PARTNERSHIP

PARTNERSHIP I. FORMATION A. Indiana Uniform Partnership Act (UPA) states that a Partnership is: Mnemonic: Associates Intend to Co-own a Profitable Business. 1. Association of 2 or more persons 2. with the Intent 3. to carry on as Co-owners 4. a Business 5. for Profit a. receipt of profits is prima facie evidence that a partnership existed b. UNLESS the profits were received as wages, rent, repayment of debt, or interest on a loan; then no presumption exists. c. or UNLESS one receives a percentage of gross receipts; if it’s not profits it’s not a presumption! B. General contract principles apply (after all, a partnership is a contract among partners) C. No writing is generally needed unless required by the Statute of Frauds: example, Executory contract that cannot be performed in one year (like setting up the partnership to last for three years) D. Partnership By Estoppel 1. Exists when parties act as if they were partners 2. Protects third parties who rely on the parties’ presentation of themselves as a partnership IF the third party extends credit to the partnership. II. PROPERTY INTERESTS A. Partnership Property 1. Determining whether property is Partnership property: a. Use intent first. If intent is unclear, use the FITUPS factors: b. Funds used to purchase (this is the most vital factor) c. Improvements and repairs—who paid for them d. Title to the property e. Use of the property f. Purpose of the partnership g. Status of the property on the partnership books 2. Rights in Partnership Property a. Creditor of the partnership may attach partnership property to satisfy a partnership debt. b. Partnership creditor, after exhausting partnership assets, becomes a creditor of individual partners. c. Partnership property is NOT subject to execution to satisfy the personal debts of the partners. d. An individual partner’s creditor may obtain a charging order for future profits and distributions made to that partner. e. A partner has no right to possess or use partnership property except to use it for partnership purposes. B. Interest In The Partnership Itself 1 1. Defined as the right to receive a pro rata share of the profits 2. No claim to specific physical property, but to the financial value represented by the partnership assets 3. May be attached (“charged”) or assigned, which merely redirects flow of the profits 4. Passes to heir or devisee on death, just like any other financial asset 5. Is considered personal property, regardless of the kind of assets owned by the partnership. 6. Presumed to be shared equally among partners unless otherwise agreed. III. RELATIONS AMONG PARTNERS A. Sharing Profits & Losses 1. Profits are shared equally unless otherwise specified in the Partnership Agreement. 2. Losses are shared in the same pro rata manner as profits. 3. Partners may not limit their liability to a third party, because they cannot limit a third party’s rights without that party’s consent. B. Remuneration: there is no compensation for services to the partnership UNLESS you’re the surviving partner wrapping up partnership affairs C. Management Rights: Regardless of how partners agree to distribute profits amongst themselves, all partners have equal management rights unless an otherwise specified in an agreement. D. Indemnification & Interest: Each partner has the right to be indemnified for partnership debts and interest E. Fiduciary Duties 1. Partners are fiduciaries 2. Require “utmost good faith and loyalty” 3. Duty of care 4. Duty of loyalty 5. Duty to render full information 6. Duty to account for any profits received F. Partners may inspect the books, and may get a formal accounting when “just and reasonable.” G. Admission of New Partners: Requires unanimous consent unless otherwise agreed H. Liability for Partnership Debts 1. New partner is liable for partnership debts incurred before being admitted, but only to the extent of that new partner’s share of partnership property, unless she expressly assumed the debts. 2. A retiring partner continues to be liable for partnership debts unless and until she is released by each creditor. I. Remedies available to Partners when another Partner causes damage to Partnership: 1. Legal a. Generally, no action at law exists, EXCEPT IF: i. wrongfully excluded ii. breach of fiduciary duty iii. partnership agreement allows action at law iv. “it’s just unreasonable.” 2. Equitable 2 a. b. c. d. Constructive trust Action for accounting Rescission of partnership agreement Decree of dissolution of the partnership (“the nuclear option,” as Professor Morrisson would say) IV. RELATIONS BETWEEN PARTNERS AND THIRD PARTIES A. Agency Principles: Partnership is Principal; each Partner is an Agent 1. Actual Authority—conferred by a. Partnership agreement, or b. Majority vote, or c. Statute (which requires partners to carry on Partnership business in the usual way, thereby giving them each actual authority to do that) i. An act not apparently for the purpose of carrying on the Partnership business in the usual way will bind the partnership ONLY if it is authorized! 2. Apparent Authority—created by a. Partner’s title, or b. Manner in which Partnership previously conducted business, or c. Custom (the manner in which other similar firms in the area conduct business) 3. Ratification 4. In Indiana, Partners have no authority to: a. assign partnership property for the benefit of creditors b. dispose of partnership goodwill c. confess a judgment d. refer a partnership claim to arbitration e. do any act making it impossible to carry on partnership business B. Liability for Partnership Obligations 1. Partnership itself is always liable 2. Partners a. Contract claims i. JOINT liability ii. Harmed party must join all co-obligors—releasing one releases them all iii. Harmed party must exhaust partnership resources before going after the individual partners b. Tort claims i. Joint & Several liability ii. Harmed party need not name every co-obligor, and need not exhaust partnership resources before going after individual partners c. An individual partner who pays a partnership claim has the right to be indemnified by the partnership and has a right to contribution from each other partner for their share of the obligation paid. C. Conveying Real Estate 1. Partner has authority to convey real estate titled in partnership name IF conveyance is for the apparent purpose of carrying on in the usual way of business. 2. Otherwise, check the names and authority. 3. If the name on the title and the name on conveyance match, title passes. 3 4. If the names on the title and the conveyance do NOT match, only the partnership’s equitable interest in the property would pass to the grantee. Title “trumps” equitable interest if competing claims arise. V. ENDING THE PARTNERSHIP A. Three-step process: 1. Dissolution 2. Winding Up 3. Termination B. Reasons/Causes for Dissolution 1. End of a definite term 2. Accomplishment of a particular undertaking 3. Partner’s express will or withdrawal 4. Expulsion of partner pursuant to the partnership agreement 5. Operation of law a. Death or bankruptcy of any partner b. Bankruptcy of partnership c. Partnership’s business becomes unlawful 6. Entry of judicial decree when: a. Mental incompetency of a partner b. Partner becomes incapable of performing partnership agreement c. Partner’s conduct prejudicially affects the partnership business d. Partner breaches the partnership agreement e. Partnership business can be carried on only at a loss f. Creditor with a charging order or assigned partnership interest applies for dissolution (if at will, or upon completion of partnership purpose) g. Any other circumstances making dissolution equitable h. When partnership is rescinded for fraud (under caselaw, not UPA). C. Old Business 1. Who may “wind up”? a. Partner who has not wrongfully dissolved is entitled to wind up partnership affairs after dissolution b. The legal representative of the last surviving partner has the right to wind up. 2. What occurs during wind up? a. Debts will be paid b. Transactions completed, and c. Any surplus applied to pay partners the amount due to them. D. New Business 1. Is the Partnership Liable? a. Partner may continue to have apparent authority to act for the partnership after dissolution ever if he’s not winding up partnership affairs. b. Burden is on the partnership to protect itself from that situation by providing notice of dissolution. c. How is notice of dissolution disseminated? i. Prior creditors are entitled to personal notice 4 ii. Others who knew of the partnership prior to dissolution are entitled to notice by publication. iii. If the partnership fails to give proper notice, it will be liable on the postdissolution obligation UNLESS the third party was aware of the dissolution (which awareness came about by any means) iv. Those who did not know of the partnership prior to dissolution are not entitled to any notice. 2. Are the Partners Liable? a. Rules for creditors remain constant: must exhaust partnership assets before going after the partners individually. b. Contribution: Partners are generally NOT entitled to contribution from one another after dissolution, because the partner is presumed to know of the dissolution. EXCEPTIONS: i. Partner dissolves partnership by express will, but another partner had no knowledge or notice of that, and incurs a partnership debt. ii. Partner dies or declares bankruptcy, but other partner had no prior knowledge or notice of that event and incurs a partnership debt. E. Post-Dissolution Distribution of Partnership Assets 1. Order of Pay (Who gets the dough?) a. FIRST pay off third party creditors b. SECOND pay off partners (other than for capital and profits) c. THIRD pay off partners for return of capital d. FOURTH pay partners for any remaining surplus (profits) 2. If Partnership assets are insufficient to cover its indebtedness when it dissolves, the loss must be borne equally by the partners. 3. Creditor Priority a. If an individual partner and the partnership are both insolvent, the partnership creditors have priority for the partnership assets over the individual creditors. b. If the partnership property is exhausted, the individual creditors and partnership creditors or “on parity” (equal footing) with one another as to the individual partner’s property. F. Continuing a Partnership Business after Dissolution 1. How may continuation occur? a. All partners who have not wrongfully dissolved must consent, OR b. The partnership agreement may provide for such continuation. 2. Creditors of the dissolved partnership become creditors of the continued business. 3. Continuing partners must compensate a withdrawing partner: a. If the partners agree, then the departing partner gets the agreed-upon amount. b. If the partners fail to agree, then the departing partner gets his interest in the partnership (valued as of the dissolution date) PLUS a pro-rata share of the profits. 4. A partner who wrongfully dissolves is only entitled to compensation for the net value of his interest, and is liable for any damages caused to the partnership. [NOTE: Limited Liability Partnerships are not included in this outline as the BarBri lecturer informed us that they were generally not tested.] 5