Business Law and the Regulation of Business Chapter 32: Operation of General Partnerships By Richard A. Mann & Barry S. Roberts

Topics Covered in this Chapter I. Relationships Among Partners A. Duties Among Partners B. Rights Among Partners II. Relationship Between Partners and Third Parties A. Contracts of Partnership B. Torts of Partnership C. Notice to a Partner D. Liability of Incoming Partner

Duties among Partners n Fiduciary Duty – duty of utmost loyalty, fairness, and good faith owed by partners to each other and to the partnership. n Duty of Obedience – duty to abide by the partnership agreement and any business decisions properly made by the partners. n Duty of Care – duty owed by partners to manage the partnership affairs without gross negligence, reckless conduct, intentional misconduct, or knowing violation of law.

Rights among Partners n Rights in Partnership Property – partners have the right to use and possess partnership property for partnership purposes. n Transferable Interest in Partnership – partner’s right to share in profits and surplus; may be transferred.

Transferable Interest in Partnership n Distributions – transfer of partnership property from the partnership to a partner. –Profits – each partner is entitled to an equal share of the profits unless otherwise agreed. –Capital – a partner cannot receive a distribution of the capital contributions in his account before his withdrawal or liquidation of the partnership. –Advances – if a partner makes an advance (loan) to the firm, he is entitled to repayment of the advance plus interest. –Compensation – unless otherwise agreed, no partner is entitled to payment for services rendered to the partnership.

Rights among Partners n Management – each partner has equal rights in management of the partnership unless otherwise agreed. n Choice of Associates – under the doctrine of delectus personae, no person can become a member of a partnership without the consent of all of the partners.

Enforcement Rights n Information – each partner has the right (1) without demand, to any information concerning partnership and reasonably required for the proper exercise of the partner’s rights and duties and (2) on demand, to any other information concerning the partnership.

Enforcement Rights n Legal Actions – a partner may maintain a direct suit against the partnership or another partner for legal or equitable relief to enforce the partner's rights; the partnership itself may maintain an action against a partner for any breach of the partnership agreement or for the violation of any duty owed to the partnership.

Partners' Liability n Personal Liability – if the partnership is contractually bound, each partner has joint and several, unlimited personal liability. n Joint and Several Liability – a creditor may sue the partners jointly as a group or separately as individuals.

Contract Liability Partner Has Actual Authority Partnership Third Party Partner Partner Has Apparent Authority But Not Actual Authority Partner Has No Actual or Apparent Authority liable indemnity bound Third Party Partnership Partner Partnership Partner

Authority to Bind Partnership n Partners with actual (express or implied) or apparent authority may bind the partnership. –Actual Express Authority –set forth in partnership agreement, or other agreement, or in decisions made by a majority of partners regarding ordinary partnership business. –Actual Implied Authority –reasonably deduced from the nature of the partnership, the terms of the partnership agreement, or relations of the partners. –Apparent Authority –acts of a partner apparently carrying on the ordinary partnership business bind the partnership, so long as that third person has no knowledge or notice of the lack of actual authority.

Partnership by Estoppel n Imposes partnership duties and liabilities on a nonpartner who has either represented himself or consented to be represented as a partner.

Torts and Crimes n Torts – the partnership is liable for loss or injury caused by any wrongful act or omission or other actionable conduct of any partner while acting within the ordinary course of the business or with the authority of copartners. n Breach of Trust – the partnership is liable if a partner in the course of the partnership’s business or while acting with authority of the partnership breaches a trust by misapplying money or property entrusted by a third person.

Torts and Crimes n Joint and Several Liability – the partners are jointly and severally liable for a tort or breach of trust committed by any partner or by an employee of the firm in the course of partnership business. n Crimes – a partner is not criminally liable for the crimes of her partners unless she authorized or participated in them.

Tort Liability Tort Within Authority or Ordinary Course of Business liable indemnity liable Tort Outside Authority and Ordinary Course of Business liable Partnership Third Party Partner Partnership Third Party Partner

Notice to a Partner n Binds Partnership – a partnership is bound by a partner’s knowledge, notice, or receipt of a notification of a fact relating to the partnership. n Notice – a person has notice of a fact if the person (1) knows of it, (2) has received a notification of it, or (3) has reason to know it exists from all of the facts known to the person at the time in question.

Liability of Incoming Partner n Antecedent Debts – the liability of an incoming partner for antecedent debts of the partnership is limited to her capital contribution. n Subsequent Debts – the liability of an incoming partner for subsequent debts of the partnership is unlimited.