Agency & Partnership Professor Donald J. Kochan

1. Agency & PartnershipProfessor Donald J. Kochan Class 21

2. Today’s Materials • Operation of the Partnership • Pages 616-648

3. Tort Liability for the Wrongs of Partners • Read the introductory notes on pages 616-617 and read the sections cited therein • UPA sec 13 – establishes partner liability for the wrongs of a partner acting in the ordinary course of business of the firm • UPA sec 14 – partnership bound by partner’s breach of trust • UPA sec 15 – all partners are jointly and severally liable for everything chargeable to the partnership under secs 13 or 14 • RUPA 305 and 306 generally track UPA standards – read the language • “actionable conduct” language expands from UPA to cover no-fault torts • J&S liability under RUPA expanded to “all of the obligations of the partnership” – SO J&S for torts and contracts under RUPA • Note the motivation for the LLP as based largely in this area of law

4. Smith v. Hensley • Truck owned by the plaintiff partner that is loaned to the partnership case; truck damaged by negligence of employee • Co-principal doctrine – see pp. 254-255 for back reference – basically one member of an enterprise cannot sue another member for vicarious liability for the acts of a third member, or an employee, of the enterprise (when dealing with unincorporated associations) • UPA sec 13 – speaks about acts of partners but by necessary implication includes the acts of employees in a partnership • Court refuses to apply co-principal doctrine saying it must give way to “practical considerations” • Partner can “wear more than one hat” in its relationship with partnership • Decision sound – see also note on Farney v. Hauser

5. Fraudulent Partner • UPA 14(a) – partnership is bound to make good the loss where “one partner acting within the scope of his apparent authority received money or property of a third person and misapplies it.” • RUPA sec 305(a) – partnership is liable for a partner’s wrongful act done “with authority of the partnership” • Comment states that means apparent as well as actual authority

6. Rouse v. Pollard • Fraud in the partnership context case • Revolves around claim to clients that the firm would invest their funds in a manner that is “perfectly secure” • Real estate law firm that often handled client funds • Capacity of attorney v. capacity as investment advisor • UPA sec 14(a) – partnership is bound by one partner’s misapplication of funds when received “within the scope of his apparent authority” • “Power of Position” Issue

7. Rouse v. Pollard (cont.) • Fraud in the partnership context case • Here, conduct not within the “practice of law” – so court finds no justification for reliance • Test of “apparently” by court here is from business perspective and law firm not in the business of investment – compare Croisant v. Watrad which tests from the perspective of the customer instead also under UPA 14 – difficult call and courts split – which side is better and why? • Court also says when both parties innocent, party that “put in position” the person committing fraud should bear the loss – can choose, monitor, and control and therefore assume the risk

8. Cook v. Brundidge, Fountain, Elliott & Churchill • Another lawyer taking clients funds case • Good discussion of contrasting lines of authority • Here, court says it should be a jury issue • Majority reliance on UPA secs 9, 13, and 14 • Majority discussion of 1890 Texas Supreme Court case in Randall focusing on scope of business (yet curiously does not discuss that issue). What can Randall teach? • Randall - Third parties must recognize that “the partner’s power to bind the firm is restricted to the doing of such things as are within the scope of the particular business” • Dissent argues for a traditional interpretation of “apparently” and powers of position. What does that mean? • Consider Zimmerman and McGarity cases in notes on pages 629-631 – tensions and conflicts

9. Partner’s Liability – Joint v. Joint and Several • Read Carefully pages 631-633 about the nature of J&S and its operational consequences • Good Practice based advice

10. Suits Against the Partnershipand Suits By the Partnership • Read the Note on page 633-634 • Under UPA, not suable under own name at common law and UPA sees partnership as an aggregate of persons • Pleading and party issues • Legislative fixes • RUPA entity theory makes suing partnership available • Same issues arise re suits by the partnership

11. Notice and Notification to the Partnership • UPA secs 3 and 12 – generally reflects common law notice requirements re lawsuits • RUPA 102 deals with this issue and largely based on UCC

12. FDIC v. Braemoor Assocs. • Imputed knowledge in the partnership context • Innocent co-venturers? • Court rejects “knew or should have known” test and instead says knowledge of tainted money is imputed to innocent co-venturers by appplication of UPA sec 12 (“knowledge of the partner acting in a particular matter, acquired while a partner or then present to his mind . . .operates as . . . Knoweldge of the partnership, except in the case of a fraud on the partnership committed by or with the consent of that partner”) • Note information and disclosure and reporting duties of partners and the relationship with this rule • Note also the point about the innocent partner “participating in the benefits” – equitable reason for rule • What are the limits of the imputed knowledge doctrine?

13. Rights and Duties Among Partners • Fiduciary Duties • Read Note on top of page 639 • UPA secs 20-22 • RUPA sec 404 and 405(b)

14. Corley v. Ott • UPA sec 21 – partner must account for any profits “derived by him without the consent of the other partners from any transaction connected with the formation . . . Of the partnership” • Why the “without the consent language”? • RUPA 404(b)(1) is more limited in sweep – duty to account limited to profits derived “in the conduct and winding up of the partnership” based on the idea (explained in note) that at the formation stage the parties are “operating at arm’s length” • Look at the facts in the case – issue of when the partnership was formed becomes important

15. Meinhard v. Salmon • Classic opinion of the law of fiduciary relationships • Secrecy and appropriation to self a pere-emptive opportunity of the venture • Range of responsibility and management position issues – what role? • Choice and denial of choice issues • UPA sec 30 – partnership not terminated during dissolution but continues during winding up • And fiduciary obligations like pre-emptive opportunities do not survive termination • So what result here? Close interpretation of facts • Partner/Trustee distinction, Comment 5 and RUPA sec 404