivable
provision, but can be altered if not manifestly unreasonable.
(2)
Duty provides 1) that other General Partner have the right
to find out what benefit you’ve gotten and 2) can’t get benefit w/o express
permission of other partners.
(3)
A General Partner cannot deal w/ a party who has an adverse
relationship to Partnership.
b)
Duty of Care: Addresses the question of negligence, according
to what standards one’s measured to if one’s careful enough.
G.
Partnership Property
1.
UPA
– Treats Partnership as an aggregation of individuals
a)
Revised UPA treats Partnership as an entity so each General
Partner isn’t a co-owner of Partnership property, rather, the property is owned
by the Partnership itself. The only
transferable interest under this view is the ability to receive profits.
2.
3
Property Rights of a Partner (§ 24)
a)
Rights in Specific Partnership Property (can’t assign w/o
consent of Partners)
b)
Right to Participate in Management: (can’t assign w/o consent of Partners)
c)
“Interest” in the Partnership (Can be assigned w/o
consent of Partners)
3.
Partner’s
Interest in the Partnership and Conveyance of (§§ 26-27)
a)
Hypothetical Illustration:
A & B have a Partnership & each invest equally. After 5 years, A wants to move and divest.
b)
What is A’s interest in the Partnership? § 26 – The right to receive profits and surplus, which is
treated as personal property and can be taxed.
c)
Can A sell his interest to C? §18(g) –yes if other General
Partners consent.
d)
If A doesn’t have consent of other General Partners is there
anything A can sell to C? §27 – w/o
consent of other partners, the only right A can sell to C is A’s “interest” in
the Partnership. C’s (Assignee) rights
upon assignment – (under §27): C
doesn’t get the right to participate in the management, inspect books, etc.
(unless he has partners‘ consent). He
only has rights to the profits.
(1)
If all C receives is the “interest” in the property, he
doesn’t become personally liable for losses.
(2)
A still retains management and property rights.
4.
Rights in specific P property
(§25): The partner is co-owner with the other
partners of specific Partnership property holding as a tenant in partnership,
but tenancy is subject to contrary agreement.
When there is a dissolution, assignee can get an accounting.
a)
Hypothetical Illustration: A owns 1/3 interest in the
Partnership and there are 3 computers.
b)
Can A take 1 computer home?
(1)
Personal Use: No, A
cannot use property for personal use w/o partner’s consent (§26(2)(a))
(2)
Partnership Use:
Yes, if for Partnership business because partners have an equal right w/
other partners to possess property for Partnership purposes. §25(2)(a)
c)
Can A sell 1 computer?
(1)
No, A cannot sell unless he has consent of the partners – to
sell/dispose (assign) property, a General Partner needs consent of all partners
§26(2)(b)
(2)
Note: Because of agency authority, if it appears that A had
the right to sell and an innocent buyer buys it from A, A can transfer good
title. However, if A really didn’t have
the right to sell, the other General Partners can sue A.
5.
Creditors
Rights in Property § 25 (c), §28
a)
Hypothetical Illustration:
A has a court order against her to pay child support. A doesn’t pay. As’ spouse gets a judgment for the amount.
b)
Can judgement be satisfied by A’s share of Partnership
Property? NO, personal creditors of a
single partner cannot reach Partnership property (General Partner’s right in
property is not subject to the judgment.)
c)
What can the creditor do? (§28)
(1)
Remedy: Charging
Order (A creditor may get a lien against the Partnership Interest so they are
entitled to profits.)
(2)
If the lien doesn’t satisfy the creditor, the court may
order a Foreclosure sale of interest in Partnership & the creditor can buy
A’s interest in the Partnership using the debt as a “credit bid”.
(3)
If this is a Partnership at will, any partner including a
creditor can cause dissolution of the Partnership and Liquidation of assets so
the Creditor would then want a Foreclosure.
(4)
Because of this threat, it is a big incentive to the
remaining General Partners to pay the debt or get someone else to buy out the
creditor’s interest, so the creditor is paid.
6.
Property
“Contributed” to the Partnership (§ 8)
a)
All property originally bought into Partnership or
subsequently purchased or otherwise on Account of the Partnership is
“Partnership Property”. §8 (1)
b)
Intention: Unless there is a contrary intention,
property acquired with Partnership funds
= Partnership Property.
(1)
CYRUS: brothers enter into a Partnership for a
Tourist Camp. C1 moves on C2’s request
and provided labor, C2 provided a 60 acre tract. Partnership later acquired a 40 acre tract in C2’s name. After 10 years, C1 dies and widow sues
claiming both tracts are Partnership property.
(a)
Intent: Court found that even though C2 purchased
the land before the Partnership Existed, since improvements, taxes, etc., was
paid out of the partnership funds, it was partnership property. C2 also
expressed in letters to C1 intent for C1 to be ½ owner of the property.
(b)
Title: Court found, that though the title of the 40
acres in C2’s name, it was not conclusive.
C2 acquired the property with
Partnership funds so it was Partnership Property.
(c)
Economic
Consequence: Court examined the
economic consequences of what the Partners were doing—C1 wouldn’t have put in
10 years of work if he wasn’t going to get anything out of the partnership.
(2)
Fact Change: C1 dies when cabin is only ½ built, and had
only moved in 4 months prior. However,
the property had increased in value.
Even though C1 & C2 had the same intent as in CYRUS, here, C1 had
hardly done any works o the property is probably not Partnership Property
yet. (The court will still examine
economic consequences)
(3)
Hypothetical
Illustration: B, C, D, E all own ¼ of electronic manufacturing
partnership. The Partnership is set up
in a warehouse owned by B. Years later,
they decide to sell the Partnership for $2 million. Warehouse was worth $10k originally, but has increased to $100k
now. How is the $100k split?
(a)
First, is the property part of B’s capital account or was
B’s intent to contribute it to the Partnership?
(i)
If it was not contributed tot he Partnership, then B gets
the property back (it doesn’t got to the buyer) even though it’s value has
increased due to the Partnership.
(ii)
If it was contributed to the Partnership, B only gets $10k
more, the other $90k is split 4 ways.
c)
Factors determining if the property was “contributed”
(intent.
(1)
Title: Did B retain title or was it in Partnership
Name? (not conclusive)
(2)
Economic
Consequences: Was there
improvements made and who paid?
(3)
Taxes: Who paid
property taxes?
d)
Revised UPA: States that intention of the parties
determine what’s contributed, but adds:
(1)
If Property is in the Partnership name, then it IS
Partnership property
(2)
If the property is in 1 or 2 names of the General Partners
& once transferred it is in the Partnership’s name, then it is Partnership
property.
(3)
Property Purchased w/ Partnership Funds = Partnership
property
(4)
Property Acquired in the name of an individual w/o mention
of the Partnership and w/o use of the Partnership funds IS NOT Partnership
property even if used in the Partnership business.
H.
Ability of a Partner to Bind the Partnership (Authority)
1.
Agency Law (Incorporated into
the UPA):
Whether an agent can bind a principal depends on the type of authority the
agent has.