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Lecture Material for Class of 2/23/17

 
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PostPosted: Fri Feb 17, 2017 1:37 pm    Post subject: Lecture Material for Class of 2/23/17 Reply with quote

To: Law 2 Students
Re: Lecture of 2/23/17
Reading Assignment to be done before class of 2/23/17

THIS IS MY OUTLINE FOR THE NEXT CLASS SESSION, 2/23/17. THERE ARE CASES MENTIONED THAT SHOULD BE READ PRIOR TO THE 2/23 CLASS. YOU ALSO SHOULD READ THE TEXT THAT COVERS THIS MATERIAL.



BUSINESS ORGANIZATIONS:

A. SOLE PROPRIETOR: May use own name or adopt fictitious one: complete control of operation; receives all profits.

B. PARTNERSHIP: Agreement: Two/more persons/entities to carry on a business together for profit.

C. CORPORATE ENTITY: Artificial legal being, created under law: given certain powers; treated as separate legal entity differs from the shareholders, who are its owners.

NATURE OF PARTNERSHIPS

Some ways similar to law of agency: Partner(s) considered agent of all co-partners for certain purposes; acts of partner w/in scope of partnership may be imputed to other partners; agency concept of fiduciary responsibility applies to partnerships.

PARTNERSHIPS DISTINGUISHED FROM OTHER ARRANGEMENTS:

VIRTUALLY ALL STATES UNIFORM PARTNERSHIP ACT (U.P.A.):

Partnership: Association of two/more persons who all voluntarily agree to carry on as co-owners of continuing business (not just one single project) for profit.

A. ESSENTIAL ELEMENTS OF A PARTNERSHIP:

Community of interest in a business; and

Sharing of profits and losses.

GENERAL PARTNERSHIP DISTINGUISHED FROM LIMITED PARTNERSHIP:

Limited partnership: Formed only by formal proceeding in compliance with the statutes in effect in the state of creation. One wherein its for investment purposes. Requires one/more general partners who manage business, and one/more limited partners merely investors.

LIABILITY LIMITATION: Limited partners no general personal liability in partnership debts unless they become general partners by taking an active part in management.


PARTNERSHIP IS A SINGLE LEGAL ENTITY

LIABILITY:

It's a separate entity, apart from its several members, and as per the U.P.A. and state statutes. However, for FEDERAL INCOME TAX purposes the individual partners report their share of taxes or losses separately even though the partnership files an "informational return" as an entity.

CAPACITY TO SUE OR BE SUED:

Most states/Federal Courts permit partnership to sue or be sued in the firm name as a separate entity.

SUIT BETWEEN PARTNERS:

Individual partners constitute partnership therefore cannot sue one another for claims arising out of the partnership business, nor can they have a partner prosecuted criminally for misuse of partnership funds. Instead, appropriate action in such cases is a suit in equity court for an accounting of the business. Discussed hereinbelow.

CRIMINAL LIABILITY:

Partnership may be indicted as an entity for violations of regulatory statutes even if there is no showing of culpability by the individual partners.

BANKRUPTCY:

Federal bankruptcy law treats partnership as single entity, so adjudication of partnership as a debtor does not make the individual partners the debtors. Also, adjudication that a partner is a debtor does not bring the partnership assets into that partner's bankruptcy.

CAPACITY TO CONVEY PROPERTY:

Partnership can hold and convey title to real or personal property in firm name as an entity.

CREATION OF PARTNERSHIPS

CREATED BY AGREEMENT OR BY ESTOPPEL.

AGREEMENT:

Partnership voluntary association two/more persons, usually based upon agreement of partners.
Contract, express/implied, essential to formation. Written agreement not required unless necessary because of Statute of Frauds. Example: Partnership agreement mandatory continuance of more than one year time of making have to be written. However, it's a better practice to for there to be a written agreement w/all terms spelled out. See P. 618-19 for suggested items to be included.

DURATION:

If there is no period of time fixed: "At will" can be dissolved any time by any partner. Can be for specific term/purpose which by it's terms establishes the duration.

CAPACITY:

Any person w/capacity to contract has capacity to become a partner. SO: Partnership where minor is one of the partners is voidable and subject to disaffirmance by the minor.

CONSENT:

No person shall become a member of a partnership w/o consent of all partners.

DETERMINING PARTNERSHIP EXISTENCE:

Disputes sometimes arise whether business relationship is partnership and whether there's an express or implied agreement to do business as partners. If the latter, the Court determines intent of parties by applying the following rules of construction:

SHARING OF PROFITS AND LOSSES OF BUSINESS:

Prima facie (in absence of proof to the contrary) evidence that a partnership exists.

JOINT OWNERSHIP OF PROPERTY:

Mere joint ownership of property does not establish a partnership.

CONTRIBUTION OF CAPITAL:

Not necessary a partner contribute capital, so contribution does not alone prove partnership.

SHARING OF GROSS INCOME:

Not of itself establish a partnership.

PARTIES' DESIGNATION/DECLARATION:

That they are a partnership entitled to weight, not conclusive.

Case Hypothetical from older edition of Cheeseman�s book: Vohland v. Sweet

FACTS: Sweet began hourly em�ployee of Vohland�s Nursery. In 1963, Vohland changed Sweet's status giving him 20 percent of net profit instead of hourly pay. Compensation paid on irregular basis. No social security or income taxes withheld from checks is�sued to Sweet as compensation. Sweet paid self-employ�ment social security tax. Sweet's tax returns declared he was a self-em-ployed salesman. Sweet contributed no capital or property to business. Sweet, instead, managed the physical aspects of the nurs�ery, supervised the care of the nursery stock, and oversaw the performance of customer contracts. Vohland made most of the sales, managed the finances, and bor�rowed money in his own name for business purposes without Sweet's approval. Sweet claims Vohland promised to "take him in, give him a piece of the action." Vohland denied statements.

HISTORY: Trial court held Sweet was a partner with 20 percent interest in the profits and property of the business.

ISSUE: Did Vohland and Sweet enter into a partnership, or was Sweet merely an employee?

DECISION: Sweet was a partner.

REASONING: Indiana code defines partner�ship as association of two/more persons to carry on as co-owners a business for profit. Here Vohland and Sweet did in es�sence share profits. Although they called it a commission, Sweet's compensation was, in substance, a share of profits. Under Indiana code receipt of profits is prima facie evi�dence of partnership. Not crucial Sweet did not con-tribute money or property since he did contribute his labor and services. Contributions of labor and skill can be as great or greater a contribution than money or property. The evidence viewed most favorably to support the judgment allows an inference of the intention by both to create a partnership.

Now compare this with the full case and tell me the difference (TO BE DISCUSSED IN CLASS:

Here is the full text of Vohland v. Sweet for you to review. Read and compare the Cheeseman presentation of the case found above. See if you find the MAJOR item left out of Prof. Cheeseman's review of the case. We will discuss during lecture of 2/21/13.



STATEMENT OF THE FACTS
The undisputed facts reveal that Sweet, as a youngster, commenced working in 1956 for Charles Vohland, father of Paul Eugene Vohland, as an hourly employee in a nursery operated by Charles Vohland and known as Clarksburg Dahlia Gardens. Upon the completion of his military service, which was performed from 1958 to 1960, he resumed his former employment. In approximately 1963 Charles Vohland retired, and Vohland commenced what became known as Vohland's Nursery, the business of which was landscape gardening. At that time Sweet's status changed. He was to receive a 20 percent share of the net profit of the enterprise after all of the expenses were paid. Expenses included labor, gasoline, insurance, burlap, nails, insecticide, fertilizer, seed, straw, plants, stock and seedlings, and any other expense. The compensation was paid on an irregular basis. Every week, two weeks, or perhaps even a month, Sweet and Vohland sat down and computed all income that had been received and all expenses that had been incurred since the last settlement. After the expenses had been deducted from the income, Sweet would receive a check for 20 percent *862 of the balance. Occasionally Sweet would receive an advance draw which would be deducted from his next settlement. No Social Security or income tax was withheld from the checks.

No partnership income tax returns were filed. Vohland and his wife, Gwenalda, filed a joint return in which the business of Vohland's Nursery was reported in Vohland's name on Schedule C. Money paid Sweet was listed as a business expense under "Commissions." Also listed on Schedule C were all of the expenses of the nursery, including investment credit and depreciation on trucks, tractors, and machinery. Sweet's tax returns declared that he was a self-employed salesman at Vohland's Nursery. He filed a self-employment Schedule C and listed as income the income received from the nursery; as expenses he listed travel, advertising, phone, conventions, automobile, and trade journals. He further filed a Schedule C-3 for self-employment Social Security for the receipts from the nursery.

Vohland handled all of the finances and books and did most of the sales. He borrowed money from the bank solely in his own name for business purposes, including the purchase of the interests of his brothers and sisters in his father's business, operating expenses, bid bonds, motor vehicles, taxes, and purchases of real estate. Sweet was not involved in those loans. Sweet managed the physical aspects of the nursery and supervised the care of the nursery stock and the performance of the contracts for customers. Vohland was quoted by one customer as saying Sweet was running things and the customer would have to see Sweet about some problem.

Evidence was contradictory in certain respects. The Vohland Nursery was located on approximately 13 acres of land owned by Charles Vohland. Sweet testified that at the commencement of the arrangement with Vohland in 1963, Charles Vohland grew the stock and maintained the inventory, for which he received 25 percent of the gross sales. In the late 1960's, because of age, Charles Vohland could no longer perform. The nursery stock became depleted to nearly nothing, and new arrangements were made. An extensive program was initiated by Sweet and Vohland to replenish and enlarge the inventory of nursery stock; this program continued until February, 1979. The cost of planting and maintaining the nursery stock was assigned to expenses before Sweet received his 20 percent. The nursery stock generally took up to ten years to mature for market. Sweet testified that at the termination of the arrangement there existed $293,665 in inventory which had been purchased with the earnings of the business. Of that amount $284,860 was growing nursery stock. Vohland, on the other hand, testified that the inventory of 1963 was as large as that of 1979, but the inventory became depleted in 1969. Vohland claimed that as part of his agreement with Charles Vohland he was required to replenish the nursery stock as it was sold, and in addition pay Charles Vohland 25 percent of the net profit from the operation. He contends that the inventory of nursery stock balanced out. However, Vohland conceded on cross-examination that the acquisition and enlargement of the existing inventory of nursery stock was paid for with earnings and, therefore, was financed partly with Sweet's money. He further stated that the consequences of this financial arrangement never entered his mind at the time.

Sweet's testimony, denied by Vohland, disclosed that, in a conversation in the early 1970's regarding the purchase of inventory out of earnings, Vohland promised to take care of Sweet. Vohland acknowledged that Sweet refused to permit his 20 percent to be charged with the cost of a truck unless his name was on the title. Sweet testified that at the outset of the arrangement Vohland told him, "he was going to take ... me in and that ... I wouldn't have to punch a time clock anymore, that I would be on a commission basis and that I would be, have more of an interest in the business if I had 'an interest in the business.' ... He referred to it as a piece of the action." Sweet testified that he intended to enter into a partnership. Vohland asserts that no *863 partnership was intended and that Sweet was merely an employee, working on a commission. There was no contention that Sweet made any contribution to capital, nor did he claim any interest in the real estate, machinery, or motor vehicles. The parties had never discussed losses.

After Charles Vohland died (in 1973) Vohland contends that he paid $1,000 a year to Mary Crystal Vohland, his stepmother and current owner of the 13 acres, as a gift, and in addition replenished the nursery stock as it was taken and sold. Sweet contends the payments were a flat fee for the use of the land.

ISSUES
Vohland presents four issues for review:
I. Was the evidence sufficient to support the finding of the trial court that Sweet had a 20 percent interest in the inventory of the landscaping business?
II. Was the evidence sufficient to support the finding of the trial court that Vohland failed to advise Sweet that trees, materials, and supplies were costs of doing business and that "net" was the amount left after such costs had been paid in full?
III. Was the evidence sufficient to support the finding of the trial court that Vohland and Sweet had an inventory with a value of $293,665?
IV. Was the evidence sufficient to support the conclusion of law of the trial court that the business relationship of the parties, Vohland and Sweet, was a partnership?

DISCUSSION AND DECISION
Issues I, II and IV. Existence of partnership

The principal point of disagreement between Sweet and Vohland is whether the arrangement between them created a partnership, or a contract of employment of Sweet by Vohland as a salesman on commission. It therefore becomes necessary to review briefly the principles governing the establishment of partnerships.

It has been said that an accurate and comprehensive definition of a partnership has not been stated; that the lines of demarcation which distinguish a partnership from other joint interests on one hand and from agency on the other, are so fine as to render approximate rather than exhaustive any attempt to define the relationship. Bacon v. Christian, (1916) 184 Ind. 517, 111 N.E. 628.

A partnership is defined by Ind.Code 23-4-1-6(1) (Uniform Partnership Act of 1949):
"A partnership is an association of two or more persons to carry on as co-owners a business for profit."

Ind.Code 23-4-1-7 sets forth the rules for determining the existence of a partnership:
"In determining whether a partnership exists, these rules shall apply:
(1) Except as provided by section 16 persons who are not partners as to each other are not partners as to third persons.
(2) Joint tenancy, tenancy in common, tenancy by the entireties, joint property, common property, or part ownership does not of itself establish a partnership, whether such co-owners do or do not share any profits made by the use of the property.
(3) The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived.
(4) The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, but no such inference shall be drawn if such profits were received in payment:
(a) As a debt by instalments or otherwise,
(b) As wages of an employee or rent to a landlord,
(c) As an annuity to a widow or representative of a deceased partner,
*864 (d) As interest on a loan though the amount of payment vary with the profits of the business,
(e) As the consideration for the sale of a good will of a business or other property by instalments or otherwise."

[1][2][3] Under Ind.Code 23-4-1-7(4) receipt by a person of a share of the profits is prima facie evidence that he is a partner in the business. Endsley v. Game-Show Placements, Ltd., (1980) Ind.App., 401 N.E.2d 768. Lack of daily involvement for one partner is not per se indicative of absence of a partnership. Endsley, supra. A partnership may be formed by the furnishing of skill and labor by others. The contribution of labor and skill by one of the partners may be as great a contribution to the common enterprise as property or money. Watson v. Watson, (1952) 231 Ind. 385, 108 N.E.2d 893. It is an established common law principle that a partnership can commence only by the voluntary contract of the parties. Bond v. May, (1906) 38 Ind.App. 396, 78 N.E. 260. In Bond it was said, "(t)o be a partner, one must have an interest with another in the profits of a business, as profits. There must be a voluntary contract to carry on a business with intention of the parties to share the profits as common owners thereof." Id., 38 Ind.App. at 402, 78 N.E. 260. In Bacon, supra, in reviewing the law relative to the creation of partnerships, the court said:
"From these, and other expressions of similar import, it is apparent to establish the partnership relation, as between the parties, there must be (1) a voluntary contract of association for the purpose of sharing the profits and losses, as such, which may arise from the use of capital, labor or skill in a common enterprise; and (2) an intention on the part of the principals to form a partnership for that purpose. But it must be borne in mind, however, that the intent, the existence of which is deemed essential, is an intent to do those things which constitute a partnership. Hence, if such an intent exists, the parties will be partners notwithstanding that they proposed to avoid the liability attaching to partners or (have) even expressly stipulated in their agreement that they were not to become partners. (Citation omitted)
It is the substance, and not the name of the arrangement between them, which determines their legal relation toward each other, and if, from a consideration of all the facts and circumstances, it appears that the parties intended, between themselves, that there should be a community of interest of both the property and profits of a common business or venture, the law treats it as their intention to become partners, in the absence of other controlling facts."

Id. 184 Ind. at 521-522, 111 N.E. 628.

Watson, supra, has substantial similarities to the case at bar, and the reader should study it. Briefly, the facts disclose that in a suit for the dissolution of a partnership and an accounting, Mary Watson commenced to work on a farm, and thereafter, in 1945, she assumed the management thereof. She made no capital contributions, and there was no specific agreement, oral or written. At the commencement, the farm and certain machinery and livestock were owned by Keller. From the proceeds of the sale of grain, livestock, and produce, new and additional machinery was purchased, and the herds of livestock were increased. Debts on old machinery were retired. Separate income tax returns were filed reflecting that, in approximate terms, Mary Watson received one fourth, Elizabeth Watson one fourth, and Keller one half the net income of the farming operation. The court, citing Bacon, supra, affirmed the trial court's money judgment in favor of Mary Watson for a portion of the increase of the machinery and livestock herds. The court stated:
"The facts and circumstances in this case are such that the court might readily conclude therefrom that Alice C. Keller, Elizabeth Watson and Mary E. Watson 'intended, between themselves, that there should be a community of interest' in any increment in the value of the capital and in the profits of their common venture in the operation of the Keller Farm. We *865 find no controlling facts to the contrary, and under these circumstances the law will presume that they intended to form a partnership. (Citations omitted)
We believe the evidence here presents a state of facts from which the trial court could legally infer the establishment of a partnership with appellee having a one-fourth interest, appellant, Elizabeth Watson, a one-fourth interest, and appellant, Alice C. Keller, a one-half interest."

Watson, 231 Ind. 391-393, 108 N.E.2d 893. The Watson court struck down the argument made in the case at bar that Mary Watson made no capital contribution, stating that a partner may contribute skill and labor in lieu of capital. The court rested its decision on the grounds that Mary received no salary or wages for her services, and her sole income was from one fourth of the net profits arising from the operation of the farm.

[4] The standard of review for a case such as this was stated in Endsley, supra.
"In reviewing the evidence to determine its sufficiency, we may only look to that evidence and the reasonable inferences to be drawn therefrom most favorable to the appellee. Butler v. Forker (1966), 139 Ind.App. 602, 221 N.E.2d 570. This Court will neither weigh the evidence nor judge the credibility of the witnesses. Butler, supra. It is the province of the trial court to determine which witness to believe when it hears the evidence. Jackman v. Jackman (1973), 156 Ind.App. 27, 294 N.E.2d 620, 625. We cannot reverse upon the basis of conflicting evidence. Franks v. Franks (1975), 163 Ind.App. 346, 323 N.E.2d 678, 680. In order to reverse the finding of the trial court, the evidence must lead solely to a conclusion which is contrary to that reached by the lower court. Butler, supra; Puzich, supra. In viewing the evidence before us in the prescribed fashion, we find that it does not lead solely to a conclusion which is contrary to that reached by the trial court."

Id. 401 N.E.2d at 771-772. In the analysis of the facts, we are first constrained to observe that should an accrual method of accounting have been employed here, the enhancement of the inventory of nursery stock would have been reflected as profit, a point which Vohland, in effect, concedes. We further note that both parties referred to the 20 percent as "commissions." To us the term "commission," unless defined, does not mean the same thing as a share of the net profits. However, this term, when used by landscape gardeners and not lawyers, should not be restricted to its technical definition. "Commission" was used to refer to Sweet's share of the profits, and the receipt of a share of the profits is prima facie evidence of a partnership. Though evidence is conflicting, there is evidence that the payments were not wages, but a share of the profit of a partnership. As in Watson, supra, it can readily be inferred from the evidence most favorable to support the judgment that the parties intended a community of interest in any increment in the value of the capital and in the profit. As shown in Watson, absence of contribution to capital is not controlling, and contribution of labor and skill will suffice. There is evidence from which it can be inferred that the parties intended to do the things which amount to the formation of a partnership, regardless of how they may later characterize the relationship. Bacon, supra. From the evidence the court could find that part of the operating profits of the business, of which Sweet was entitled to 20 percent, were put back into it in the form of inventory of nursery stock. In the authorities cited above it seems the central factor in determining the existence of a partnership is a division of profits.

From all the circumstances we cannot say that the court erred in finding the existence of a partnership.

Issue III. Excessive judgment

Vohland argues that the evidence is insufficient to support a finding that the value of the inventory was $293,665. The court's award to Sweet was 20 percent of this amount. Vohland argues that the figure *866 testified to by Sweet included $284,860 in nursery stock growing on land owned by Mary Crystal Vohland, and this stock was therefore her property. However, the evidence is clear that some sort of lease arrangement was involved wherein Mary Crystal Vohland was paid and the stock could be removed without her prior consent. Vohland cites no authority to support his contention, nor does he develop any cogent argument as to why nursery stock planted on leased premises are not fructus industriales.

[5][6] Generally, fructus industriales, such as growing crops, are considered to be personal property and are not a part of the real estate. Niagara Oil Company v. Ogle, (1912) 177 Ind. 292, 98 N.E. 60; Perry v. Hamilton, (1893) 138 Ind. 271, 35 N.E. 836; Richardson v. Scroggham, (1974) 159 Ind.App. 400, 307 N.E.2d 80; 9 I.L.E. Crops s 2. However Vohland makes a bare assertion unsupported by authority that insomuch as Mary Crystal Vohland owned the real estate, neither he nor Sweet had any interest whatever in the nursery stock planted there at the admitted expense of Sweet and Vohland. We hold that Vohland has not complied with Ind. Rules of Procedure, Appellate Rule 8.3(A)(7) by presenting citations of authorities and cogent argument, and has waived that issue. Krueger v. Bailey, (1980) Ind.App., 406 N.E.2d 665; American Optical Company v. Weidenhamer, (1980) Ind.App., 404 N.E.2d 606; Nationwide Mutual Insurance Company v. Pomeroy, (1967) 141 Ind.App. 288, 227 N.E.2d 448.

For the above reasons this cause is affirmed.

Affirmed.

RATLIFF, P. J., and ROBERTSON, J., concur.

PARTNERSHIP

CASE PAGE: 378 34.3

CASE PRESENTED IN CLASS: FLIP


2. PARTNERSHIP BY ESTOPPEL; WHEN THIRD PARTIES ARE INVOLVED:

Between partners: Agreement is required. However, parties who are not partners may be bound as partners by estoppel in their dealings with third parties.

Both nonpartner and partner who consents to the representation are estopped� forbidden�from denying liability [UPA � 16]. If all partners of partnership consent to the representation, the credit contract becomes an obligation of the partnership. Example: Dean, Sunny, and Bob form partnership to operate a men's clothing store. One day Dean's daughter Gail, who has just graduated from college, accompanies Dean on partnership business. On a visit to Threads, Inc., a clothing supplier to the partnership, Dean introduces Gail as the "new partner." Although she is not really a partner, Gail enters into a contract with Threads, Inc., to purchase $100,000 of Madras cloth (on credit) on behalf of the partnership. Dean remains silent while Gail signs the contract. Neither the partnership nor the other partners are liable on the contract. The partnership by estoppel is between Dean and Gail, who are personally liable for the contract.


LIABILITY OF ALLEGED PARTNER:

Holds himself out to be a partner in actual or apparent partnership, or expressly/impliedly consents to represenations a partner, liable to any third person who extends credit in good faith reliance upon such representations.

CASE PRESENTED IN CLASS: WELCH


LIABILITY OF PARTNERS WHO REPRESENT THIRD PERSON AS A PARTNER:

Actual partner represents nonpartner to be member of the partnership, thereby makes that person an agent with the power to bind him as though the person were in fact a partner. However, only those partners who made or consented to the representation would incur the liability.

FICTITIOUS FIRM NAME:

Partnerships or sole proprietors desiring to conduct business under fictitious firm name required by most state statutes to register and publish certificates setting forth the true names and addresses of all partners or parties to make a public record for the benefit of those who deal with the business.

PARTNERSHIP PROPERTY

Frequently necessary to distinguish between property belonging to partnership firm and property belonging to individual partners to ascertain rights of the partners and the creditors.

PRIMARY TEST: Whether or not partners intended to devote it to partnership purposes.

WHAT CONSTITUTES PARTNERSHIP PROPERTY:

All property originally brought into the partnership or subsequently acquired, by purchase or otherwise, on account of the partnership, is partnership property.

DETERMINATION OF INTENTION:

Absence clear expression of partners' intent:

Courts consider facts and circumstances surrounding the acquisition and ownership of the asset:

PURCHASE WITH PARTNERSHIP FUNDS:

Conclusive asset belongs to partnership unless the contrary intention is proved.

PARTNERSHIP PURPOSE:

More closely asset associated with business of the partnership, more likely it will be held a partnership asset.

STATUS IN PARTNERSHIP BOOKS:

If property listed as firm asset in partnership books and records this is given considerable weight, especially where all parties are shown to have knowledge of this fact.

GOODWILL:

Favor the owner of business has won from the public and probability customers will continue patronage, is a partnership asset.

TITLE:

Status of title not conclusive, just one factor considered.

IMPROVEMENTS MADE WITH PARTNERSHIP FUNDS:

Not determinative, particularly if improvements are separable from the asset.

USE OF PROPERTY:

Use of asset in partnership business not enough in itself to establish intent that it's owned by the partnership.

WHAT IS PARTNERSHIP CAPITAL?:

Sums of money or things of value contributed by partners as permanent investments.

STATUS OF CAPITAL:

Important for partners to make clear intention of capital to become partnership property or to remain that of contributing individual.

LOANS BY PARTNER:

To the partnership do not become part of the capital but make the lending partner a creditor of the partnership.

TITLE TO PARTNERSHIP PROPERTY

PERSONAL PROPERTY:

Partnership may hold and transfer title to personal and real property in the name of the partnership.
TRANSFER OF TITLE:

Title acquired in partnership name must be conveyed in the partnership name.

RIGHTS OF PARTNERS IN PARTNERSHIP PROPERTY:

Each partner is co-owner with other partners of specific items of partnership property. And has equal right to possess partnership property for partnership purposes.

NONPARTNERSHIP PURPOSES:

No partner has right to possess partnership property for nonpartnership purposes w/o consent of all the other partners.

ASSIGNABILITY OF PARTNERSHIP PROPERTY:

Any partner may transfer/assign interest in partnership assets to third person. However, this does not transfer title, but merely the proportionate interest owned by the transferring partner. The assignee only entitled to receive any profits which assignor partner would be entitled. Assignee no right to participate in partnership business, inspect the books, or receive information about partnership transactions.

RIGHT OF SURVIVORSHIP

EXAMPLE OF RESTAURANT SITUATION

CHARGING ORDER:

To reach partnership interest of individual partner, a creditor should get a charging order appointing a receiver to collect the debtor-partner's share of the profits, or reach such partner's share upon dissolution.

POWERS OF PARTNERS

MANAGEMENT OF THE BUSINESS:

As already stated, all partners have equal rights in the management and conduct of the partnership business.

UNANIMOUS CONSENT:

Any change in the partnership agreement or any decision that substantially affects the partnership requires unanimous vote of all partners.

Right to Participate in Management

In absence of agreement to contrary, all partners have equal rights in the management and conduct ofthe partnership business [UPA � 18(e)]. In other words, each partner has one vote regardless ofthe proportional size of his or her capital contribution or share in the partnership's profits. Under the UPA, simple majority decides most ordinary partnership matters. If the vote is tied the action voted on is considered to be defeated.

The following issues require the unanimous consent ofthe partners: 1. Assignment of partnership property for the benefit of creditors 2. Disposal ofthe goodwill of the business. 3. Actions that would make it impossible to carry on the oridinary business of the partnership. 4. Submission of a partnership claim or liability to arbitration [UPA � 9(3)]. 5. Admission of a new partner to the partnership [UPA � 18(g)]. 6. Actions in contravention of the partnership agreement [UPA � 18(h)]. 7. Actions that are not apparently for the carrying on of the business of the partnership in the usual way or that change the nature of the business [UPA � 9(2)].

The partners may agree to modify the majority and unanimous consent rules. The partners may delegate management responsibility to a committee of partners or to a managing partner. The partnership agreement can also create classes of partners with unequal voting powers.

Assignment

CASE PRESENTED IN CLASS: RABITO

POWER OF AN INDIVIDUAL PARTNER:

Each individual partner an agent of the partnership for the purpose of conducting partnership business.

EXPRESS AUTHORITY:

Each partner-agent has express authority given under partnership agreement or by a majority vote of the partners.

IMPLIED AUTHORITY:

Each partner has implied authority to do acts customarily done in type of partnership and which are usual for such businesses.

CUSTOMARY POWERS:

Customary powers of the partner to bind the partnership depend upon the nature of the business.


ACTS NOT WITHIN APPARENT AUTHORITY:

Acts not apparently necessary for carrying on partnership business do not bind partnership unless authorized by the other partners. EXAMPLE: Payment of partner's personal debt with partnership property must be authorized by the partners. EXAMPLE: Giving away partnership property or selling part of the partnership capital is not binding without authorization.

UNAUTHORIZED ACTS:

Unless authorized by other partners, or unless other partners have abandoned partnership business, individual partner has no authority to perform any of the following acts

Assign partnership property for the benefit of creditors

Dispose of the goodwill of the business

Do any act which would make it impossible to carry on the ordinary business of the partnership

To confess a judgment;

To submit a partnership claim or liability to arbitration

RIGHTS OF PARTNERS

SHARE OF PROFITS:

Profits and losses shared equally by partners unless agreement specifies other ratio.

CONTRIBUTIONS:

Consist of initial capital investments of partners in business and any later advances made by a partner to partnership property.

REPAYMENT OF CONTRIBUTIONS:

Each partner entitled to repayment of contributions following dissolution before any profits may be distributed to partners.

REIMBURSEMENT:

Each partner entitled to indemnification or reimbursement for all expenses and personal liabilities reasonably incurred in furtherance of the partnership business or for preservation of the business or property.

PARTNERSHIP BOOKS:

Since each partner has equal right to management, each partner also has at all times access to and may inspect and copy the partnership books.

INFORMATION:

Each partner has right to demand and duty to disclose any information that might affect partnership business to all the other partners or their legal representatives.

RIGHT TO AN ACCOUNT:

Partner cannot sue another partner on an obligation due from the partnership, such as an expense or loan reimbursement, without the consent of the other partners. The appropriate remedy for an aggrieved partner is an equity suit for an accounting.

FORMAL SUIT FOR ACCOUNTING IN EQUITY: Usually indicates
problems in partnership. Seldom granted except in connection
with formal dissolution. But cf. If partnership engaging in
ILLEGAL ACTIVITY: Partnership engages in illegal activity, such as bookmaking, equity court will not hear an accounting.

CAUSES FOR FORMAL ACCOUNTING: Any partner has right to formal accounting as to partnership affairs under any of the
following situations (1) Partner wrongfully excluded from
partnership business or from the possession of partnership
property by co-partners; (2) If right exists under any partnership agreement; (3) If partner has breached a
fiduciary duty (4) Whenever other circumstances render it
just and equitable.

DUTIES OF PARTNERS

Certain duties to partnership and other partners. These duties include

Duty of Loyalty

Partners are in a fiduciary relationship, therefore they owe each other duty of loyalty. This duty is imposed by law and cannot be waived. If there is a conflict between partnership interests and personal interests, the partner must choose the interest of the partnership. Examples of Breach of the Duty of Loyalty involve:

Some basic forms of breach of loyalty

1. Self-Dealing

Occurs when partner deals personally with partnership, such as buying or selling goods or property to the partnership. Such actions are permitted only if full disclosure is made and consent of the other partners is obtained.

EXAMPLE: Partnership: Dan is a partner looking for a piece of property on which to build a new store. Dan owns desirable piece of property. To sell the property to the partnership, Dan must first disclose his ownership interest and receive his partners' consent.

2. USURPING A PARTNERSHIP OPPORTUNITY

Offered opportunity on behalf of partnership cannot take the opportunity. E.G.: If third party offers opportunity to a partner in their partnership
status (e.g., the opportunity to purchase a business), the partner cannot take the opportunity for themself before offering it to the partnership. If the partnership rejects the opportunity, the partner is free to pursue it if it does not violate any other duty he or she owes to the partnership.

3. Competing with the Partnership

A partner may not compete with the partnership without the permission of the other partners. For example, a partner in a partnership that operates an automobile dealership cannot open a competing automobile dealership without his or her co-partners' permission.

4. Secret Profits

Partners may not make secret profits from partnership business.
EXAMPLE: Partner may not keep kickback from a supplier.

5. Breach of Confidentiality

Duty to keep partnership information (e.g., sse trade secrets, customer lists, and the like) confidential.

6. Misuse of Property

Owe duty not to use partnership property for personal use.

A partner who breaches the duty of loyalty must disgorge any profits made from the breach to the partnership. In addition, the partner is liable for any damages caused by the breach.

DUTY OF OBEDIENCE

Requires partners adhere to provisions of partnership agreement and decisions of partnership. Breach of this duty: liable to the partnership for any damages. EXAMPLE Jodie, Bart, and Denise form partnership to develop real property. Partnership agreement specifies acts of partners limited to those necessary to accomplish the partnership's purpose. Bart, acting alone, loses $100,000 of partnership funds in commodities trading. Bart is personally liable to partnership for the lost funds as he breached the partnership agreement.

DUTY OF CARE

Must use reasonable care and skill in transacting partnership business.
E.G.: Same level of care and skill a reasonable business manager in the same position would use in the same circumstances. Breach is negligence. And therefore liable to partnership for any damages caused by negligence. Not liable for honest errors in judgment. EXAMPLE Tina, Eric, and Brian form partnership to sell automobiles. Tina, responsible for ordering inventory, orders large, expensive cars. War breaks out in Middle East interrupts supply of oil to United States. Demand for large cars drops substantially, partnership cannot sell its inventory. Tina not liable because duty of care not breached. cf.: Different if war broken out before the order was placed.

DUTY TO INFORM

All information they possess that is relevant to affairs of the partnership [UPA � 20]. Even if a partner fails to do so, the other partners are imputed with knowledge of all notices concerning any matters relating to partnership affairs. Knowledge also imputed regarding information acquired in the role of partner that affects the partnership and should have been communicated to the other partners [UPA � 12]. EXAMPLE: Ted and Diane partners. Ted knows piece of property owned by partnership contains dangerous toxic wastes fails to inform Diane of this fact. Even though Diane does not have actual knowledge of this fact, it is imputed to her.

ACCOUNTABILITY:

In addition to duty to provide full and true information to other partners, each partner must account to partnership for any benefit or profits made w/o consent of other partners if it was in any transaction connected with partnership business.

FULL TIME AND ENERGY:

Unless agreed to the contrary, each partner required to give full time, skill, and energy to partnership business.

COMPENSATION:

Absent agreement, partners not entitled to compensation for services, receiving share of profits instead.

Compensation

CASE PRESENTED IN CLASS (BROFFMAN)

LIABILITIES OF PARTNERS

TORT LIABILITY:

Partnership liable for any wrongful act or omission committed by any partner in the authorized conduct of the ordinary course of partnership business.

JOINT AND SEVERAL LIABILITY:

SEE PAGE 578 CASE # 34.2

SEE PAGE 579 CASE # 34.5

CONTRIBUTION:

Third party proceeds against one partner individually and collects personal judgment, partner may have right to contribution from the partnership and other partners for their proportionate share of amount due.

PERSONAL OR UNAUTHORIZED ACT:

Partner commits act outside scope of partnership business or his authority to act, such partner liable to the injured third person even though the partnership not liable.

Tort Liability

SEE PAGE 579 CASE # 34.6

CONTRACTUAL LIABILITY:

AUTHORIZED CONTRACTS

CASE PRESENTED IN CLASS (Kemmler)


By partner for partnership become obligation of partnership, even though agreement made in name of the individual rather than partnership.

CONTRACT JOINT LIABILITY:

Absent statute to contrary, jointly liable, and suit filed either against the partnership or against all of individual partners, jointly.

ADMISSION BY PARTNER:

Admission/representation by one partner concerning partnership business w/in partner's authority may be used as evidence against the partnership.

PARTNERSHIP TRANSACTION:

Admission must concern partnership, not personal, transaction to be admissible against the partnership. EXAMPLE: Partner involved in auto accident; admits at fault, would be admissible against the partnership if at time partner engaged in partnership business. However, inadmissible if involved in purely personal matter.

EXTENT OF LIABILITY:

Each general partner, including "silent," dormant, and unknown partners, has unlimited liability.

UNLIMITED LIABILITY:

When partner has unlimited liability, partner liable to full extent of his partnership interest plus his personal assets for all liabilities and obligations incurred by the partnership.

(1) LIABILITY PRIORITIES:

Before a creditor can take personal assets on a judgment against the partnership, must be shown partnership assets exhausted or are nonexistent.

LIABILITY OF INCOMING PARTNER:

Not personally liable for any obligations of partnership incurred before became partner unless expressly assumes responsibility. However, all partnership assets, including interest purchased by incoming partner, remain liable.

LIABILITY OF OUTGOING PARTNER:

Outgoing partner continues to be liable for all partnership debts and obligations incurred prior to his separation, but not for those subsequently acquired.

DISSOLUTION AND WINDING UP

DISSOLUTION:

Point when partners cease to carry on business together.

WINDING UP:

Dissolution not final termination of partnership, is the start of process of winding up any business necessary to settle the partnership affairs and render final accounting.

NEW BUSINESS:

Any new business undertaken following dissolution and during the winding up process is solely for personal account of partner involved. [King v. Stoddard, 28 Cal. App. 3d 708 (1972)

Purpose of winding up is to finish any uncompleted business, liquidate assets, and make final distribution to the partners.

PARTICIPATION:

Any partner who did not wrongfully cause dissolution may participate in winding up process.

FIDUCIARY DUTY:

Any partner owes fiduciary duty to partnership until final termination. Where services rendered by partner after
dissolution, but while continuing ongoing business, the partners rendering such services entitled to a reasonable compensation.

CAUSES OF DISSOLUTION

Partnership may be dissolved either with/without violation of the original agreement, because of some supervening cause, or by court order.

DISSOLUTION WITHOUT VIOLATION OF AGREEMENT

Dissolution by Act of the Partners

1. TERMINATION OF A STATED TIME OR PURPOSE

A partnership that is formed for a specific time (e.g., 10 years) or purpose (e.g., the completion of a real estate development) dissolves automatically upon the expiration of the time or the accomplishment of the objective.

2. WITHDRAWAL OF A PARTNER

Any partner of a partnership at will (i.e., one without a stated time or purpose) may rightfully withdraw and dissolve the partnership at any time.

3. EXPULSION OF A PARTNER

If partnership agreement provides partners can be expelled upon happening of certain events, then expulsion of a partner in accordance with the provision dissolves the partnership.

4. ADMISSION OF A PARTNER

New partnership is comprised of the continuing partners and the newly admitted partners.

5. MUTUAL AGREEMENT OF THE PARTNERS

All of the partners of an ordinary partnership may at any time mutually agree to dissolve the partnership.

DISSOLUTION IN VIOLATION OF AGREEMENT:

Because of highly personal nature of partnership and agency liability connected any partner may dissolve partnership at any time. However, if partner wrongfully breaches agreement in forcing dissolution, partner is subject to liability for damages.

SUPERVENING CAUSES FOR DISSOLUTION

ILLEGALITY:

Purpose of business becomes illegal under the law: partnership dissolved.

BANKRUPTCY:

Adjudication of bankruptcy or insolvency of the partnership, or of one of partners, dissolves partnership.

INSOLVENCY:

Most courts: Insolvency alone, without an adjudication of a partner or partnership, does not dissolve the partnership.

DEATH:

Any one of partners dissolves the partnership.

CONTINUATION OF PARTNERSHIP BUSINESS:

Most partnership agreements should provide for continuation of business in event of death of one of the partners, usually by providing life insurance or a payment to the heirs of the reasonable value of the interest of the deceased partner. Estate of Witlin, 83 Cal. App. 3d 167 (1978)]

ORDER OR DECREE OF COURT:

Upon showing of proper cause, which may be based upon any of the following grounds:

a. Equitable cause: Circumstances render it just and equitable, e.g., a business that is losing money, court may order dissolution.

b. Misconduct: Of a partner to extent that it is injurious to partnership or to other partners, e.g., misappropriation of partnership funds by one of the partners is also a ground for dissolution.

c. Incapacity: Of partner to discharge duties {e.g., because of insanity) also a proper ground.

d. Dissension: Among partners may allow for dissolution where so serious they cannot reasonably conduct business.

NECESSITY OF GIVING NOTICE

P. 629-30

NOTICE OF DISSOLUTION MUST BE GIVEN TO ALL PARTNERS.

If a partner who has not received notice of dissolution enters into contract on behalf of the partnership in the course of partnership business, contract binding on all partners.

NOTICE OF DISSOLUTION MUST BE GIVEN TO CERTAIN THIRD PARTIES IF THE PARTNERSHIP IS DISSOLVED OTHER THAN BY OPERATION OF LAW.

Degree of notice depends on relationship of third person with the partnership [UPA � 35]:

1. Third parties actually dealt with partnership must be given actual notice (verbal or written) of dissolution or have acquired knowledge of the dissolution from another source.

2. Third parties not dealt with partnership but have knowledge of it must be given either actual/constructive notice of dissolution.

Constructive notice consists of publishing a notice of dissolution in a newspaper of general circulation serving area where business of partnership regularly conducted.

Not dealt with the partnership and do not have knowledge of it do not have to be given notice.

If proper notice not given to required third party after dissolution of a partnership, and a partner enters into contract with third party, liability may arise on the grounds of apparent authority,

Notification of dissolution of partnership not given to a creditor in the
following case.

CASE PRESENTED IN CLASS (HELMOS)

SEE PAGE 579 CASE #34.7

DISTRIBUTION

Winding up process completed and assets liquidated, final step
before termination is distribution: First to the creditors then to partners.

DISTRIBUTION TO CREDITORS:

Liabilities of partners and partnership business must be paid on schedule of priorities, in the following order:

A. NONPARTNER CREDITORS:

Creditors other than partners must be paid first.

PARTNER CREDITORS:

Partners who have made loans or advances to the business other than for capital or profits must be paid next.

CAPITAL CONTRIBUTIONS:

Return of all capital contributions is then made to the individual partners.

INSUFFICIENT ASSETS:

If there is insufficient partnership property to satisfy these liabilities, including partner loans and contributions, then the partners must make further contributions to the extent necessary to make up the losses. EXAMPLE: A, B, & C are partners. When partnership formed, Contributed $4,000 capital; B, $3,000; and C, $2,000. During a rough period, A loaned another $5,000 to the partnership. Things did not improve and partnership was dissolved. After winding up and liquidating the assets, there was $40,000 left. Creditors, other than partners, claimed $50,000. Total liabilities of the partnership would be: (i) Outside creditors, $50,000; (ii) Partner A creditor, $5,000; (iii) Capital contributions of A, B, & C combined, $9,000; for a total
liability of $64,000. Since only $40,000 is on hand, there is a deficit of $24,000, which requires further contribution of $8,000 each from A, B, and C in order that all liabilities could be paid.

MARSHALING OF ASSETS: If a partner or partnership is in an equity court or in bankruptcy for dissolution, the rule of marshaling the assets is applied.

RULE REQUIRES: Partnership assets must be applied first to the satisfaction of the partnership creditors, and individual or personal assets of a partner applied first to the satisfaction of his personal creditors, with any remaining balance being applied to the satisfaction of the other category.

DISTRIBUTION TO PARTNERS:

After payment of all liabilities, including return of capital investments, any remaining assets are distributed to partners as profits, divided equally unless partnership provides different ratio.

CASE PRESENTED IN CLASS (SUMMERVILLE)

SEE PAGE 579 CASE #34.4

SEE PAGE 579 CASE #34.5
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