Agency & PartnershipAgency & PartnershipProfessor Donald J. KochanProfessor Donald J. Kochan

Class 20Class 20

Today’s MaterialsToday’s Materials

Partnership OperationPartnership Operation

Pages 581-616 Pages 581-616

Partnership GenerallyPartnership Generally

Why enter into a partnership?Why enter into a partnership? Pooling of assetsPooling of assets

Pooling of ExpertisePooling of Expertise Specialization IssuesSpecialization Issues

Liability ControlsLiability Controls Third Part Confidence – Reputational Third Part Confidence – Reputational

MarketabilityMarketability Taxation and Bankrupty IssuesTaxation and Bankrupty Issues

Saleability/Alienability/DepersonalizationSaleability/Alienability/Depersonalization

Types of AuthorityTypes of Authority

What are the types of authority?What are the types of authority? Why do they matter?Why do they matter?

Who do they matter to?Who do they matter to? How do authority issues relate to the How do authority issues relate to the

incentives to create a partnership?incentives to create a partnership? How is the Question related to How is the Question related to

Control or the Surrender of the same?Control or the Surrender of the same? Know concepts on p. 581Know concepts on p. 581

Elle v. BabbittElle v. Babbitt

Implied Actual Authority CaseImplied Actual Authority Case Authority created by acquiescenceAuthority created by acquiescence

Ordinary Course of BusinessOrdinary Course of Business BUT, decisions to end the BUT, decisions to end the

partnership, in effect, require partnership, in effect, require unanimity – i.e. not ordinary course unanimity – i.e. not ordinary course of businessof business

Summers v. DooleySummers v. Dooley

Deadlock case – partners equally dividedDeadlock case – partners equally divided UPA sec 18(e) and (h) (same principles as RUPA 401(j))UPA sec 18(e) and (h) (same principles as RUPA 401(j)) UPA 18(h) – “Any difference arising as to ordinary UPA 18(h) – “Any difference arising as to ordinary

matters connected to the partnership may be decided matters connected to the partnership may be decided by a majority of the partners.” -- here have 2 partners by a majority of the partners.” -- here have 2 partners and one objects -- focus on word “decided” which and one objects -- focus on word “decided” which does not clearly state need a majority to actdoes not clearly state need a majority to act

Court interprets as Ordinary matters decision requires Court interprets as Ordinary matters decision requires approval by majority of partners and ½ is not a approval by majority of partners and ½ is not a majority – “If the partners are equally divided, those majority – “If the partners are equally divided, those who forbid a change must have their way.”who forbid a change must have their way.”

Consider the indemnification issues separatelyConsider the indemnification issues separately

National Biscuit Co. v. StroudNational Biscuit Co. v. Stroud

Focus on first rule – generally, Focus on first rule – generally, ABSENT restrictions in ABSENT restrictions in the partnership agreement, a partner has the power the partnership agreement, a partner has the power to bind the partnership in any matter legitimate to to bind the partnership in any matter legitimate to the business. the business. Alternative phrasing re “ordinary” Alternative phrasing re “ordinary” mattersmatters

Deadlock caseDeadlock case Unpaid creditor/partner objects to continued Unpaid creditor/partner objects to continued

purchase of breadpurchase of bread Court interprets as – unless a majority OBJECTS, Court interprets as – unless a majority OBJECTS,

ordinary matters may be conductedordinary matters may be conducted Probably the better interpretation than Probably the better interpretation than SummersSummers as it as it

encourages business to continue in an orderly way AND encourages business to continue in an orderly way AND objecting partner can seek dissolutionobjecting partner can seek dissolution

Apparent Authority and Apparent Authority and Burns v. GonzalezBurns v. Gonzalez

Partners have apparent authority to conduct ordinary Partners have apparent authority to conduct ordinary business and carry on business in the usual waybusiness and carry on business in the usual way

““Usual way” defined according to industry, customs, Usual way” defined according to industry, customs, practices, etc. -- fact specific and context specific; practices, etc. -- fact specific and context specific; reference to evidence of other firms in the same reference to evidence of other firms in the same business is focused on by courtbusiness is focused on by court

Note the parallels with apparent authority in agency Note the parallels with apparent authority in agency discussed on pp. 591-92discussed on pp. 591-92 In particular, “B is liable for the act of C if B has In particular, “B is liable for the act of C if B has

‘held out’ to other persons that C is empowered to ‘held out’ to other persons that C is empowered to perform acts of that particular nature”perform acts of that particular nature”

Being “necessary” is not an exception if it is unusualBeing “necessary” is not an exception if it is unusual

Apparent Authority and Apparent Authority and Burns v. GonzalezBurns v. Gonzalez

Burden is on the participating partner to prove Burden is on the participating partner to prove what he did was the usual waywhat he did was the usual way

UPA sec 9(1): Usual Way is based on fact that UPA sec 9(1): Usual Way is based on fact that every partner is the agent of the partnership for every partner is the agent of the partnership for the purpose of its businessthe purpose of its business

UPAUPAUPA sec 9:UPA sec 9: (1) Every partner is an agent of the partnership for the purpose of its (1) Every partner is an agent of the partnership for the purpose of its

business, and the act of every partner, including the execution in the business, and the act of every partner, including the execution in the partnership name of any instrument, for apparently carrying on in the usual partnership name of any instrument, for apparently carrying on in the usual way the business of the partnership of which he is a member binds the way the business of the partnership of which he is a member binds the partnership, unless the partner so acting has in fact no authority to act for the partnership, unless the partner so acting has in fact no authority to act for the partnership in the particular matter, and the person with whom he is dealing partnership in the particular matter, and the person with whom he is dealing has knowledge of the fact that he has no such authority.has knowledge of the fact that he has no such authority.

(2) An act of the partner which is not apparently for the carrying on of the business of the partnership in the (2) An act of the partner which is not apparently for the carrying on of the business of the partnership in the usual way does not bind the partnership unless authorized by the other partners.usual way does not bind the partnership unless authorized by the other partners.

(3) Unless authorized by the other partners or unless they have abandoned the business, one or more but less (3) Unless authorized by the other partners or unless they have abandoned the business, one or more but less than all the partners have no authority to:than all the partners have no authority to:

(a) Assign the partnership property in trust for creditors or on the assignee's promise to pay the debts of the (a) Assign the partnership property in trust for creditors or on the assignee's promise to pay the debts of the partnership,partnership,

(b) Dispose of the goodwill of the business,(b) Dispose of the goodwill of the business,

(c) Do any other act which would make it impossible to carry on the ordinary business of a partnership,(c) Do any other act which would make it impossible to carry on the ordinary business of a partnership,

(d) Confess a judgment,(d) Confess a judgment,

(e) Submit a partnership claim or liability to arbitration or reference.(e) Submit a partnership claim or liability to arbitration or reference.

(4) No act of a partner in contravention of a restriction on authority shall bind the partnership to persons (4) No act of a partner in contravention of a restriction on authority shall bind the partnership to persons having knowledge of the restriction.having knowledge of the restriction.

Notes on Pages 594-596Notes on Pages 594-596 Understand RUPA 303 and the filing of a “statement of Understand RUPA 303 and the filing of a “statement of

authority”authority” Gives noticeGives notice Can expand or restrictCan expand or restrict Provides greater clarity for otherwise uncertain Provides greater clarity for otherwise uncertain

situationssituations

Understand the restrictive attitude taken regarding Understand the restrictive attitude taken regarding transfers of real property discussed in note 2transfers of real property discussed in note 2

Understand UPA/RUPA word change and note 5 explaining Understand UPA/RUPA word change and note 5 explaining no major difference in substantive rule between “usual no major difference in substantive rule between “usual way” and “ordinary course”way” and “ordinary course”

RNR Investments Limited Partnersghip v. RNR Investments Limited Partnersghip v. Peoples First Community BankPeoples First Community Bank

RUPA case where partnership agreement RUPA case where partnership agreement LIMITS authority but third partner never LIMITS authority but third partner never examines the partnership agreementexamines the partnership agreement

Focuses on the knowledge and reliance point Focuses on the knowledge and reliance point – reliance is reasonable under RUPA if 3 does – reliance is reasonable under RUPA if 3 does not have not have actualactual knowledge of the lack of knowledge of the lack of authority (UPA has just said “knowledge”); authority (UPA has just said “knowledge”); under RUPA, 3 may be put on notice of lack of under RUPA, 3 may be put on notice of lack of authority but not have actual knowledgeauthority but not have actual knowledge

RNR Investments Limited Partnersghip v. RNR Investments Limited Partnersghip v. Peoples First Community BankPeoples First Community Bank

““the determination of whether a partner is acting with authority to bind the the determination of whether a partner is acting with authority to bind the partnership involves a two-step analysis. The first step is to determine whether the partnership involves a two-step analysis. The first step is to determine whether the partner purporting to bind the partnership apparently is carrying on the partnership partner purporting to bind the partnership apparently is carrying on the partnership business in the usual way or a business of the kind carried on by the partnership. An business in the usual way or a business of the kind carried on by the partnership. An affirmative answer on this step ends the inquiry, unless it is shown that the person affirmative answer on this step ends the inquiry, unless it is shown that the person with whom the partner is dealing actually knew or had received a notification that the with whom the partner is dealing actually knew or had received a notification that the partner lacked authority. partner lacked authority. See Kristerin Dev. Co. v. Granson Inv.,See Kristerin Dev. Co. v. Granson Inv., 394 N.W.2d 325, 330 394 N.W.2d 325, 330 (Iowa 1986)(applying Iowa version of UPA). Here, it is undisputed that, in entering (Iowa 1986)(applying Iowa version of UPA). Here, it is undisputed that, in entering into the loan, the general partner was carrying on the business of RNR in the usual into the loan, the general partner was carrying on the business of RNR in the usual way. The dispositive question in this appeal is whether there are issues of material way. The dispositive question in this appeal is whether there are issues of material fact as to whether the Bank had actual knowledge or notice of restrictions on the fact as to whether the Bank had actual knowledge or notice of restrictions on the general partner's authority.general partner's authority.

[7] RNR argues that, as a result of the restrictions on the general partner's authority [7] RNR argues that, as a result of the restrictions on the general partner's authority in the partnership agreement, the Bank had constructive knowledge of the in the partnership agreement, the Bank had constructive knowledge of the restrictions and was obligated to inquire as to the general partner's specific authority restrictions and was obligated to inquire as to the general partner's specific authority to bind RNR in the construction loan. We cannot agree. Under section 620.8301, the to bind RNR in the construction loan. We cannot agree. Under section 620.8301, the Bank could rely on the general partner's apparent authority, unless it had Bank could rely on the general partner's apparent authority, unless it had actual actual knowledgeknowledge or or noticenotice of restrictions on that authority. “ of restrictions on that authority. “

Partner Liability by Estoppel and Partner Liability by Estoppel and Royal Bank v. WeintraubRoyal Bank v. Weintraub

Post-dissolution behavior of former law partnersPost-dissolution behavior of former law partners Case itself is difficult to follow and poorly writtenCase itself is difficult to follow and poorly written Focus on UPA sec 16 -- text on page 604 Focus on UPA sec 16 -- text on page 604 Fact of dissolution was not readily knowableFact of dissolution was not readily knowable Partnership by estoppel “should not be lightly invoke Partnership by estoppel “should not be lightly invoke

and generally presents issues of fact . . .”and generally presents issues of fact . . .” Here there was an apparent existing partnership and Here there was an apparent existing partnership and

investigation was sufficiently completedinvestigation was sufficiently completed In light of notes following, think about risks of In light of notes following, think about risks of

continued holding out and other behavior that continued holding out and other behavior that supports false public impressions or fails to correct supports false public impressions or fails to correct such false impressionssuch false impressions

Bardon HypotheticalBardon Hypothetical

Focus on the precise language of sec 16 to Focus on the precise language of sec 16 to determine issues of liabilitydetermine issues of liability

How does consent to use of name fit in?How does consent to use of name fit in?

Holding out issuesHolding out issues

Knowledge issuesKnowledge issues

Implied consent issuesImplied consent issues

Is There a Duty to Speak?Is There a Duty to Speak?

Must one act to correct impressions that he did Must one act to correct impressions that he did not create?not create?

See Official Comment to UPA 16 on page 605: “It See Official Comment to UPA 16 on page 605: “It has been held that a person is liable if he has been has been held that a person is liable if he has been held out as a partner and knows that he is being held out as a partner and knows that he is being held out, unless he prevents such holding out, held out, unless he prevents such holding out, even if to do so he has to take legal action . . . On even if to do so he has to take legal action . . . On the other hand, the weight of authority is to the the other hand, the weight of authority is to the effect that to be held out as a partner he must effect that to be held out as a partner he must consent to the holding and that consent is a consent to the holding and that consent is a matter of fact.” So?matter of fact.” So?

Brown v. GersteinBrown v. Gerstein

Medical Malpractice case and name on Medical Malpractice case and name on letterheadletterhead

Note the focus on facts and degreeNote the focus on facts and degree Use of name in the business alone too Use of name in the business alone too

“slender” to show consent even if use “slender” to show consent even if use of name is with person’s knowledgeof name is with person’s knowledge

Case seems to strongly favor actual Case seems to strongly favor actual consent; more egregious facts lead consent; more egregious facts lead some courts to go other waysome courts to go other way

Brown v. GersteinBrown v. Gerstein See general estoppel elements on p. 607See general estoppel elements on p. 607

““to prevail under this doctrine a plaintiff must to prevail under this doctrine a plaintiff must prove: (1) that the would-be partner has held himself out prove: (1) that the would-be partner has held himself out as a partner; (2) that such holding out was done by the as a partner; (2) that such holding out was done by the defendant directly or with his consent; (3) that the defendant directly or with his consent; (3) that the plaintiff had knowledge of such holding out; and (4) that plaintiff had knowledge of such holding out; and (4) that the plaintiff relied on the ostensible partnership to his the plaintiff relied on the ostensible partnership to his prejudice. prejudice. Ibid.Ibid. See also Reuschlein & Gregory, Agency See also Reuschlein & Gregory, Agency and Partnership § 198 (1979); Crane & Bromberg, and Partnership § 198 (1979); Crane & Bromberg, Partnership § 36 (1968); Rowley on Partnership 423-436 Partnership § 36 (1968); Rowley on Partnership 423-436 (2d ed. 1960); Painter, Partnership by Estoppel, 16 (2d ed. 1960); Painter, Partnership by Estoppel, 16 Vand.L.Rev. 327 (1963). Failure to establish any of these Vand.L.Rev. 327 (1963). Failure to establish any of these requirements precludes recovery on an estoppel theory.”requirements precludes recovery on an estoppel theory.”

J&J Builders Supply v. CaffinJ&J Builders Supply v. Caffin

Masonry building materials delivery caseMasonry building materials delivery case Looking at facts here, court decides Looking at facts here, court decides

Failure to deny statements, coupled with Failure to deny statements, coupled with later admission that he had held himself later admission that he had held himself out as a partner (plus but not necessary out as a partner (plus but not necessary factor), sufficient to establish liability factor), sufficient to establish liability under UPA sec 16under UPA sec 16

Personal appearance issue distinguishes Personal appearance issue distinguishes case from Browncase from Brown

Reliance Conundrum and Reliance Conundrum and Brown & Bigelow v. RoyBrown & Bigelow v. Roy

License on a wall at office caseLicense on a wall at office case ““public representation”public representation” Court holds reliance NOT necessary Court holds reliance NOT necessary

to prove if a holding out is made to to prove if a holding out is made to the publicthe public

But see SimonelliBut see Simonelli

Reisen Lumber & Reisen Lumber & Millwork Co. v. Simonelli – and Millwork Co. v. Simonelli – and

RUPA solves ambiguityRUPA solves ambiguity

Construes UPA 16 as requiring Construes UPA 16 as requiring reliancereliance

Note 5 on page 616 – RUPA 308 Note 5 on page 616 – RUPA 308 makes clear that reliance is makes clear that reliance is necessary whether the necessary whether the representation is public or privaterepresentation is public or private