ba outline professor groves[1]

8/4/2019 Ba Outline Professor Groves[1]

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rrayBA OUTLINE PROFESSOR GROVES

FALL 07

Entity Types: Biz class 1

Unincorporated

- Partnership- Limited Partnership- Limited Liability Company

Incorporated

- Corporation

Biz class 2

- Small ( closely held)- Large ( Publicly traded)

Publicly traded company more likely to be corporation due to the higher level of regulation they often

have.

Relations Among Owners (Internal)

y Financing the entity

y Fiduciary duties

y Sharing profits

y Liability allocations

y Control someone who puts up the money ask is it your money

y Termination

Relations-Owners & 3rd

Parties (External distributors, purchasers, suppliers, etc.)

y Liability

y Asset Protectiono Creditors

Competing Interst:

y CORP.o ConnectedtoCorp. are;

Officers Directors directorsoften havedifferentissuesthey wantnesteggs,retirement,etc.

These aretheones whosetthepolicydirectorsfight with otherdirectors,etc. Employees

Agency Principles:

y Principals and Agents:o The Agency Relationship:

Principal: Thepersonorentity whomanifests assentforanotherto acton herbehalf. Agent: Assentstoso act.


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o At a friends birthdaypartysomeonesaid mike vickshould beelectrocutedlike hedidtodogs(THE AGENT). Thesecretaryoftheorganizationoverheardthecomment anddidit. (THEPRINCIPAL)

A. Thesecretaryis an agentoftheOrganization B. Thesecretaryisnot an agent.

o TypesofPrincipalsforthe I amgoingtoelectrocuteyou agent A: I am an agentforkillVick,Inc. Isdisclosed becauseyouknow whothe agentis,youknow whotheprincipalis

B: I am an agent butI amnottellingyou whoIrepresent Partiallydisclosed becauseyouknow whothe agentisbutnottheprincipal.

C: I amgoingtoelectrocuteyou.Undisclosed becauseneitherisdisclosed.o For all answers, A is Disclosed, B is for partially disclosed, and C is for Undisclosed.

Term 3rdpartynoticeofagentrole 3rdpartynoticeofprincipali.d.

Disclosedprincipal Yes Yes

Partiallydisclosed Yes No

Undisclosedprincipal (2.06) No No

AGENT IS MOST LIKELY RESPONSIBLE WHEN THERE IS AN UNDISCLOSED PRINCIPAL.

BUT IS THE PRINCIPAL OFF THE HOOK? No they are not off the hook because it is in the scope of

actual authority.

y Undisclosed principal can still have liability if done within the scope of actual authority.

Hypo: A clerkwas askedtotake a settlement agreementto anotherparty by a partnerinthefirm. Theygetinto a caraccident andthesettlementnevergetsthere. Theclerkacted.andthusisresponsible.

Undisclosed puts themselves at more risk because they havent identified themselves.

y 2.06 Estoppel of Undisclosed Principal cant get out from under liability just because you tryto change the relationship to the party.

CONSENT v. CONTRACT:

y Doestherelationship betweentheprincipal andthe agentneedto be bycontract,orjust byconsent?o Consent is enough. What is the difference? Consideration.meaningyoudont haveto haveconsiderationto be an agent.

y

What happens now if you bring the deal and you sign on behalf or believe that they are entitled tothe deal?o Ifyoudidit andthere wassomethingtraceable bythe 3rdpartyorifit appearedto be an agent.

BONDS HYPO:

y Bonds walks into managing Partners office.

y MP tells associate Lets surprise Bonds and get him a potent pill and then winks.

y MP says, tell the firms pharmacist its for Bonds

y Firm has an account there.


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o 1st role of analysis: Who are the Parties? Bonds no manifest assentbecause he didnt say anything Managing Partner Is the principal Associate Is an agent of the firm. Pharmacist/Store Owner doesnt manifest assent to do something.

o But what if Bonds did say something like he needed something? Bonds = Principal MP = agent

Assoc. = co-agent Pharma = co-agent

y Associate used firm credit card to buy steroids without firm permission?o Whatkindofauthoritydoes associate have? Actual Authority 2.01 (page 5) Meaning actual

authority is not limited to what happens in actual terms

y But what if Associate says, MP wants me to do something that could get me in trouble and theassociate gets him a generic alternative. The MP says that isnt what he ordered and will not pay

for it. And the Pharm wants payment. Who is liable?

o Bondso MP Becauseitisinthescopeofthe authoritybecause he justsaid a potentpill.o Associateo StoreOwner

Therefore the specificity concerns what is within the scope. 2.02 Scope of Actual Authority

y Whats the difference between apparent and actual authority?o Actual authority isdealing with thesituation betweentheprincipal andthe agent.o Apparent deals with theexpectationsofa 3

rdparty.

y What if the associate takes it upon himself to get the steroids?o Aslong asthestoreowner/pharmacist would havereasonto believethat he was actingon behalfoftheprincipal.

o Agent (Associate) has breached the fiduciary duty to principal (MP)o The pharmacist would then go after the MP and the MP would have to go after the

associate.

y What if, associate calls and says I quit but still buys the steroids.o Still has apparent authority becausethe 3

rdpartystill hasreasonto believe heis an agentofthefirm.

o Actual authorityisterminated, becausethere was a revocationora renunciationtotheprincipal

Type Actors Scope End

Actual Principal/agent Implied,nec,orincidentaltoprincipals

objective

NaturalterminationAgentrenouncesPrincipalrevokes

Apparent 3rdparty/ agent Reasonable beliefandtraceable

Nolongerappears actual

AGENCY 6-STEP ANALYTICAL CONSTRUCT (PATAAT)


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y Whos Principal?

y Agent?

y 3rd Party?

y Scope of the Agents Actual Authority?

y Scope of the Agents Apparent Authority?

y When does the Agent Authority Terminate?

LLLP:

LLC: Provideslimitedliabilityforallparticipants whetherinmanagementornot. Providesthe benefitsofbeingincorporated withoutthelimitations andrules appliedtocorp.

The Corporation: Inthe ABsenerio, A canform a Corporation butissubjecttofederalincometaxation andmandatoryproceduralrequirementsthatmayincreasethecostofoperation. Corp.provideslimitedliabilityforallparticipants whetheractiveorpassive. (meaninginvestors) AreeitherPublicly heldorclosely held.Theoretically a Corp.consistsof3 layers,shareholders, boardofdirectors, andofficers.

A and B Hypo:

y A provides the money. B provides services.

y A wants veto power over the business activities since he put up the money.

y AB = Not an employer employee relationship because they are profit sharing. And even thoughA states he has veto power it works more like a Partnership.

y AB is not a creditor debtor relationship because there is no repayment planned and they bothshare an interest whereas creditors dont have these.

y A and B are not Principals and Agent relationships because they are both Agents of the Principal(the Partnership)

AB = PARTNERSHIP; 202 2 or more persons who are co-owners for profit, whether or not the 2

intend a partnership.

WEEK 2__________________________________________________________________________________

y Who Ya Runnin With? & Whats in a Name? (Agency Relationships)

y THE PARTNERSHIPS

A and B Hypo:

y A provides the money. B provides services.

y A wants veto power over the business activities since he put up the money.

y AB = Not an employer employee relationship because they are profit sharing. And even thoughA states he has veto power it works more like a Partnership.


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y AB is not a creditor debtor relationship because there is no repayment planned and they bothshare an interest whereas creditors dont have these.

y A and B are not Principals and Agent relationships because they are both Agents of the Principal(the Partnership)

y AB = PARTNERSHIP; 202 2 or more persons who are co-owners for profit, whether or not

the 2 intend a partnership.

Independent Contractors: When there is a lack of control by the client.

Text: (Inadvertent Partnerships) p. 117.

y Text:Martin v Peyton, p 118-121y KNK, a partnershipinsecurities hadfinancialdifficulties. Hall, a partnerarrangedfora loanofsomesecuritiesfromPayton andsomeotherfriends (Ds) to beused ascollateralfora bankloantoKNK($500kin LibertyBonds). Loan agreementstipulatednopartnershipintentions, anduntiltheloan wasrepaid,Ds weretoreceive 40%ofprofitsfromthefirm. Dscouldinspectthe books and wereto be

heldintheloop aboutthefirms business.Dscould also vetorisky ventures. Allpartners hadto assigntheirintereststoD assecurityfortheloan. ThecreditorsofKNKclaimedthatDs had a partnership.Trialcourtfoundtransactionto be a loan,Ps appeal.

y Issue: Haspartnership beenestablished? NO!

y A Partnershipis an associationof2 ormorepersonstocarryon a businessforprofit. Creationis byexpressorimplied agreement. Psclaimthat written agreementofthefirm with Dsconstitutetheformationofanexpresspartnership.

y Furthermore,profitsharingindicatespartnership. Butdoesnt haveto be. AND just becausethelanguagesaysnopartnershipdoesntmeanitdoesnotexist. The whole agreement will beconsidered.Allthefeaturesofthe agreement betweenthePs andDsfollows a loan agreement.

y The defendants are trusteesand the precise issue is whether the trustees are partners. This wasthe case in that another creditor likely wanted to collect from the business and thus the trustees

who lent money.

y BUT the trustees want to be known as lenders and thus without liability from other creditors.

y THIS CASE IS TO SHOW THAT THERE ARE FACTORS THAT WEIGH FOR ANDAGAINST BEING A PARTNER IN A FIRM OR BUSINESS.

y How to resolve such an issueo Examine the agreemento Identify the partnership attributeso Identify the non-partnership attributes

UPA

101(6) - "Partnership" means an associationoftwoormorepersonstocarryon asco-owners a businessforprofitformedunderSection 202,predecessorlaw,orcomparablelaw ofanotherjurisdiction.

202(a)Except asotherwiseprovidedinsubsection (b),the associationoftwoormorepersonstocarryon asco-owners a businessforprofitforms a partnership, whetherornotthepersonsintendtoform a partnership.

202 (C) Indetermining whethera partnership has beenformed,thefollowingrules apply:


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202(C)(3) - Aperson whoreceives a shareoftheprofitsofa businessispresumedto be a partnerinthebusiness,unlesstheprofits werereceivedinpayment:

(i) ofa debt byinstallmentsorotherwise( thereis a clearrepaymentschedule andinterestrate);(ii) forservices as anindependentcontractororofwagesorothercompensationto anemployee;(iii) ofrent;(iv) ofan annuityorotherretirementorhealth benefitto a beneficiary,representative,ordesignee

ofa deceasedorretiredpartner;

(v) ofinterestorotherchargeon a loan,evenifthe amountofpayment varies with theprofitsofthe business,including a directorindirectpresentorfutureownershipofthecollateral,orrightstoincome,proceeds,orincreasein valuederivedfromthecollateral;or

(vi) forthesaleofthegoodwillofa businessorotherproperty byinstallmentsorotherwise.

ISSUE: Issomeone a partner?

Analysis:

y sharingofprofits? Ifyousee additionalfactsofwhetherthere areotherfactssurrounding

y Examinecaselaw traditionalpartnership

y Examinestatutoryexceptions

Simpson v Ernest and Young, 850 F. Supp. 648 (1994)

y 2 companiesmergedtomakethelargest accountingfirminthe world. Buttheydidnt haveenoughmoneyintheirretirementfundforalloftheiremployees.

y Sotheystartedlettinggosomeoftheolderemployees (40s) likeSimpson whomade $140ka yearand

hiredyoungerCPAsthuspreventing highpensions ANDretirement benefits.

y SoSimpsonfilessuitfordiscriminationofage. Buttodothisyoumust be anemployee. ThusE and Yclaimed he was a partner.

y TheCOURT resolvedthisissue by;o SASMOVFo S SHARING INPROFITSo A ACCESS TOBOOKSANDRECORDSo S SECURITY permanenceo M MANAGEMENT AUTHORITY OVEROWNEMPLOYEESo O OWNERSHIPINTERESTSo V VOTING RIGHTSo F FIDUCIARY DUTY

y Courtfoundthat hedidnt havethesefactorsto be a partner.

y Simpson hadillusory votingrights, Advisory boardcould veto his vote, boardselected bynominatingcommittee,nominatingcommitteeselected bymanagementcommittee,managementcommitteeselected byChairmanoftheBoard

y Courtsaidoftenthatnoonefactorisdeterminable..butthatdoesntmeanthatsome arentmoreimportantthanothers.

o Which oftheSASMOVFfactorsisprimary? ManagementorAccesstoBooks andRecords?


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y InRhoads v. JonesFinancialCo., - Wemust wonder just how manypartnersintherealworld (actually) controlfactorssuch asthemanagementofthefirm andthecriticalelementsofhisorherwork

y Therefore,managementmaynot be asimportant..itis a delegableright.

y Votingrights arenotdelegable.

SHARING PROFITS AND LOSSES:

y Often times business owners are blinded by profits and dont see the losses.

y 90% of American businesses have losses at first.

SHARING PROFITS BY AGREEMENT OR STATUTE:

y Agreement: 103(A) Relations and agreements trump what is said in statutory language.ONLY when you dont have that agreement is when you turn to statutory language.

y Statutory by Default: 401(b) It is when you dont have an agreement is when you shareequally.

Profit Sharing Agreements (PUCSAS)

y % (flat) butproblemwith thisisoftentimesotherpartners workharder,etc.

y Units (ratio) *(preferred) you will havecertainunitsPartnerUnits/ TotalUnits, becauseifthenumberofpartnerschange,theunitsstaythesame.

y Capital Investment: Theprofits will bedivided basedupon whoputsupmoney%oftotalinvestmentinthefirm ( moneyorequipment). But what happens whenyoudont havecapitalbutyou bringinthemost business?

y Salary (Plus Profit) What happensifyoudont haveprofits?

y Annual Agreement Justfigureout attheendoftheyear.

y Sales/Billables hours worked.

What happens when you dont have an agreement? AB hypo? The have a profit of 10k, and B didnt put

up any cash, how much does he get? 5keven if he didnt do shit.

How much of an agreement is necessary to avoid default statutory provisions?

BANE v. FERGUSON:

y Bane was an attorneyforIsham, Lincoln andBeale andin 1985 thefirmentitledeveryretiringpartnera

pension. Baneretired 4 months afterittookeffect andthenthefirmmerged. Themergereventuallyledtothedissolveofthefirm.

y Banesuedforthenegligenceofthemanagingpartnerstomergethatcause himtolose hispension.

y Judgment affirmed.

y Pclaims violationofUPA section 9(3)(c) butthisistoprotect activepartnersfromtheunauthorized actsofanotherpartner. When heretired, heceased as a partner.

y Thefiduciarydutyclaimis void also becauseonce heceased as a partner,there wasnofiduciarydutytohim.

y The breach ofkalsofailed becauseoftheclausecontained about benefitsceasingifthefirmfailed.


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y Similarlycannotfind a dutyofcareto a retiredpartner. (tortlaw)

Partnership losses and Ambiguities

y 306(a) Allpartners are joint andseverallyliable.

Partnership Obligations:

y 3rdparty winssuit againstpartnership

y 301 (1)

y 305 (a)

y 306 (a) ( allpartners areliable jointly andseverallyliableunlessotherwise agreed bytheclaimant) (b) (new partnersshouldnot haveliabilityfortransactionsmade beforetheygotthere)

y Allpartners areresponsible ( unlessotherwise agreed)

y Can allocateliability betweenpartners

y BUT 1 partnersfailureisotherpartnersliability

y

Betweenpartners 401 (b), allocatesthelosses bythe%o

fshareso

fpro

fitif

no agreementotherwise.

o Allocationofloss by agreementOKo LikeProfits agreement,ifno agreementonlosses

y BUT 3rdpartyclaims, 306 (a)o Allocationineffective (Joint andSeveral) cant vary -103(10) UNLESS;

3rdpartystipulation New partner LLP [cant vary - 103(9)]

Kessler v. Antinora

y

P andDenteredinto an agreementforpurchaseofa building. AgreementprovidedPtoputupmoneyandDto act ascontractor. 60% wastogotoKesslerand 40%toD afterP had beenrepaid. Venturelostmoney andPsuedforrepaymentofapprox.65k.

y CourtP arguedthat heshould berepaid byD butthecourtfoundthattheintentofthe agreementshowsthatP wassupposedto bereimbursed bythesaleofthe housenot byD.

y Joint-venture wastorepayP with thesaleofthe house. Therefore,they both sharedinthelosses,ie.Pforhismoney andDforhislaboron a 3 year job.

y 401(d) is the section that could help.

y ARTICLE III deals with 3rd parties and thus doesnt deal with this case since it is partner betweenpartner.

y COURT saysthatthereis an agreementthere.mostscholarsdisagree.

y 401(c),partnershallreimburse.thereforeyoucan haveclause certainfundsxyz,shall berefundable

y OR 401(h)

y Key to take away is.be specific in k language.

ROCA, et al.

y Firstredflag:o Oral agreement


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o 2 partners had65% and 35%goingto 5 others butnoclarity about how it wasgoingto bedividedorwhatit actuallywas

o They hadnoidea whatto with the%ifa partnerleft.o Roca endedupleaving because hethoughttheprofits werent beingsharedfairly.

y Oncethecourtdeterminedthatthere was an agreement,thecourtstillsaidthat apartnershipexists.o Courtdistinguishedthiscasefromtheotherbecausethere wassomementionofprofits andprofitsharing.

y SUMMARY:o Youcan have anoral agreemento Andthe agreementcanlackmanythings

620.8202. Formation of partnership

620.8401. Partner's rights and duties

WEEK 3__________________________________________________________________________________

PARTNERSHIP CREDITORS:

y Creditor: The person who lent you something in and expects repayment.

y The enforcement of partnership obligations is the least uniform and most confusing of allaspects of American partnership law. -Thompson 640 N.E.2d 408,410

DISTINCT ASSESTS FOR COLLECTION ON JUDGMENT PARTNER FROM PARTNERSHIP:

y 201(a); a partnershipI anentitydistinctfromitspartners

y 203;property acquired by a partnershipispropertyofthepartnership andnottheindividuals

y 307(c); judgment against a partnershipisnotnecessarily a judgment againstthepartner.y 501;partnerisnot a co-ownerofpartnershipproperty.

y 401(a)(1);Thompson v. Wayne Smith

Issue: Whether a creditor may collect from individual partners for debts incurred by the partnership? Yes.Solong asthepartnership assets aredepletedorotherscenariosunderUPA 307(d)

FACTS:

y P hiredDto build homeson Hilton HeadSC. Dispute brokeout,Smith sued both thePartnership andindividualsinthepartnership. Court awarded 107kagainstthepartnership butdismissed against

individuals. He was also awarded attorneysfees.y TheninOhioturnedtheSC judgmentinthere where he believedthepartnershipto holdtheirassets.

y Collected 2500kandexhaustedthe assets andfilednew judgmentinOhiofortheremainingcash.

y Partnership arguedthatsinceSC vacatedthe judgment againstindividualsthatOhiomustfollow fullfaith andcredit andres judicata.

y Ohiotrialcourtdidenterjudgmentwason appeal. BUT whileOhio was being appealed,Smith filedcase againstPartnerThompsoninIndiana andSummary judgment wasenteredforSmith inthefullamountof157k. Afterthis judgment,Ohioruledthateachpartnerwasresponsiblefora 1/3 ofjudgment.


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Analysis:

y SCruledthat a Partnershipis a distinctentity andtoprove againstindividuals, he would havetoprove aKexisted betweeneach partner. (Modern View)

y Courtreasonsthough thatthere are 2 waystoproveindividualliability. 1. Is againsteach individualand 2. is whenpartnership assets have beenexhausted. And 3. IfthePartnershipisinsolvent atthetimesuitis brought byindividualdebt (BUT isnotthecase here)

y ExhaustionofPartnershipisrecognizedin jurisdictions whereliabilityis joint.

y RULE: ONCE partnership assets have been exhausted, a partnership creditor becomes a creditorof the individualif Partnership prop. is insufficient for debt, it is to be held pro rata. Essentially,

once the Partnership funds have been exhausted, it becomes joint and several.

y 2nd Defense is that the suit against individuals is essentially an attempt to re-litigate the SC claim.

y Difference between Jointliability and joint andseveralisthatin joint, allpartiesmust besued butinthelatter, justonepartymay besued.butonce alltheparties arenamed, andthe judgmentisinplace,thecreditormayforce anyoneofthedebtorstopayin whole.

y On appeal,thecourt affirmed, holdingthat a priordecisionin anotherstate vacatingthe judgmentagainstthepartnerin hisindividualcapacity wasnotres judicata. Thecourt heldthatthatdecisionmerelyestablishedthatthepartner'sindividual assets werenotyet atriskbecausethe assetsofthepartnership hadnot beenexhausted atthatpointintime. Thecourt heldthatoncethepartnership assetswereexhausted,thepartner'sindividual assetscould beusedtosatisfytheentireoutstanding amountofthe judgment. Thecourt heldthatsinceit wasprovedthatthepartnership's assets wereexhausted,noquestionoffactexistedprecludingsummary judgment againstthepartner.

y OUTCOME: Thecourt affirmedsummary judgment againstdefendantpartnerinplaintiffjudgmentcreditor'ssuittocollecton a foreign judgment.

y REAL ISSUE:o Iftheindividual hasseparatekwith thecreditor= creditoroftheindividual =

Immediate AccessPartnerspersonal assetso CreditorofthePartnership

Must 1st attempttosatisfy judgmentfrompartnershipproperty

y Noinitial accesstopartnerspersonal assets WHY?

y Becauseifthereis a creditorofa partnership, and a creditoroftheindividual, andthecreditorofthepartnershipgoesfortheindividualfirst,theindividualcreditorisSCREWED.

HENCEtheexhaustionrule. UNDERwhatcircumstance (otherthanexhaustion) should a partnershipcreditorbe ableto accesspartners assetstocoverforthepartnershipdebts? (Martin v.Peyton)

y BY stipulationofthecreditor(wecancollectindividually) provision.

y OtherIndependentBasis;i.e.if1 partnerwentoutsidetoscopeoftheotherpartnerstostrike a deal,etc.

y

B

ankruptcy

y Whatifyou (ascreditor) findoutthey havent beenpayingtheirbills, andyoudontknow how they willpaytheirdebt,

y CantakethemtoCOURT;UPA 307(d);o d) A judgmentcreditorofa partnermaynotlevyexecution againstthe

assetsofthepartnertosatisfy a judgment basedon a claim againstthepartnershipunlessthepartnerispersonallyliablefortheclaimunderSection 306 and:


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o (1) a judgment basedonthesameclaim has beenobtained againstthepartnership and a writofexecutiononthe judgment has beenreturnedunsatisfiedin wholeorinpart;

o (2)thepartnershipis a debtorin bankruptcy;o (3)thepartnerhas agreedthatthecreditorneednotexhaustpartnership

assets;o (4) a courtgrantspermissiontothe judgmentcreditortolevyexecution

againstthe assetsofa partnerbasedon a findingthatpartnership assets

subjecttoexecution areclearlyinsufficienttosatisfythe judgment,thatexhaustionofpartnership assetsisexcessively burdensome,orthatthegrantofpermissionis an appropriateexerciseofthecourt'sequitablepowers;or

o (5)liabilityisimposedonthepartnerbylaw orcontractindependentoftheexistenceofthepartnership.

o ANY OF THESE CAN BE A BASIS FOR GOING AFTER.

y UPA 1997 collection against Partner; BAIL;

y IF you were the attorney, you should name in the complaint, ALLindividuals in the partnership. Furthermore, many states assert that in

order to bring a claim, all partners MUST be named.

y Exhaustion rule: 1) Pliability= partnership assetsfirst 2) receive judgment 3)courtorderedwritunsatisfied 4) thenpursuepartnersindividual assets

LIMITED LIABILITY PARTNERSHIPS;

y If you have a partner who is negligent, you will be shielded from such negligence. (NARROW)

y 306(c) allows for the innocent partner to be protected against k problems, torts problems,otherwise (quasi ks, quantum merit)

y A is an llp fails to pay for a printer is ordinary course of business. Printing co. is entitled to 500, ifstate has narrow protection of llp, which is true? A or b?

LLP LIABILITY SHIELD

y 306(c) (BROAD PROTECTION) protectsfromcontract,tortorotherwise.

y NARROW, negligence andmalpractice.

y EVENin an LLP,youcannotprotect againstyourownmalpractice,under306(a) version.

MANAGEMENT NIGHTMARE

y Question is always what is the scope of authority of the jerkoff who screwed up.

National Biscuit v. Stroud: UPA section 15,

FACTS:

y D andFreemanenteredinto apartnershiptosellgroceriesunderthenameStroudsFoodStore. Norestrictionsinpartnership agreementormanagerialfunctionsorauthority.

y Stroud advisedPthat he wouldnot beresponsibleforanyotherdeliveryofbread but attherequestofFreeman,they bought andsold breadinthe amountof$171.04.

y D andFreemanendedpartnership andD wasresponsiblefortyinguplooseends. HethusrefusedtopaythePs bill.


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ISSUE: Eventhough there arenorestrictionsinthepartnership agreement,canequalpartnersescaperesponsibilityforpartnershipobligations bynotifying a creditorthattheindividual willnot beresponsibleforpartnershipdebtsincurred?

ANSWER: NO,unlessthepartnershipdissolves andthatpartnernotifiesthecreditorbeforesuchtransactionsthatmakethedebt areincurred.

y Evenifthey would havecontractedfordifferentmethodsofpayment,thepaymentofequality would

be binding.y JustchangethefactstoFreeman as anemployee. Isthatenough tochangeliability. The 3rdparty

wasnotonnoticethat he was a partner.

y Statement of Partnership Authority, 303(2) - maystatethe authority,orlimitationsontheauthority,ofsomeorallofthepartnerstoenterintoothertransactionson behalfofthepartnershipand anyothermatter.

y BUT 103, and 301, require that the 3rd

party MUST be notified..therefore,noticeto a 3rdparty

isnecessary.

y MUST HAVE STATEMENT OF PARTNERSHIP AUTHORITY AND NOTICE TO THE 3RD

PARTY.

y REMEMBERemployeecould be actingunderapparent authority andtheoutcome would bemuchthesame.

Smith v. Dixon:

FACTS:

y Saleofland amongst a family and a partnershipismadeforfarming. Eventually,themanagerofthepartnershipWRSmith contractedtosellthelandfor200k, andthedisputelies within.

y Had actual authoritytokfor225kbutinsteadkdfor200k. BECAUSE he had apparent authorityandthe 3rdparty wasnot awareoftheprovisionof225k, hethus acted withinthescopeofhisauthority. (outcomedifferentifsection 303 UPA applied)

y Rule: The acts of a partner done in the ordinary course of business bind all partners. Unlessauthority is limited and 3rd party has notice.

Rouse v. Pollard

FACTS:

y Elderlywoman had a lotofmoney and attorneysaidthat hecouldinvestitforher. BUT heputitinto hisownprivate bankaccount.

y Analysisisthatthelawyerwasusing hisowndiscretiontoinvestthefunds. Partnerwouldnot beliable becauseotherpartnerisnot acting withinthescopeofthe business.

ROACH v. MEAD;

y Lawyeris broketellsclient he willpay him back. Cantpay him back, andfiles bankruptcy.

y Thereforeisthepartnerliablefortheloan?

y YES.hereitis withinthescopeoftheemployment. Itdiffersfromtheothercaseinthatit wasreasonable..( lawyerhas handled businesstransactionsforclient before)

y Shouldgive adviceofinterest,security.andtherefore hedidnt advise himofanything. Heshouldvemade him awareofvarioussecurities.

Notification to 3rd

party


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Section 301 (1) Each partner is an agent of the partnership for purposes 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 the partnership business, unless the partner had no authority to act for the

partnership and the person with whom the partner was dealing knew or had received notification that

the partner lacked authority.303(a) (2) Partnershipmaylimit authority, but (accesstopublicrecordsnotenough fornotification)303 (f) non-partnernotdeemedtoknow limitation303 (e) exceptionisforrealestate

- partnerlimitationisrecordedinofficethatrecordstransfers

Thoughts About TheseCases: INVESTMENT DECISIONSBY A PARTNER;

RightResults? RightReasons?

ROUSE: Endsup with noliabilitytothepartnership,isthistherightresult?

y Whatcouldshe havedone?

y Get a letterfromthefirm.nolonger justtheindividualpartnerresponsible.

y Even better,canIgetsomesecuritiestomakethepartnershipliable.

MEAD

y Courtlooked atitin a broadersenseinthattheylooked atthescope asentailingideasthattheyshouldhavegiven adviceonsecurities,interest,etc.

Shouldtherule beroadto holdthePartnership whodidntknow aboutit,liable?

y ThinkaboutitintermsofWHOSINTEREST DOWEPRIORITIZE?

FANARAS:

25kretainer,getsloanfromclientfor400k. Courtrulesthattheretaineronly heldforthe advice andthattheloan agreement wasseparatefromthelegal agreement.

WEEK 4__________________________________________________________________________________

MANAGEMENT SUMMARY AND FAIRNESS ANALYSIS:

DUTIES OF PARTNERS TO EACH OTHER:

Meinhard v. Salmon

FACTS:

y Louisa GerryleasedtoDtheBristolHotelon 5th

aveofNY for20years,ending April 1922, atthecostof200k.

y Salmoncontracted with Pin a joint venture. P wastopayD halfofthemoneytoreconstruct, alter,manage, andoperatetheprop. D wastopay 40%ofthenetprofitstoPforthe 1stfiveyears and 50%


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thereafter. D wasto havesolepowerto manage,lease,underlet,operatethe building. Certainrightsupondeath existedforthe 2.

y Uponthetermination,Elbridge Gerry had a reversion. Wantstodemotheplace butcant andcontractswith Dfor20years with successivecovenants,sototaling 80years at willofeitherparty.

y DdoesnottellPofthekwith Gerry. Dfoundout aboutthekanddemandedthatit be heldin a trustoftheir joint venture.

y Lowercourt heldthatP wasentitledto halfinterestinthenew lease andmust assumeresponsibilityforhalfobligations. D appeals.

ISSUE:y Doesthenew leasecarry with itthedutytoextendsuch anobligationto his joint venturethenewopportunity?

y YES:o Dutyis higherfora managingco-adventurer, andthus Gerryowed hisco-venturingpartnerastakeinthenew venture. Itseemsunderhandednotto.

o There was a closenexus betweenthenew opportunity andtheold venture.It was actually anenlargementofthefirstopportunitythey werein. SinceD wasincontrol heshouldreceive 51%andP 49%.Any nexus of relation between the new opportunity and the old business is keyto evaluating.

o A trustee is held to something stricter than the morals of the marketplace. Not honestyalone, but the punctilio of an honor the most sensitive

o LOOK AT WHETHER IT IS AN ENLARGEMENT OF THE SUBJECT-MATTER OFTHE 1

STVENTURE. ( proximity is an important factor)

ROL-Each partner in a partnership owes the other partners a fiduciary duty to act in the best interestsof the partnership over the interests of the individual in matters concerning the partnership

DISSENT:

y Not a generalpartnership, andnoexpectancyofa renewalofthelease andnointentionthatP would bea partofDs businessforever. P hadtheopportunitytorenew hisinterestintheexistingkbetweenthe2. Dissent holdsthatit was a limited venturefora specificterm.

HYPO:y A andB have a partnershipto build apartmentsin Atlanta. 2 weeks beforethecompletionofthe

apartmentcomplex,Coffers A anopportunityto buildsinglefamily homein Jax. A doesit. Does Aowe a fiduciarydutytoB?

o NOdifferent venture alltogetheraccordingtoMeinhartcase.

HYPO 2:

y A andBform a partnership (ABPlanes) to build a planein Jax. 2 weeks beforefinish Coffers A job tobuildtrain with ABengine.EnginedesignforABplanesis adaptabletotrains. A does.does hebreach dutytoB?

o Yes,o APPROPRIATIONOFPartnershipKnowledge andcapabilities.Commonalityofenginedesignsmakesthis a loyaltyissue.

Starr v. Fordham:

FACTS:

y P had become a partneratFoley Hoagin 1982, he was activelyseekingtoleavethefirminearly 1984.Duringthistime,thefoundingpartners were alsopartners atFoley Hoag.


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y Fordhaminvitedtheplaintiffto jointhenew law firmKilburn,Fordham& Starrettin January, 1985. Pwithdrew fromFoleyHoagonMarch 1, 1985. Thefoundingpartners and anotherattorney,thedefendantBrianW. LeClair, withdrew fromFoley HoagonMarch 4, 1985.

y Thefoundingpartners haddividedthefirm'sprofitsequally amongthepartnersin 1985.Each ofthefivepartnersreceived $ 11,602.In 1986,thefirm'sfinancialfortunesimprovedsignificantly.OnDecember31, 1986,thefirm'sprofits were $ 1,605,128.In addition,thefirm had $ 1,844,366.59 in accountsreceivable and workinprogress. Theydidntfactorin accountsreceivable whentheycalculated his

earnings when hele

ft.

Analysis:

y Arg. 1: They wereselfdealing

y Argument 2;the business judgmentruledoesnot applyiftheplaintiffcandemonstrateself-dealingonthepartofthe allegedlywrongdoingpartner.

y GOODFAITH ARG: judgethenmadeextensivefindingsconcerningthefairnessoftheplaintiff'sshareoftheprofitdistribution. The judgefoundthattheplaintiffhadproduced billable hourandbillabledollaramountsthatconstituted 16.4% and 15%,respectively,ofthetotal billable hourandbillabledollaramountsforallofthepartners as a group. The judgenoted, however,thatthefoundingpartnersdistributedonly6.3%ofthefirm's 1986profitstotheP.

y judgenotedthatFordham andStarrett werethesoleshareholdersofFordham,P.C., andStarrett,P.C.,respectively. Asthesoleshareholdersofa corporategeneralpartner,the judgeconcludedthatFordham andStarrett werepersonallyliableforthe breachesoffiduciaryduty bythefoundingpartners.

y Thefoundingpartners werenotunfairinrefusingtoconsidertheplaintiff's accountsreceivable andworkinprocessfor1986 whentheydetermined hisshareoftheprofits. The judgeconcludedthatthefoundingpartners wereliable becausetheyrefusedtoconsiderbillable hourand billabledollarfigures whenthey allocatedthefirm'sprofitstothepartners.Who won?PARTNERSOR

Withdrawingpartner.Partnersgot allworkinprogress,WP justgot a largerpercentageofprofitsalready accountedfor.

FUNCTION:

y Finders = originators

y Minders = managersgot 28% (400+K)

y Grinders = billers (16% 100k)

y NORMALLY itisokforPartnerstofigureouttheprofitbut whenthey areself dealing,meaningthatthe assignedprofitstothe GRINDERS, had a directreflectionontheirownprofits. Thelessthatthe billersgot,themoretheygot. BUSINESS JUDGMENT RULE APPLIES UNLESS YOU ARESELFDEALING!!!!

y THOSE who areselfdealing (lessyougiveoneside,themoreyougain),needto befair. Evenifyou havesomekindoflegitimate businesspurposeneedto befair.

y Dluredthe billerandtold himthatoriginationisnot a significantfactor. Cannot hold weightthoughbecauseis a misrepresentationclaimFURTHERMORE,thereis animpliednotionofGOODFAITH ANDFAIRDEALING.which isnotfiduciaryduty. GF AND FD is not a fiduciaryduty.


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y OTHERconcernofP was, accountsreceivable.BUT courtssaysNO! Thatlongtermlease was anobligationtopay.includingthe biller.anduntilyourliabilities aretakenout.andyoureduceyourliabilities below youraccountsreceivableyoucannotgetthem.

y Profits are a residualto ascertainyourdebt.

y SO whatdoyoudoto avoidgettingintothiskindofsituation? Get a DEFINITIONofcurrentliabilities (i.e.lease),provisionthatmyWIPisnotsubrogatedtothelease (you would haveto additin).

o

UPA 1997 404;

404(b) = Meinart Case..this is what resulted from this case. Bythelanguageinthis,thedutyofloyaltyislimitedtothefollowing

No A.A.I.C.

y (1)Appropriations cant appropriatethepartnershipopportunity.

y (2)Adverse Interests (cannot do things adverse to the interest of the partnership

y (3)Competing (cannot do things that will compete with the partnership)

Section 103;cantlimitthedutyofloyalty. ANDinmoststates,canlimitloyalty, butcannotcompletelynixthenotionofloyalty.

Hypo: A andBareconsideringcreating a publicrelationsFirmCCtorepairreputationsofdamagedsportscoaches.Coach W andS agreeto hireCCifCCtakesthemtotheCarribeanfordiscussions. A andB agreetothepartnership.Bothparties aretocontributecostsequally,unlessonepartydoesnt havethemoney.Priortothat agreementBsays he hadnocash so Aputup allthemoney.InfactpriortosigningthePartnershipAgreement,B hadmore availablecash than A had. A findsoutB hadthefunds available, andclaimsB violatesBsdutyofloyalty.Ans:No, violationofthedutyofloyaltynot 404(b)&(c).Butpossibly violates 404(d).

Hypo: HALL OFFameFelonsis a generalpartnershipinthe businessofauctioningsportsmemorabilia ofOJSimpson andothernotoriousstars. Theentityiscash poorandneedsto buyitemsforeventual auction.PartnerA hadpersonalfundsin a CDonlymaking 1.5%. A offerstotakethosefunds andloansitto HHF at7%. Thisisthesamerate asthe bankschargeoncomparableloans. HHF acceptsknowingnothingofAspriorlessprofitableinvestingexperience.Did A violate hisfiduciarydutiesto HHF?Ans:No, although heisfurthering hisowninterestsitisnot adverseto HHF bydoingthissothereisnoviolationof404(e). The banks wouldchargethesame amount. Thereisnotaking advantageofanyone here.However,thingsgetmorequestionableiftheinterestrate was 25%.

WEEK 5__________________________________________________________________________________

KEEPinmindthatthingsthatoccurPRIORtotheformationofthepartnership.(404(b))BUT in 404(d) itsaysnothingthatlookstoprior,during,orwindingup

404 cont:

If you further your own interest as a party, and nothing is adverse, look at subsection (d) but.you can

further own interests. LOOK at 404(b) but compare with the other Provisions..(e) and (f).

404(c)DUTY of CARE:

y Prohibits gross negligence, reckless conduct, intentional


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o Gross Negligence: A conscious, voluntary actoromissioninrecklessdisregardofa duty andofconsequencesto another.

Hypo: RogerClemmons andWifePartnershipowns a humangrowth hormonedistributioncompany. Ule abaseballtrainerwon a suit againstRogerpersonallyfordefamation whenClemmonsclaimed Ulelied aboutgiving HGH toRogerand his wife. Ulesoughttosatisfy his judgment againstRogerfromthe assetsofthepartnership.NeitherRogerorthepartnership arein anyfinancialdistress.Which isthemostlikely holdong?Rogerprevailsunder501

Hypo: S& G partnershipthereisnopartnership agreement.Susan waslosingfaith inthepartnershipsoshetransferred herpartnershipinterestto John. Johntold George I amgoingtofind a new client base andreceivea higherrateofreturnthenyoupreviouslyreceived andI HAVE A TRACKrecordtosupportit. Georgeobjectsto Johnsintrusion andfiles aninjunction against johntokeep johnfromparticipatinginthe business?Whatsthelikelycourtruling? George winsunder503a3 and 502. Georgeprevails b/c johnonlyreceived atransferrablerighttoprofits,losses, anddistributions,notmanagement.

Transferees and Creditors of partner ARTICLE 5501- Partner not co-owner of partnership property, he has no interest in partnership property which can be transferred502- Partners transferable interest in partnership- the only transferable interest in a partnership is the partners shareof profits and losses of the partnership and the partners right to receive distributions503-Transfer ofPartners Transferable Interest-

a) a transfer in whole or in part1) is permissible2) does not by itself cause the partners dissociation3) does not, however, allow the transferee to participate in the management or conduct of the partnershibusiness, or to access books and records

d) upon transfer, the transferor retains the rights and duties of a partner other than the interest in distributionstransferred

DISSOLUTION:

y Mostpeople areupsetthatthey arelosingtheopportunitytomakemoneyinthefuture.

PAGE v. PAGE:

FACTS:

y Partnersenteredintooral agreementin 1949 contributing 43kinfirst 2 years. Businesslostmoneyuntil1957. Dscreditoriscorp.owned byP (thesupplier). Partnershipdidmakemoneyin 2 years but wanttoend anyway.

y SO A andBownpartnership, A isthecreditor,Boffersservices, A wantstoendpartnership becauseAirForce base wasopened and A wantedmoneyforhimself.

y Theformerpartnership was a limitedpartnership andprovidedfora definitetermoffiveyears and apartnership at willthereafter. Defendantinsists, however,thatthemethodofoperationoftheformerpartnershipshowed anunderstandingthat allobligations wereto berepaidfromprofits. Heneverthelessconcedesthatthere wasnounderstanding astothetermofthepresentpartnershipintheeventoflosses.

y ALL they had were a hopeforprofitssotheirreallyisnt an agreementthattheprofits wouldrepaythatorthatthere would be anyprofits.

y Dcontends, when a partneradvances a sumofmoneyto a partnership with theunderstandingthattheamountcontributed wasto be a loantothepartnership and wasto berepaid assoon asfeasiblefromtheprospectiveprofitsofthe business,thepartnershipisforthetermreasonablyrequiredtorepaytheloan.

y However,dfailedtoprove anyfactsfrom which an agreementtocontinuethepartnershipfora termmay beimplied. The understanding to which d testified was no more than a common hope that thepartnership earnings would pay for all the necessary expenses.


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y HELD: reversed -If, however, it is proved that plaintiff acted in bad faith and violated his fiduciaryduties by attempting to appropriate to his own use the new prosperity of the partnership withoutadequate compensation to his co-partner, the dissolution would be wrongful and the plaintiff would beliable for violation of the implied agreement not to exclude defendant wrongfully from the partnershipbusiness opportunity. WRONGFUL DISSOLUTION.

y At will -----P benefits

y TERMorUNDERTAKING (Untilthattermorundertaking has been accomplished): (IMPLIED INTOAGREEMENT UNTIL:

o

Loanisrepa

id (

frompro

fits)

o Revenuegoalreachedo Debts arepaido Propertydisposedoffavorably

DissolutionCausedByAt will: Specified Termorundertaking:Plaintiffbenefits

Hypo:AB have a partnership, no written agreement, A loans 20k, business usually takes 5 years to make

profit. B agrees to As decision to wait the 5 years before making profit. B decides wants out after 2 mos.

Can he do this?

o Caselaw suggeststhattheycanimply a reasonabletimeto allow A togetrepaid.

y Whatiftheystayedin businessfor4 years?o Notreallycansayeitherwaybutneedtoinvestigatethefacts.

FOREXAMPURPOSES USERUPA AND THEPAGECASEBAD FAITH by DISSOLVING PARTNER?

y Situation arrives whentheystartmakingmoney,onepartnerwantstodroptheother.o

B

UT courtdi

dnt buyi

ntothi

so He wasputonnotice andthere werent anyotherinstancesoffraud,etc.

BAD FAITH BRINGING WRONGFUL DISSOLUION:

y Can be an at willpartnership butnottoDEFRAUDpartners.

y Freezeoutminoritypartners

y Sells assets atinadequateprice

y FREEZE OUT Aprocess,usuallyin a closely-heldcorp., bywhich themajorityshareholdersortheboardofdirectorsoppressesminorityshareholdersin anefforttocompelthemtoliquidatetheirinvestmentontermsfavorabletothecontrollingshareholders.

Hypo: A,B ANDCform a partnershipthepartnership agreementstatesitis a partnership at will andthatnopartnerare boundtoremain a partners. Underthe agreement a majorityofthepartnerscandemandthat allpartnersmake a required additionalcontribution when a viable businessopportunitytothepartnershipdemandsit. The agreement alsostatesifonepartnercannotmake a capitalcontributionthenthenon-partnermustrelinquish hisinterests andtheotherpartnerscanterminatethepartnership. As wifecontracts a diseases and aisnearbankruptcytryingtopaythemedical billsBandCdemandcontributionofallpartnersconsistent w thepartnership agreement at apricethatincludes a 38%premium beyondthefinancedneedfortheinvestmentopportunity.Ifb CANNOT MAKE THECONTRIBUTION THENCAN b ANDcterminatethepartnership?Nomostcourtssay.


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CONSEQUENCES FOR TRANSITIONS OUT OF PARTNERSHIPS

8182 Maryland Partnership v. Sheehan:

y Leaseexecution Sheehan

y Withdrawal and assignment with oldpartnership

y Leaserent/occupy

y Withdrawal (ofoccupiers)

y Defaultoflease.

y ISSUES: Still liable for the lease? Yes.o Pluslease heldthatthey wereliableforalltheyearsifdefaulted.o AND arguedthat heneveractualizedit. Butcourt holdsitstarted when hesignedthelease.o Can a partnerbeliableifthey withdrawalfromthepartnershiplater?

RULE: Obligations or debts incurred while a partner is still in the partnership,partner will still be obligated after dissolution.

GIBBS v. BREED, ABBOT & MORGAN

y Trust andEstatelawyersleftonefirmto anotherand with themtookcertaininformation,such aslawyers,etc.

y Theformerpartnersfirstsuedtogetmoney backwhentheyleft. HencetheDsfiled a counter-claim

y Courtruledthatthisinformation

y Themannerin which partnersplanforanimplement withdrawals.isstillsubjecttotheconstraintsimposedonthem by virtueoftheirstatus asfiduciaries.

y Issue 1:Did Gibbs breach FDindiscussing jointmove with Sheehan?No.Sheehanmoved becauseofhisowninterests andis allowedtodissociatefromthefirm.

y Issue 2:DidPs breach FD whengivingupconfidentialinfo aboutotheremployeestonew firm? Yes.CourtfindsthatPs werestillpartofthefirm and hadnotsubmittedintentto withdrawalyet, andnewfirm hadunfairadvantageinrecruitingnew employeesfromoldfirm.

BOHATCH v. BUTLER & BINIONy Bohatch met with LouisPaine,themanagingpartneroverherconcernsthatMcdonaldwasoverbilling

Pennzoil.

y Investigationensued,Pennzoil wasmade aware butsaidsatisfied with theircoverage.

y Bohatchstentativedistributionshare wasreducedtozero.

y ISSUE:o Is there a duty not to expel someone for reporting suspected unethical conduct?o No. Partners may choose with whom they wish to associate, and they have no obligation to

remain partners.

o But argumentexists againstfiringthose who whistle blow becauseofwrongfulconduct. Ifthisisorwasthecase,such whistleblowers wouldntcomeforward.

o COURT rejectsthis becausethefundamental aspectofa partnershipistrust and a whistleblowerthusdissipatesthis aspect.

DISSOLUTION UNDER UPA 1997:

1. Page 116

Dissolution Overview:1. Dissociation (step 1) ceasing activity as a partner


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2. Dissolution (step 2) eventuallyleadingtotermination,thinkofasnextstepfortermination. Eventthatleadstowardtheendofactivity alltogether. Stilldutytopay billsduringdissolution.

3. Winding up (step 3)finalizingthetermination, whentheentitynolongerexists andmoniesleftovercan bedistributed.

Dissociation Causes WEEI 601

-Will of Dissociated partner

-Event per agreement

-Expulsion by partnership-Incapacity ( financial, physical)

WEEK 6__________________________________________________________________________________

TAXATION:

Proprietorships: Businesses whollyowned by a singleindividual.

UnincorporatedBusinessForms:

DISSOLUTION UNDER UPA 1997SeePg. 116formore

Dissolution Overview (a 3 step process)- Dissociation

o Endofactivity as a partner- Dissolution

o Thenextsteptowardtermination Aneventleadingtowardtheendofactivity alltogether.

- Winding Upo Thefinaltermination wheretheentity (partnership) nolongerexists

You arepayingthefinal bills andsplittinguptheprofits.

Dissociation Causes - WEEI 601- WillofDissociatedPartner

o Ifpartnersays heyI wantout.- EventPerAgreement

o Thereis aneventinthefuture agreedtoin a partnership agreementthattriggers a dissociation DUIconviction FelonyConviction

- Expulsion byPartnership- Incapacity (physical,financial)

EXPULSION TYPES PUJI [ 601 (3) (4) (5) (6) (7)] ( These are permitted ways expulsion can happen)- Partnership agreement- Unanimous VoteofOtherPartnersIf:

o Unlawfulto bein business with thatpartnero Partnertransfers hispartnershipinterestora substantialportionofhisinterest (75%,maybemorethan 50%)

Profits/losses anddistributions ( 502)


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Hypo:Sam, Jule, Gingeraregeneralpartners assubcontractorsto Tanwater,providingprivatesecuritythestatedepartmentin Angola.B/cSamwasoverly aggressiveinthistasks, 20civilians werekilled while he wasonduty. A U.S.courtissued anorderprohibiting himfromengagingin anyofthefirms activity. Thereisnoprovisionforexpulsioninthepartnership agreement.Nordidthecourtorderaddresstheissueofexpulsion. Jule and Gingernonetheless votedtoexpelSam.Samobjects b/cthereisnoauthorityunderthecourtorderorthepartnership agreementforexpulsion. HasSam beenproperlyexpelled?Yes, 601(4)(i) it is unlawful to carry on partnership business w/that

partner. Hypo:Sam and Juledecideto haveSam back.Samthensells ofhisrightstoprofits,losses, anddistributionsondissolutionto Jamie.Nothinginthepartnership agreementprevents a transferofinterests. Jule and GingeragainexpelSam.Which ofthestatementsaretrueunderUPA1997?601(4)(ii) This is a proper dissolution b/c of the transfer of asubstantial part of the partners partnership interest.

- JudicialDetermination b/c:o WrongfulConducto Breach ofagreementordutyo Notreasonablypracticable ( Bohatch) materially affectedthe business

- Incapacityofpartner

o Financial (Bankruptcy)o Physical (Guardian)o Or JAV judicialdetermination b/cofpartnership agreement-wrongfulconduct, breach of

agreementorduty,notreasonablypractical//

Power to Dissociate; Wrongful Dissociation - 602(a)a partnerhastherighttodissociate at anytime,rightfullyorwrongfully(b)a partnersdissociationis wrongfulonlyif:

(1)itisin breach ofanexpressprovisionofthepartnership agreement;or(2)inthecaseofa partnershipfora definitetermorparticularundertaking, beforetheexpirationofthetermorthecompletionoftheundertaking:

(i) partnerwithdrawals byexpress will,unlessthe withdrawalis within 90daysofanotherpartnersdissociationordeath

(ii) thepartnerisdissociated by judicialdetermination(iii) thepartnerdissociated by becoming a debtorin bankrupcy.

Rightful


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Hypo:PartnershipXisinthe businessofselling wholelifeinsurance. Thepartnership agreementstates(1) itwillremain a partnershipfor2 years whileittests themarket and (2) a partnercannot also have a financialinterestin anyentitythatisin a related businessofthepartnership.PartnerG investsincompany Y thatsells alltypesoflifeinsurance, butdefersreceiving anycommissionsfromcompany Y untilthe 2 yearstestrunofthepartnershipX.IsthatpartnerproperlydescribedunderUPA1997 as wronglydisassociating himselffrompartnershipX?602 what he did was in direct violation of non-competition provision.Hypo: X, Y, andZform a partnershipto build 2 condos. Just beforethe 2ndiscompletedZtellsX and Y he hastostop working with them b/c his 2 yearoldsonissick.Zindeedstops working. UnderUPA 1997 hasZ

wrongfullydissociated himselffromthefirm?Yes, under 602(b)2Hypo:Zsson hascancerandZ hasno health insurance andZs billsfarexceed hisincomeforcingintobankruptcy beforethe 2ndCondoiscompleted.Ztellsthepartnership he will workb/c he hasnootherchoice.UnderUPA 1997 hasZ wrongfullydissociated himselffromthepartnership?Yes 602(b)2(iii)

Dissolution Big Picture

Rightful ---------------------Dissolution By WEEI 601 --------- Wrongful

Actions of Non-Dissociated Partners

Or Rightful Partner603(a) - 801(1) (2)

603(a)Ifpartnersdissociationresultsindissolution and windingup, Article 8 applies,otherwise Article 7

applies(b)Uponpartnersdissociation

(1)thepartnersrighttoparticipateinthemanagement andconductofthepartnershipterminates,subjectto 803

(2)thepartnersdutyofloyaltyunder404 terminates(3)thepartnersdutyofloyaltyunder404 continue with regardtomatters arising beforethe

partnersdissociation,unlessthepartnerparticipatesinthe windingupofbusinesspursuantto803

701 Purchase of Dissociated Partners Interest

(a) ifa partnerisdissociatefrom a partnership withoutresultingin a dissolution and windingup,thepartnersinterestmust bepurchasedfora buyoutpricepursuanttosection b

(b)the buyoutpriceofa dissociatedpartnersinterestisthe amountthat would have beendistributabletothedissociatingpartnerunder801

(c)damagesforwrongfuldissociationunder602,must beoffset againstthe buyoutprice,interestmust bepaidfromthedatethe amountowed becomesduetothedateofpayment

(d)a partnershipshallindemnify a dissociatedpartnerwhosinterestis beingpurchased against all

partnershipliabilities, whetherincurred beforeorafterdissociation,exceptliabilitiesincurred by an actofthedissociatedpartner

(e) ifno agreementofpaymenttodissociatedpartnerwithin 120days,partnershipshallestimate buyoutprice

(h) Apartnerwho wrongfullydissociates beforetheexpirationofa termorundertaking,isnotentitledtopaymentuntiltheendoftheterm,unlessthepartnerestablishesto a courtthatearlierpayment willnotcauseundue hardshiptothe businessofthepartnership.

702 Dissociated Partners Power to Bind and Liability to Partnership


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(a) fortwoyears aftera partnerdissociates withoutresultingin a dissolutionorwindingup,thepartnershipis bound by an actofthedissociatedpartnerwhich would have boundthepartnershipunder301 onlyifthe 3rdparty

(1)reasonably believedthatthedissociatedpartnerwasthen a partner(2)didnot havenoticeofthepartnersdissociation; and(3)isnotdeemedto have hadknowledgeunder303 ornoticeunder704

(b)a dissociatedpartnerisliabletothepartnershipforanydamagescausedtothepartnership arisingfromanobligationincurred bythedissociatedpartnerafterdissociationforwhich thepartnershipisliable

under(a) 703 Dissociated Partners Liability to Other Persons

(a)Apartnersdissociationdoesnot byitselfdischargethepartnersliabilityfora partnershipobligationincurred beforedissociation. A dissociatedpartnerisnotliablefora partnershipobligationincurred afterdissociation,except asotherwiseprovidedinsubsection (b)

(b)Apartnerwhodissociates withoutresultingin a dissolution and windingupofthepartnership businessisliable as a partnertotheotherpartyin a transactionenteredinto bythepartnership, within 2 years afterthepartnersdissociation,onlyifthepartnerisliablefortheobligationundersection 306 and atthetimeofenteringintothetransactiontheotherparty

(1)reasonably believedthatthedissociatedpartnerwasthen a partner(2)didnot havenoticeofthepartnersdissociation; and

(3)isnotdeemedto have hadknowledgeundersection 303 ornoticeunder704(c)By agreement with thepartnershipcreditorandthepartnerscontinuingthe business, a dissociatedpartnermay bereleasedfromliabilityfora partnershipobligation.

704 Statement of Dissociation

(a)A dissociatedpartnerorthepartnershipmayfile a statementofdissociationstatingthenameofthepartnership andthatthepartnerisdissociatedfromthepartnership.

(b)A statementofdissociationis a limitationonthe authorityofa dissociatedpartnerforthepurposesofsection 303

(c)Forthepurposesofsection 702 and 703, a personisdeemedto havenoticeofthedissociation 90daysafterthestatementofdissociationisfiled.

801 Events Cuasing Dissolution and Winding Up of Partnership BusinessMusts Dissolve and Wind Up

(a)P/S at willa. Express willofa non-dissociatedpartner

(b)P/Sfortermorundertakinga. Express willofatleast halfofremainingpartnersb. Expirationofterm

(c)P/S agreementa. illegal

Hypo:X, Y, andZ arepartnersinthecarpentry business. Thereisnopartnership agreementorlimitsonthetimeortheendeavorsoftheirbusiness.Ztells hispartners heisleaving b/c he wantstogotolaw school. He

demands a dissolution and windingupofthepartnership.X and Y object and wanttocontinuethepartnershipw/outZ.WillZ be abletocausethedissolutionofthepartnershipunderUPA 1997? Yes 801(1)

Hypo:X, Y, andZform a partnershipto build 2 condos.Beforethe 2ndcondoiscompletedZfilesforbankruptcy b/cofmountingmedical billsforhis 2 yearson.ButZ wantsthepartnershiptocontinue b/c hebelieves hecansoonreceive? Yes 602(b)(2)(iii) and 801(2) evenifeitherXorY changetheirminds.

Hypo: ZtellsX and Y he hastostop workingforthepartnership and hefiles bankruptcy.On june 1 Zfilesbankruptcy andceases activity w/thepartnership, butX and Y waqnttheparttocontinue w/outz b/cthey have


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a replacementforhim w/out anylosstothepartenrshiup.Eventhough Zustheoineunabletoperformthedutiesiofthepartenship.Zclaims (1) heisentirtledtocash forthe valueofthispartinterests as

Hypo:Inthe abovecase wherethepartnershipcontinues w/outZ.Zs withdrawalcausesthepartnershiptodiscontinue workingonthecondo.X and Y hadtopaythepurchaser50,000 as a partnershipobligation.X andY tellZthey willdeductthe 50,000fromthe amountZ would haveotherwise beenentitledtoreceive whenthey bought himout.CanX and Y deductthe 50,000fromZs buyoutpriceunderthe UPA 1997? Yes,under801(2) and 701(c).

Dissolution and Winding Up ---------------

WHEN BUSINESS CONTINUES

Rightful---------------- (1)DissociationBy WEEI 601--------------- Wrongful =liability/Damages| | | || | | |V BuyoutminusDamages (701c)

ActionsofNon-dissociated WaitforTerm (701h)partnersorrightfulpartner603(a)- 801(1)(2)

|

------------Buyout-------------orContinue Business

When the Business Winds Up:

Rightful -------------Dissociation By WEEI 601 ------------- Wrongful

- participation in wind up - no participation in wind up- judicial supervision of wind up - no wind up supervision

- charges to account/ Damages

Lingering Issues on Wind Up:

y ChangeMindOption (802)o Afterdissolution before windupo Resumeoperationso Preserve 3rdpartyrights

y Pre Dissolution TransactionsStillBinding (804)

y PostDissolutionfilingofstatementofdissolutioncanlimitliability.

Partnership Accounting:

Rudimentary Formula For balance Sheet: Kindofa snapshotforthatparticulartime

Assets = liabilities + equity:

Toseethefinancialconditionofa transaction:Assets: | Liabilities 0

Cash $10,000 | OwnersEquity $10,000


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Liabilities is money that is owed but not paid out yet such as accounts payable or bank loan, so still

considered part of assets.

RUDIMENTARY FORMULA FOR PROFIT AND LOSS STATEMENT: Thisreflectsexpenses andincomeofa periodoftime.(aka:IncomeStatement)

Revenue Expenses = income

BalanceSheet (year1) ------ownersequity -------Balancesheetyear2

Profits and Loss||V

Reflectsoperations betweenyear1 and 2

AskthemdidyouraccountantmanagetheP & L fromyear1 and 2.

NET CASH FLOW STATEMENT: Eliminatesthoseitemsthatdontreallyreflectthecash.

y Keepstrackofcash in/cash out.y GrossReceipts

o Lessexpenses =

y NOIo LessmortgagePayments =

y Cash Flow Before Tax

y Income TaxSavings (addon) =

y Cash Flow AfterTax

Purposeforexaminationoffinancialstatements-wheninvestingin a business

- when buyingthe businessoutright-whenlendingtoourbuyinggoodsfromthe business-toget accuratefinancialpicturetominimizeexposure (enough liquiditytorepaydebts_

Over what period of time do we track the company?

y Accounting Periods:o IfwecloseourbooksonDec. 31

stIcalled a calendar year.

o Fiscal Year:

Matching income and expense items and

CASH v. ACCRUAL

Accounting Method

Item Cash Accrual

Income Received Earned


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Expense Paid Obligation incurred

HYPO:

Dec. 2005 Jan. 2006

Services and billings by A,

receipt of bill by B.

Payment by B, receipt by A.

Cash Deduction to B, Income to A

Accrual Deduction to B, Income to A

WEEK 7__________________________________________________________________________________

Introduction to Business Forms: Floating in the Legal Universe

Reasons for Picking Certain Business Forms:

y Protection from 3rd

parties (limited liability)y Protection of money

y Taxes, etc

Protection Against Others Liability Shield:

y Sole proprietor:Singleindividual with nofiling.o Noshield againstpersonalliability.

y General Partnership: Morethanonepersonin businesso Shieldonlyforactivityoutsidethescopeofbusiness activity.o Joint andSeveralliabilityforbusiness activity.

y Limited Partnership:o Shieldoflimitedpartner,liabilityforgeneralpartner

Exceptownmisconduct (306(c)) Unless activeparticipation Nomanagementforlimitedpartnerbasically just aninvestor IfLimitedpartnertakespartinmanagement hemay become a generalpartner

Limited LiabilityPartnership- shieldofallpartners againstpersonalliability- exceptownmisconduct 306- unless activeparticipation

y Limited Liability Companyo Shieldofallpartnersevenifactiveparticipationo LLC BASICSo 1 ormorememberso Articlesoforganization608.407

File with stateContains address,principleoffice,registered agentforserviceofprocess,signed by 1 memberOptiontoIDmember/managerMembermanaged bydefault 608.422

o Contribution 608.421o Cash,property,services,promissorynote w/cash guarantee


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o Profits andlosses allocatedperoperating agreemento Durationisperpetual,unlessoperating agreementspecifiesdissolution via timeorevent

Florida LLC Act re Operating Agreement 608.423

o Can beoral, but writingtrumpsoralifconflicto Can becreated before, after,ortimeoffiling articlesoforganizationo Cantakeeffectonformationorotherdateo Cannot unreasonablyrestrict a righttoinformationoraccesstorecords 608.423(1)

Hypo: So which statement below illustrates how are LLCs and S Corps are both different from a sole

proprietor?Both the LLC andSCorps haveshields againstpersonalliability,soleproprietorsdonot.LLC vs. S Corp

Unlimitedmembers 100shareholderlimitMemberscan becorps(eithercors) shareholderscannot becorpsorLLCsMemberscan benon-USresidents shareholderscannot benon-USresidentsNotaxfreemergers,stockswaps,reorganizations taxfreemergers allowedChameleonmanagement reqd boardofdirectors (exceptions)

LLCFiduciaryDuties

Federal Taxation Among Entity Types:

Proprietorship ( sole owner in owners name)- Profitorlosses arereportedonownerspersonalincometaxreturn

Unincorporated business forms ( GP, LP, LLP, LLC)- Partnership with twoormorepartnersmustprovideeach partnerwith K-1 form informingthemoftheshareofprofitsorlosses,these arethenreportedonindividualincometaxreturns, Taxationisimposedonly atthelevelofowners,not attheentitylevel

C Corporations- Double taxation,entire taxable income forentity is taxed, theneach partnerorshareholder reports theirprofitorlossesfortheirindividualincometaxreturn.

S Corporations

- Similar to taxation of unincorporated business forms, 100 shareholdermax and cannot be nonresidentaliens.

y Taxable Income Range is Established

y Within that Range, the tax is computed on:o Set amount atstartoftherangeo Afterstarting amount, a %isusedtocompute additionaltaxuntiltheendoftherange.

%isthemarginalrate Marginalrateisprogressive

y Marginal = tablerategoingforward w/n bracket

y Effective = averageofrates (tax+taxableincome)

TAX PLANNING AS A PRIORITY? Considerthatyouknow thatyou willpaytaxes butnot alwayscertainaboutliability. Therefore,protectionofliabilityoftentakesprecedent.

y Taxeso Certain


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o Immediate

y Bracket Bustero Minimizetaxforhighest bracketowners (LLC allocation)

y Business form:o Small = passthruo Largercorporindependentcash rich = retainearnings & defertaxes whilegetting appreciation

andinterest.

______________________________________________d ifferenceofliabilityplanning.y Liability shield

o Uncertaino Unknown

y LLCs are taxed like Partnerships. Meaning that the partners pay the tax only once.

C Corp Double Whammy [On 75k taxable income @ 35% rate]

y Corp Tax - $13750,owners 21437 = totaltax burden 35,187 (48%)

y Unincorptax0 owners 26250 = 26250 (35%) Corpis 34%increase.

S Corp

y Same Pass through treatment

y 100 shareholders maxo Individuals only (no corps or llcs)o Exception for certain trusts

y One class of stock

Tax Planning on rates:

y Try to get your client the best tax rate.

Accumulation C-Corp. Planning Advantage

y C Corp retained earnings not taxed until sold at more favorable rates (e.g.post retirement)Meaningthatthey will be at a lowertaxablerate whentheyretirenot asmuch comingin.

y Inincorp andScorp annual allocationtaxedeach yearatindividualrate.

Capital Gains Tax-capital assets: assets heldforprofitmakingorinvestmentpurposes

-taxinonthe ga

in-shortterm ( 1 yearorless)= ordinaryrate,usually higherthanlongterm

-longterm (morethanoneyear)= 15%-Strategy

CORP GENERAL PARTNERMODEL FORTAXSHELTERA businessform wascreatedthat assuredthatlossescould bepassedthrough toinvestors,thatinvestors hadnopersonalresponsibilityforlosses, andthatthepromoters (corpgen partner) ofthetaxsheltercouldrunthingswithoutpersonalresponsibilityforthedebts andlosses arising whenthe businessultimatelycollapsed.


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LIMITED PARTNERSHIPS WITH CORPORATE

y Tax Shelter Rationale:o page (139) a business form was needed that assured that lossescould bepassed through to

investors,that investors hadnopersonalresponsibility for losses, and thatthepromotersof thetaxsheltercouldrunthings withoutpersonalresponsibilityfordebts andlosses arising whenthebusinessultimatelycollapsed. (Just wanttomakesurethey have allpossible advantages withoutthedownside.)

o Note: There isno law preventing a boardmemberof a corporategeneralpartner from being alimitedpartneras well byinvestinginthelimitedpartnership.

In Re USA Cafes:

- GeneralPartner(thetwo brothersown virtually allthecorporategenpartner) wasowner47%ofLimitedPartnership ( USA Cafes)

- GeneralPartners boardmembers werepaidsidepurses(15-17 milsidedeal) tosellPartnershiptoMetsaAcquisitions at anunreasonablylow price

- Psclaim GoodFaith andFiduciaryDutiesprinciples apply here and boardmembers breached 404 dutyofloyalty

- Issue: Do the directors of a corporate general partner owe fiduciary duties to the partnership and

to its limited partners?YES- If youre in a TRUST relationship you cant WASTE the assets.

VENTURE CAPITALIST FIRM:

y OVER15 BILLIONgiven as basicallyprivateequity.

y Raisingmoneyforventuresis whattheydo.

y Venture Capital Scheme:o Investorsto v.c.sgenpartners,thentogivemoneyraise allcapital,management,etc.,portfolioco., andthentheyretainpreferredshares/ votingrights.

VC/GeneralPartner:canraise allcapital, hasthemanagementexpertise,cangetpotentialnew fundingVC: wantspreferredshares, and votingrights, andconversionrights (intocommonstock)

VC:doesntputmoneyinonlyonecompany;theyputitin a portfolioofcompanies (thisusuallylasts 7 to 10years andtheytypicallyspecializein a particulararea)

In Re Spree.com Corp:

y Ps wanttodo business with V.Cs (TCV) andSpree.com, andthedirectormakes harsh statementswhileSpree.com wastryingtomakemoney.

y Suedforbreach ofconfidentiality and breach offiduciaryduty.

y Butthecourtsaysthatthey would have hadtodisclosetheinfo aboutnot havingmoney and henceitisnotconfidential.

y Theotherclaimistortiousinterference: intent byDto harm,

y Issue:Didthestatementsmadetothereporterandthereafterpublishedconstitute a wrongfuldisclosureofconfidentialmaterial asdefined bytheparties agreement?No.Inthecourseofsoliciting 3rdpartyinvestors,P would have beenforcedtomake a completedisclosureofitsfinancialconditiontoinvestors. Since anyinformationthat becomespublicly availableisnolongerconfidentialinformation,thestatementsindicatingthatPis runningoutofcashdonotprovidethe basisforaclaimofbreach ofcontract.

y Potential breach of fiduciary duty, but none here probably because of loophole in confidentialityclause. But corporate general partners do generally have FD to limited partners. Adverse Interest

to partnership.


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LLCS:

y LLCs weremotivated bythepass through (taxing)treatmentoftheIRS.

y BUT they aredifferentinmanagement structure.o ChameleonmanagementStructure:

LLCs havemembers,notshareholders. Insteadofhaving a boardofdirectors,thereis a manager. ANDthustheChameleonnatureisthechoiceofwhomanages.

-membermanagement

- ORsinglemanagero Similarlyfile articlesoforganization which isessentiallytheoperating agreementthatgoesthrough thedetailsoftheliabilities andresponsibilitiesofthemembersofthe LLCS.

y Goodquestionisshould an LLC havedetailslikeCorporations?o Onereasoniscreates a goodpapertrail.o Mayenhanceprofessionalism

LLC basics

1 ormoremembers Name= limitedliabilitycompanyorlimitedcompany LLCorLC ArticlesofOrganization 608.407

- File with state- Contains address,principaloffice- OptiontoIDmembermanagerselection- Membermanaged bydefault

Contribution 608.422- Cash,property,services,promissorynote

Profits andlosses allocatedperoperating agreement Durationisperpetual,unlessoperating agreementspecifiesdissolution via timeorevent.

Florida LLC Act re Operating Agreement 608.423 Can beoral, but writingtrumpsoralifconflict

Can becreated before, after,ortimeoffiling articleoforganization Cantakeeffectonformationorotherdate Cannot unreasonablyrestrict a righttoinformationoraccesstorecords 608.423 (1) Cannoteliminatedutyofloyaltyordutyofcare 608.423 (2)

LLC v. S Corp:

LLC:

y Unlimitedmembers

y Membercan becorporation (CorS) orLLCs

y Memberscan benonusresidentsy Notaxfreemerger,stockswaps,reorganizations

y ChameleonManagement

S Corp:

y 100shareholderlimit

y Shareholderscannot beCorps (CorS) orLLCs

y Shareholderscannot benon-USresidents

y Taxfreemergers,etc., allowed


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y RequiredBoardofDirectors (exceptions)

LLC FIDUCIARY DUTIES:

y

Blackmore Partners, LP v. Link Energy LLC: could see test question

y LinkEnergyis an LLCformedin hopesofassuming andcontinuingEOTT EnergyPartners, LPupon

emergencefrom bankruptcy. (Relatedtocrudeoilsales)y Pis aninvestmentpartnership who wereunit holders.

y Boughtthem andthecreditors became a seniorunsecuredcreditorwho wouldget 9%.

y Linkwasin badshape anddecidedtosaletoPlains All AmericanPipeline, LP. Accordingto Linkoperating agreement,theBoardofdirectorscouldeffectuatethetransaction without a votefromunitholders (members). Most assets have beensold, andisintheprocessofwindingup.

y Linkeventuallysoldunitsforbelow $1 a unitdownfrom $5.

y Theshadything wasthatthere was 25milpaidtothe 9%creditors,they would waivetheircovenants.

y Complaint allegesthatthere was an alternativeproposal,meaningthatthey wantedto havethecompanytoremainindependent andnottogounderand alsothatChevron/Texaco wantedtotakeovermarketingoperations which would have beenlucrative asrevenue and allowsimprovementofthe balancesheet.

y Tocombatthemotiontodismiss,mustshow aninferenceofdisloyaltyorlackofgoodfaith.

y Theinference wasthatthe actual agreementcouldnot have been any worseforthemembers. Andthusthemotiontodismiss wasdenied butinthefactualrulingofthetrial,theCompany wasfoundto beintheZONEofinsolvency. ANDthustheirfiduciarydutyshiftedfromthememberstotheCreditors.

y Thefinalresultofthecasenotesthatthere wasnootherfactualinstancethatthere was a viablealternative.

y When the operating agreement gives the managing partner power to make decisions without themembers, could violate fiduciary duty. However, perhaps paying off creditors was in the best

interest of the partnership and there was no other viable option.

Thecloseryougetto a businessfailure,themorethecourtisgoingtosaytheycanusetheirbusiness judgment

of

whethertokeepthemoney

forthemembersorpaythecred

itors and

iftheypaythecred

itors

it w

illprobablybeokay.

Elf Atochem North America, Inc. v. Jaffari and Malek LLC

y Made airplanemaskant andtheplaintiffandthedformed an LLC. The benefit wastogettheEPAfriendlyproduct.

y Pputup a mil andgot 30%. Dgavetherightstotheproductfor70%.

y Operating agreement had arbitrationclausetoexclusive jurisdictioninCalifornia.

y Elfsigned and Jaffarisigned butnotthe LLCformedtogether.

y Ptryingto avoid arbitrationclause becausethey wantthe benefitsofDelawarelaw.

y Courtdismissesforlackofsubjectmatterjurisdiction becauseofthe arbitrationclause.

y Butitisthemembersthat aretherealparty andthe LLCis just a circumstanceofthemembers.y BUT therealunderlyingrationaleisthat LLCs havemaximum authoritytocreatestipulationsintheoperating agreement,including butnotlimitedtoremovalfromdomiciledstatetostateofchoice.

y Courts will bendoverbackwardsinDelawaretogive LLCs,especiallymanagingparties,maximumrights without breachingfiduciaryduty.

y LLCOperating Agreements aremost akintoPARTNERSHIP AGREEMENTS. b/c it outlines theparties responsibilities and organization.

y BUT cannot waivefiduciaryduties.


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y Issue:Maythemembersofa limitedliabilitycompany,though theuseofa forumselectionclauseintheirmembership agreement, vest jurisdictionin a particularforum?

y YES.Delaware Limited LiabilityCompany Actprovides broaddiscretionindrafting LLC agreement.Thepolicyofthe actistogivemaximumeffectofthemembersfreedomofcontracttogoverntheirrelationshipprovidedthattheydonot violate anymandatoryprovisionofthe Act.

y Red flag operating agreement and statutes disagreementAbry Partners V, L.P. v F & W Acquisitions LLC

FACTS:y Pis a groupofentities affiliated withprivateequityfirm ABRY (Buyer) bought a portfoliofrom anotherprivateequityfirmProvidenceEquityPartners (Seller). Theportfoliocompanythat waspurchased byDs (company) wasinthe businessofpublishingmagazines.

y Purchase agreement wastoonly becontained withinthe 4 cornersofdoc.

y Pslooktorescindcontractduetoundisclosedfinancialconditions.

y Issue: Is the Buyer permitted to seek rescission in this court despite the exclusive remedy of termsof the Stock Purchase Agreement? YES, see below

y Agreementis againstpublicpolicyif1) theSellerknew thatthecontractualrepresentations andwarranties werefalseor2) thattheSelleritselfliedtotheBuyerabout a contractualrepresentation andwarranty.

LEXISNEXIS:Defendantportfoliocompanyseller, a sophisticatedprivateequityfirm,filed a motiontodismissthecomplaintofplaintiffbuyer, a similartypeoffirm, which soughttorescindtheparties'stockpurchase agreement (SPA)and assertedclaimsoffraudulentinducement andnegligentmisrepresentation. Alternativeclaimsfordamageswere alsosought.

ThepartiesenteredintotheSPA forthe buyer'spurchaseofa portfoliocompany. TheSPA indicatedthatthebuyeronlyreliedonrepresentations and warranties withinthefourcorners,itlimitedtheliabilityofthesellerforanymisrepresentationoffactcontainedtherein, anditprovidedthat anindemnityclaim wasthe buyer'sexclusiveremedy. Thereafter,the buyerfiledsuit, allegingthatthefinancialstatementscontainedmaterialmisrepresentations,resultinginexcessiveoverpayment. Thesellersoughtdismissal basedonfailuretostate aclaim. Thecourtinitiallynotedthatduetotheforumselectionclause andthechoiceoflaw principlesofDel.Code Ann.tit.6, 2708,Delawarelaw wascontrolling.Further,thecomplaint waspled with sufficientparticularitypursuanttoDel.Ch.Ct.R. 9(b). Thecourtfoundthat astheparties weresophisticated,theexclusiveremedyprovision wasenforceabletotheextentthatthesellerdidnotmakeintentionalmisrepresentationsoract with knowledgeofthefalsitythereof. However,ifthe buyershowedknowledgeorintentionalmisrepresentations,thenthelimitationprovision wasinvalid as againstpublicpolicy.

Thecourtgrantedtheseller'smotion with respecttothenegligentmisrepresentationclaim anditgrantedtheremainingclaimstotheextentthatthe buyercouldnotshow thattheselleractedintentionallyorwithknowledgeoffalsity.Intheeventthatsuch knowledgeorintentionalmisrepresentations wereshown,themotion wasdenied.

y Allegedfraudulentscheme:o 10xEBITDA (earnings) = higherpurchaseprice (earnings beforetaxation,etc.)

Overstatedearnings+understatedExpenses, = higherEBITDA = higherprices (ie.Higherbaseto applythemultiple)

y CASE = Forallthe artfuldrafting,cannotcompletelyreleaseyourclientfromliabilityiffraudexists.


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Poore v Fox Hollow Enterprises

FACTS:

y Campbellfiledmotion although heis/wasnot an attorney, because he believedDisnot a Corporationandthus hecouldrepresentthemortheycould berepresented without a licensed attorney.

y IS LLCmorecorporatelikeorpartnershiplike? Morecorporatelikeintermsofrepresentationsincethereis a certainshieldofliability with themembersofthe LLCthat actslikeshareholdersofthecorporation.

y Issue: Should the Court apply the theory of corporate representation in this case? Yes, LLCs arerequired to have legally certified representation since the LLC is more like an artificial entity and

not a natural person.

Marie L. Kasten v Doral Dental USA, LLC

FACTS:

y P wasgiven 23.1%membershipinterestinD aspartofa divorcesettlement.

y D begannegotiating withpotential buyers,P wanted accesstocertaindocs (businessrecords,financial/taxstatements,etc.)

y Theycomplied with some butnot all.she wantedemailsto/from/by. Courtrulede-mailsnotdocsorrecords butcommunications. Shecouldreview othercorrespondence.

y Emailscan becompanydocuments anddrafts, LLC actrequiresmanagerstoprovideinfoofallthingsaffectingmembersdoesntlimitdocstoonlytax articles.

y Draftsare companydocuments.

y Anotherfactoris whethertherequestistoo burdensomerequires balancinglaws biasforaccessingthecoststothe LLC.

Supreme Court Ruled they should have access to e-mails and drafts but must be relevant.

FLORIDA LLC ACT reOperating Agreement608.423:

y Can beoral but writingtrumpsoral.

y Can becreated before, after,ortimeoffiling articlesoforganization

y Cantakeeffectonformationorotherdate

y Cannot unreasonablyrestrict a righttoinformationoraccesstorecords608.423(1)

y Cannoteliminatedutyofloyaltyordutyofcare608.423(2)

WEEK 8__________________________________________________________________________________

CORPORATIONS:

Mistrust art

iculated,l

imitat

ions

imposed, butthenremoved?

y Incorporationsforbusiness wascommonlydeniedbecauseorfearofencroachmentupontheliberties andopportunitiesoftheindividual. Fearofthesubjectionoflabortocapital. Fearofmonopoly.someinsidiousmenaceinherentinlarge aggregationsofcapital,particularly when held bycorps.

y Thegenerallawslongembodiedsevererestrictionsuponsize andscopeofcorporate activity, wereinpart, anexpression

y Doesthestateofincorporationmatter?

Traditional Statutory Corporate Scheme


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Directors/ultimate authorityto bind/actthecorporation;fiduciarydutytocorp andshareholders;setpolicyOfficers/delegatedmanagement; answertodirectors;implementpolicy Shareholders/electdirectors;non-managers

Louis K. Liggett Co. v. Lee:

y HistoryofCorps andlimitsinthe US and whythelimits were withdrawn.

Notes:

2. California makesCorpsincorporatedinotherstates butdo businessinCalifornia follow CaliCorporateDisclosure Act.

y Predictable

y Attract andRetain QualityDirectors/officers

y Statutoryflexibilitytoselfmanage (contractarianfreedom)

y Courtexperience andstocked w/corpspeak

y Barcorpspeaklegislativelistens.

y Contractarian Freedom: FIRM istheentitythatequityownerscontract with.

y Corpspeak: Protectingyourown againstyourown.

y Dont have to reimburse the shareholders

Dole Food Co. v. Proxy Statement:

FACTS:

y Dole Hawaii wasmovingtoDoleDelaware.

y

Movedto

D

elaware becauseD

elawareisknownto bemost advanced and

flex

ibleCorplaw.

y Move willonlyeffectcompanydomicile.Contractarian theory Nexus of Contracts

Capital,Risk,Management(equityowners)|v

Labor(employees) >>> Firm


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Shareholder Agreements:

y What is the name of the doc that legally creates the corporation?o ArticlesofIncorporation

y Can they be printed?o Yes

y Can articles be in foreign language?o No. Must be writteninEnglish

y Must there be a corporate seal?o No,notrequired, butshoulddoit. b/citcan verify authorizedtransactions byusingseal.

y Which list below is the full range of those who may execute the articles? o Anyfiduciary, a boarddirector,chairman,etc.

y Page 214 isexampleofarticlesofincorporation.o Whatifab justendedinstores. Not valid becausemustsignifyitisincorporated.o Whatifexistingcorp wasnamed ab softwarestore. (section 4.01) Must bedistinguishable.o Whatifsubmission wasdateofmailing? Isthatenough? Is a difference betweenmailing and

filing (2.03) says,Corp.existence begins when articles arefiled.

y Duration of entity:o I want the entity to die when I do.

Put it in the articles.or Any lawful purpose BUT remember articles are public doctrines, may want to put items in your bylaws

instead.

o Registered Office: Which officeshould betheregisteredoffice? Yourortheirs?

y Should haveoneplaceto beserved withprocess. What happensnext? Lookatsection 2.05.

InMoststatesyouonlyneedoneormoreperson as anincorporator.

y Inmoststatesneed 1 ormore boardofdirectors, 9 statesyouneed 3.

y FLA says if you have shareholders with preemptive rights, that must be in ARTICLES.Preemptive rights means that shareholders have rights to buy

How much moneydoyou haveto haveinmoststates?

y None butinDCitis $1000.

LOOK at check list page 220 221 1-8.

WEEK 9__________________________________________________________________________________

Premature Commencement of Business:

y Promoter (Fiduciary Duties) (MMOPP)o Person who acting aloneorinconjunction with oneormoreotherpersons,directlyorindirectlytakesinitiativeinfounding andorganizingthe businessorenterpriseofanissuer.

MaterialFactDisclosure Misrep.Offacts avoidance OR Personalinterestdisclosure

y Ofhertransactionsre:corporateenterprise


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Personal Gain Avoidance

y AttheexpenseofCorp.

y Promoter Enemies SCCCso Creditors,otherpromoters,othercorps.

Subsequentpurchasersofcorpinterests (suckers) Copromoters Corps. Creditors

o Creditorsshould be abletosue becauseofconversion.

Stanley J. How & Associates, Inc. v. Boss

FACTS:

y Factsdontmakeclearifcorp. waseverformed. Project becomes abandoned and Architectdoesnotgetpaid.

y Issue: Is the person signing for the nonexistent corporation liable under the contract if thecorporation subsequently does not materialize? YES.

o This wouldmakethepromoterliabletotheplaintiffunless there was the unambiguousintentthatthecontract wasconstruedtomean 1) thattheplaintiffagreedtolooksolelytothe

new corporationforpayment 2) thatthepromoterdidnot have anydutytowardtheplaintifftoformthecorporation andgivethecorporationtheopportunityto assume andpaytheliability.

o The person signing for the nonexistent corporation is to be held personally liable, unless theintent is clearly expressed otherwise.

o What if the promoter relies on the attorney but the attorney screws up, is the promoter stillon the hook? Promoter is still liable.

Robertson v. Levy:

FACTS:

y RULE 2.04

y Can the president of an association that filed its articles of incorporation ( which were firstrejected but later accepted) be held personally liable on an obligation entered into by the

association before the articles of incorporation has been issued? YES.

y MBCA section 146: Ifanindividualorgroup assumesto act as a corporation beforethecertificateofincorporation has beenissued, joint andseveralliability attaches.

y MBCA section 56providesthatthecorporationcomesintoexistenceonlywhenthecertificate hasactually beenissued

DISREGARD OF THE CORPORATE ENTITY:

To bleed is not to pierce

Piercing the Corp. Veil:

Bartle v. Homeowners:

FACTS:

y Builders (subsidiary)

y Build house atcost


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y COOPmembers

y VetCooperative (Parent)o Corporate veil will bepiercedonly whenthereisfraudulent use of subsidiary bytheparentor

whentheparent hascommitted acts with the subsidiary to its benefit and to the detrimentof the creditor. Nofraudoract byDinjuringcreditors bydepleting assetsorotherwise.

o Dissentinthiscasesimplysaysthatthe builderwassimply an AGENT oftheParent. Samecompany.

o Generally speaking, the doctrine of piercing the corporate veil is invoked to prevent

fraud or to achieve equityo These wereseparatecorporations anditis withinthelaw toform a corporationforthe verypurposeofescapingliability.

Dewitt v Fleming Fruit Co

FACTS:

y Alter Ego Theory: Whentheindividualusesthecorp. as a faade.

y FACTORScourtslookat:o Grossundercapitalizationo Nocorpformalitieso Nopaymentofdividendso Siphoningoffundso Nocorp.recordso Faadeforprincipalstockholderso Onlyforspecificshareholderforspecificcorporateobligation

not allshareholders arepierced not allcreditorspierceshareholders

y Eventhough hadCorp.setup,didnt actlike a corp.

y Alter ego theory:using a corporateentitytoconductpersonal businessthatperpetuatesinjusticesothatthecorporate veilispiercedtopersonally holdshareholderliable.

y Issue: Can the corporate veil be pierced and the corporation and its stockholders be treated asidentical, without fraud being alleged? YES

y A singlefactorisnotenough topierce, butifseveral alteregofactors along with elementsofinjusticeorfundamentalunfairness,thecourtcanpierce.

y When a corp.paysoutmoneythey havetomake a declarationofdividends

Baatz v. Arrow Bar:

FACTS:

y Thisis a contractual basis (meaningthecorporation) andnotmadeto be allowedtopiercethecorporateveil.

y Furthermorethereisnoevidencethattheydid anythingotherthanpourdrinks.

y POINT: Alteregotheoryis whenthey areusingthecorp.fortheirpersonaluse.

y Issue:May a courtdisregardthecorporateentityiftheevidencefailstoindicateinjustice andinequitableconsequences?NO.

y Ps arguethatDscorporation was an alterego, butnoevidencetosupport allegations. Failure to

comply with all corporate formalities will not necessarily justify piercing the corporate veil.

y UNDERCAPITALIZATION:o Had 155ko 5 kofownmoneyo = 150kbalnce


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o Sototalowed was 145k Butcourts andindustrydoesnt wanttogetinvolved andsay how much capitalsomeoneshould havetorunorstart a business.

UNDERCAPITALIZATIONmea

ba outline professor groves[1]

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