Operations of Partnerships and LLPs (Outline six)

What are partners in a partnership?

They are agents, and therefore fiduciaries.

How are partners like agents?

They have the same duties all agents have and also owe each other a duty of loyalty and care.

Arthur, Conan, and Doyle formed an LLP for real estate. While Arthur was on vacation in Hawaii, he buys an office building for himself without telling Conan and Doyle. He then sells the property for a huge profit, when they find out they sue Arthur for breaching the fiduciary duty of loyalty. What is Arthurs best argument?

The building is only for commercial use, and that he bought it with his own money through his name.

What is the issue with Arthur’s argument?

There are no limitations found that indicate the parties are limited to the scope of residential properties in D.C. which means that there is prospective interest →Conan & Doyle win.

Assuming that Conan and Doyle win, how much can they recover from Arthur?

They are paid the profits from the sale with each of the partners receiving 1/3 of the profits.

What if Arthur sold the office building at a loss, can Arthur recover from Conan and Doyle?

No he cannot recover any funds from Conan and Doyle.

When a partner learns of an opportunity within the partnership’s present or prospective areas of business what must they do?

The partner may not take the opportunity for itself, but must give the partnership a RIGHT OF FIRST REFUSAL.

All partners have what type of authority involving contracts?

All partners have whatever express authority given, plus implied and apparent authority to make contracts within the ordinary scope of the partnership’s business.

Acts outside the ordinary scope of business require what?

Unanimous consent

Examples of acts outside the ordinary scope of business that require unanimous consent?

• Major transactions that the partnership usually doesn’t do\

• Modifications/Amendments to the partnership thats outside the scope

Sigmund LLP has 10 partners and own an apartment building. Some partners want sigmund to convert the apartments to condos. If the partnership agreement is silent, how many partners must approve for the transaction to go forward and why?

10 partners would have to approve → Why: major transaction that partnership usually doesn’t do requires Unanimous Consent

What approval if any, does Sigmund need before renting out an approval?

He would only need one sign of approval from any one of the partners (Regular operations)

If there is a dispute among the partners over the terms for renting apartments, how will that dispute be resolved?

It would be decided by majority rule

Ann and Bo are two partners in ANBO, LLP, a real estate company. Ann sells some of ANBO’s real estate to TP despite BO not approving the sale. Bo claimed ANBO was not bound by the contract because both Ann and Bo have to approve. TP sued ANBO to enforce the contract, who wins?

Tp wins because Ann was acting as an agent. Ann had apparent authority

What can the loser of ANBO do now?

Bo can sue Ann for breach of the partnership agreement

Unless agreed otherwise, how are matters within the ordinary scope of business are decided by?

They are decided by majority vote

Ben and Jerry are 50/50 partners. Ben tells Jerry he wants to hire an employee; Jerry says no. Ben does it anyway, so Jerry sues Ben. Is hiring an employee within the ordinary scope of business?

Yes it is and it will need a majority vote

Jerry argues that Ben needed majority approval before hiring the employee. What can Ben argue in response?

Ben can argue all partners have implied authority to hire an employee as it falls within the ordinary course of business operations. However Jerry can say your’e trying to take my authority away

The court concluded both Ben & Jerry were right, matters in the ordinary course of business are decied by majority vote. So how should the court decide the case?

The court sides with Jerry as Ben breached a duty of good faith by taking an action that he knew his 50% partner opposed

We form a consulting firm partnership. I put in 75,000 and you (49 students) collectively put in 25,000. I do 90% of the work of the partnership and you do 10%. We make 100,000 profit in year 1, but our agreement is silent on how that profit would be shared. What is my shared of the profit?

Your share of the profit is 2% ($100,000 / 50 partners =2,000 dollars each)

Unless agreed otherwise, profits are shared how?

Equally, and losses are shared the same as profits

I did 90% of the work; do I get a salary?

Unless agreed otherwise, a partner’s sole compensation is their share of profit.

While you are a partner, could you also be a full-time GW student and work elsewhere?

No

Unless agreed otherwise, partners are expected to devote how much time?

Partners are expected to devote full time to the partnership business

What is a silent partner?

Is a partner of all purposes, except they have no voice in management.

What are a Silent Partner’s liabilities?

They are just as liable as other partners regardless of their power in management.

A, B, and C are doctors and partners in a medical LLP. Dr. C commits malpractice against TP. Who can TP sue?

TP can sue Dr.C because they committed a malpractice. TP can also recover from the whole LLP as it happened in the scope of employment.

TP then goes to DR.D, E, and F, a medical partnership to get repaired. Dr.D commits malpractice against TP. Now who can TP sue?

D,E, and F are liable as Dr.D committed a malpractice and E and F are liable through vicarious liability.

Before TP can recover a partnership debt from an individual partner, what must TP do first?

TP must first exhaust all the assets of the partner who committed the wrongful act

Suppose DEF partnership has no assets, and TP collects from F, is that the end of the story?

Dr.F would be entitled of contribution from Dr.D and Dr.E .

What is a contribution?

Two or more sureties who are bound to answer for the principals default and who should share between them the loss.

What happens when a surety performs its obligation but ends up paying more than their share?

they are entitled to seek contribution from the other sureties or partners who are equally liable for the debt.

Lana, Maximo, and Nerissa are the three partners in the LMN Partnership. They agreed to share profits 20/30/50, respectively, but made no agreement on sharing losses. The LMN Partnership owed $300,000 to a supplier, and Maximo paid the supplier in full out of his own pocket. How much, if anything, is Maximo entitled to recover from Lana and from Nerissa?

He is owed 60,000 from Lana and 90,000 from Nerissa.

What should happen if Lana is unable to pay?

You would remove Lana’s share from the partnership, give that share to Maximo, and pay the new amount. Maximo would be entitled to $187,500. (300,000 × 5/8 (Lana’s share is 2/8 + 3/8 Old Maximo’s share = New Maximo’s Share)

Is it easier for a corporation to buy a new building under their corporation or create a new separate entity to rent that building under their new entity?

It is easier for the corporation to buy the building as the corporation now has to create the entity, have separate accounting records, and pay separate taxes.

Why would a corporation create an entity to buy + rent a building?

So that they can diversify their assets + decrease their risk.

What happens if the corporation buys the building and it goes bankrupt?

Creditors would take everything including their building.

What happens if the corporation fails but the separate entity owns the building?

The corporation can fall back on the LLP and the building. The creditors can take the lease but you will still own the building which you could sell for assets.