- MUTUAL CONSENT(formal/informal; express/implied)

- One entity (the agent)

- ACTS ON BEHALF of another entity (the principal)

- subject to principal's CONTROL 

- Outward Manifestation (not subjective intent)

- Reasonably interpreted by the agent to INDICATE CONSENT 

Equal Dignities Rule

1. A statute 

2. requiring certain transactions to be in writing to be enforceable

3. agent can only bind principal if agency relationship is document in writing signed by principal 

- Principal must have the right to control the goal of the relationship

- Facts of relationship may imply consent to control 

- If a creditor exercises EXTENSIVE CONTROL over its debtor's business, that control can establish an agency relationship. The creditor may be liable to debtor's debts to others. 

see A. Gay Jensen Farms Co. v. Cargill, Inc

- contract/formalities not necessary to form agency relationship 

----- Courts will evaluate the relationship itself, not the labels used by the parties involved. Parties can deny agency relationship but nature of relationship reveals agency

- Can change rights and duties but MAY NOT abrogate certain powers

----principal always has power to control 

----agenct may have certain powers to bind

----both principal and agent have power to end relationship 

Agent has power to bind a principal through: 

(types)

1. Actual authority (express or implied)

2. Apparent authority

3. Estoppel

4. Inherent Power

5. Ratification 

- Objective manifestation by the principal

- a reasonable interpretation of manifestation

- lead the agent to believe that is authorized to act for the principal 

A. Gay Jensen Farms Co. v. Cargill, Inc

Brief Facts: Cargill, the creditor, held by court to be principal of Jensen Farms, therefore liable to farmers for Jensen's debts. 

Holding: A fiduciary agency relationship merely requires a “manifestation of consent by one person to another that the other shall act on his behalf and subject to his control, and consent by the other so to act,” regardless of whether a contract was formed or the intent of the parties was to be bound by the legal obligations of that relationship. 

- Silence, when reasonably interpretated, can indicate consent. 

Agent does something, principal realizes agent did the thing, but makes no objection and allows conduct to continue. 

- Reasonable person in the position of the agent at the time of acting

- Objective standard.

---Any secret, subjective intent of princiapal not considered 

- Situation of parties

- relationship to one another

- Type of business

- Customs & trade practices of business

- nature of act

- formality or informality of instrument creating agency 

- Authority to act includes authority to do acts

--- incidental to it

--- usually accompany the act

--- reasonably necessary to accomplish the act 
OR

the principal's goals known to the agent cause the agent to think that the act is authorized by principal  

• Agent acting with actual authority binds both principal and third party to a contract 

UNDISCLOSED PRINCIPAL

• Third Party may: 
• Insist on rendering performance- if altered performance would increase or change the party's burden. 
• Escape the contract- SEE NOTECARD

1. contract contains provision declaring agreement inoperable if agent is representing someone
2. agent fraudulently represents that:
1. not working for principal
2. the 3rd party would not have entered into contract knowing principal was a party
3. agent knew or should have known that the party would not have made the contract 
3. Active Misrepresentation or failure to disclose alone is insufficient.
1. Must be affirmative misrepresentation, not just silence. 

- Power to bind, not the right. 

• Elements:
• Objective manifestation from one party (apparent principal)
• which reaches 3rd party
• which causes 3rd party to REASONABLY BELIEVE that another (apparent agent) is authorized to act for the "apparent principal"

Agency by Estoppel

• 3rd party detrimentally relies on appearance of authority

• Intermediaries like a secretary
• By Position- local custom or business practices 
• By acquiscence
• By inaction- SEE NOTECARD

• Someone must assert that the apparent agent has actual authority
• apparent principal must be aware of assertions and fail to contradict them
• the third party must be aware of:
• the assertions
• the apparent principals' knowledge
• apparent prinicpal's failure to contradict
• Failure to contradict causes 3rd party to reasonably believe agent is authorized

• act solely for the benefit of the prinicpal in all matters connected with the agency
• No unapproved benefits- 
• Confidential Information- safeguard confidential information and not use that info. for agent's own benefit. 
• includes: generally not known and either carries an economic benefit OR could cause damage/embarassment
• EVEN IF unrelated to subject matter of agency
• BUT DOES NOT encompass special skills gained from performing tasks 

• Not to compete in any matter within scope of the agency 

• If serving two principals AND:
• neither principal knows about the dual agency, either may rescind; OR 
• if one principal knows, the other may 1) affirm the transaction and seek damages from agent and knowing principal, or 2) RESCIND.

Legitimate Disloyalty

• FACTORS TO JUDGE Protection of the interest of others that jusitfy an agent's act of disloyalty: 
• legtimacy of the other party's interest and th importance to that other party
• that interest will be respected by the world in general and by the principal in particular
• legitimacy of principal's interest 
• agent could have acted to protect other party's interest while minimizing damage to principal  

• PAID Agent- reasonably careful person in a similar situation 
• Gratuitous agents: applies to other gratiutous actors so almost always requires gross negligence. 

• Arises when two or more persons manifest an intention (word OR conduct) to associate as co-owners in a business for profit. 

Rules Governing Inter Se Relationships 

"Default Rules" Between Partners

• Can be changed by agreement among partners
• Ex: Profit Sharing
• Equal right to manage

• Mandatory Rules
• cannot be changed by agreements among partners
• UPA 9: partner has power to bind partnership through acts apparently for carrying on the business of the partnership in the usual ordinary way
• partner's wrongful acts binds the partnership 

• All Partners are personally liable for all debts and other obligations of the partnership
• EXHAUSTION: 
• Some UPA JX- must exhaust partnership assets before going after individual partners
• RUPA- Exhaustion applies per statute
• LIABILITY- 
• MOST UPA- jointly and severably liable for debts arising out of partner's misconduct BUT only jointly liable for all other partnership debts
• RUPA- jointly and severally for all obligations
• INTER SE Loss Sharing Plan has no effect on 3rd party's claim against particular partner 

What is a Partner?

Fenwick v. Unemployment CC

1. Share profits
2. Share losses
3. Control
4. Holding out to 3rd parties 

Who is Partner v. Employee?

6 Factors

Clackamas Gastro. v. Wells

Davis v. Loftus

Income partners at law firm were not partners within the meaning of Uniform Partnership Act and thus were not liable for any legal malpractice by two lawyers at firm; partnership agreement established that income partners received a fixed salary plus a bonus, that they did not share in partnership's profit or loss, that firm would repay their capital contribution without regard to the firm's profit or loss, that their compensation was set by executive committee, and that they had no right to vote on the management or conduct of the partnership business.

An individual who was classified as a partner-employer under state partnership law might be classified as an employee for other purposes, including the purpose for which federal antidiscrimination law extends protection to employees but not employers. 

Factors:

- Demoted partners had no control since a self-perpetuating executive committee existed. 

- No voting power 

1. Frank bought a 2- percent interest, later increased to 3%.  Did the bookkeeping, had a business degree, etc.  Pickens (the managing partner) terminated Frank’s interest and paid him book value.  There was no written agreement, so the court looked at oral agreement and past experience with other partners.  Based on testimony the court finds that Pickens had a right to terminate and pay book value for the interest.  
2. HOLDING: Bottom line: Can have an oral partnership agreement.  Can alter dissociation terms.
3. Although it is best for expulsion provisions to be contained in a written partnership agreement, courts may find that there is an oral agreement permitting a partner's expulsion. For example, in Frank v. RA Pickens & Son Co.,⁸ the court held that expulsion could be based on a verbal "understanding" that the managing partner could cause expulsion at any time.

Brief Fact Summary. Respondents, William Peyton et al., entered an agreement with a broker, John Hall, to loan Hall collateral to keep his business afloat. Appellant, Charles Martin, interpreted the agreement as forming a partnership.

Synopsis of Rule of Law. An agreement that offers a degree of control by a first party to protect first party’s assets should not be considered a partnership if factors as a whole indicate that the other party still maintains day-to-day control of the business.

The agreements did not establish a partnership. Although Respondents ensured that they had some control over the operations of Hall’s business, the controls they bargained for were to ensure that their investment was secure. Immediately prior to Respondent’s investment, Hall’s business was doing poorly due to bad decision-making and Respondents needed to prevent further bad decisions. Hall still was able to control the day-to-day affairs, and Respondents never had control to initiate their own ideas.

Kaufman-Brown Potato Co. v. Long

Young v. Jones

Brief Fact Summary. Plaintiffs, Robert Young et al., relied on an unqualified audit letter from one of the Defendants, Price Waterhouse-Bahamas (”PW-Bahamas”), and placed $550,000 with a South Carolina bank. The investment was not accounted for, and Plaintiffs brought this action against Defendants.

Synopsis of Rule of Law. Partnership by estoppel creates a liability to third parties who rely upon representations that a partnership exists.

There was no partnership by estoppel because there was no proof that Plaintiffs relied upon any acts or statements by Defendants that a partnership existed between PW-Bahamas and PW-US. Plaintiffs never made any assertions that they extended the credit based upon a perceived partnership between Defendants and therefore can not rely upon the doctrine of partnership by estoppel.

Brief Fact Summary. One partner in a joint venture took advantage of an opportunity that arose from the partnership without informing his partner.

Synopsis of Rule of Law. Members of a partnership owed duty of loyalty to each other and so must disclose opportunities that arise in order for both to have an equal chance to take advantage of it.

Joint adventurers owe to one another the duty of the loyalty, while the enterprise continues.

Defendant held the lease as a fiduciary, for himself and another, sharers in a common venture. If he had revealed this fact to Gerry, Gerry would have laid before both of them his plans of a new lease. The preemptive opportunity that was an incident of the enterprise, Defendant appropriated to himself in secrecy and silence.

The fact that Defendant was in control as the manager charges him with the duty of disclosure, since only through disclosure could opportunity be equalized. For him, the rule of undivided loyalty is relentless and supreme.
The subject matter of the new lease was an extension of the subject matter of the old one. A managing co-adventurer appropriating the benefit of such a lease without warning to his partner might expect to be reproached with conduct that was underhand, or lacking in reasonable candor, if the partner were to surprise him in the act of signing the new instrument.
The form of the equitable interest allotted to Plaintiff should attach at the option of Defendant to the shares of stock, which were owned by him or were under his control.

 Partnership or Joint Venture:

(1) A partnership did NOT exist.

The crucial elements of a partnership are

1. an intention to be partners,
2. co-ownership of the business, and
3. a profit motive.

Under comment 1 to § 202 of the Revised Uniform Partnership Act, a “business” is defined as “a series of acts directed toward an end.”

• Here, the parties were not co-owners of a business – they entered into the leases for a set period of time and their activity, rather than being a series of acts, was limited to that occurrence.

• Also, their intention was to try to sell the leases, and the parties were involved in other oil and gas related undertakings with various other parties.

(2) A joint venture DID exist:

For a business enterprise to constitute a joint venture, the following four elements must be present:

1. contribution by the parties of money, property, time, or skill in some common undertaking, but the contributions need not be equal or of the same nature;
2. a proprietary interest and right of mutual control over the engaged property;
3. an express or implied agreement for the sharing of profits, and usually, but not necessarily, of losses; and
4. an express or implied contract showing a joint venture was formed.

Here, the court held that because the leases were purchased out of the parties’ checking account funds in equal shares, they were titled in Empire Oil’s name rather than each of the parties’ names, and profits were going to be shared if the leases were sold, a joint venture did exist.

II. Breach of Fiduciary Duty

Principles of partnership law apply to the joint venture relationship – a partner owes duties of loyalty and care to the other partners.

The duty of loyalty:

a. To account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner in the conduct and winding up of the partnership business or derived from a use by the partner of partnership property, including the appropriation of a partnership opportunity;
b. To refrain from dealing with the partnership in the conduct or winding up of the partnership business as or on behalf of a party having an interest adverse to the partnership; and
c. To refrain from competing with the partnership in the conduct of the partnership business before the dissolution of the partnership.

Here, although the original Horn leases did not contain an extension or renewal provision, the top leases purchased by LaCrosse and Haughton were effectively extensions of the original Horn leases.

Because of this, they breached their fiduciary duties of loyalty by taking advantage of a joint venture opportunity when they purchased the top leases without informing Bragg and Sandvick.

Clause in parntership agreement that allows competition is not breach of a fiduciary duty. 

- partners can opt out of duty of loyalty: non-compete

Background: Retired corporate officers brought action against corporation and corporate board members claiming that board breached corporation's stock plan's implied covenant of good faith and fair dealing and its fiduciary duty and unjustly enriched itself when the board redeemed retired officers' stock after their post-retirement put rights had expired, but before selling the corporation's government business division. The Court of Chancery dismissed claims. Retired officers appealed.The implied covenant of good faith and fair dealing involves a cautious enterprise, inferring contractual terms to handle developments or contractual gaps that the asserting party pleads neither party anticipated.

Court will only imply contract terms when the party asserting the implied covenant of good faith and fair dealing proves that the other party has acted arbitrarily or unreasonably, thereby frustrating the fruits of the bargain that the asserting party reasonably expected.

The implied covenant of good faith and fair dealing only applies to developments that could not be anticipated, not developments that the parties simply failed to consider.

Brief Fact Summary. Plaintiff, Charles Bane, retired and collected a pension from a law firm that was then run by Defendants, Richard Ferguson et al. Defendants dissolved the firm and the pension.

Synopsis of Rule of Law. Partners do not owe a duty to partners that retire from the partnership.

Held. There is no common law duty to retired partners. Further, the pension agreement does not establish a duty, and they would not have breached the duty nonetheless because Defendants never intended to dissolve the firm. Defendants are also protected under the business judgment rule from claims of negligent management. Public policy also dictates that members of a firm should not be held liable under a tort claim of negligent mismanagement because the result would enable a multitude of people to state claims against any failing business.

Discussion. Former partners need to establish a duty through contract if they want to ensure that ongoing partners meet any duty that the retiring partners wants to rely upon, because common law will not protect them.

Brief Fact Summary. Plaintiffs, James Meehan and Leo Boyle, left the law firm of the Defendants, Maurice Shaughnessy et al. Plaintiffs wanted money they believed was owed to them under their partnership agreement, and Defendants countered that Plaintiffs violated their fiduciary duty and interfered with Defendants’ business.

Synopsis of Rule of Law. A partner has the obligation to render a true and full accounting of business affecting the partnership.

acts. Plaintiffs were long-time partners at Defendants’ firm. Both were very successful lawyers within the firm but became dissatisfied. Once Plaintiffs decided to leave, they gave thirty days notice (instead of the agreed upon three months – but this was waived by a partner in the firm), took other attorneys from the firm with them and contacted referring attorneys and clients about their imminent departure and provided forms to clients to switch to Plaintiffs’ new firm. Plaintiffs denied their intentions to leave on several occasions. However, Plaintiffs maintained their usual standard of performance during their entire association with the firm. When Plaintiffs left, they took 142 of the 350 pending contingent fee cases.

The partnership agreement provided rights for each of the parties after dissolution that resolved the allocation of business immediately. Departing attorneys were entitled to receive their share of capital contribution and net income currently entitled, as well as a right to a portion of the firm’s unfinished business.

Issue. The issue is whether the conduct of Plaintiffs violated a fiduciary duty owed to the remaining partners of the firm.

Held.Plaintiffs conduct regarding their secret planning for their new venture after their departure from the firm was not completely unacceptable. Plaintiffs would have to engage in some initial planning for the new firm to ensure that they would have the necessary resources and know-how to start their own firm. Pre-departure planning would also be required to ensure that the needs of clients were met with their new firm. However, Plaintiffs’ conduct went too far concerning their retention of former clients. Plaintiffs left Defendants at a disadvantage when they denied they were leaving and when they secured clients while Defendants were initially trying to game-plan for Plaintiffs’ departure.

Plaintiffs conduct regarding their secret planning for their new venture after their departure from the firm was not completely unacceptable. Plaintiffs would have to engage in some initial planning for the new firm to ensure that they would have the necessary resources and know-how to start their own firm. Pre-departure planning would also be required to ensure that the needs of clients were met with their new firm. However, Plaintiffs’ conduct went too far concerning their retention of former clients. Plaintiffs left Defendants at a disadvantage when they denied they were leaving and when they secured clients while Defendants were initially trying to game-plan for Plaintiffs’ departure.

Although Plaintiffs violated the partnership agreement by violating their fiduciary duties, they will only be held responsible for damages arising from their conduct. Therefore Plaintiffs are still entitled to their share of capital contribution and compensation.

Discussion. The court noted that the rules agreed to by the partners through the partnership agreement will be upheld when possible. Therefore, partners can agree on a different set of rules versus what is required under statutory or common law.

Brief Fact Summary. Charles Gibbs and Robert Sheehan, (Plaintiffs), former partners of Breed, Abbot & Morgan, (Defendant), brought suit against Defendant for monies due to them under their employment contract. Defendant alleged Plaintiffs breached their fiduciary duty to Defendant. Plaintiffs appeal the trial court judgment in favor of Defendant in the amount of $1,861,045.

Synopsis of Rule of Law. It is a breach of fiduciary duty for a shareholder to surreptitiously provide competitors with a selective list of qualified employees and their salaries.

Facts. Between January and July of 1991, Plaintiffs were the only partners in Defendant’s Trusts and Estates Department. The department also consisted of three associates and support staff. In June, Plaintiffs informed Defendant’s president that they had accepted offers to join Chadbourne. Days later, Plaintiffs sent Chadbourne a memo detailing the names of staff in the Trusts and Estate Department and corresponding personnel information such as salaries, billable hours, and bonus structures. The memo was prepared in April in anticipation of discussions with prospective firms. Plaintiffs testified that the recruitment of certain personnel was discussed with different firms between March and May.
While plaintiffs were still working at Defendant law firm, Chadbourne interviewed several members of Defendant’s staff. When Plaintiffs left Defendant law firm, they took with them their chronologies. In the following weeks, Chadbourne made employment offers to Defendant’s staff, all of whom accepted. Plaintiffs also used their chronologies to solicit Defendant’s clients. 92 of the 201 Trusts and Estate clients transferred their business to Chadbourne.
Plaintiffs then brought suit to recover monies due to them under their employment contract with Defendant. Defendant alleged Plaintiffs breached their fiduciary duty to Defendant. The trial court held that the way in which the leave was orchestrated was done with the intention to cripple Defendant’s Trusts and Estates department, specifically, 1) Plaintiffs breached their fiduciary duty by supplying confidential employment information to Chadbourne while still partners at Defendant law firm; 2) Plaintiffs breached their fiduciary duties by taking their chronologies with them; 3) Gibbs breached his fiduciary duty by persuading Sheehan to leave with him.

Issue.
Whether Plaintiffs breached their fiduciary duty as partners of the firm they were about to leave by supplying confidential information to Chadbourne while still partners at Defendant law firm.

Whether Gibbs improperly solicited his partner Sheehan to leave the law firm.

Whether it was improper for the two attorneys to take their chronologies with them.

Held.
Yes. Plaintiffs breached their fiduciary duty as partners of the firm they were about to leave by supplying confidential information to Chadbourne while still partners at Defendant law firm.

No. There was no breach of fiduciary duty with respect to Gibbs’ interactions with Sheehan.

No. There was no breach of fiduciary duty with respect to either partner’s removal of his desk files from Defendant law firm.

Dissent. The evidence before the court fails to support any finding that Plaintiffs violated their fiduciary duty to their partners at Defendant law firm. There is no showing nor did the trial court find that the employee information was provided to Chadbourne or any other firm during the period that Plaintiffs were interviewing or at any time before they gave notice to Defendant law firm. Further the type of employment information at issue in this case is generally widely known outside the firms themselves and can be obtained from professional publications, headhunters, and other sources.

Discussion. Defendant did not establish that Gibbs breached any duty to it by discussing with Sheehan a joint move to another firm. There was no breach of duty by Plaintiffs in taking their desk files. However, there is ample support for the finding that the preparation and sending of the memo was a breach of fiduciary duty. Plaintiffs began recruiting while still members of the firm and prior to serving notice of their intent to withdraw. The memo itself contained confidential employment data calculated to give Chadbourne an unfair advantage in recruiting certain employees. Gibbs was privy to this information based on his position as a shareholder.

Brief Fact Summary. Plaintiff, Gerald Lawlis, was a partner of Defendant firm, Kightlinger &Gray. Plaintiff was expelled from the firm after a long battle with alcoholism.

Synopsis of Rule of Law. The remaining partners must act in good faith, which would prohibit the wrongful withholding of money or property, when expelling a partner,

Facts. Plaintiff was a long-time member of Defendant firm, but after time he suffered from alcoholism. After concealing his problem for several months, Plaintiff missed several months of work to seek treatment. Defendant firm outlined conditions for his return. The agreement outlining his return did not provide any second chances, but when Plaintiff continued to have problems Defendant firm gave him a second chance. Defendant lightened Plaintiff’s workload and kept him as a senior partner. Three years after Plaintiff first came to Defendant with his alcohol problem, once he made a complete recovery, Plaintiff asked for his shares to be increased dramatically. Defendant responded by recommending his senior partner status be severed, and he was eventually expelled from the firm per the procedures outlined in the partnership agreement.

Issue. The issue is whether Defendant firm acted in good faith when they expelled Plaintiff from the firm.

Held. Defendant firm did act in good faith during the expulsion of Plaintiff. Defendant followed the procedures of the agreed-upon partnership agreement when they voted to expel Plaintiff from the firm. There was no proof that Defendants were acting fraudulently or with a deceitful intent in expelling Plaintiff. The facts indicated that there was sufficient reason for expelling Plaintiff, namely to protect Defendant’s good will. Further, motivation for Plaintiff’s expulsion is not at issue when there is a no cause expulsion clause in the partnership agreement and there was no wrongful withholding of any money or property of Plaintiff’s.

Discussion. The court will uphold clause of a partnership agreement as long as they are consistent with statutory protections. There is a benefit to provisions such as the no cause expulsion clause, and the parties were in a position to understand what they agreed to.

Brief Fact Summary. A partner is expelled from the partnership for accusing a senior partner of overbilling a major client.

Synopsis of Rule of Law. Partners in at-will partnerships have the freedom to expel another partner if the offending partner damages the personal confidence and trust of the partnership.

Held. The Court of Appeals judgment is affirmed.
No. There is no fiduciary duty that creates an exception to the at-will nature of partnerships for whistle blowing.

Yes. Defendant breached the partnership agreement when it failed to disburse the $7,500 per month draw and give notice of this reduction.

Dissent. Punishing a partner for her good faith effort to alert her partners to the possible overbilling of a client in compliance with the Disciplinary Rules of Professional Conduct is a breach of the partner’s fiduciary duty to one another and discourages others from reporting another lawyer’s unethical behavior.
Concurrence. In this instant case, Defendant did not breach its fiduciary duty by expelling Plaintiff because she made a good faith, but incorrect charge against a senior partner that threatened the firms’ relationship with an important client and the partners’ relationship with each other. However, a bright line rule that there is no exception to the at-will partnership rule is too absolute and broad.

Discussion. A charge that a partner overbilled, whether true or not, has a profound effect on the personal confidence and trust essential to the partnership.

Brief Fact Summary. Appellant administrator, George Putnam, brought an action against Appellees, John and Maurine Shoaf, to collect money paid to Appellee’s partnership. Appellees bought their interest of the partnership from Carolyn Putnam, whose estate is now represented by Appellant.

Synopsis of Rule of Law. A conveyance of partnership property by one partner held in the name of the partnership is made in the name of the partnership and not as a conveyance of the individual interests of the partners.

Held. The Appellant is not entitled to the money collected by the business. Although the dishonest bookkeeping occurred while Putnam was still a partner, Putnam signed over her undivided interest in the partnership to Appellees. A partner does not personally own any specific property of the partnership and therefore can not retain any rights to the partnership after she conveyed it to Appellees. If she had an interest in the money, then she had an interest in the partnership

Brief Fact Summary. Defendant partner, C.N. Stroud, refused to pay Plaintiff, National Biscuit Co., for bread deliveries that the second Defendant-partner, Earl Freeman, authorized while Stroud specifically attempted to disclaim responsibility.

Synopsis of Rule of Law. Each partner has an equal right to the management of the business and any business performed under the scope of the partnership can only be contravened by a majority of the partners.

Held. Stroud can be held liable for the deliveries. Partners are jointly and severally liable for the actions of the partnership. Freeman’s conduct in allowing the deliveries was within the scope of the business and he has a right to make these decisions unless a majority of the partners vote to deny him of these rights. Since Stroud is only one half of the partnership, and not a majority, he is unable to prevent Freeman from exercising his rights.

Discussion. Stroud could have avoided the charge by dissolving the partnership earlier or by amending the partnership agreement when he believed Freeman’s management should be restricted. The business also received a benefit from the delivery, and therefore it was not a complete loss for Stroud. But couldn’t the court view Stroud’s refusal of the deliveries as a decision within the scope of the business that can not be overruled by Freeman’s consent?

Restaurant, a partnership, was not entitled to indemnity from defendant partner for partner's negligence that resulted in injury to partner's child in restaurantkitchen, even though partner's conduct in having child in kitchen partly served her own interests, given that partner's conduct occurred in the ordinary course of business; another partner had requested that defendant partner come to work that evening in place of absent cook, and defendant partner was preparing food for partnership when child was injured

Partnership is liable to injured party and liable to indemnify negligent partner for conduct occurring in the ordinary course of business; conduct of partner may be partly motivated by personal reasons and still occur in the ordinary course of business of the partnership. M.S.A. §§ 323A.3-01(2), 323A.3-05(a), 323A.4-01(c).

RNR Investments Limited Partnership v. Peoples First Community Bank

Procedural: Mortgagee brought foreclosure action after limited partnership, as mortgagor, defaulted under terms of note and mortgage.

Facts: Peoples First Community Bank (P) sought foreclosure of a construction project after RNR Investments (D) defaulted on its construction loan.

Issue: Is a partnership bound by the unauthorized acts of a partner when the third party neither knew nor
should have known of restrictions on the partner’s authority?


Rule: A general partner’s authority to act on behalf of the partnership in the
ordinary course of partnership business is established, notwithstanding any limitation on the general partner’s actual authority, if a third party did not know or have reason to know that the general partner in fact lacked authority to bind the partnership.

Holding:Yes. Under the Revised Uniform Partnership Act, a general partner’s authority to act on behalf of the partnership in the ordinary course of partnership business is established, notwithstanding any limitation on the general partner’s actual authority, if a third party did not know or have reason to know that the general partner in fact lacked authority to bind the partnership. Although a third party
has no duty to inspect the partnership agreement to detec

Brief Fact Summary. Plaintiff J. Edward Day, a Washington attorney, worked as a senior partner for Defendant Sidley & Austin, a Chicago-based firm. Defendant forced Plaintiff to share the chairmanship position of the Washington office after they merged with a second firm.

Synopsis of Rule of Law. The fiduciary duty in a partnership ensures that a partner does not profit for themselves at the expense of the partnership.

Held.Defendant did not violate a fiduciary duty to Plaintiff by their merger and subsequent title change for Plaintiff. The partnership agreement that Plaintiff signed authorized the executive committee to appoint members and chairpersons, so Plaintiff was aware of the possibility of a co-chair. Also, Defendants decisions were not made to personally profit at the expense of the firm, and their fiduciary duty does not extend to what Plaintiff proposes. Finally, even if Plaintiff was aware of the title change, his vote against the merger would not have affected anything because a proposed merger only requires a majority vote unless specifically stated otherwise in the partnership agreement.

Discussion. Members of a partnership do not violate a fiduciary duty to one partner simply because that partner believes that their position was de-valued in any manner. If the other partners are following the agreement provisions and they are exercising their rights in a manner that is beneficial for the partnership over their personal interests, then they are meeting their duty.

Brief Fact Summary. Respondent Russ Owen and Appellant Israel Cohen entered a partnership agreement to run a bowling alley. Within a few months Respondent moved for a dissolution of the business once the partners’ relationship turned sour.

Synopsis of Rule of Law. A partner can move to dissolve a partnership if another partner’s conduct undermines or breaches the partnership agreement.

Held. The evidence presented did support a dissolution of the business. A partner may move for a dissolution of the business when another partner’s conduct negatively affects the business or another partner willfully or repeatedly breaches the partnership agreement. Appellant refused to do his share of the work required and talked of pressuring Respondent out of the business. Appellant also took money from the business above and beyond the agreed amounts.

Discussion. Appellant maintained that the differences between the partners were minor, but taken as a whole the Appellant would have been allowed to subject Respondent to harsh, belittling treatment if the partnership was forced to continue.

Brief Fact Summary. Appellant, Carr P. Collins, petitioned for a dissolution of his partnership with Appellee, John L. Lewis, because the start-up costs were excessive and the business had failed to turn a profit.

Synopsis of Rule of Law. A partner does not have the right to dissolve a partnership when his conduct is the only conduct that is adversely affecting the business.

Held. The petition for dissolution should not be granted because the party petitioning for the dissolution is the only party that is not abiding by the partnership agreement. The agreement provided that Appellee would manage the business while appellant provided the financial support. Appellee convinced a jury that he was providing sound management, and any problems affecting the business were due to unforeseen circumstances or due to Appellant’s meddling in management. The court did not want to reward Appellant’s behavior by granting a dissolution.

Discussion. A partner will not be granted a dissolution when the partners are in hopeless disagreement if the partners are still able to fulfill their obligations of the contract. Barring an agreement otherwise, a partner should be protected from another partner dissolving a business when they have followed the agreement.

Brief Fact Summary. Plaintiff and Defendant were brothers who ran a linen supply business. After years of losses, Plaintiff wanted to dissolve the business just as it became profitable.

Synopsis of Rule of Law. Unless specified, a partnership may be dissolved at will by any partner providing the partner is exercising good faith.

Held. A partnership can be dissolved by the express will of any partner providing that the partner making a good faith judgment. Although factors may exist that would indicate that the parties meant to have a partnership for a certain term, those factors did not exist in this case. However, Plaintiff could not dissolve the partnership in order to enrich himself at the expense of the partnership.

Discussion. This case follows the Uniform Partnership Act which allows for a dissolution at will unless stipulated in the agreement. This holding would seemingly be in contrast to the holding in Collins v. Lewis. However, a partner’s obligation to operate in good faith overrides their freedom to dissolve the partnership.

Procedural:Certiorari to review a decision of the Maryland Court of Special Appeals affirming a trial court judgment.

Facts: After the death of a partner, his personal representative sued the surviving partners for liquidation of the partnership assets.

Issue:Does the winding up of a partnership require its liquidation?

Rule: When the remaining partners wind up the partnership in good faith and provide an accurate accounting of the partnership’s value, the departing partner has no right to compel liquidation.

Holding: No. When the terms of a partnership agreement fail to establish the time or circumstances upon which the partnership will terminate, a partnership at will is created. Absent specific terms in the partnership agreement, a partnership dissolves upon the death of one of the partners, but the partnership is not terminated until the winding-up is complete.

ANALYSIS: At issue in Creel was whether the surviving partners of a partnership had a duty to liquidate all partnership assets because there was no provision in the
partnership agreement providing for the continuation of the partnership upon a partner's death, and the estate had not consented to the continuation of business. After examining cases in which other courts had elected to order an in-kind distribution rather than a compelled liquidation, or had allowed the remaining partners to purchase the withdrawing partner's interest in the partnership, the court concluded that the UPA did not mandate a forced sale of all partnership assets in order to ascertain the true value of the business, and that 'winding up' was not always synonymous with liquidation. Creel. The court further noted that it would have reached the same conclusion regardless of whether the UPA or RUPA governed since, under RUPA, the remaining partners could have elected to continue business following the death of one of the partners. This is a practical resolution to the issues and the problems related to whether a partnership should hold a fire sale and suffer those consequences or allow the parties left after a death to determine if they want to do an accounting, pay off the estate of the deceased partner, and then continue on in business. There is a fairly large law section in this opinion so we avoided just bolding everything and bolded the most important of the most important. We also separated the actual opinion from the rules of law that were quoted by the judge. Notice, the agreement comes first in interpretation and then the UPA or its progeny come second as gap fillers.

Brief Fact Summary. Defendant, Chris Prentiss, appealed the decision to allow Plaintiffs, his former partners, to successfully bid for the business after it was dissolved.

Synopsis of Rule of Law. Absent bad faith or an agreement that states otherwise, a partner may bid on the resale of the partnership.

Facts. Defendant and Plaintiffs were partners in the owning and operation of a shopping center. Defendant was unable to pay his share of the operating losses. His debt to the partnership as well as several differences between the parties led Plaintiffs to exclude Defendant from managerial activities. Plaintiffs moved for a dissolution of the partnership, and Defendant moved to appoint a receiver. The receiver liquidated the business assets, and Plaintiffs submitted the highest bid. Defendant challenged the sale of the business to Plaintiffs, claiming the repurchase was done in bad faith.

Held. Absent bad faith or a prior agreement that states otherwise, Plaintiffs are entitled to bid on their own former assets during a judicial sale. The court referenced A.R.S. Section: 29-238 which outlined the rights of each partner after a dissolution but offered no basis for denying the partners to bid on the resale.

Discussion. Defendant could have sought damages under a breach of their partnership agreement if it was found that Plaintiffs were responsible for the wrongful dissolution of the partnership.

Alaska Uniform Partnership Act permitted first partner to buy out second partner's partnership interest after the partnership was dissolved; permitting buyout reduced economic waste by avoiding the cost of appointing a receiver and conducting a liquidation sale, and also guaranteed second partner a fair value for his partnership interest.

Partner's obligation to pay for his capital contribution to the partnership was not partnership debt upon dissolution; parties had agreed that partner's payment for his interest in the partnership property would come from partnership profits, but this stipulation was not reasonably susceptible to an interpretation that the partnership assumed partner's loan obligation.

defendant was accountable to the partnership for any benefit he derived from his personal use of partnership property

Brief Fact Summary. Appellant, Charles Monin, alleged that his former partner, Appellee Joseph “Sonny” Monin, violated his fiduciary duty to the business when he independently sought to contract with a third party once the partnership dissolved.

Synopsis of Rule of Law. A partner’s fiduciary duty to the partnership applies during the period when a partnership is dissolving and winding up its affairs.

Held. Appellee did violated his fiduciary duty to the partnership. Although DI was under no obligation to do business with the higher bidder, Appellee had an obligation to not bid against the partnership. This duty is present while the business is winding up the business. There was no evidence to suggest that DI would have gone to a different hauler if Appellee did not offer his services, and his behind-the-back dealings devalued the business by $64,000. Therefore Appellee is liable for the difference in value.

Dissent. The dissent argues that Appellee tried in good faith to work with Appellant but Appellee was disagreeable. Evidence was presented to show that all but one of the members of DI would choose to do business with Appellee over Appellant. Evidence also indicated that Appellant was hard to work with, and some drivers were ready to quit rather than work with him. The auction was not genuine in that both parties knew the bid was subject to DI’s approval. Therefore Appellee fulfilled any fiduciary obligations.

Discussion. Given the evidence, Appellee could have avoided the issue by dissolving the business citing the poor relationship while keeping Appellant in the loop in conversations with DI if it was so certain that they would not work with Appellee.

Brief Fact Summary. Plaintiff, Pav-Saver Corporation, formed a business with Defendant, Vasso Corporation, to sell concrete paving machines. Plaintiff moved to dissolve the partnership and sought a return of the trademarks and patents associated with the business or payment for the intellectual property.

Synopsis of Rule of Law. A party responsible for the dissolution of a partnership is not entitled to collect for the value of goodwill.

Held.
Plaintiff is not entitled to the patents and trademarks because they are necessary to continue the business. The partnership agreement stated that the partnership was for a permanent length of time, and therefore the business is entitled to the intellectual property to continue; otherwise the business is worthless. However, Plaintiffs are not entitled to collect for the value of the property because the value of the intellectual property is primarily good will, and under the Uniform Partnership Act a party can not collect for good will.

The liquidated damage clause is enforceable, but only because the payments are stretched over a ten-year period. Defendant has no claim that payment should be immediate because he agreed to the 10-year provision.

Dissent. The dissent argues that the partnership agreement provides the patents and trademarks for the life of the partnership, and since the partnership is now over Defendant is no longer entitled to their use. The agreement provision should take precedent over the Uniform Partnership Act.

Discussion. The majority offers no precedent to support their finding that the patents and trademarks should be available to the remaining partners after dissolution. The real-world effect of prohibiting the business to use the patents and trademarks would be to make the operation of the business impossible, so the court may have hesitated to allow what they thought would be an unjust outcome.

Brief Fact Summary. Plaintiff, Stephen Kovacik, solicited Defendant, Henry Reed, to enter a partnership wherein Plaintiff provided the money and Defendant provided the labor. Plaintiff sought to collect half of the money that he contends the business lost during their partnership.

Synopsis of Rule of Law. In a partnership wherein one partner contributes capital and the other labor, the partner contributing capital can not hold the other accountable for money lost, just as the partner responsible for services can not hold the other responsible for any losses he suffered.

Held. Plaintiff is not entitled to collect any money from Defendant for operating losses. The agreement did not expressly allocate each party’s liabilities in the event of an operating loss, and therefore it is assumed that the partner providing the financing is responsible for any financial losses. The other partner is responsible for the potential loss of any services rendered.

Discussion. Plaintiff was not required to perform any services to the extent that Defendant had to perform. It would be counterintuitive to believe that Defendant would have agreed to perform all the labor while still being liable for half of any losses

Brief Fact Summary. Appellant, Fred Belman, is a representative of the estate of a deceased partner, Thomas Nordale. Appellant is challenging a lower court judgment that allowed Appellee partners (G & S Investments et al.) to continue the partnership and buying out Nordale’s share.

Synopsis of Rule of Law. Until a court decrees a dissolution, the dissolution has not yet taken effect and partners are still able to take advantage of any buyout provisions under the agreement.

Held. Appellees are entitled to utilize the buyout provision because there was never a court-ordered dissolution. Appellant argued that the dissolution filing may have caused Nordale to rely upon the filing to his detriment, but Nordale could not have reasonably relied upon an act that was never affirmed by a court. The court then followed the buyout article of the agreement, which entitled the estate to Nordale’s capital account. Although Appellant argued for the fair market value, the court held that it was Nordale’s capital contribution plus profits and minus losses.

Discussion.
The court noted that even the Appellants own witness admitted that a partner’s capital account is maintained on a cost basis rather than a fair market value.

The provisions of a bargained-for partnership agreement are given a lot of weight in determining the fates of partnerships. The court clearly wanted to follow provisions of an agreement that each party bargained for rather than rely upon fall-back statutes. It would clearly be judicially efficient to enforce provision the parties contemplated rather than apply the statutes.

Brief Fact Summary. Plaintiffs, Howard Jewel and Brian Leary, and Defendants, Stewart Boxer and Peter Elkind, were partners of a firm that has since dissolved. Plaintiffs appeal the trial court’s allocation of fees stemming from work in progress during the dissolution.

Synopsis of Rule of Law. For law practice partnerships, the Uniform Partnership Act requires that any fees paid to the partners for cases in progress during the dissolution should be allocated to the former partners according to their right to fees during the partnership.

Held. The court held that the Uniform Partnership Act should apply when the parties lacked any written agreement that contemplated the sharing of the fees. The Act provides that the partnership exists until the completion of winding up the business, and therefore no partner is entitled to extra compensation for work performed while winding up of the business. There are no exceptions for law firms or for instances when the clients substituted the prior firm with the individual attorney when the character of the business remained the same. The partners would be eligible for reimbursement from the firm for all reasonable expenses.

Discussion. Defendants argued that the nature of work performed by attorneys is unique, but the court treated law firms just as they would have treated any other partnership. Compare this decision with

Meehan v. Shaughnessy (Dissolution)

Brief Fact Summary. Plaintiffs, James Meehan and Leo Boyle, left the law firm of the Defendants, Maurice Shaughnessy et al. Plaintiffs wanted money they believed was owed to them under their partnership agreement, and Defendants countered that Plaintiffs violated their fiduciary duty and interfered with Defendants’ business.

Synopsis of Rule of Law. A partner has the obligation to render a true and full accounting of business affecting the partnership.

Held.Plaintiffs conduct regarding their secret planning for their new venture after their departure from the firm was not completely unacceptable. Plaintiffs would have to engage in some initial planning for the new firm to ensure that they would have the necessary resources and know-how to start their own firm. Pre-departure planning would also be required to ensure that the needs of clients were met with their new firm. However, Plaintiffs’ conduct went too far concerning their retention of former clients. Plaintiffs left Defendants at a disadvantage when they denied they were leaving and when they secured clients while Defendants were initially trying to game-plan for Plaintiffs’ departure. 

Plaintiffs conduct regarding their secret planning for their new venture after their departure from the firm was not completely unacceptable. Plaintiffs would have to engage in some initial planning for the new firm to ensure that they would have the necessary resources and know-how to start their own firm. Pre-departure planning would also be required to ensure that the needs of clients were met with their new firm. However, Plaintiffs’ conduct went too far concerning their retention of former clients. Plaintiffs left Defendants at a disadvantage when they denied they were leaving and when they secured clients while Defendants were initially trying to game-plan for Plaintiffs’ departure.

Although Plaintiffs violated the partnership agreement by violating their fiduciary duties, they will only be held responsible for damages arising from their conduct. Therefore Plaintiffs are still entitled to their share of capital contribution and compensation.

Discussion. The court noted that the rules agreed to by the partners through the partnership agreement will be upheld when possible. Therefore, partners can agree on a different set of rules versus what is required under statutory or common law.

Brief Fact Summary. The appointed trustee of a bankrupt estate, Plaintiff Lawrence Holzman, brought this action to hold Defendants, Ricardo de Escamilla et al., liable as general partners of the business at issue.

Synopsis of Rule of Law. A limited partner will be held liable as a general partner if the limited partner acts to take part in the control of the business

Held. Although Russell and Andrews are listed as limited partners, their conduct made them as accountable as general partners. Russell and Andrews took part in controlling the business, and that control holds them liable as general partners.

Discussion. The evidence clearly indicated that the listed limited partners had more control than the listed general partner. The partners could not escape liability by simply labeling themselves as limited partners

Sharing of profits (not gross receipts)= primca facie UNLESS debts as installments, wages, rent, annuity to a widow, interest on a loan, consideration for a sale of a business

1. all property brought in or acquired during partnership = parntership propert UNLESS K says different. 

Brief Fact Summary. Petitioner, Frigidaire Sales Corporation, entered into a contract with a limited partnership, Commercial Investors (”Commercial”), wherein the sole general partner was another corporation, Respondent corporation Union Properties (”Union”). Petitioner sought to hold Respondent individuals, Leonard Mannon and Raleigh Baxter, liable for the breach even though they were limited partners.

Synopsis of Rule of Law. A limited partner will be held liable if, for personal gain, they take control of a business over and above their normal rights as limited partners.

Held. The individual limited partners can not be held liable for the Limited Partnership’s breach with Petitioner. Petitioner was aware that Union was the only general partner of Commercial, and if they were uncomfortable with a corporation being named as the sole general partner then they should have requested additional assurances to ensure performance. Further, evidence demonstrated that Union was not a shell for Baxter and Mannon to operate Commercial – Commercial was only one limited partnership under Union. The purpose of Union was to build collaborations with other parties, and one of those parties was 

Commercial. Therefore Union was not simply in use for individual gain. If the legislature did not intend this limited partnership structure, they can simply correct it through legislation.

Discussion. The court holds the plaintiffs more accountable for the parties they contract with. There was also no element of fraud, which is the second element detailed in other corporate veil cases.

General partners who sought to purchase real property owned by limited partnership were obliged to pay fair market value and not to conceal from partners any facts which would bear on question of fair market value, and were also obliged to reveal any other information regarding purchase which bore upon property's value or method they were utilizing to pay for it.

Evidence that general partners who sought to purchase real estate owned by limited partnership failed to advise appraiser as to conditional zoning which would have increased value that they used his appraisal in making presentation to limited partners knowing that it was not based on current information, and that they did not seek new appraisal before resubmitting proposal upon disclosure of conditional zoning, coupled with great disparity in testimony as to valuation, was sufficient to support finding that general partners did not act in good faith and breached their fiduciary duties in paying price below market value for the property.

Unless limited by partnership agreement, a general partner has the fiduciary duty to manage the partnership in its interest and in the interests of the limited partners.

Under limited partnership law, a claim of breach of fiduciary duty must first be analyzed in terms of the partnership agreement, which is the operative governing instrument, and only where that document is silent or ambiguous, or where principles of equity are implicated, will a court begin to look for guidance from the statutory default rules, traditional notions of fiduciary duties, or other extrinsic evidence.

Where limited partnership agreement specifically provided that general partner had sole discretion in case of a merger, subject to unitholder ratification, general partner's actions did not have to be fair and reasonable to the partnership, pursuant to fiduciary default rule.

Brief Fact Summary. Plaintiff company, Water, Waste & Land, Inc., brought this action to collect from Defendant individuals, Donald Lanham and Larry Clark, for work performed by Plaintiff. Defendants claimed that they could not be held personally liable as agents of a limited Liability Corporation (LLC).

Synopsis of Rule of Law. State statutes providing constructive notice to third parties when an LLC has been incorporated do not extend to agency law.

Held. The court reversed the district court and reinstated the findings for Plaintiff. The LLC statutes never intended on being read so broadly as to absolve agents from deceptively withholding the existence or name of the principle. Common law agency principles still apply regardless of the statute. Colorado’s agency law holds agents responsible when they do not fully disclose the principle, and the notation of “P.I.I.” on Defendants’ business cards does not fully disclose the principle.

Elf Atochem North America, Inc. v. Jaffari 727 A.2d 286 (Del. 1999)

Brief Fact Summary. Appellant, Elf Atochem North America, Inc., brought suit against Appellee, Cyrus Jaffari, for issues related to their LLC, Malek LLC. The suit was brought in a Delaware court, but the LLC agreement called for disputes to be settled with arbitration in San Francisco, CA.

Synopsis of Rule of Law. The Delaware LLC statutes give great deference to the freedom of LLC members to contract, providing the terms do not overstep any of the mandatory statutory provisions.

Held.
It is irrelevant that the LLC itself did not assent to the agreement because the members of the LLC, the Appellant and Appellee, consented to the agreement. This is true regardless of whether the claims are derivative or direct because the parties agreed that all claims related to the agreement should be subject to the agreement’s arbitration provisions.

The arbitration and choice of forum provisions are valid. The Delaware laws regarding LLC’s allow for parties to contractually determine how to settle disputes and where.

FACTS: Dr. Segal (D) the defendant and counter-claimant in this case, formed Genitrix, a biomedical LLC of which Fisk Ventures, LLC (P) was a member. Fisk (P) and other members failed to cooperate with Segal's (D/CC) financing efforts and the company ultimately failed. Fisk (P) and other members sought to dissolve the company and Segal (D/CC) counterclaimed, contending that the Genitrix members breached the LLC Agreement and their fiduciary duties to the company by standing in the way of the
proposed financing. The members moved to dismiss the counterclaims, arguing that Segal's (D/CC) allegations reflected nothing more than their exercise of their contractual rights.

ISSUE: Did the Genitrix LLC members breach their contractual or fiduciary obligations?

RULE Because LLCs are not a creature of the state but of contract, the duties and obligations of the LLC members are as set forth in the LLC agreement.

HOLDING: The Court of Chancery, Chandler, Chancellor, held that:
1 third-party claims did not provide basis for personal jurisdiction over nonresident class B shareholder;
2 failure of class B representatives on LLC board to accede to class A member's proposals did not constitute gross negligence, willful misconduct, bad faith, or knowing violation of law;
3 class B representatives did not breach a duty to company, or tortiously interfere with employment contract of class A member, by replacing him as chief executive officer; and
4 class B representatives did not breach implied covenant of good faith and fair dealing.
Motions granted.

ANALYSIS: The gist of the officer's motion for reargument on the breach of fiduciary duty claims was that the representatives of the company had different duties under the limited liability company agreement than members. The officer argued that the court ignored this distinction and therefore erred. Additionally, the officer argued that the court misunderstood facts and misapplied the law with respect to the officer's claim of tortious interference with contract. Specifically, he argues that the court misunderstood the limitations imposed by the officer's employment agreement or otherwise misapplied the law by choosing between two reasonable interpretations of the contract. The court found that its prior opinion clearly addressed the duties of the representatives. Therefore, because the officer failed to demonstrate that the court's decision was predicated upon a misunderstanding of a material fact or a misapplication of the law, the motion for reargument on the fiduciary duty claim failed. Finally, regardless of whether the court misinterpreted the employment contract, the tortious interference claim failed because the representatives were not strangers to the contract.

Courts will pierce the corporate veil if (1) an entity ignores corporate formalities and acts as the alter ego or instrumentality of a shareholder and (2) the liability limitations of the corporate forum results in injustice or is fundamentally unfair. Victoria Elevator Co., Inc. v. Meriden Grain Co., 283 N.W.2d 509, 512 (Minn.1979) (listing several factors supporting alter ego or instrumentality finding). “The practice of piercing the corporate veil is generally a creditor's remedy used to reach an individual who has used a corporation as an instrument to defraud creditors.” Id.

Must come with clean hands- if a party's conduct contributed to the breach, it would be unjust to allow recovery 

Brief Fact Summary. Appellants, Hunt Sports Enterprises et al., and Appellees, John McConnell et al., were part of an LLC that was bidding for a professional hockey franchise. The principal of one of Appellees, John McConnell, personally made a bid for a franchise after the principal of one of the Appellants, Lamar Hunt, rejected numerous lease agreements and stalled the application for the franchise.

Synopsis of Rule of Law. Members of an LLC can agree to limit the scope of the fiduciary duty they owe to the LLC.

Held. The members of an LLC can define the scope of their fiduciary duty. Therefore, Appellees did not violate their fiduciary duty owed to CHL when they made a bid for the NHL franchise, because each member of CHL agreed that members could compete against the LLC.

Discussion. The court relied on general contract law to justify LLC members to define their fiduciary duties. If parties agree to be held to a certain set of conditions, courts try not to disturb the agreement unless there are statutory or strong public policy concerns.

Brief Fact Summary. Plaintiff corporation, VGS, Inc., brought this action to validate its merger with Virtual Geosatellite LLC (”LLC”) after two of the three managers of the LLC, without notifying the third majority shareholder, voted for the merger.

Synopsis of Rule of Law. Minority shareholders owe the majority shareholders a duty of loyalty to inform them in advance of any plans for a merger or the structure of a merger.

Held. The court held that the merger is invalid. Although Plaintiff is correct that there was only a requirement of the majority of LLC managers to vote for the merger, Sahagan and Quinn violated their fiduciary duty to Castiel by not informing him of the vote. A minority interest has a duty of loyalty to the majority interest, even if it means that the majority interest will thwart the vote by removing Quinn. The fact that Castiel may have been a poor performer does not exempt the other members of their duty to inform him in advance of the meeting.

Discussion. The court treats the majority shareholder’s incompetence as a separate issue from the minority shareholder’s duty of loyalty regarding board meeting notifications.

Evidence supported finding that the conveyance of limited liability company's (LLC) sole asset by two LLC members to themselves, in the guise of a newly created LLC, represented a material conflict of interest; not only did members engage in self-dealing, but in doing so they also increased their individual interests in new LLC which received property.

Material conflict of interest of members of limited liability company (LLC) did not prohibit them from voting to make transfer of LLC's sole asset to new entity, so long as they dealt fairly with remaining member

Members of limited liability company (LLC) with a material conflict of interest may not willfully act or fail to act in a manner that will have the effect of injuring the LLC or its other members; inquiry on question contemplates both the conduct, along with the end result, and a determination of the purpose of the LLC and the justified expectations of the parties.

imited liability company (LLC) members breached the operating agreement when they removed member and declared his interest forfeit without cause, even though members claimed that member breached fiduciary duty by arranging separate fee from potential financier, that member breached promise to make capital contributions, and that member failed to disclose relationship with finance before executing operating agreement; there was no proof that removed member had any separate fee agreement with potential finance, no proof that capital contributions were required as an enforceable promise, and member's relationship with finance was well known before operating agreement was executed.

Member, who was unilaterally removed from limited liability company (LLC) in breach of operating agreement, was entitled to a constructive trust on 18% of LLC's shares held by successor interest, less member's share of capital contributions made by other members, where member offered no proof of dollar value of his interest in LLC, 18% represented member's interest in LLC before his was removed, shares in successor were held in escrow and could not be traded until certain benchmarks were met, and members made capital contributions of over $139,000 in order to maintain economic position.

Brief Fact Summary. Plaintiff, New Horizons Supply Co-op, brought an action against Defendant limited liability company (LLC), Kickapoo Valley Freight, and one of its members, Allison Haack. Plaintiff wanted to hold Haack personally liable for the debt Kickapoo Valley Freight owed t Plaintiff.

Synopsis of Rule of Law. Members of an LLC can be held personally liable for the debts of their LLC if they fail to properly dissolve the LLC under the relevant statutes.

Issue. The issue is whether Haack took the appropriate steps to shield herself from liability upon the dissolution of the Defendant LLC.

Held. Haack is personally liable for the debt incurred by Defendant LLC owed to Plaintiff. The Court of Appeals of Wisconsin, District Four, held that the lower court’s reasoning of holding Haack liable was faulty, but the result was correct. The facts could have provided evidence that Haack and her brother formed an LLC, and hence the LLC should not be considered a partnership, but there is little doubt that the Defendant LLC was not properly dissolved. The creditors were not properly notified of the dissolution, and creditors have priority over former partners of the LLC for the assets of the dissolving LLC. Because Haack took assets of the dissolving LLC, and evidence showed that the assets could have covered the debt owed to Plaintiff, Haack personally owes Plaintiff the outstanding gas card balance.

Discussion. The proper dissolution of an LLC is one area where the statutory requirements are not flexible. The requirements are in place to ensure that third parties are protected from dealing with the LLC.

“Members,” within meaning of operating agreement of limited liability company (LLC) providing that members of the company ‘from time to time’ would wind up the company's affairs upon dissolution, included the withdrawing members who forced the company's dissolution and who had a financial interest in the company's assets.

Trial court was not required to hold evidentiary hearing on request by withdrawing members of Kansas limited liability company (LLC) for appointment of receiver to accomplish the liquidation of the company's sole real estate asset upon dissolution, where withdrawing members' allegations of remaining members' “intransigence and incompetence” were minor accusations based on subjective conclusions.

Brief Fact Summary. Plaintiff, Great Lakes Chemical Corporation, brought claims under the Securities Exchange Act against Defendants, Monsanto Company and Sweet Technologies, Inc., for misrepresentations allegedly made when Defendants sold an LLC to Plaintiff.

Synopsis of Rule of Law. Securities laws are meant to regulate investments rather than commercial ventures, and therefore a security can be a traditional stock or alternatively an investment contract that consists of an investment of money in a common enterprise with profits to come solely from the efforts of others.

Held. The court held that it was not a security as understood by the Act.
The court held that the interest purchased by Plaintiff was not a stock as understood to be covered by the Act. Although the shares that Plaintiff purchased share the qualities of a traditional stock in that they have “the right to receive dividends contingent upon an apportionment of profits; (2) negotiability; (3) the ability to be pledged or hypothecated; (4) voting rights in proportion to the number of shares owned; and (5) the ability to appreciate in value”, the stock is not what was intended to be regulated by the Act. The Act is intended to protect investments, but this transaction is commercial in nature.

The court held that the interests purchased by Plaintiff were not an investment contract because there was no common enterprise (Plaintiff was the only one who would own NSC) and the profits would not come from the efforts of others (Plaintiff will exert control over NSC through appointing the managers).

Discussion. The court is not ruling that Plaintiff does not have a claim, but they are limiting the scope of the Securities Exchange Act to include only investments rather than commercial transactions. There are likely alternative causes of action to hold Defendants accountable for any damaging misrepresentations.

Fact that investments were structured as general partnerships was not determinative of status as securities; rather, Court of Appeals was required to examine economic realities of transactions to determine whether they were investment contracts

To determine whether investors expected profits solely from efforts of promoter or third party and whether investments in general partnerships were investment contracts, Court of Appeals was not limited solely to formal partnership agreement and powers conferred on investors and could look to promotional materials, oral representations by promoters at time of investment, and practical possibility of investors exercising powers pursuant to partnership agreements.

UPA- both

RUPA- A partnership is a distinct entity from its partners

UPA-  depends on case law

RUPA- must exhaust partnership's assets before pursuing assets of individual partners

1. Control- how much does alleged partner participate in management decisions or voting. 

2. Agreement to Share Losses

3. Contributions of property to business

4. Extent to which the profit share constitutes "the recipient's only remuneration (compensation)" from the business

5. Parties own characterization

IF a person represents itself as a partner or allows others to make rep. 

AND a 3rd person REASONABLY RELIES on the rep. and does business w/ enterprise

THEN the person who rep. as a partner is personally liable on the transaction 

AND others who have either made or consented to the rep. are bound by person's acts 

1.3rd party must believe the misrepresentation AND

2. Misrepresentation  MUST CAUSE the 3rd party to act

EX: 

IF -a partnership exists, AND 

- all the partners make or consent to the MISREP of a person's status

THEN BOTH partners and partnership is liable

IF - a partnership exists, BUT

- NOT only some made/consented to MISREP

THEN partnership not liable. Only partners who made/consented to MISREP

IF NO PARTNERSHIP

- then those who made or consented are JOINTLY (UPA) or jointly and severably liable (RUPA)

1.  a right to share in the profits of partnership

2. right, at dissolution, to receive the value of any property that the partner contributed to the partnership 

- also right to be indeminified against expenses and liabilities incurred at service of partnership 

DEFAULT: Losses born in proportion to profit share

EX: 60/20/20 profit share = 60/20/20 loss share 

Loss sharing agreements among partners HAVE NO BEARING on 3rd party claims 

• UPA 18(b): The partnership must idemnify every partner in respects:
• payments made
• personal liabilities
•  as long as:
• REASONABLY INCURRED 
• in ordinary & proper conduct of business 
• or its preservation 

• CONTRIBUTE: transfer their ownership interest
• FURNISH: provide only use of property 
• LEASE or LOAN: provide only use + rent, interest, or royalty

1. Type of transfer depends on INTENT
2. NO lease/loan unless some type of payments made
3. Contributed v. Furnished FACTORS:
1. Use of property
2. Use of partnership funds in improving, maintaining, insuring, or paying taxes on property
3. Indication in partnership's books that property belongs to partnership
4. nonreceipt of rent or other compensation 

1. Emphasis on title
2. FORMALITIES: 
1. if name of partnership on title OR
2. in name of one or more partners or instrument indicates person acting in capacity for partnership 
3. ASSETS: 
1. If partnership assets used to buy property = partnerships
2. IF NOT: seperate property 

1. What compensation, if any, the partner receives for providing property to the partnership AND
2. whether the partner ever receives back the property provided 
1. if depreciates: who bears loss?
2. if appreciate: who gains?

When lease period ends, goes back to partner. If any appreciation/depreciation, the gain/loss belongs to partner 

1. Partnership owes VALUE of contribution, measured at the time of contribution
2. IF value increased or decreased, belongs to PARTNERSHIP:
1. EX:
2. 3 Partners, equal split,  Larry donates land. Appreciates from 400K to 1 mil. Larry gets 400K + (Slice from partnership)

1. JOE contributes LABOR but nothing else. 
2. BILL contributes 250K
3. SCENARIOS:
1. P looses money: Joe gets nothing but has to share loss so 125: goes from Joe to Bill 
2. Gains Value: 
1. SPLIT
2. though some courts may give it all back to Bill 

UPA 24: 

1. rights in specific property

2. interest in partnership

3. right to participate in management

Absent other agreement, each partner has the right to possess and use partnership property for the purposes of the business, but no partner has the right to use partnership property for other purposes. 

1. RUPA 501: NOT a co-owner and has no interest
2. may USE or POSSESS partnership property only on behalf of partnership 

1. Only economic rights are freely transferable. 
2. BUT NOT 
1. NO right to participate in management or NO 
2. use partnership propeerty 
3. CREDITORS:
1. may only collect on claim against an individual partner for economic rights  UNLESS
   Charging Order: 

Special device in UPA 28 & RUPA 504: obligates the partnership to pay to the creditor any amounts that would otherwise be paid to debtor partner

ALSO judgment lien: 

• right to KNOW 
• BE INVOLVED in conducting business
• COMMIT partnership to 3rd parties
• Participate in business decisions
• VETO certain decisions 

1. UPA: 
• access to books
• 20: true and full information on ALL things affecting partnership
• 18: equal right in management and conduct which implicitly means the partner must have proper info. 
• DUTY OF LOYALTY = duty of candor
2. RUPA: 

• Access to books 
• any info reasonably required for the proper exercise of partner's rights and duties uner the partnership agreement and RUPA
• on demand, any other info. UNLESS info. is unreasonable or otherwise improper under circumstances 
• DUTY TO DISCLOSE depends on role within partnership. 
• if special managing partner, he has duty to inform other partners even if review of books would reveal info. 
• BUT DUTY TO INFORM IS NOT A FIDUCIARY DUTY 

Right to Bind the Partnership

• Actual Authority to Bind: binds partnership
• No Authority to Bind: 
• partner may be liable to partnership
• partner liable to 3rd party
• egregious situations: expulsion
• NO INDEMNITY RIGHT 

Default Partner Scope of Authority

UPA: commitments incidental to, usually accompany, or reasonably necessary

RUPA: same 

IF a partner knows or has reason to know that another partner would object to a proposed agreement, the first partner has no actual authority to commit the partnership, unless the partnership agreement provides otherwise

RUPA: Only one: addition of partner

UPA: DEFAULT

- resolve by vote

- each partner has 1 vote 

- some require majority, others unanimity 

MATTERS REQUIRING UNANIMOUS VOTE:

- assign property to creditors or in return for the assignee's promise to pay partnership's debts

- disposing of the good will of the business

- doing any other act which would make it impossible to carry on the partnership's ordinary business

- confessing a judgment against the partnership

- submitting a claim by or against the partnership to arbitration

- adding a partner 

UPA: 

1: no agreement can completely remove fiduciary duties

2. the more fundamental the obligation, the higher judicial scrunity

3. DICTA: nondelegable right to consent to change

RUPA: 

same 

• Duty to Furnish Services: not really in UPA or RUPA or modern case law so you can have passive partners
• Duty of Care: RUPA and UPA: no gross negligence or reckless or willful misconduct 
• Duty of LOYALTY: SEE CARD

• NO compete with partnership
• NO taking business opportunities from which the partnership might have benefitted or that the partnership may have needed
• NO using partnership property for personal gain
• engaging in conflict-of-interest transactions

1. UPA: contine until partnership termination!
2. RUPA: conduct of the partnership, the non-competition restriction ends upon dissolution. The other effects remain until the partnership terminates 

1. RUPA 403 expressly requires each partner to refrain from competing with the partnership in the conduct of the partnership business before the dissolution of the partnership
2. UPA 21: every partner must account to the partnership for any benefit, and hold as the trustee for it any profits derived by him without the consent of other parnters from any transaction connected with the formation, conduct, or liquidation of the partnership

• Include those from which the partnership might have  profited but also those which the partnership may have needed
• can be waived by uniamous partner's informed consent
• can avoid by presenting the opportunity to the partnership AND having the partnership vote

• partner him-, her-, or itself 
• closely related family member
• organization in which the partner has a material financial interest
• any other person whose interests are adverse to the partnership

• Disgorge all profits gained through the disloyal act
• if can prove damages, can recover those also
• may have to rescind any portion of a contract tainted with a partner conflict-of-interest 

• partner-to-partner transactions including:
• partnership formation
• renegotiation of profit shares
• sale or purchase of current partner's interest
• exercise of discretion vis-a-vis copartners:
• right to expel partner without cause 
• rightfully calling end to a partnership when end disadvantages one partner and advantages another 
• Both UPA and RUPA require:
• FULL DISCLOSURE:
• any info. relating to value of partnership interest
• could not be learned by examining books 
• FAIR DEALING

• Partner-to-Partner: 
• PROCESS: candid, noncoercive manner
• SUBSTANCE: fair price in p2p transactions but full disclosure usually handles this
• courts don't care about buyer's remorse so as long as cranky party had the information, they can't complain 

• Agreement can alter consent requirement
• RUPA: may authorize an act that would violate duty of loyalty if 1) partnership agreement says it can with specified majority vote 

POWER TO BIND                     UPA                     RUPA

Through Partner's...

contractual undertakings

wrongful act

breach of trust

knowledge, notice

admission (NO RUPA )

effect of public statements (NO UPA)

• Dissociation causes dissolution. Dissociation of any partner 
• Dissolution does not end partnership- still has to "wind up" affairs. 
• End of partnership is not necessarily end of partnership business.- usually a successive partnership
• A partner always has the power (but not necessarily the right) to end the partnership- may be a "wrongful" dissolution 

• Express Will of an at-will partnership- power and right to cause dissolution by making known their will
• Express Will Dissolution for a Term or Undertaking- Power to but not right. If early dissolution = premature and wrong 
• Dissolution by Expulsion- 
• Dissolution by death or bankruptcy. 

• Parters who have no wrongfully dissolved the partnership have the right to wind up the partnership
• What about extradordinary events? 
• some courts treat them as ordinary events of winding up so majority vote applies
• Appoint a RECIEVER:
• for Cause:
• waste, fraud, gross mismanagement 

• Acts "appropriate for winding up partnership affairs or completing tranaactions unfinished at dissolution"
• Acts that would bind partnership if dissolution had not occurred 
• IF extended credit to P before D: 
• absent dissolution, act would have bound P 
• 3rd party had no knowledge of dissolution
• IF no credit before Dissoltuin:
• knew of partnership prior to D
• no knowledge/notice of D
• no public notice of dissolution
• absent dissolution, would have bound P

• Subject to the agreement
• UPA DEFAULT: 
• If Rightful:
• Liquidation likely 
• BUT IF partner expelled according to agreement:
• can "cash out" the expelled w/o liquidation
• cause the expelled partner to be released from personal liability for debts of dissolved partnership 
• If Wrongful: 
• First Choice belongs to "Good" partner. 
• remaining partners must agree unanimously AND
• indemify wrongful dissolver 
• AND cash out or promise to cash out 
• if DECEASED: estate may or may not, case law is divided. 

• UPA Default:

1. Outside creditors paid off
2. Inside creditors (partners)
3. partners repaid invested capital 
4. any remaining funds, divided, according to profit share percentages 
1. IF UNABLE TO PAY, partners must pay according to their respective obligations to share losses