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Overview. Scope of Rights . AB Software.

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Overview l.jpg

Overview

Scope of Rights


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AB Software

A and B are going into the business of selling computer software. A will invest $100,000 and wants veto power over basic decisions, with no increase in his investment. B will make no cash contributions but will provide sweat equity, by maintaining the store’s website on a day-to-day basis. B will receive $5,000/ mo. in salary. After payment of B’s salary and other expenses, profits will be divided equally.


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Entity Formed?

  • AB formed a general partnership 'cause parties have agreed to split profits. SEE UPA 7(4). No formalities required


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Will GP satisfy their needs?

  • A-$, no expectation of immediate return, likely marginal knowledge or expertise, needs protection vs B waste or mismanagement so wants veto power

  • B-Experience, skills, needs salary to survive, sweat equity

  • Both presumably want limited liability

  • Bottom line: Can’t get limited liability in GP


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PARTNER LIABILITY

EACH AND EVERY PARTNER IN A GENERAL PARTNERSHIP IS AN AGENT FOR THE PARTNERSHIP AND CAN BIND THE PARTNERSHIP UNLESS THEY HAVE NO AUTHORITY AND THAT IS KNOWN TO CONTRACTING PARTY. AUTHORITY IS DEFINED BY KNOWLEDGE OF AND CONSENT BY OTHER PARTNERS. (UPA SECT 9)

THE ASSUMPTION FOR APPARENT AUTHORITY IS THAT ACTIONS FALL WITHIN SCOPE OF BUSINESS OF PARTNERSHIP.


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APPARENT AUTHORITY

  • Manifestation made by Principal that is directly or indirectly, but reasonably relied upon by third party regarding the nature and/or scope of agent; and such reliance is to their detriment. Third party has the burden to show that the reliance is reasonable.

  • BOTTOM LINE: FOCUS ON WHAT THE THIRD PARTY BELIEVES, BASED UPON WHAT PRINCIPAL DOES.


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RESTATEMENT 3rd of Agency 2.03

- Based on 3rd party's reliance on Partner's conduct regarding Agent's authority; Agent can't establish authority with 3rd party

- Partner is an agent of the Partnership unless the Partner has no authority and 3rd party knows it.

- Partner's actions in the ordinary course of business will bind Partnership whether authorized or not.


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ESTOPPEL

 A person will be liable (or can no longer assert title) under estoppel if by action or omission he creates a reasonable reliance on a third party to change their legal position or act to their detriment; if he intentionally or carelessly caused such belief, or knowing of such belief, did not take reasonable steps to notify the party of the facts. (Inaction, unless gross, will rarely constitute grounds for estoppels)

Conduct necessary to charge the Principal is lower than in apparent authority as the the 3rd party must have some detrimental reliance.

Restatement 8 B (1)


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Can AB get what want in LP?

  • LP IS FORMED WHEN FORMALITIES ARE SATISFIED: WRITING AND FILING. LP HAS LIMITED LIABILITY IF HE IS NOT IN CONTROL PER STATUTE--CANNOT EXERCISE CONTROL IN DAY-TO-DAY OPERATIONS .

  • Restrictions on Transferability: Transfer only economic rights , i.e., profits, which means limited secondary market.

  • Can disproportion profits and losses, e.g., 50% of profits and 70% of losses.


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ULPA 303 (1976)

  • …A limited partner is not liable for the obligations of the limited partnership unless he or she is a general partner or, …he participates in control of the business.


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Can AB get limited liability?

1. Can A limit his liability by written agreement? (ULPA 303 B)

2. Is there any way that A can limit his liability and still be in control in a limited partnership? (ULPA 303).


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ULPA 303 (p 136 in Textbook)

-- LP does not participate in "Control" if he or she

a) Is a Kor or agent or employee of partnership or officer, director, or shareholder of a general partner that is a corporation

b) only consults with G.P. but cannot override daily decisions

c) only attends meetings

d) voting on dissolution, sale or exchange of assets, incurring debts, others than in pursuit of ordinary business, change in the nature of business


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Answers

1. Can A limit his liability by written agreement?

Ans: LPship allows limited partners to limit liability to amount of investment in the partnership. (ULPA 303), But need a writing and filing to do so.

2. Is there any way that A can limit his liability and still be in control in a limited partnership? (ULPA 303).

Ans: Yes, Need a writing and filing with Secy of State would need to be satisfied per UPLA 201. Under ULPA 303, there is an exception.

-- LP is not in "Control" if he or she

a) Is a Kor or agent or employee of partnership or officer

b) only consults with G.P. but cannot override daily decisions

c) only attends meetings

d) voting on dissolution, sale or exchange of assets, incurring debts, others than in pursuit of ordinary business, change in the nature of business


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Can AB achieve what they want in LLC?

  • ? B's interest tied to past performance or future—

    • ANS. CA- any or no consideration is okay for Pship, although may screw up capital accounts. Prefer past perf. plus K re future services, both are now considered valuable consideration for interest (See eg. 501 ULPA)

  • Bottom line: Yes, but there will be limits on transferability


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CORPORATION

  • CREATED AFTER ARTICLES OF INCORPORATION ARE FILED WITH THE SECRETARY OF STATE; AND FORMALITIES SATISFIED; INCORPORATING CREATES A SEPARATE LEGAL ENTITY.


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Can AB achieve what they want in Corporation?

  • No, can’t contribute sweat equity as consideration for a corporation in California.

  • ? B's interest tied to past performance or future--ANS. CA- any or no consideration is okay for Pship, although may screw up capital accounts. Prefer past perf. plus K re future services, both are now considered valuable consideration for interest (See eg. 501 ULPA)


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QUESTIONS

1. What is the scope of the liability of the partners ? (UPA 15)

2. Can they both participate in management of business? (UPA 18)

3. Can one fire the other? (UPA 18)

4. Can B get paid for his services without a written agreement? (UPA 18)

5. Can A and B be required to invest more money despite their agreement? (UPA 18, 40)


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UPA (1914)

Sect. 9 If actions are outside ordinary business, Partnership is not bound unless authorized by other Partners

Sect. 14- If Partner's actions are within scope of apparent authority where a Partner receives money but misapplies it, the Partnership is bound.

Sect. 15-All Partners are liable jointly and severally for everything chargeable to the Partnership… Jointly for all other debts and obligations of the partnership.

Sect. 21-Partners must account to the Partnership for partnership opportunities on any profit received without knowledge or consent of other Partners

(Business Opportunity Rule)


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PARTNER’S RIGHTS

UPA 18

The rights and duties of the partners in relation to the partnership shall be determined, subject to any agreement between them, by the following rules:

a) Each partner shall be repaid his contributions, whether by way of capital or advances to the partnership property...and must contribute towards the losses, whether of capital or otherwise, sustained by the partnership according to his share in the profits.

b) The partnership must indemnify every partner in respect of payments made and personal liabilities reasonably incurred by him in the ordinary and proper conduct of its business....

e) All partners have equal rights in the management and conduct of the partnership business.

f) No partner is entitled to remuneration for acting as a partner in the partnership business,....


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UPA 40 (d)

  • The partners shall contribute... the amount necessary to satisfy the liabilities...but if any of the partners refuse to contribute their share of the liabilities...and the additional amount necessary to pay the liabilities, then the others shall pay.


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PARTNER LIABILITY

RUPA 807 (C)

RUPA 307 (c)

  • A partner...may recover from the other partners any contribution the partner makes to the extent the amount contributed exceeds the partner's share of the partnership obligations.

  • A judgment against a partnership is not by itself a judgment against a partner. A judgment against a partnership may not be satisfied from a partner's assets unless there is also a judgment against the partner.


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PARTNERSHIP LIABILITY

  • General rule is that partnership is liable for all actions of partners, regardless of breach of trust, wrongdoing as against a 3rd party who is without knowledge but relies to detriment. (UPA 11-15)

  • Each party has a fiduciary duty as to others and may seek indemnification against one who acts improperly.


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QUESTIONS

1. What is the scope of the liability of the partners ? (UPA 15)

2. Can they both participate in management of business? (UPA 18)

3. Can one fire the other? (UPA 18)

4. Can B get paid for his services without a written agreement? (UPA 18)

5. Can A and B be required to invest more money despite their agreement? (UPA 18, 40)


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ANSWERS

1. WHAT IS SCOPE OF LIABILITY OF PARTNERS? 

Ans. Each partner is jointly and severally liable for the obligations of the business--A puts up $, B provides labor, split profits 50-50; UPA 15. A cannot limit liability in GP

2. Can they both participate in management of business?

Ans: yes per UPA 18e. Can one fire the other? No, not as 50-50 partners.

3. CAN B GET PAID FOR SERVICES?

Ans.: Yes, if there is an employment agreement. He cannot be paid just for being a partner per UPA 18F.

4. CAN A FIRE B?

Ans: No, as 50-50 partners, neither can fire the other. They can only dissolve the business.


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ANSWERS

5. Can A and B be required to invest more money despite their agreement?

Ans: Yes, partners are jointly and severally liable. If one does not have it, the other can be forced to pay and then seek reimbursement or indemnification from the P-ship. Both must discharge outstanding debts. If B is insolvent, then A can be made to pay, but would be entitled to get $ back at liquidation.


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ANSWER

  • 6. What happens to losses incurred by AB Furniture if the business becomes insolvent. Would A have to contribute more money? -What if B does not have any money?

  • Ans. Under 18A and 40d yes, A and B must contribute pro rata for any losses. This means that unless specify that not required to make additional contributions, A and B would have to contribute money for losses.

  • UPA 18b allows partner to seek indemnification from the partnership. Partnership loans must be repaid with interest. Under 1994 revision, clarifies that account will be credited to funds advanced.


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