Business Associations Duties of Partners to Each Other Introduction • Previous Materials Considered Management of the Partnership Issues as They Related to the Partnership’s Responsibilities when Dealing With Third Parties. (e.g. law firm clients, a vendor, and a real estate transferee. • Current Materials Consider Duties Partners Owe to Each Other---Particularly When Performing Their Managerial Responsibilities. Meinhard v Salmon • Facts That Gave Rise to the Litigation: • Salmon and Meinhard were joint venturers to develop a property leased by Salmon into a commercial real estate venture. They agreed Meinhard would supply ½ the funds; parties agree to share profits and losses; Salmon had “sole power to manage…” Events that occur near the end of the 20 year lease? Meinhard Facts • Owner of lease offers Salmon opportunity to lease the Bristol property as well as five other nearby lots and develop them. • Salmon forms a corporation, Midterm Realty Co. to exploit the new business opportunity. • Salmon fails to tell Meinhard about the new deal. Plaintiff’s Position • New lease should be held in trust as an asset of their joint venture. • Plaintiff offers to perform his share of the obligations under the new lease. • Defendant Salmon refuses. • Suit follows. Plaintiff’s Theory of the Case • Salmon owed him a fiduciary duty as a partner. Duty required Salmon to place the partnership interests before his own. Duty required undivided loyalty to the partnership and to Meinhard. • Duty included disclosure of the partnership opportunity. • Defendant breached that duty: did not disclose; usurped partnership opportunity. General Principles Governing Partners Relations To Each Other • Partners owe each other fiduciary duties. • Managing partner has a higher duty to co- partners because of his position. • “Punctillo of honor” is the standard of behavior. Careful attention loyalty obligations. Issue • Defendant violate his fiduciary duty to his joint to the Plaintiff? • Court first determines that the business opportunity for the new lease belongs to the joint venture. See page 66 Why is this determination important to the disposition of this case? Fiduciary Duty Breached By Salmon • Disclosure. How? Based on the Meinhard holding, what types of matters must be disclosed to partners? • Chance to Compete. How did Salmon breach this duty owed to Meinhard? Other types of duties of loyalty owed by partners • Conflict of interest. • Not to compete. Remedies for Violations of Fiduciary Duties • Remedies Imposed by the Court. • New Lease Placed In a Constructive Trust • Trust Attached to the Shares of the corporation created to commercially develop the property; party to the lease. Why does the court agree that Defendant Salmon should have one share more than Meinhard? • Share of the profits. Dissent’s Position • By focusing on the scope of the joint venture agreement between Meinhard and Salmon, what does the dissent conclude? • Scope of the joint venture? • Nature of Meinhard’s interest in the joint venture and the prior lease? • Upon the expiration of the lease, the joint venture terminated after the final accounting to Meinhard. Duties Imposed by the UPA (1914) • UPA 20 Duty to Render Information. • Only on demand? • “all things affecting the partnership” • Who is entitled to this information? UPA 21 & 22 Accounting of “any benefit.” Hold in trusts profits. Partner entitled to a formal accounting. Modify Partnership Duties by Agreement? • Express language in UPA 20-22 that resolves this question? • Judicial approach to this question? See note 4 at page 70 (Singer v Singer). Compare UPA (1997) 404 • 404(a) duties owed by partners: loyalty and care. • 404(b) defines duty of loyalty; 404(b)(1) compare with UPA 21. • Duty of care defined. 404 (c ). Negligent conduct of business by a partner (malpractice) violate the duty of care? Sexual harassment of partnership employee by partner violate the duty of care? Alter fiduciary duties by contract Restrict fiduciary duties? Eliminate them entirely? Partnership Dissolution Dissolution • Defined: UPA 29 what changes occur to the legal relationship by a partner “ceasing to be associated in the carrying on …of the business” of the partnership. • Does the business necessarily close? Dissolution: Timeline of Events • Dissolution Event: Examples of types of events or Causes? See UPA 31 • Wind Up of Partnership Affairs • Termination of the Partnership. Collins v Lewis • Facts: Plaintiff Collins and Lewis were partners in a cafeteria business; agreed that Collins would furnish the money to develop the business and Lewis would furnish the lease for space for the business and manage it; agreed to share profits. Agreed to remain partners for the 30 year term of the lease. Events Leading to Discord Between the Partners • Financing costs exceeded previous estimates. • Expenses exceeded business receipts. • The partners blamed each other for the business problems. Collins Brings and Action for Judicial Dissolution • Why does he seek judicial dissolution? Why not simply dissolve under UPA 31(1)(b) because he is unhappy with Lewis’ management of the business? • Difference between a partnership at will and a partnership for a term? Collin’s Position/Court’s Response • Court should dissolve the partnership if the partners can no longer agree on the management of the business; there is no expectation that the business will make a profit. Any “no fault” judicial dissolution? • Why does the court deny Collins’ petition for dissolution? For foreclosure on the mortgage he held on Lewis’ interest in the partnership? General Rules Applicable to Judicial Dissolution • Legal right rests in the court’s equitable powers. Exercise of those powers depends on whether party seeking dissolution has performed his responsibilities under the partnership agreement. • Jury findings that control the court’s exercise of its equitable powers. • Reason business was not profitable was due to Collins’ breach of his agreement to furnish funds to get the business in operation. Lessons From Collins v Lewis • How did Lewis limit his liability for potential losses to Collins’ capital investment? • How did Collins protect himself in the event the business was not profitable? • What advice would you have offered to Collins if he wanted to limit his investment to $300,000 worth of start up costs? Judicial Dissolution UPA 32 • Basis for court to exercise its equitable powers to dissolve a partnership? • “no fault” judicial dissolution exists? Cauble v Handler • Action for an accounting brought by administrator of the estate of the deceased partner. • Event that caused the dissolution? Trial Court’s Disposition • Award plaintiff $20.95; • Tax plaintiff with the costs of the auditor who examined the partnership books. • Plaintiff appeals Plaintiff’s position • Trial Court erred: • Used book value or costs of assets vs market value • Plaintiff due a share of the profits earned between the date of dissolution and the date of judgment. Issues • Use book value or market value when determining assets of partnership? • Trial court err in not awarding plaintiff share of the profits for partnership earnings between date of dissolution and date of judgment? Court Determinations • Determination of partnership assets should be made based on market values of those assets at the date of dissolution. • UPA 38(1): At dissolution the dissolving partner could have elected to have the assets of the partnership liquidated applied to pay the creditors and the remaining funds used to pay the partners the amounts owed them. • Partners do not usually elect this option. Why? UPA 42 Election • Business continues after retirement or death of partner. • Partner’s estate can elect to get interest on the value of the partnership interest used by the business between dissolution and termination of the partnership; • Or can elect to receive a share of the profits earned between dissolution and termination. Court Determines Elections Made by Cauble • UPA 38? • Did not elect to liquidate the business. • UPA 42 ? • At trial elected to receive a share of the profits. UPA 1914: Summary of Elections Available to Withdrawing Partners • UPA 38 Liquidation Election of Allow the Business to Continue • UPA 42 Business Continues: Can elect interest or share of profits made between date of dissolution and final termination of the partnership as to the withdrawing partner. Adams v Jarvis • Action for Declaratory Judgment. • Facts: Partnership of three physicians enter into an agreement that provides that upon withdrawal of a partner the withdrawing partner receives amounts as determined by their agreement. There is no dissolution unless all of the partners agree to dissolve the partnership. Plaintiff withdrew. Plaintiff’s Position • UPA 38 applies. He is entitled to have the partnership assets liquidated, creditors satisfied and he should be paid his one third interest. • Trial Court’s Position? • Statute Applies Issue • Is the agreement enforceable even though it varies the statutory election right? Supreme Court’s Disposition • Statute does not specifically address a withdrawal from a partnership with an agreement that the business is to continue after withdrawal of a partner. • Enforce the agreement as long as it sets forth a method to pay the withdrawing partner his agreed share or does not jeopardize the rights of creditors. Supreme Court’s Application of UPA 38 • UPA 38 does not forbid methods other than liquidation. • UPA 38(1) election applies only, “unless otherwise agreed.” • Construing the terms of the agreement, withdrawing partner is not entitled to one third of the accounts receivable. Per the agreement the partnership retains possession of the accounts receivable. • Trial Court Reversed and Remanded. Hypo • Plaintiff entitled to 5/36 of the profits collected for the entire year. What if the remaining partners departed from their usual methods of collecting payments from patients during the year plaintiff withdrew with the intentions of vigorously pursuing those accounts the following calendar year? 8182 Maryland Associates, LTD Partnership v Sheehan • Law firm entered into a 10 yr. lease for office and parking space with 8182 Maryland. What type of business association was the firm? • General Partnership 8182 continued • Defendant Sheehan along with 12 other partners signed the lease. Lease made no provision for liability of incoming or withdrawing partners. One year later, Sheehan withdrew from the partnership. Assigned his interest in the partnership to the remaining partners. New partners joined the firm. They did not sign the lease. Partners left the firm. Firm defaulted and filed for bankruptcy. Lessor sues the firm’s partners. Trial Court’s Disposition • Dismisses 36 partners. • Two partners limit any recovery against them to firm assets. • Trial court dismissed the action against defendant Sheehan. Issues • Effects of withdrawal of partners on liability to creditors. • Effects of incoming partners on liability to preexisting creditors. Missouri Partnership Law UPA (1914) • UPA 38(1) How can a withdrawing partner be discharged from liability for debts owed by the partnership to existing creditors? • By express agreement between the partnership, partner, and creditor. • Agreement may be inferred. • Under Mo. Caselaw, admission of new partner dissolves the old partnership. Sheehan’s Position/Court’s Response • Sheehan signed the lease; left the partnership before the lease commenced or was breached by the firm. • Court’s Response: Liable when lease executed. • Sheehan argues he left the partnership before any breach occurred. • Court’s Response: Sheehan remained liable on the lease contract; remained liable for contingent obligations of the partnership. Subsequent Partners Liability • Privity of Contract and Estate Theories • UPA 17 interpreted in light of the above theories. Incoming partner liable for partnership obligations; satisfy liability only out of partnership property. • Leases: consider contract and property principles. Privity of Contract or Estate • Original partners who signed the lease liable under what theory? • Privity of Contract: liable under the terms of the contract. (Future payments due on the lease also.) • New partners who occupied the premises liable under what theory? • Privity of Estate: liable for the rent for the periods they were in possession as tenants of the property. Liable for payment of the rent only. Withdrew before breach/not liable. Applying Partnership and Landlord Tenant Law • Court must harmonize areas of law. Partnership and Landlord tenant. • Landlord tenant law: lease obligations arise and bind the partnership continually. Why is this principle important? • Original partnership liable under contract and property theories; subsequent partnership liable under property—landlord tenant theory Difference in Liability • Contract liability on the lease: liable for performance of the lease for the entire period. • Property liability (privity of estate) liable for the period the premises are occupied by the tenant. New partners jointly and severally liable for rent payments? See p. 99 • Advice for the landlord? Lampert, et al PC v Gallant et. al • Law firm at issue was a personal service corporation. Yet, court treats the parties as if they were in a partnership relationship. Why? LHR Split Up • Problem: no formal agreement on how to handle contingent cases in the event of a dissolution. • Problem: no agreement on competing for clients after dissolution or on payment of fees by clients. Fiduciary Duties of Lawyer Partners to Each Other • Treated like partners even though service corporation. • Rule of Professional Conduct governs: lawyer shall not participate in offering or making an agreement in which a restriction on the lawyer’s right to practice is part of the settlement or a controversy. • Policy reasons for the above limitation? Policy Reasons Behind Rules of Professional Conduct • Policy Concern that Drives the Rule That Limits Contracts that Restrict an Attorney’s Right to Compete for Clients. • Protect the Clients of the Withdrawing Atty. • Protect Their Freedom of Choice of Counsel LHR’s Claim of Breach of Fiduciary Duty by Gallant • Basis for firm’s claim that Gallant continues to owe the firm fiduciary duties? • Court’s view of claim that Gallant’s representation of former LHR clients at his new firm represents a breach of fiduciary duty owed to the other shareholders at LHR? • Disciplinary Rules Can Trump Contractual Provisions; also Claims of Breach of Fiduciary Duties. Gibbs v Breed, et al • Gibbs and Sheehan former partners of BAM withdrew and joined another firm Chadbourne. • Plaintiffs, Gibbs and Sheehan seek amount they are due under the partnership K. • Defendants BAM and partners allege Plaintiff’s breached their fiduciary duties to the BAM • Lower court ruled for BAM Examination of Contested Actions • Persuading another partner to leave. • Recruiting BAM employees. • Providing a competitor with confidential information about BAM’s personnel. • Taking chronology files of BAM cases to new firm. • Solicitation of former BAM clients. Duty of Loyalty Obligations Upon Withdrawal • Apply when planning and implementing withdrawals from the partnership. • Why does the court treat recruitment of BAM employees differently than recruitment of BAM’s clients? • Prewithdrawal recruitment of employees allowed if firm has been given notice of the atty’s intention to withdraw. Conduct Considered as a Breach of Fiduciary Duty of Loyalty • Supplying competitor with confidential information about BAM’s employees; • Providing competitor with recruitment advantage over one’s partnership. Expulsion of a Partner • UPA 31 (1)(d) • What is expulsion? • Conditions upon which a partner may be expelled? • Can the expelled partner force a liquidation of the partnership? See UPA 38(1). Bohatch v Butler & Binion • Case involves an expulsion. • Why was Bohatch expelled from her law firm partnership? Bohatch Facts • Bohatch law firm partner. • Suspected another firm partner (managing partner) was overbilling a firm client. • Reported her suspicions to other partners. • Partners investigated her complaint. Found no overbilling. • Firm eventually expelled Bohatch. Issue • Create exception to the rule that partners have no duty to remain partners where expelled partner reported suspicions of overbilling by another partner. Legal Principles Regarding Expulsion • No duty to remain partners. • Firm has a duty not to expel a partner in bad faith? • What is bad faith? • Expulsion for self gain? • Expulsion for business reasons? • Expulsion due to policy disagreements? Duty to Retain a Whistle Blower Partner? • Policy Concern Raised? • Expulsion discourages compliance with Rules of Professional Conduct. • Court refuses to create an exception to the partnership at will doctrine. • Attorney’s position: must report ethical violation—not protected from retaliation for doing so. Concurrence/ Dissent Views • Majority: can expel whistle blower whether correct or incorrect about ethical violation. • Hecht: right to expel good faith whistle blower who incorrectly reports ethical violation—that equals simple bad judgment. • Dissent: violates fiduciary duties to expel a partner for complying with the Disciplinary Rules of Conduct. Good faith effort to alert firm to overbilling =breach of fiduciary duty. Compare Atty’s in Publicly Traded Firms • Sarbanes Oxley protects whistle blowers from retaliation. See p. 110. Dissolution UPA 1997 • Different theoretical views of the partnership between the 1914 Act and the 1997 Act. • 1914 partnership aggregate of partners. • 1997 partnership a legal entity. UPA1997 • Formal recognition that partners may be corporations, llc’s, other types of entities. • Dissociation is the name given to the event causing the change in the relationship of the partners. • Expulsion power exists. No agreement required. • Partnership continues despite dissociation of a partner. Inadvertent Partnerships Determining Whether or Not A Partnership Exists Consequences of Informal Creation of Partnerships • Creation May Be Inadvertent • Parties May Think They Have Created a Different Relationship • Courts May Find the Existence of a Partnership with Judicially Determined Partner Incurring Rights and Liabilities Partnership by Estoppel • UPA 16 Difference in Inadvertent Partnership Determination • Person is not a Partner in Fact • Liable as Though a Partner To Persons Who Extend Credit due to: • Representations You Make • Representations You Allow Others to Make Martin v Peyton • Case Concern Claims of Partner by Estoppel or • Creation of Partnership by Law? Martin v Peyton • Plaintiff’s Position: • Plaintiff alleges that the defendants, Peyton, Perkins, and Freeman really became partners with the brokerage firm, Knauth, Nachod & Kuhne. Facts That Support Partnership Determination? • Defendants are to Receive a Share of the Profits. UPA 7 (4) • Defendants Have the Right to Control the Management of the KN&K Firm. UPA 18 (e) How? • Other rights associated with partner status. Inspection rights. UPA 19 Martin v Peyton • Defendants Positions: • Not partners. Evidence offered to support their position? P.119 How does the court treat this evidence? • Are lenders with veto and managerial powers. Major right defendants lack that partners possess. P. 120 • Defendants’ reasons for contracting for above rights? Legal Concepts • Partnerships are created by contract. • Court determines if partnership exists. • Statements by the parties that deny they intend to create a partnership are not dispositive. • Court examines the circumstances. • Sharing of profits relevant or presumptive evidence but not dispositive. Court’s Decision • Defendants are not partners. • Cautionary message for creditors? • Creditors can protect themselves; whether they become partners is a “matter of degree.” Smith v Kelley • Plaintiff sought a partnership accounting. Claims he was a partner of the Kelley- Galloway accounting firm. • Written Agreement? • Evidence Plaintiff offers as proof he was a partner? • Held out as a partner: to the IRS, Accounting Board, a state court, and on a contract. Defendant’s Position • Deny Partnership Relationship with Plaintiff • Evidence offered to support their position. • No right to share profits. • No contribution to assets. • No authority to manage, or contract for the firm. Not liable for firm losses. Court’s Decision • Defendants were more credible. • No partnership ever intended. • Trial court took into consideration the appropriate elements of a partnership. Hypo • During period while plaintiff worked for K-G vendor extended credit to K-G based on representations that Plaintiff as a partner. • K-G defaults on the debt. Plaintiff liable? • Customer of K-G injured on a slip and fall. Inadequate insurance and assets in K-G to pay damages. Plaintiff liable? UPA (1914) 16: UPA (1997) 308?