ba i - rupa outline - wood

RUPA Outline – BA IProfessor Wood

Fall 2008

CHAPTER 11: THE CREATION OF A PARTNERSHIP

I. Introduction1. “Partnership” means an association of two or more persons to carry on as co-

owners a business for profits. RUPA § 202(a).

II. Elements of a Partnership (4 Elements)1. Association

a. Voluntary agreement of the parties, express or impliedi. The intent of the parties does not matter, if a K states that it is

not a partnership, but in reality it fits this definition, then it will be held to be a partnership for liability purposes

2. Personsa. Any legal or commercial entity. RUPA § 101(10)

i. A corporation or another partnership can be a partnerii. Must have capacity to contract and must be competent

3. To carry on as co-owners a businessb. There must be control and management of the business

i. For example on this, see Cox v. Hickman below.a. A business is every trade, occupation or profession and consists of “a

series of acts directed toward an end.”4. For profit

a. Receipt of a share of profits of a business is presumed to be a partner in the business, unless the profits were received in payment

i. Of a debt. RUPA § 202(c)(3)(i).1. Cox v. Hickman

a. Facts: Creditors take over bankrupt partnership and run the business in order to make a profit and recover the moneys owed to them by the business. After the creditors recover their debt, the business will go back to the original partners.

b. Issue: Are the creditors that take over the business now partners of the business?

c. Holding: No. The creditors are not partners.d. Rule: Look at:

i. Control (who controls the day-to-day operations) – the creditors control the day-to-day operations, but…

1. Profits (who will share in the profits) – the moneys owed to the creditors are not “profits”; rather

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they are debts of the business. See RUPA §202(c)(3)(i). Once the debt is repaid the business and its profits will be returned to the original partners (aka the residual claimants).

ii. For services as an independent contractor or of wages or other compensation to an employee. RUPA § 202(c)(3)(ii).

1. Serapion v. Martineza. Facts: Woman is an employee of a law firm. She

is later given an interest in the partnership. She was paid some of the profits of the company. Then she bought an interest in the property and received a higher percentage of the profits.

b. Issue: Is she an employee of the partnership of which she is a partner?

c. Rule: An equity owner is one who does not get paid a salary, but gets paid a percentage of the profits. A non-equity owner gets paid a salary. The court gives us factors to consider that correspond with RUPA code sections:

i. The right and duty to participate in management (§ 401(f))

ii. The right & duty to act as an agent of other partners (§ 301(1))

iii. Exposure to liability (§§ 305 and 306)iv. The fiduciary relationship among

partners (§ 404(a))v. Participation in profits and losses (§

401(b))vi. Investment in the firm (§ 401(a) and §

204)vii. Partial ownership of firm assets (§ 501)

viii. Voting rights (§ 401(j))ix. The aggrieved individual’s ability to

control and operate the business (§§ 601-603, Dissociation)

x. The extent to which the aggrieved individuals compensation was calculated as a % of the firm’s profits (§§ 601-603, Dissociation)

xi. Extent of the individual’s employment security (§§ 601-603, Dissociation)

d. Holding: No, she is an equity member rather than an employee. She satisfied many of these factors. She had voting rights and her

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compensation was substantially dependent on the firm’s fortunes.

iii. Of rent. RUPA § 202(c)(3)(iii)iv. Of interest or other charge on a loan. RUPA § 202(c)(3)(v).v. Etc.

5. Example of the Analysis for Partnership Formation:a. Lupien v. Malsbenden

i. Facts: Malsbenden loaned a company money with no interest being charged on the loan. He was to be repaid out of the profits of the business. Also, the owner of the business was not there on a daily basis, so the plaintiff dealt with defendant each time he dealt with the company. Malsbenden claims he was a creditor helping run the business so that he could recover on his loan.

ii. Issue: Is D a partner?iii. Analysis: Go to § 202 and apply the elements:

1. Association – there was a loan that was really a contribution to equity. One of the key facts was that his “loan” was interest-free and there was no repayment schedule.

2. Persons – it is between persons3. To carry on as co-owners a business – he made the day-

to-day decisions of the business and actually had physical control of the business since the original partner left.

4. For profit – the D is claiming that his receipt of profits from the partnership was in repayment of debts so as to fit under the exception in RUPA § 202(c)(3)(i). However, the court noted that he was only going to be repaid upon sales of the company in the Bradley division rather than on a repayment schedule and that this looks more like a distribution of profits.

b. In McDowell v. McDowell, the court, citing the RUPA, looked to several factors to determine whether the parties have formed a partnership:

i. The receipt or right to receive a share of the profits of the business,

ii. The expression of an intent to be partners in the businessiii. Participation or right to participate in the control of the

businessiv. Sharing or agreeing to share losses of the business or liability

for claims by 3rd parties against the business, andv. Contribution or agreeing to contribute money or property to

the business

III. Income Tax Considerations – A Brief Summary

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1. Partnership income and losses flow directly through to the individual partners’ returns. The income and losses maintain their original character (i.e. as tax-exempt)

2. The partnership does play a role, however, by taking tax elections that cannot be changed by the actions of the partners at the individual level when they are completing their individual returns.

IV. Contributions of Property to the Partnership1. Ambiguities Concerning Ownership of Particular Property

a. RUPA §§ 203 and 204 Presumptions regarding Propertyi. RUPA § 203 (“Property purchased with partnership funds is

partnership property.”)ii. RUPA § 204(d) (“Property acquired in the name of one or more

of the partners without an indication of their status as partners and without the use of partnership funds is presumed to be the partner’s separate property, even if used for partnership purposes.”)

1. McCormick v. Brevig (p 564)a. Facts: Woman deeded cattle to her son, Clark,

and his two sons. Clark was a partner with Joan in a ranching business. The cattle were listed and treated as partnership property for tax purposes and proceeds from the cattle’s offspring were put into a partnership account. Joan claimed that the cattle were partnership assets.

b. Issue: Were the cattle partnership assets?c. Rule: RUPA § 204(d) d. Holding: The cattle are Clark’s individual

property. There is nothing in the record to indicate that the cattle were purchased with partnership assets (§ 203) or transferred to him in his capacity as a partner of the partnership (§ 204(d). Nor has their been any assignment of the cattle to the partnership. You have to show intent from the owner-partner to contribute the capital to the partnership. Intent can be inferred from the circumstances. Here, the plaintiff provided no evidence that there was intent to transfer the cows into the partnership. Therefore, they are presumed to be the Clark’s personal property even though they were used for partnership purposes and treated as partnership property on tax returns.

2. For evidence, look to the capital accounts of the partners to see if the value of the property showed up in

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the account. If the property has been contributed to the partnership. It should show up in the capital account. If it simply is being used by the partnership, the value of the use of the partnership should show up in the account, or we should see lease payments being made from the partnership to the partner who owns the property.

3. Curtis v. Charles (Note 1 page 565)a. Charles is labor partner and Curtis contributes

land and pays the taxes on the land. Charles died and his wife is suing Curtis for the increase in FMV of the land. So, she is saying that the land is owned by the partnership. Is it?

b. RUPA § 204(d) broken into elements:i. Property acquired in the name of one or

more partners1. Yes, acquired in the name of Curtis

ii. Without an indication of their status as partners and without the use of partnership funds

1. Yes, there was no mention of the partnership when he acquired title

iii. Is presumed to be the partner’s separate property, even if used for partnership purposes

1. Facts supporting presumption that the land itself was not contributed: Curtis personally paid the taxes on the land

2. Facts attacking presumption that the land itself was not contributed:

a. If they had found that Curtis was reimbursed for the taxes out of partnership earnings

b. The building of structures that are significant in value on the land (intent can be inferred from the circumstances)

2. The Property Rights of a Partnera. RUPA § 501 (“A partner is not a co-owner of a partnership property

and has no interest in partnership property which can be transferred, either voluntarily or involuntarily.”)

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b. RUPA § 502 (“The only transferable interest of a partner in the partnership is the partner’s share of the profits and losses of the partnership and the partner’s right to receive distributions.”)

i. Application of §§ 501 & 5021. Groff v. Citizens Bank of Clovis

a. Facts: Groff takes out a loan that is secured by all of his currently owned cattle and all “after acquired” cattle. Subsequently, Groff enters a partnership with Pickering, and the partnership buys cattle. Groff defaults on the loan with the bank. The bank wants to include the cattle purchased by the partnership under the term “after acquired” cattle.

b. Holding: The bank is trying to have an interest in cattle that are partnership property under § 203 (purchased with partnership funds). Groff does not have a transferable interest in the partnership property (per § 501), other than his interest in a share of profits, losses, and distributions per (§ 502).

c. RUPA § 602 (“A partner has the power to dissociate at any time, rightfully or wrongfully, by express will to withdraw as a partner.”)

i. The effect of a dissociation on property rights of a partner:1. Putnam v. Shoaf

a. Facts: Frog Jump was operating at a loss. Putnam wants to dissociate under § 602. She sells her interest to Shoaf. It is later determined that the bookkeeper had been stealing from the business. The business recovers from the bookkeeper. Putnam now claims entitlement to that recovery based on her past interest in the property.

b. Holding: Once she transferred her interest, she has no entitlement. She has transferred her entire interest. This is an asset that the partnership did not know it had, like oil being found underground. It was transferred with everything else. You can’t pull out certain parts of the partnership and say that you retained it.

3. Are the Services of a Partner Property of the Partnership?a. Sharfman v. State

i. Facts: A partner of a partnership is in an accident and can no longer work. The partnership sues the negligent driver that caused the accident, seeking recovery for the loss of the partner’s services.

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ii. Holding: The labor of the partners is not an asset of the partners. Only the individual that is injured gets to recover. He only spoke for a second on this and I didn’t really catch it.

CHAPTER 12: THE OPERATION OF A PARTNERSHIP

I. Contractual Powers of Partners1. Introduction

a. RUPA § 103 says that the partnership agreement will govern the relationship between partners and between the partners and the partnership, except for the nonwaivable provisions in § 103(b).

b. RUPA § 301(1) (“Each partner is an agent of the partnership for the purpose of its business. An act of a partner, including the execution of an instrument in the partnership name, for apparently carrying on in the ordinary course of partnership business or business of the kind carried on by the partnership binds the partnership unless the partner had no authority to act for the partnership in the particular matter and the person with whom the person was dealing knew or had received a notification that the partner lacked authority.”)

c. RUPA § 303 (the import of a statement of authority under § 303 is used to grant extraordinary authority or to limit the ordinary authority that is provided by § 301)

2. Actual Authoritya. Elle v. Babbit

i. Facts: One partner, Beall, changed a K that would have decreased the partnership’s profit. Now the other partners are trying to claim that the partnership is not bound by his act.

ii. Issue: Is the partnership bound by this partner’s act?iii. Holding: Yes. § 301(1) says that an act of a partner for

apparently carrying on in the ordinary course binds the partnership, unless there was no authority to act in the particular matter. Was there actual authority? First, look to the default rules under § 401(f) & (j). Per § 401(f), each partner has equal rights in the management and conduct of the partnership business. So, all of the partners have equal management rights. When a difference arises as to a matter of business, as is the case here, it must be decided by a majority of the partners (§ 401(j)). So, under the default rules, he would have acted without authority. However, we must determine if this default rule can be modified by agreement, and if so, whether it was in fact altered. § 103 has a list of provisions that cannot be altered by agreement of the partners. §§ 401(f) & (j) are not listed in § 103, so they can be altered. Now, we look to the partnership agreement. This court held that partners may, if they wish, agree to leave the management of

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the business in the hands of a single managing partner. Such an agreement may be implied from the parties’ course of conduct. In this case, Beall handled all of these types of partnership affairs. None of the partners ever objected. Therefore, he had authority and his acts bind the partnership.

b. Summers v. Dooleyi. Facts: There are 2 partners to a business. Summers wants to

hire an additional employee. Dooley objected. Summers went ahead and hired the man and paid him out of his own pocket. Now Summers is seeking reimbursement from Dooley because he says Dooley benefited from the income brought in by the extra employee.

ii. Issue: Can the partner (Summers) bind the partnership?iii. Holding: No. He will not be reimbursed.iv. Class Notes: It says that they are partners so we do not need to

establish a partnership. It does not seem to be an issue here. Now lets face the next part of the analysis. Go to § 401(f) and (j). The better section to deal with this issue is § 401(j). The issue is whether it was inside or outside the ordinary course of business. The judge thinks that it is inside the ordinary course of business. This is where a lot of the disputes will take place (“ordinary course of business”). Here, hiring an employee is the ordinary course of business. Selling all of the assets of the business is not the ordinary course of business. Now we can face the next question. Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners. The intent of this rule is that partners will have equal rights in the management and conduct of the partnership business. If the partners are equally divided, those who forbid the change must have their way. The issue here is that 50% is not a majority. When you have a deadlock, the court says that the ones who want to keep the partnership agreement the same will win.

v. Hypothetical: What if this had been a case where the third party had not been paid and he was trying to hold everybody in the partnership liable. How do we know if Summer’s action bound the partnership? We should look at § 301. It answers whether there is a partnership. Before we talk about § 301, notice that questions involving a partnership and a third party are not the same as questions involving the partners. § 301(1)’s important language is “ordinary course of business.” This is the ordinary course of business so the partnership would have been liable.

c. Nat’l Biscuit Co. v. Stroudi. Facts: Stroud and Freeman enter general partnership. (We

don’t need to establish a partnership.) Plaintiff sold bread to

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the partnership regularly. On partner tells Plaintiff that he doesn’t want any more bread delivered and that he won’t pay for it. The other partner orders bread anyway.

ii. Issue: When a partner tells a third party that he will no longer be responsible for partnership debts is that effective to prevent his liability?

iii. Rule: What is the first thing we want to establish? We want to determine if it was in the ordinary course of business. We want to know whether the partnership is bound. Look to § 301. The court uses § 9, which is the analogue to § 301. We must see if it was in the ordinary course of business or business of the kind carried on by the partnership. Let’s use both of these. Was it the ordinary course of business? They ran a grocery store, these are groceries, and they have bought these groceries in the past. Therefore it is the ordinary course of business. Now, the next phrase is a little bit broader (business of the kind carried on by the partnership). It is designed to benefit third parties who think that selling cookware, for instance, is of the kind carried on even though they don’t have the evidence to show that this partnership sells cookware. So now we know that § 301 would bind the partnership. Is Stroud’s denial of responsibility effective? No it is not. He said he won’t pay. This is the same type of question as the previous case. He has no authority to say that his partnership will not pay for bread. Look at section 303(a)(2). If Stroud tells the vendor that Freeman does not have authority, it is only effective if Freeman in fact did not have authority. Here, Freeman did because 303 says he did. Stroud cannot withdraw his authority. Suppose there had been 3 partners and Stroud and Wood get together and don’t want to let Freeman buy bread anymore. If Stroud tells 3rd party that Freeman cannot buy bread anymore, it would be effective. Look at 301(1). Freeman only lacks actual authority if the partnership says so; 401(j). So, how do you get out of it? Look at page 589 note 3. Under the old UPA it was dissolution of the partnership. Now it would be disassociation by Stroud coupled with notification to the third party.

3. Apparent Authoritya. Burns v. Gonzalez

i. Facts: Partnership whose sole business was the sale of broadcast time on a radio station with Bosquez and Gonzalez as partners. Burns and his partners paid $100,000 for certain times which he would sell to others. The time was not made available to Burns. Bosquez, acting on his own behalf and on behalf of the partnership, executed a note that would pay

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Burns a salary of $20,000 a year from the sale of such broadcast times. Burns also agreed not to sue the partnership.

ii. Issue: Is Gonzalez bound by Bosquez’ actions?iii. Holding: RUPA § 301 states that a partner may bind a

partnership when his act is “apparently carrying on in the ordinary course the partnership business or business of the kind carried on by the partnership.” RUPA recognizes a partner’s apparent authority if his act is in the ordinary course of a business of the kind carried on by the partnership. The court is saying that the burden of proof for showing that it is in the ordinary course of business was in the hands of the plaintiff. You can look to custom in the business. Here, the course of business is selling air times, not issuing promissory notes. Therefore it was not in the ordinary course of business and he did not have apparent authority.

4. Partner Liability by Estoppela. RUPA § 308 (“If a person, by words or conduct purports to be a

partner, or consents to being represented by another as a partner, in a partnership or with one or more persons not partners, the purported partner is liable to the person to whom the representation is made, if that person, relying on the representation enters into a transaction with the actual or purported partnership.”)

b. Royal Bank v. Weintraub, Gold & Alperi. Facts: Law firm was given a check from a loan and was

supposed to put it in escrow. The check was never returned. The defendants say that the partnership had been dissolved orally prior to the receipt of the check, but all other evidence points to its existence. Was the firm ever a partnership? Yes. They maintained the old offices and answered the phone with the same greeting. They were a partnership, but not anymore. They have dissolved the partnership. We can reach Weintraub, but now we would like to reach Gold and Alper for liability too.

ii. Issue: Are Gold and Alper estopped from denying that they are not liable?

iii. Rule: RUPA § 308 iv. Holding: Gold and Alper are estopped from denying liability.v. Class Notes: So, how do we know that the agreement entered

into by Weintraub would bind the partners? Look to § 308 to see if Weintraub’s actions are binding on the partnership. Break it up for an analysis. Per § 308, we will run the analysis based on their words and conduct.

1. Someone purporting to be a partner a. They maintained an office togetherb. There is an adverse fact here. There were

individual listings in the attorney directory. The court says that this one adverse fact is

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insufficient to offset the evidence showing that they had represented themselves as partners.

2. Someone (Gold and Alper) consented to being represented by another (Weintraub) as a partner

a. The words on the letterhead could be considered words by Alper and Gold that they may be represented by Weintraub.

b. Allowing the receptionist to answer the phone using the partnership name is speaking words (through an agent) that they may be consenting. Also, having their partnership listed in the phone book are also words that they consent.

3. Was the representation made to Plaintiff? a. Yes.

4. Did Plaintiff rely on the representation? a. Yes.

c. Is There a Duty to Speak?i. J&J Builders Supply v. Caffin

1. Facts: There is a corporation formed by Caffin and Jeffrey and they will be held liable as partners.

2. Ruling: Look to § 308. What are Caffin’s words or conduct? His conduct is silence. Silence can be sufficient.

ii. Consent can be implied by conduct. Holding out as a partner may be construed from acts and conduct. Silence counts as conduct. It is sufficient if the course of conduct (silence) is such as to induce a reasonable and prudent man to believe that which the conduct would imply (that he is a partner).

II. Tort Liability for the Wrongs of Partners1. In General

a. RUPA § 305 i. (a) – “A partnership is liable for loss or injury caused to a

person . . . as a result of a wrongful act or omission . . . of a partner acting in the ordinary course of business . . . or with authority of the partnership.”

ii. (b) – “If, in the course of the partnership’s business or while acting with authority of the partnership, a partner receives or causes the partnership to receive money or property of a person not a partner, and the money or property is misapplied by a partner, the partnership is liable for the loss.”

b. RUPA § 306 – (“All partners are liable jointly and severally for all obligations of the partnership unless otherwise agreed by the client or provided by law. [Note, however, that a] person admitted as a partner into an existing partnership is not personally liable for any partnership obligation incurred before [he was admitted].”)

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i. Note: This is a change from the UPA. It is now joint and several liability.

2. Tort Liability of Partnership to an Injured Partner (Co-Principal Doctrine) a. Smith v. Hensley

i. Facts: A truck was used by the partnership and the truck was the personal property of one of the partners. The partnership operated a coal mine and used a fleet of trucks. Hensley’s truck is being rented from him. The truck was damaged and the partner sues to recover for the damage.

ii. Ruling: The partnership is liable under § 305 because the truck was damaged in the ordinary course of business. Even though this was not damage caused by another partner, but rather by an employee, § 305 still applies. The court held that it is common practice for partnerships to carry on their business through employees, and that the partners should therefore share the loss.

1. Note: If one of the partners had taken the truck for a joy ride and it had been damaged, there would be no partnership liability because it would not have been used in the ordinary course of business as required under § 305.

2. Note: Under the UPA, a partner could not sue the partnership. He would first have to dissolve the partnership then file suit. Now, a partner may sue the partnership (including himself by name) without dissolving the partnership first.

3. The Fraudulent Partnera. Rouse v. Pollard

i. Facts: A divorce lawyer talked his client into transferring all of her money to him for investment purposes and the lawyer took off with her money.

ii. Ruling: Under § 305(b), the act must be in the course of the partnership business or while acting with authority of the partnership. Investing is not in the business of family law. Also, there is no actual authority. Therefore, the plaintiff cannot prevail.

4. The Nature of Partnership Liabilitya. RUPA § 306 states that “all partners are liable jointly and severally for

all obligations of the partnership unless otherwise agreed by the claimant or provided by law.”

b. RUPA § 307 states that a plaintiff may not reach the personal assets of an individual partner until exhausting the partnership assets.

III. A Brief Look at Partnership Accounting1. The book explains a BS and IS2. Capital Accounts

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a. RUPA § 401: “each partner is deemed to have an account” that is credited with the net amount of the contribution and share of profits of the partner and charged with distributions to and the share of losses of the partner

b. In other words, at the formation of the business, the capital account should consist of the partner’s contribution, then at year end the undistributed net profits should be allocated to the partners’ accounts based on the applicable % and the amount of withdrawals made should be deducted from the account.

c. If one partner withdraws cash in excess of his capital account, he will have a negative balance in his capital account. Upon liquidation, he will be required to pay the money back to the partnership to make the other partners whole.

IV. Rights and Duties Among Partners1. Fiduciary Duties – RUPA § 404 - “The only fiduciary duties a partner owes to

the partnership and the other partners are the duty of loyalty and the duty of care.” (§ 103(b) tells us that particular parts of § 404 cannot be changed by agreement of the partners)

a. Duty of Loyaltyi. RUPA § 404(b) – “A partner’s duty of loyalty to the partnership

and the other partners is limited to the following: 1. (1) to account to the partnership and hold as trustee for

it any property, profit, or benefit derived by the partner in the conduct and winding up of the partnership business or derived from a use by the partner of partnership property, including the appropriation of a partnership opportunity;

2. (2) to refrain from dealing with the partnership in the conduct or winding up of the partnership business as or on behalf of a party having an interest adverse to the partnership; and

3. (3) to refrain from competing with the partnership in the conduct of the partnership business before the dissolution of the partnership.”

ii. Duty during formation of the partnership1. Corley v. Ott

a. Facts: Corley is a capital partner and Ott is a service partner. Ott had an option to purchase land, and without disclosing this fact to Corley, Ott talked Corley into purchasing the same property for a higher amount and with less land.

b. Issue: Is there a breach of duty of loyalty? Disclosure is a component of loyalty, but it isn’t the primary issue. Loyalty is the issue.

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c. Secondary Issue: Put the loyalty issue aside for a moment. Ott contends that his time and labor should be credited to him as payment for services. Where do we go to find out if this is accurate? RUPA § 401(h), states that no partner is entitled to remuneration for acting in the partnership business. This rule can be changed by agreement, but here there is no such agreement.

d. Back to the duty of loyalty claim. What RUPA section should we look at? It is § 404(b). This court applies the UPA, which says that the duty is owed in formation. The RUPA is different because it does not mention “formation.” Would Corley prevail under the RUPA? Wood thinks that probably Corley would prevail anyway. This is about timing. Was the partnership in existence at the time of the conduct in question? The court finds, on page 640, that the partnership was formed by implication with the transaction on March 30, after which the conduct took place. Therefore, this conduct would fit under the RUPA language placing the duty on the partners “in the conduct of” the partnership.

iii. Pre-empting Business Opportunities1. Meinhard v. Salmon

a. Facts: Partners come together to lease property. It is getting ready to expire. The owner of the reversionary interest approaches Salmon and wants to develop the property even more. Salmon enters into an agreement to do this, and doesn’t tell Meinhard anything about it.

b. Issue: The issue is not failure to disclose. It is part of the loyalty claim. Remember this! The language that is quoted often says “not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.” § 404(b)(1) is at issue.

c. Ruling: Another word for opportunity is “partnership property.” The opportunity is the property right belonging to the partnership. So, it is wrongful if a particular partner takes this opportunity/property right. How do we know if this is a partnership opportunity?

i. The court looks for a connection to a partnership business in some way. RUPA

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§ 404(b)(3) says that the partners cannot compete before dissolution of the partnership. Is this a form of competition? Yes, both the partnership and Salmon want the lease. There is a tension between this and § 404(e), which says that the partner isn’t in breach merely because the partner furthers his own interest. So you can further your interest as long as you don’t take the partnership interest. Here, we have more than merely. What about (d)? This is where good faith and fair dealing show up. Under § 103, this provision cannot be changed. Did Salmon act in good faith and fair dealing? No. He violates (d), (b)(3), and (b)(1), and (e) does not help him.

iv. Leaving the Business1. Meehan v. Shaughnessy

a. Facts: Partners were leaving a law firm. Before they gave notice and wound up the business, they started preparing for the formation of their new partnership and started to talk to the current partnership’s clients about moving.

b. Issue: The issue is whether there was a breach of loyalty by the two partners who are leaving the firm by their secrecy in preparing to leave.

c. Rule: § 404(b), which cannot be amended, pursuant to § 103(b).

d. Ruling: § 404(b)(3) says that a partner’s duty of loyalty is limited to refraining from competing with the partnership in the conduct of the business before the dissolution of the partnership. § 404(d) says that a partner shall exercise good faith and fair dealing. The asset of the partnership is the clients. Partners owe each other a fiduciary duty of the utmost good faith and loyalty. Meinhard v. Salmon. There is no direct duty of disclosure in RUPA. The court goes on to state that “once it is established that a partner has engaged in self-dealing, or has acquired a partnership opportunity, these courts require the fiduciary to prove that his or her actions were intrinsically fair and did not result in harm to the partnership.” Self-dealing means that the partner was acting for the entity in a

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transaction with him or her self. This does not fit easily in that definition, but it is similar. Therefore, the partners leaving this firm bear the burden of proof to show why it is not a breach of a fiduciary duty, either by showing that the transaction is intrinsically fair or showing that after there was full disclosure, there was acquiescence by the partnership. Here, there was no such showing, so they lost. The remedy is provided by § 405(a). This is a breach under §§ 404(b)(3) and (d) because there was not fair dealing (took partnership asset (client) without partnership permission.

v. Fiduciary Duties and Freedom of Contract1. Jerman v. O’Leary

a. Facts: There was a “sale” of partnership assets to the general partners. The general partners were owed money from the partnership and took the land as payment. They have the authority to sell the partnership assets because a majority of them agree to the sale, but one partner disagrees. The alleged breach of loyalty is that they sold themselves partnership assets, and that those assets have a FMV in excess of what they paid for it.

b. Issue: whether or not there was a breach of the duty of loyalty.

c. Ruling: The partnership has a claim against the general partners under § 405, which allows for claims against partners that breach § 404 duties. There is a claim of self-dealing. Either § 404(b)(1) or (2) and also (d) should be considered. Where would disclosure fit in all of this? §404(d) requires fair dealing. What about §103(b)(5)? It says partnership may not modify §404(d), but may set forth the standards under which §404(d) will be measured. But §103(b)(5) doesn’t work because there is nothing about the standard in the agreement. So we go up to §103(b)(3)(ii)? A breach of duty of loyalty will not be found if all material facts are disclosed and all of the partners agree with the act or transaction that would otherwise breach the duty of loyalty. There was not disclosure of all material facts.

b. Duty of Care

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i. RUPA § 404(c) – “A partner’s duty of care to the partnership and the other partners in the conduct and winding up of the partnership business is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.”

ii. You can eliminate the duty of care in cases of grossly negligent or reckless conduct by the partnership agreement if you want (this is a “reasonable” reduction pursuant to § 103)

iii. Bane v. Ferguson1. Facts: Bane retired and the firm he worked for merged

with another firm and then the merged firm was dissolved and Bane didn’t get his retirement benefits.

2. Issue: The issue is whether a retired partner in a law firm has a claim against managing council for negligent acts that terminate his retirement benefits.

3. Ruling: § 404(c) is the default rule for the duty of care owed to the partnership and other partners. Unless you have a partnership agreement to the contrary, mere negligence is not enough. You can have a K that increases the liability, but this is not likely because the trend is to reduce liability by partnership agreement, not raise it. Under duty of care, the default standard of care is gross negligence. You can change that so long as it is reasonable, as mentioned above.

iv. Moren v. Jax Restaurant1. Issue: The issue is whether Moren breached her duty of

care by acting grossly negligent. 2. Analysis: First we need to find out if the partnership is

liable (§ 305), then we would see if she was acting grossly negligent in breach of her duty of care (§ 404(c)) and see if she can personally be liable to the partnership (§ 405).

a. Under § 305, we must determine if she is working in the ordinary course of business. If not, the partnership is not liable (she would be personally liable). The court says she was acting in the ordinary course of business of the partnership.

b. To find that she is personally liability, we would have to add § 405(a). This says that the partnership can go after a partner personally if they breached a duty under § 404.

c. Under § 404(c), the part of the analysis that we are at is whether she is in fact grossly negligent. The partnership needed her to be there and she had the child problem. Is it grossly negligent to

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bring the child to the restaurant? No. Negligent? Maybe, but not grossly negligent. Therefore, there is no breach of her duty of care. Of course, she bears her liability for her partnership share, but she is not personally liable.

i. Note: Pursuant to 103(b)(4), they could have changed the standard of care in the partnership agreement to where she would be personally liable (making the standard merely negligence), but that is not the case here.

c. Duty of Good Faith and Fair Dealing i. RUPA § 404(d) – “A partners shall discharge the duties to the

partnership and the other partners under this Act or under the partnership agreement and exercise any rights consistently with the obligation of good faith and fair dealing.”

ii. There are 2 cases that should be read together.iii. Holman v. Coie

1. Facts: Holman is a partner at a law firm. He said things that their primary client objected to. The client decided that Holman should not do any more work for them, so the firm fired him. The claim at issue is that the P was expelled without cause. The court says to look at the law under the UPA, which says that you can decide to dissolve the partnership in whichever way you want, but that it has to be bona fide. Then they go to Black’s Law Dictionary, which says that this means there must be good faith. Now we are where we want to be.

2. Analysis: We are looking to see if there has been a breach of the duty of good faith and fair dealing under § 404(d). In order to show good faith, what do we have to show? There must be evidence that the purpose of the severance was to gain a business or property advantage to the remaining partners. It appears that they are firing him to keep their main client. The reason that this doesn’t work is because they are not taking any asset of the partnership for themselves; rather, they are just telling him that he is no longer a partner and he doesn’t have a stake in that asset. They are acting for the benefit of the partnership as a whole and therefore did not breach the duty of good faith.

iv. Winston & Strawn v. Nosal1. Facts: There are partners who share in profits

(partners) and partners who are income partners (not really partners). One partner was fired for economic reasons. He refused to leave, and a vote was taken. A

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2/3 vote was required to expel him. More than 2/3 voted to expel him. He contends that his expulsion was void because it was in breach of an implicit duty of fair dealing (it is explicit in the RUPA, not in the UPA). What gives rise to his claim? He asked for financial statements because he thought they were taking partnership assets. They blew him off for a while then he started pushing them on it and he was later fired.

2. Analysis: For good faith we are looking for the taking of an asset that belongs to all partners to the detriment of the remaining partners. His refusal of access to records raises an inference that he was fired because he was seeking information denied to him, but that was supposed to be given to him under § 403(b) (which cannot be altered per § 103(2)). The court sees this as a valid claim. If he didn’t have a claim that they were taking partnership assets and was just seeking the financial info for whatever other reason, the issue would be § 403(b). This case brings in the duty of good faith because of the claim of the taking of assets.

2. The Right to an Accountinga. An accounting is like an audit to look at the books and records and the

partnership agreement to determine what the parties owe to each other. This is typically done in the event of dissolution.

b. RUPA § 405(b) makes an accounting available during the term of the partnership as well as upon dissolution. It is optional, however, because the RUPA says an action may be maintained “with or without an accounting as to partnership business.” Accountings are discussed more in depth below.

3. Suits Among Partnersa. RUPA § 405(b) – “A partner may maintain an action against the

partnership or another partner for legal or equitable relief, including an accounting as to partnership business, to enforce a right under the partnership agreement, a right under this Act . . . , or enforce the rights and otherwise protect the interests of the partner, including rights and interests arising independently of the partnership relationship.”

b. This section of the outline deals with a partner bringing an action to enforce the partnership agreement. Who may he have an action against? More than likely it is another partner for that partners failure to live up to the partnership agreement. Usually it is a partner’s failure to make contributions to the partnership. Now, under RUPA § 405(b), an accounting is no longer required.

c. Smith v. Manchesteri. Facts: This is an action by Smith against another partner,

which is a corporation. Smith claims that the corporation did not maintain its capital account (didn’t contribute capital).

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Also, the corporation failed to manage the partnership. Also, there is a claim of self-dealing (the partnership bought an option on land on which the partnership had a parking easement).

ii. Analysis: We look to § 405. We do not need an accounting under the RUPA like we would under the UPA. We are trying to bring an action against a partner. We can do this under § 405(b). (§ 405(a) covers actions by the partnership rather than by a specific partner; this comes into play when a couple of partners come together and want to file an action on behalf of the partnership against a specific partner.)

1. The self-dealing claim comes under § 404(b)(2). What facts support this statute? The language of the statute speaks specifically of the interest adverse to the partnership. The interest adverse is the taking of the option on land, which the partnership needs for its business. A partner has taken the land for himself. What else in § 404 would work? § 404(b)(1). This one would work too.

2. For the mismanagement claim, we are talking about the duty of care. So claims of bad management are about care. It is limited to refraining from engaging in grossly negligent or reckless conduct. The partnership agreement could have a higher standard per § 103(b)(4), but we don’t have facts about that here. Use the default standard then. The fact most fitting is that they didn’t receive competitive bidding. Most people would employ competitive bidding. This is certainly negligent. Is it grossly negligent? Probably not.

d. Schuler v. Birnbaumi. This case is again about the UPA and here there is a general

requirement that there be an accounting, but there is an exception here under the UPA. The partnership had just begun to exist. There is only one transaction so there is nothing to account for. This is an exception to the rule for an accounting. The RUPA doesn’t require one anyway.

V. Claims by Creditors of the Partnership1. RUPA § 306 – “(a) Except as otherwise provided in (b) . . . , all partners are

liable jointly and severally for all obligations of the partnership unless otherwise agreed by the claimant or provide by law. (b) A person admitted as a partner into an existing partnership is not personally liable for any partnership obligations incurred before the person’s admission as a partner.”

2. § 307 tells us how we can reach the partners’ assets.a. (b) says that partnership assets must be exhausted first, then you can

go after the partners’ assets

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b. (c) a judgment against the partnership is not a judgment against the individual partners; and in order to reach the partners’ personal assets, you must first get a judgment against the partner’s personally

VI. Claims by Personal Creditors of a Partner Against the Partnership Interest of the Partner

1. Steps a Personal Creditor must go through to get to a the Partner’s Interest in the Partnership

a. First you must get a judgment against themi. § 502 says that “the only transferable interest of a partner in

the partnership is the partner’s share of profits, losses, and distributions.” So, the creditor cannot touch the partnership assets themselves.

b. Second you must get a charging order under § 504(a).i. You receive transferrable interest from this (share of profits,

partner’s right to receive distribution). c. Next you could foreclose and at the foreclosure sale purchase the

rights of the transferee. § 504(b)i. The rights of the transferee are the right to a share in profits

that the transferor-debtor-partner had been entitled. They are not entitled to interfere in the management of the partnership business or affairs, or to require information or an accounting or to inspect books. Bauer v. Blomfield Co.

2. Tupper v. Kroc – Example of the Steps above and Transferability of Interestsa. Tupper was unable to pay his share of partnership obligations. Kroc,

a third party, paid the total amount owed by the partnerships in exchange for interest bearing note from Tupper. This is going to matter b/c this is a debt owed by Tupper to Kroc. This is personal, not partnership related. Kroc obtains a judgment against Tupper for the amount of those notes. Next, Kroc got a charging order. His authority under the RUPA for this move is § 504(a). Next, Kroc used § 504(b) to foreclose (had a judicial sale of that transferrable interest). § 504(c) allows Tupper to come forward and redeem. Now there is a sale with a very low sales price. So now we have Kroc who owns the transferrable interest. Tupper is alleging a number of things on page 716 in the last full paragraph. Is § 504 subject to agreement? The answer is yes unless § 103 prohibits it. There is no prohibition in § 103. Lastly, § 401(f) says that each partner has management rights. These rights are not transferable under § 502. So Tupper has management rights even though he has lost all of his shares to Kroc. Tupper therefore there is still a management share owned by Tupper.

CHAPTER 13: DISSOCIATION OF A PARTNER & DISSOLUTION OF A PARTNERSHIP

I. In General

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1. Under the UPA, the withdrawal of any partner meant the dissolution of a partnership. Any time a partner withdrew, there had to be dissolution. This is no longer the case. The RUPA, in § 601, allows a partner to dissociate under certain circumstances, and dissociation does not result in automatic dissolution of the partnership under the RUPA. So, dissolution and dissociation have different tracks under the RUPA. When a partner leaves, we have to determine if it is dissociation or dissolution

2. RUPA devotes 3 articles to breakups of personnel in a partnership.a. Article 6 (§§ 601 – 603) defines the events that result in dissociation

of a partneri. RUPA § 601 lists 10 events that will cause dissociation,

including the express will, expulsion, bankruptcy, or death of a partner

ii. Most dissociations result in a buyout of the dissociating partner’s interest under Article 7

iii. RUPA § 602 defines a wrongful dissociation and provides for damages in cases of wrongful dissociation

iv. RUPA § 603 discusses the effect of a partner’s dissociationb. Article 7 (§§ 701 – 705) sets the standards for the buyout of a partner,

subject to agreement otherwisei. RUPA § 701 deals with the purchase of a dissociated partner’s

interestii. RUPA § 702 deals with the dissociated partner’s power to bind

the partnership to liabilityc. Article 8 (§§ 801 – 807) covers dissolution and winding up the

businessi. RUPA §801 contains the dissolution provisions, which are not

listed in § 103 and are therefore free to be manipulated by partnership agreement

ii. RUPA § 804 is the analogue to § 702 (these should be linked up with one another)

3. Liquidation Rightsa. RUPA § 807(a) – “Any surplus [upon winding up] must be applied to

pay in cash the net amount distributable to partners in accordinance with their right to distributions . . .”

b. RUPA § 807(b) – “Each partner is entitled to a settlement of all partnership accounts upon winding up the partnership business.”

c. Dreifuerst v. Dreifuersti. Facts: A partnership operated two feed mills and it dissolved

and requested a sale of the assets. Instead of selling the assets, the court divided the two mills between the 2 brothers. One of the brothers wanted a sale and the other wanted dissolution in kind.

ii. Issue: In the absence of a written agreement (which could change the default rules) can a partner, upon dissolution and

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winding up of the partnership, force a sale of partnership assets?

iii. Rule: This is a partnership at will, so under RUPA § 801(1), a partner can cause the dissolution of the partnership by giving notice of their express will to withdraw as a partner. It is possible for a partner to break up a partnership under the single partner bust-up rule (text page 739). Next we go to §807(a). It requires there to be a distribution to the partners in cash, so one of the partners cannot force a distribution in kind, unless certain conditions are satisfied. For instance, they could if the partnership agreement had changed this default rule. Also we must look to the reasons for the rule in question. If the reasons are not at issue in the present case, the court may ignore the rule. (“[T]he principles of law and equity supplement this chapter.” RUPA § 104(a).) Examples:

1. If there were no creditors to be paid from the proceeds (the default rule looks like a good rule because there must be funds to pay creditors)

2. If ordering a sale would be senseless since no one other than the partners would be interested in the assets of the business

3. If distribution in kind would be fair to all partners (this is difficult to satisfy because there was no set value for the individual assets so how can they be divided equally?)

iv. Because of the default rule, and because of the difficulties an equal distribution in kind, the trial court should have sold the assets rather than distributed them among the partners.

d. Creel v. Lilly (note case)i. The court, using the UPA, interpreted a crudely drafted

agreement to allow the partnership to continue after the death of a partner. Under the RUPA, the partnership continues after a partner’s death per § 601(7)(i). This is a dissociation, so what will happen next? Per § 603, we must determine if the partnership dissolves and is wound up (in which case we would go to Article 8) or if the partnership continues (in which case we will go to Article 7). Here, the other partners will purchase the partner’s interest (§ 701(a)). § 701(b) will tell you how much to pay if there is no agreement that tells you how you will pay (note that this section is not listed in § 103). The court under the UPA found an agreement that there would be a distribution rather than liquidation (in other words, they leaned toward using the RUPA).

II. Causes of Dissolution1. Dissolution at Will

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a. Wood’s Rulesi. If a partner wishes to withdraw from a partnership, he may do

so. RUPA § 602(a). However, the withdrawal may be rightful or wrongful. RUPA § 602(a) & (b). If the partner chooses dissociation, he will be paid for his partnership interest. RUPA § 701(a) & (b). The partner can also choose dissolution under § 801(a)(1). This is a highly criticized provision of the RUPA, often called “the bust-up rule,” because it seems inconsistent with the numerous other provisions of the RUPA that are designed to promote the stability of partnerships.

ii. As mentioned above, the withdrawal can either be rightful or wrongful. If it is wrongful (i.e., a withdrawal before the expiration of a partnership for term), then he must pay damages per RUPA § 602(c).

b. Girard Bank v. Haleyi. Facts: Reid wants out of a partnership but dies before it was

completed. ii. Issue: Was the partnership dissolved during Reid’s lifetime or

upon her death? 1. The reason it matters is because we will use different

rules for distributing the assets. If it was in her lifetime we’d use §807(a), and they would have to pay now. If it were upon her death, they would only have to pay over a 10-year period (agreement said this; see note page 733).

iii. Rule: RUPA § 801 states that a partnership at will be dissolved when the partnership receives notice of a partner’s express will to withdraw as a partner (the highly criticized bust-up rule discussed above). She wrote a letter saying she was terminating the partnership on February 10. The effective termination was February 10. The court found that this was dissolution during her lifetime, which means that the provisions under the partnership agreement for slow payout didn’t matter.

c. Page v. Pagei. Facts: One of the partners owns a corporation that loaned the

partnership $62,000. The partnership has been running at a loss over the last 6 years. The corporation-partner wants to terminate the partnership. If there is a sale, then the partner who is owed $62,000 starts with a bid to buy the business, so the defendant doesn’t want a sell. This is a partnership of the kind that it would be unlikely to find buyers out there, not that they couldn’t.

ii. Analysis: The first question we must ask is if this is a partnership at will or a partnership for term. If you dissociate or dissolve wrongfully, there will be consequences. § 602(c)

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and § 801, respectively, state this rule and the consequences. They say that the partner will be liable for damages. Is this a wrongful dissolution because it is a partnership for term, rather than a partnership at will? The partnership agreement doesn’t say it is a partnership for term, however the court can deem the partnership as being for term. The court cites a case where a partnership was implied to be for term for the amount of time it took to pay back a loan. The court determines that the facts here do not support such a finding. The court says that it is therefore an appropriate dissolution and we must go forward with a sale. There may have been a breach of fiduciary duty, though, under §404(d) (good faith and fair dealing).

1. This is a case where the business of the sale is going to be problematic because there will not likely be willing buyers, but the court says that this does not matter and they must force a sale anyway. They say that if there is a claim that this is a breach of a fiduciary duty, then bring it. This is not, however, a wrongful dissolution because it is not in violation of some term.

2. Judicial Dissolutiona. RUPA § 801(5) – “A partnership must be dissolved and its business

must be wound up if, upon application by a partner, a judicial determination is made that (i) the economic purpose of the partnership is likely to be unreasonably frustrated; (ii) another partner has engaged in conduct relating to partnership business which makes it not reasonably practicable to carry on the business in partnership with that partner; or (iii) it is not otherwise reasonably practicable to carry on the partnership business in conformity with the partnership agreement.”

b. Potter v. Browni. Facts: There is a partner who has a lot of control, Harry

Brown, Sr., and he has a majority share of the rights. Mr. Brown would like to admit Moore into the partnership. The majority of the partners didn’t agree to let Moore in. Moore then reduced the salaries of the other partners, but only temporarily. Now, the partners who had received the small paychecks want to dissolve the partnership under § 801(5)(ii). Specifically, it is charged that the wrongful conduct of three of the ten members of the firm affects prejudicially the carrying on of its business and renders impracticable the continuance of the partnership.

ii. Analysis: There are 2 paths available under the RUPA. There can be dissolution of the partnership (not judicial) or dissociation (expulsion) of a single partner (must be judicial if not by partnership agreement or by unanimous vote).

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1. If we sought an expulsion under RUPA § 601(5)(iii), the issue is whether it would be impracticable to continue the partnership. What has Moore done to make it impracticable? They have been able to continue the partnership and have in fact made a profit. However, could they have made even more profit if he hadn’t been there? It doesn’t matter because we aren’t looking to maximize profits; we are only looking to see if it is impracticable to continue the partnership. In fact, Moore’s share of the profits over time was left in the partnership and was being used as capital to keep the partnership going. This goes against the argument of unreasonable behavior.

2. The second path is dissolution under § 801(5)(ii). We would have the same issue – whether it would be impracticable to continue the partnership. Dissolution does not have a provision for wrongful dissolution like dissociation does. The court determines that the partnership should not be dissolved per the analysis above.

II. Notice of Dissolution and Termination of Authority Among Partners1. Termination of Authority

a. Dissolution i. If a partnership has dissolved, there may be people who have

not heard about the dissolution. § 802 says the partnership continues after dissolution for the purpose of winding up its business. So there is a period between dissolution and termination called winding up. During this time, per § 804, “a partnership is bound by a partners act after dissolution that is appropriate for winding up the partnership business or would have bound the partnership under § 301 before dissolution, if the other party to the transaction did not have notice of the dissolution.” § 806(a) says a partner is liable to other partners for partnership liability. § 806(b) talks about actions after dissolution that do not deal with winding up the business. The partnership is liable to the third party under § 301 and § 804. The individual partner is liable to the partnership under § 806(b). A statement of dissolution can be filed pursuant to § 805 which gives constructive notice to persons 90 days after being filed of the limited apparent authority of partners to transactions which are appropriate for winding up the business.

b. Dissociationi. If a specific partner is dissociated, he still has the power to

bind the partnership in particular circumstances. This is

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discussed in RUPA § 702. The dissociated partners liability to other persons is discussed in § 703. Both sections confine liability to those who do not have notice of the dissociation. § 704 provides for the filing of a statement of dissociation as a means of giving constructive notice 90 days after the statement is filed. Notice also that the power of a dissociated partner to bind the partnership is limited under all circumstances to 2 years, whether notice is given or not.

2. Notice of Dissolution – Lingering Apparent Authoritya. Warner v. Modano

i. Facts: Plaintiff sues Beale and Modano. Beale is a physician who had lent money to Modano in return for a note that gave him an option to become a partner by discharging the indebtedness.

ii. Issue: The question is whether or not Beale is going to be liable on the debts to Plaintiff.

iii. Analysis: To determine if the partnership is liable under the RUPA we start our analysis at § 804. There are 2 possibilities: the partners act was (a) appropriate for winding up the partnership business or (b) if it would have bound the partnership under § 301 if the third party did not have notice of the dissolution. Under the RUPA, we ask whether he was a partner. As a partner he is liable to the third party. This is unlike the UPA where we asked if his status as a partner was known to the third parties. § 806(b) says that a partner is liable to the partnership for liabilities incurred on behalf of the partnership under § 804(b).

3. Continuing the Businessa. Buy-Sell Agreements

i. Seattle v. Marshall1. Partner of the partnership dies. Under the RUPA we

would turn to § 601(7). It says that the death of a partner causes dissociation. In the absence of a partnership agreement, the next step would be §701(b), which says that “the buyout price of a dissociated member is the amount that would have been distributed to the dissociating partner….” What are meant by the two choices in this section? Liquidation is selling everything for fair market value as opposed to selling the business as a going concern. The asset that is different between these is goodwill. § 701(b) is the default rule. You can, however, change this rule because it is not listed in § 103. The partners can, for instance, have a buy-sell agreement. The problem in this case was determining the reasonable value of the partnership interest. The parties are fighting over the

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value that the remaining partners had to pay. The remaining partners wanted the value lower because of discounts that should have been taken into account. (1) The first was a discount for sales cost. They are saying that the estate will not have to pay sales costs and so the partners should get some credit for that. (2) The next discount was the minority interest discount. A minority share in a business is worth less than a controlling interest in a partnership. The partner that died only had a minority interest of 20%. (3) Lastly, if the partnership redeems his share, the estate will not have to pay capital gains tax upon sale of the partnership interest. The court says that these discounts should not be taken into account because it was not specifically stated in the partnership agreement. You can agree to whatever you want with a buy-sell agreement, but here they did not agree to include these things. When you write an agreement you should include more precise terms than just saying it is FMV. You could write into the agreement that it will be book value. So, book value stays stagnant during times of increased in costs, it will be lower than FMV. Another thing you could do is to have an annual partnership meeting where the partners agree on a value of the business. Suppose that the buyers and sellers can’t agree on a price. You go to § 701(e), (f), (g) and (i).

b. Continuation Clausei. Hunter v. Straube (this is not an issue in RUPA)

1. The partners who are leaving are trying to avoid the UPA rule that leaving results in dissolution. The partners had an agreement of what to do in a dissolution that was harsh to the leaving partners. The problem in the agreement was that the partners who were leaving were subject to a non-compete clause. This is not a problem under the RUPA; it was only a problem under the UPA, because you can dissociate in the RUPA.

c. Liability of an Incoming Partneri. RUPA § 306(b) – partners are not liable for partnership

liability before their admissionii. This section is not listed in § 103 and can therefore be altered

by agreement. An incoming partner can agree to be liable for partnership debts in existence at the time of their admission.

d. Liability of a Withdrawing Partneri. RUPA § 703(a) says that dissociation does not relieve the

dissociated partner of liability that was incurred before

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dissociation. They are not liable for debts arising after they dissociate, except as provided in (b). Under (b), if a third party enters into a K with the partnership after a particular partner leaves, that partner may still be liable IF it is within 2 years of dissociation AND if it is in the ordinary course of business of the partnership AND if the third party believes that the particular partner is still a partner. A statement of dissociation can be filed under § 704(c) that changes the 2-year time span above to 90 days after filing the notice. This would help the dissociating partner.

ii. Redman v. Walters1. Redman is a client and he is seeking relief from Walters

who has dissociated. We turn to RUPA §703(a). The obligation to Redman arose before dissociation. Walters can’t avoid liability.

iii. Munn v. Scalera1. Analysis if this were a Dissociation

a. There are 2 ways that a partner can be discharged of a liability. § 703(c) and (d). So, one way is by agreement with the partnership creditor and the partners continuing the business. Did this happen in Munn? No. The agreement is on page 766. Why does that not satisfy § 703(c)? There is no agreement to let anybody off the hook; it just says that they will finish the work. Under § 703(c) there has to be an agreement to absolve a partner of liability. So, let’s go to §703(d) which says they can be relieved if a partner’s creditor, with notice of the partner’s dissociation but without the partner’s consent (Peter’s consent), agrees to a material alteration in the nature or time of payment of a partnership obligation. What is a material alteration? Here, they paid where Robert should have paid. The court says that this is a material alteration. So now why should Peter be responsible because the third party overpaid? He should not be liable because this is a material change.

2. Analysis under Dissolution as were the Facts of the Casea. Now we are in Article 8. RUPA § 802 says the

partnership continues after dissolution, but only for the purpose of winding up its business. If a partner enters into a K with a third party after dissolution, we should look to § 804 to determine the partnership’s liability. A partner

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can bind the partnership under 2 circumstances listed at (1) and (2) in the rule. § 804(2) deals with K’s that are being entered into that are in the ordinary course of business. § 806 says that after dissolution a partner may be liable to the partnership for K’s entered into in § 804. Also, it says that if a K is entered into under § 804(2), the partner is liable to the partnership for any damages that result.

e. Creditor’s Claimsi. Ellebracht v. Siebring

1. Facts: There are 3 partnerships. Partnership “A” has Claud Owen and Grace. “B” has Owen and Grace. “C” has Gary, who agrees to assume the liabilities of partnership “B”. This comes to the context of a long-arm statute and whether Gary can be reached by the Long-arm statute of Missouri. Partnership “A” manufactured a product that injured plaintiff. The plaintiff wants to reach Gary personally saying he is responsible for the debts of partnership “A.”

2. Analysis: To see if Gary is liable for partnership “A” causing injury, we must go to RUPA § 306 (“Partner’s Liability”). § 306(b) says that new partners to a partnership are not liable for obligations that arose before they were admitted as a new partner. This can be altered by agreement. Was there an agreement here? Yes. Gary, in partnership “C,” agreed to be bound by partnership “B.” But the liability arises in “A.” So, even under this agreement, Gary is still not liable. In an exam, we may have started with § 305 to determine if partnership “A” was even liable.

f. Rights of a Retired or Dissociated Partner or the Estate of a Deceased Partner When the Business is Continued

i. Seattle-First Nat’l Bank v. Marshall1. There is a bill owed in this case. Is the estate entitled to

pre-judgment interest? 2. Analysis: We must determine when, under the RUPA,

interest is payable to a dissociated partner. Generally those who recover a judgment are not entitled to pre-judgment interest. The RUPA says that interest is payable to a dissociated partner in the last sentence of § 701(b). Under the UPA, you had an option to seek profits, but under the RUPA, you do not have the option and can only receive interest on the value of your partnership interest.

g. The Treatment of Goodwill

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i. Goodwill is the continuity of place and continuity of name. ii. § 701(b) has 2 options for the buyout price of a dissociated

partner’s interest: (1) the amount that would have been distributed if the assets of the partnership had been sold at the date of dissociation, or (2) the amount that would have been distributed after winding up if the entire business had been sold as a going concern without the dissociated partner, whichever is greater. The difference between these two is the goodwill of the business.

4. Winding Up; Liquidation: Terminating the Businessa. Winding Up and Liquidation

i. §§ 802 and 803 say that the partnership continues to exist after dissolution in order to wind up the business. § 803(c) sort of defines winding up activities. The partnership terminates after the winding up is complete. However, per § 802(b), all of the partners may waive the right to have the partnership business wound up and terminated in certain circumstances.

ii. Resnick v. Kaplan1. Facts: After dissolution, during the winding up stage,

Resnick was continuing to service clients. Upon winding up, the court distributed the fees that he earned pursuant to the partnership agreement. Resnick is claiming that he should get the fees himself.

2. Analysis: § 401(h) says that a partner is not entitled to remuneration for services performed for the partnership, except reasonable compensation for services rendered in winding up the business of the partnership. Resnick’s actions were not the type referred to in § 803(c). He is not entitled to remuneration for those activities.

iii. Marr v. Langhoff1. This case dealt with the duties owed during the winding

up stage. § 404(g) says that the duties are applicable to the person winding up the business as if they are a partner. The question then is when the winding up process is complete. The court says that the completion of the winding up process is not from a third party’s point of view; rather it is from the partner’s point of view.

iv. Ohlendorf v. Feinstein1. Feinstein wants to submit the highest bid for land, so he

puts a partnership together. Ohlendorf backs out. Does he have the power to dissolve the partnership? No, because it is not a partnership at will. So he cannot dissolve under § 801(1). The partnership is for a

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particular undertaking as listed in § 801(2). Could he dissociate? Yes, a partner can dissociate under § 601(1) if he gives the partnership notice of his express will to withdraw as a partner. It may, however, be a wrongful dissociation. We must look to § 602(b). A partner’s dissociation is wrongful if (1) it is in breach of an express provision of the partnership agreement or (2) in the case of a partnership for term or for a particular undertaking, before the end of the particular term or particular undertaking. So, § 602(1) or (2) would work. He would therefore owe damages under § 602(c). We must then go to § 801. It says that a partnership is dissolved, and its business must be wound up, if . . . (2) in a partnership for a definite term or particular undertaking . . . (i) within 90 days of . . . a wrongful dissociation under § 602(b), the express will of at least half of the remaining partners to wind up the partnership business. So, if the remaining partners wish to dissolve, they can dissolve.

b. Terminationi. Settlement of Accounts

1. Farnsworth v. Deavera. Facts: There are 3 partners who contribute

different amounts (A = $10,000; B = $5,000; and C = $2,000). They had agreed to share profits equally. They could have agreed to any distribution they wanted, but they chose to do it equally rather than based on their capital accounts or contributions. This is the default rule under § 401(a). Unless stated otherwise, losses are distributed the same as profits. Upon liquidation, they end up with $5,000 and a $12,000 loss. We distribute the loss equally among the partners. So each capital account will be decreased by $4,000 ($12,000 / 3). A and B have positive capital accounts. C ends up with a negative capital account of ($2,000). If a partner ends up with a negative capital account, that partner must pay in the negative amount. RUPA § 807(b) (“A partner shall contribute to the partnership an amount equal to any excess of the charges over the credits in the partner's account.”) So, C must pay in $2,000.

ii. The Judicial Sale1. Prentiss v. Sheffel

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a. Facts: There was a judicial sale of partnership assets. A problem arises when the judicial sale is awarded and 2/3 of the partners are able to buy the partnership.

b. Issue: (1) Was it a wrongful exclusion from partnership business and (2) should two majority partners be allowed to purchase the partnership assets at a judicially supervised dissolution sale?

c. Ruling: The court says that the judge acted within his discretion in conducting the sale and if the Plaintiff feels that he has been wronged he should bring suit under § 404 for breach of a duty of good faith and fair dealing.

iii. The Losing Venture: Claims Among Partners1. Kovacik v. Reed

a. A contributes $10,000 and B is a labor partner. The partnership has a $9,000 loss. The default rule is that the loss is distributed equally. B has a negative capital account and must pay in.

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