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Chapter 38 – Operation of Partnerships and Related Forms
 

Chapter 38 – Operation of Partnerships and Related Forms

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  • Fiduciary: One who holds goods in trust for another or one who holds a position of trust and confidence. Basically, partners are pulling for the same team and we all know what happens when one of the team stops pulling.
  • Would this scenario change if Carol’s business was out of town or the town so large that Carol’s business was not competition for the Ann Elk Tavern?
  • First, Monty has the duty to serve and must obtain Brian’s consent before leaving. Brian could sue Monty for damages if Brian doesn’t consent, which would be the cost of finding a replacement for Monty’s service. Second, Brian breached the duty to account by using partnership funds for personal use. Brian surely will have a different view of his action, though! Third, Brian probably exceeded his actual authority by hiring the employees. However, in a partnership or limited liability partnership, every partner is a general manager of the business. On the other hand, if there is a written partnership agreement stating that Brian is only to handle finance and accounting issues, Brian has breached the duty to act within his actual authority.
  • The photo is either a team of doctors (perhaps a partnership) or it’s Halloween.
  • Spector sued Konover seeking damages stemming from Konover’s alleged breaches of his fiduciary duties in managing the Tri Town partnership. The trial court found that Konover proved that he dealt with Spector fairly and breached no fiduciary duty. Spector appealed to the Appellate Court of Connecticut. Appellate court stated: “Konover’s practice of diverting Tri Town funds to other entities and retaining interest earned on Tri Town partnership funds constitutes a breach of fiduciary duty.”
  • Loss-sharing agreements between partners do not bind partnership creditors unless the creditors agree to be bound. In Spector v. Konover, involving all-too-common overreaching and misconduct in a partnership with active and passive partners, the court found that the managing partner was not entitled to receive special compensation for managing the business, absent agreement of the other partners. The court also found that the managing partner breached several fiduciary duties, including by refusing to distribute a higher amount of partnership profits.
  • The scope of this implied authority is determined with reference to what is usual business for partnerships of the same general type. Implied authority of a partner may not contradict a partner’s express authority, which is created by agreement of the partners.
  • Apparent authority exists because it reasonably appears to a third party that a partner has authority to do an act. Often, the implied authority and apparent authority of a partner are coincident.
  • The hyperlink is to the case opinion on the Findlaw.com website. The clip art is a mnemonic because NBN Broadcasting concerns radio networks. NBN Broadcasting, Inc. v. Sheridan Broadcasting Networks, Inc. : a partnership agreement designed to prevent and resolve conflicts between the two partners eventually caused serious disagreements. The partners wanted to be equal essentially, but a deadlock provision allowed one partner to dominate, eventually causing a breakdown of the partners’ relationship. It illustrates the necessity for careful drafting of partnership agreements, including anticipating that a part of the agreement may cause an undesired result.
  • When a partner commits a crime in the course and scope of transacting partnership business, rarely are his partners criminally liable. But when the partners have participated in the criminal act or authorized its commission, they are liable. They may also be liable when they know of a partner’s criminal tendencies yet place him in a position in which he may commit a crime.
  • Hyperlink is to the court’s opinion on the Findlaw.com website. While decided under New York law, the decision would be the same under the RUPA.
  • False. Partners owe to the partnership and each other the highest degree of loyalty. False. Partners may compete with the partnership only upon the consent of partners. True. A partner isn’t liable to the partnership for honest errors in judgment (negligence), but is liable for losses resulting from gross negligence, reckless conduct, intentional misconduct, or a knowing violation of law. True.
  • True. True. False. For contract obligations of an LLP, only the LLP is liable. True.
  • The correct answer is (c).
  • The correct answer is (e). A partner in a trading partnership (with inventory) has implied and apparent authority to borrow money for partnership
  • Photo indicates possible uneven distribution of burdens and rewards in a partnership. Opportunity to discuss liability as a partner as well as public policy inherent in agency and partnership law.

Chapter 38 – Operation of Partnerships and Related Forms Chapter 38 – Operation of Partnerships and Related Forms Presentation Transcript

  • C H A P Operation of Partnerships and T E R 38 Related FormsIt is not the individual but the team that is the instrumentof sustained and enduring success in management.Anthony Jay, quoted in Management Teams – Why TheySucceed (R. Meredith Belbin, 1984) 38-1
  • Learning Objectives• List and explain duties partners owe to the partnership and each other• Explain why partnership agreements can resolve issues about partners’ management and compensation rights• Describe the liability of partners for torts and contracts 38-2
  • Duties of Partners to Partnership and Each Other• Revised Uniform Partnership Act (RUPA) states that partners owe to the partnership and each other the highest degree of loyalty and must act consistently with the obligation of good faith and fair dealing (a fiduciary relationship)• Same duty applies to all forms of partnership 38-3
  • General Duties• Partners have duties to serve, account for use or disposal of partnership funds, act within actual authority, avoid interests adverse to the partnership, disclose material information, and maintain the confidentiality of partnership information – Exception: “silent” partners do not serve – Partners may compete with the partnership only upon the consent of other partners 38-4
  • Example of Partnership Duties• Ann and Elkie own the Ann Elk Tavern as general partners. Ann wants to invest in her boyfriend Brock’s auto shop and neighbor Carol’s Bar N’ Grill. Ann could invest in Brock’s shop without competing with the Ann Elk Tavern partnership, but should not invest in Carol’s Bar N’ Grill without first getting Elkie’s consent – A tavern and a bar are too similar and may give rise to a breach of duty claim 38-5
  • Example of Partnership Duties• Monty is general manager of Python Inc. and Brian handles the company’s finances and accounting. Monty wants to help Arthur run his auto shop instead of working for Python Inc. While reviewing the books, Monty discovered Brian used company funds for a down payment on his car. Monty also found out that Brian hired two employees yesterday without consulting Monty. – What issues are raised by this scenario? 38-6
  • Duty of Care• Each partner owes a duty of care in doing partnership business• A partner isn’t liable to the partnership for honest errors in judgment (negligence), but is liable for losses resulting from gross negligence, reckless conduct, intentional misconduct, or a knowing violation of law 38-7
  • Duty of Care• A partner must make business decisions that s/he has a reasonable belief are in the best interests of the partnership• A partnership agreement may alter the duty of care, but may not eliminate duty 38-8
  • Spector v. Konover• Partners agreed to build shopping plazas under a particular entity – No written agreement – Managing partner Konover diverted partnership funds to other entities and commingled funds• Appellate court found Konover liable for breach of fiduciary duty by misusing partnership funds, self-dealing, and failing to disclose material information 38-9
  • Compensation of Partners• RUPA states that a partner is not entitled to salary or wages, even if disproportionate time spent conducting partnership business – A monthly draw is allowable• Instead, partner compensation is a share of business profits, offset by shared losses – Shared equally unless agreement to the contrary 38-10
  • Management Powers• Every partner in a partnership or LLP is a general manager of the business• Thus, by implied authority, a partner binds the partnership and partners for acts within the ordinary course of business• Agreement among partners may expand, restrict, or eliminate a partner’s implied authority 38-11
  • Management Powers• A partner’s implied authority may not contradict a partner’s express authority created by agreement of the partners• A partner’s express and implied authority together constitute actual authority 38-12
  • Restricting Implied Authority• When a partner’s implied authority is restricted or eliminated, the partnership risks the possibility that apparent authority to do a denied act will remain• Partners may give notice of a partner’s authority or limitation of authority by filing a Statement of Partnership Authority or Statement of Denial with the secretary of state or the real estate recording office 38-13
  • Power to Convey Real Property• An individual partner’s transfer of real property owned by a partnership will bind the partnership if expressly, impliedly, or apparently authorized, or ratified by the partnership• A partner has implied and apparent authority to sell real property if the partnership sells real property in the usual course of the partnership business 38-14
  • Borrowing Money• A partner may not borrow money in the partnership’s name without express, implied, or apparent authority• A partner in a trading partnership (with inventory) has implied and apparent authority to borrow money for partnership• A partner of a nontrading partnership (services) has no implied or apparent authority to borrow money 38-15
  • Negotiable Instruments• A partner with authority to borrow money has authority to issue negotiable instruments (e.g., promissory notes) for that purpose• If a partner’s name is on a checking account signature card filed with a bank, the partner has express authority to draw checks• Partners have authority to negotiate or transfer instruments (e.g., checks) for the partnership 38-16
  • Management Decisions• In general, management decisions in the ordinary course of partnership business are by majority rule, one vote per partner – Unless otherwise expressed by agreement• Some decisions not in the ordinary course of business require unanimous consent – Example: a decision to expand or bring in another partner 38-17
  • The Partnership Agreement• By unanimous agreement, partners may modify management rules such as limiting or expanding authority, creating classes of partners with special or weighted voting rights, or delegating powers• NBN Broadcasting, Inc. v. Sheridan Broadcasting is a lesson in the necessity of careful drafting of an agreement 38-18
  • Liability for Torts & Crimes• Respondeat superior doctrine of agency law may be applied to determine liability of partners and the partnership for torts of a partner and partnership employees• Partnership and partners are liable jointly and severally for torts of a partner committed within ordinary course of partnership business 38-19
  • General Partnership as Entity• Under RUPA, a partnership may sue or be sued in its own name• Partners also may be sued since they are jointly and severally liable for partnership obligations (contract or tort)• If partnership and individual partners sued, any judgment must first be satisfied from partnership assets, then from personal assets of the partners sued 38-20
  • General Partnership Liability for Torts & Crimes• Partners and the partnership are liable: – When a partner commits a breach of trust – For a partner’s negligence (generally) • Generally not for a partner’s intentional torts• When a partnership and partners are held liable for a partner’s tort, they may recover the amount of their vicarious liability from the wrongdoing partner. 38-21
  • The LLP & Tort Liability• The limited liability partnership (LLP) was created to reduce personal liability of professional partners – An innocent partner of an LLP has no liability for malpractice of partners• LLP partners also have no personal liability for debts of the business, such as an invoice, leases, or loans 38-22
  • LLP as Entity• For contract obligations, only LLP is liable• For tort obligations, LLP is liable as well as the partner who committed the tort – Innocent LLP partners bear no liability• Ederer v. Gursky: New York’s LLP law, while mostly shielding LLP partners from liability to LLP creditors, did not shield LLP partners from liability to each other for breaches of contract or partner duties 38-23
  • Test Your Knowledge• True=A, False = B – Partners owe to the partnership and each other an ordinary degree of loyalty – Partners may compete with the partnership as long as it does not harm the partnership. – A partner is liable to the partnership for losses resulting from gross negligence or reckless conduct. – A partnership may sue in its own name. 38-24
  • Test Your Knowledge• True=A, False = B – In general, management decisions in a partnership are decided by majority rule. – A general partnership is liable for a partner’s negligence. – For contract obligations of an LLP, only the partners are liable. – A partner with authority to borrow money has authority to issue negotiable instruments. 38-25
  • Test Your Knowledge• Multiple Choice – Two accountants formed Caine & Able, LLP. The partnership and each partner was sued for Able’s alleged negligence. Who might be liable? a) Only Able due to his negligence b) Only the partnership, Caine & Able c) The partnership and Able d) The partnership and either partner, jointly or severally 38-26
  • Test Your Knowledge• Multiple Choice – A partner in a trading partnership has what type(s) of authority for borrowing money? a) Express authority b) Implied and apparent authority c) Actual authority d) Implied authority e) All of the above 38-27
  • Thought Questions• When drafting the partnership agreement, should duties and compensation be allocated evenly or according to each partner’s contribution and skill? Should partners be shielded from personal liability? 38-28