Business Organizations

9 June

• One of the things that distinguishes a partnership from co-ownership is the intent to share profits, not just gross receipts.
• Partners can bind the partnership in contract; that's part of why they have fiduciary duties to one another.
• Partners take profits, which would otherwise be available to creditors, and that's why they're liable to creditors-- they need to share the risk.
• RUPA § 401(a). Partners' rights and duties. This is the partner acount/contribution stuff is deemed to work.

  (b) is a little counterintuitive: partners are entitled to equal shares by default (of both profits and losses) regardless of their contributions.

  (c) (d) and (e) business expenses and advances beyond initial capital contribution and loans can all be reimbursed to partners.

  (f): each partner has equal rights in the management and conduct of the partnership business by default (this is agency authority).

  (g) no self-dealing with partnership property. (h) no separate payment for services performed for the partnership.

  (i) all partners must consent in order to add a partner.

  Now remember, most agreements will vary things like (i).

  (j) for ordinary matters, a majority can decide; for extraordinary things, it takes unanimity.

• Problem 2-1, the Sendo/Microsoft thing. These cases are very fact-specific, and it's hard to know whether a court will find a partnership or not. Hopefully in real life they had a more detailed contract than just the four points we've seen.

  And what if it's not a partnerhsip? You can still have fiduciary duties (and agents and principals) without a partnership. Fiduciary duties can arise out of contract as well.

• Partnership management: who makes decisions within the partnership, and who represents the partnership to 3rd parties?
• § 303: this doesn't really happen much in practice, but you can designate which partners can do what.
• § 401(f)/(j) is the core of the Nabisco story on pp. 67-68. Note that the partnership might be liable to the 3rd party, but the rogue partner might be liable to the other partner. See also the foonote (p. 68) on Summers v. Dooley: when you don't have a majority vote, you preserve the status quo.

  This stuff does come up, where you've got two shareholders with equal votes (even in 50-50% C-corporations).

• § 301: Each partner is an agent of the partnership for the purposes of its business. Note that this is the entity theory. Under aggregate theory, each partner would be an agent of the other partners.
• First American Title v. Lawson
  An LLP is a general partnership with a liability shield around each of the partners. The partners are not personally liable for the obligations of the partnership-- they're only liable to the extent of what they've put into the partnership.

  There's not really much rationale behind this-- it's maybe just the court doing what they think is right. On the other hand, Snyder would have gotten insurance anyway. This is really like four separate coverages: one for the partnership and one for each partner.

• Problem 2-2: is a partner really a partner if they have no real say?
• § 404: The only fiduciary duties that a partner owes are due care and loyalty (plus also good faith and fair dealing). Note the differences between here and § 8 of the Restatement of Agency.
• We need to know, for each of the organizations, what kinds of fiduciary duties are owed.
• Note the discussion of negligence on p. 80: simple negligence doesn't create a cause of action against the negligent partner. We want people to be cautious about who they allow to become partners. Also, there's going to be negligence from time to time-- it's sort of a cost of doing business. Now, gross negligence (which technically doesn't exist in WI: you knew or should have known that your conduct was likely to cause harm vs. simple-- failure to use the care that an ordinary person would have) is a different matter.
• RUPA § 103 -- default rules and what can be waived. The partnership agreement trumps all the default rules, except the ones listed in (b), which can't be waived.
• RUPA § 403: rights and duties with respect to partners' access to records.
• Meinhard v. Salmon
  This is essentially the end of RUPA § 404(1): he became aware of an opportunity that would be appropriate for the partnership, and didn't bring it to the partnership. We want partnerships to thrive, and we want partners to be able to rely on one another. We don't want partners to have to take care of every single detail all the time-- we need to be able to count on partners maximizing shareholder value.

11 June

• You can owe fiduciary duties even though you're not a partner.
• By default all partners have equal rights in management of the partnership business.
• Courts are not bound by the ways in thich partners label themselves-- people can be found to be employees, for example.
• The default rule in corporations is that people vote according to their shares (whereas, with partnerships, it's equal).
• Problem 2-3
  So they have a corporation, but they form a partnership (in which they'd have 50-50 shares). Covall wants the higher rent because money going to the partnership gets him more income than money going to the corporation.
• Gibbs c. Breed Abbot & Morgan
  A chronology is the lawyer's copy of every letter that he personally has sent out, kept in chronological order. (a "chron")

  The court finds that only the personnel memo was a breach of duty: they had that information because of their standing in the firm.

  This is a somewhat messy and arbitrary decision, actually, and the court seems guided somewhat by the standard practices of the field.

• So we need to know the agency fiduciary duties, and then how RUPA limits those, and what further variations you can make by contract.
• Key concerns in partnership accounting: how will profits be divided, and what will happen at the end if:
  • You win big
  • You break even
  • You lose money
  Partners are, of course, liable for the debts incurred. If you're going to take out the profits, then you need to share the risk, after all. Capital accounts are how we track profits and losses: RUPA § 401(a).

  In the capital account:

  • Credits
    • Contributions (net value; not including services)
    • Profits
  • Debits
    • Distributions/withdrawals (usually in cash)
    • Losses
  Profits can be income or gains. Losses can be debts/spending or capital loss. At the end of the partnership, you pay all the creditors, and the partners get the balance of their capital accounts, and then also whatever surplus is left over from the sale of assets.

  The amount you put in at the beginning (into your capital account) does not affect your share of the profits, at least by default. By default, everyone is entitled to an equal share of profits and losses. When profits are shared differently (by agreement), losses are shared like profits. And sometimes people contract for additional shares based on services, even though by default services don't affect contributions.

  The order of payment at the end: outside creditors get paid first, then partners who have made loans, then capital accounts are paid out, then profits are shared.

• A partnership draw is a monthly (or whatever) percentage of what you anticipate your share of the next year's profits will be. Usually you estimate conservatively, so you'll get a bonus at the end of the year. A draw is just an advance on a distribution.
• If there aren't enough assets to pay out the partners' capital accounts, you pro-rate the assets remaining according to the sizes of their capital accounts. And if there's actually a loss, the partners have to pay it, based on the percentages at which profits would be shared.
• A capital account can become negative (it's rare, but that could happen). You have to pay that amount in before any of the end-of-partnership payouts can take place. A lot of agreements will say that you don't have to make up a negative capital account, but that's the default.
• All this is RUPA § 807.
• Phelps v. Frampton
  Remember that you can never contract out of the duty of good faith and fair dealing. :)
• In re Keck, Mahin & Cate
  Liability of partners to third parties. See RUPA § 301: a partner is an agent of the partnership (actual and apparent authority apply). And § 305: partnership liable for actionable conduct. If it's simple negligence, the partners just share the obligations; if it's gross negligence one partner can go after the negligent one. You're only liable for losses that take place while you're a partner: § 306. A judgment against a partnership is not a judgment against a partner: you have to exhaust the assets of the partnership before you can go after a partner (§ 307).

  And there's § 308: liability of a purported partner. This is an apparent authority issue. This is why we say LLP in our logos, and stuff. You can be treated as a partner for purposes of liability, if you appear to be a partner, and you want to avoid that potential liability.

  So anyway, all of that underlies this case. These two ex-partners left before the malpractice claims were even filed, but they're liable for obligations incurred while they were partners, because that's how we deal with withdrawing partners.