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

Class 23Class 23

Today’s MaterialsToday’s Materials

Pages 677-682; Pages 677-682; 706-707; 710-724706-707; 710-724

Partnership OperationPartnership Operation(cont.)(cont.)

Duty of DisclosureDuty of Disclosure Duty of Good Faith Duty of Good Faith

and Fair Dealingand Fair Dealing Right to AccountingRight to Accounting Claims by CreditorsClaims by Creditors

Duty of Full Disclosure:Duty of Full Disclosure:Walter v. Holiday Inns, Inc.Walter v. Holiday Inns, Inc.

Duty of Disclosure: How is it related to Duty of Disclosure: How is it related to duty of care, duty of loyalty, and duty of care, duty of loyalty, and

fiduciary duties?fiduciary duties?

Materiality issuesMateriality issues

““item by item analysis of the specific item by item analysis of the specific facts . . .”facts . . .”

Duty of Full Disclosure:Duty of Full Disclosure:Walter v. Holiday Inns, Inc.Walter v. Holiday Inns, Inc.

““Materiality cannot be determined in a vacuum. In business Materiality cannot be determined in a vacuum. In business transactions, what is material must be evaluated in the transactions, what is material must be evaluated in the

context in which the statements or omissions occurred. context in which the statements or omissions occurred. . . . . . . This is true as well in partnership buy-outs. 2 Alan R. This is true as well in partnership buy-outs. 2 Alan R.

Bromberg & Larry E. Ribstein, Bromberg & Larry E. Ribstein, Bromberg and Ribstein on Bromberg and Ribstein on PartnershipPartnership § 6.06, at 6:64 (1988) (in partnership buy-out § 6.06, at 6:64 (1988) (in partnership buy-out

transactions, “[e]ven if a partner was subject to a duty of full transactions, “[e]ven if a partner was subject to a duty of full disclosure and failed to disclose every fact in connection disclosure and failed to disclose every fact in connection

with a particular transaction, there is no liability unless the with a particular transaction, there is no liability unless the nondisclosed facts were such as might be expected to have nondisclosed facts were such as might be expected to have induced action or forbearance by the other partners-that is, induced action or forbearance by the other partners-that is, were material”). . . . the sophistication of the complaining were material”). . . . the sophistication of the complaining

partner and the degree of access to partnership records are partner and the degree of access to partnership records are key factors to be considered. key factors to be considered. . . . . . . “ “

Walter v. Holiday Inns, Inc. (cont.)Walter v. Holiday Inns, Inc. (cont.)

““As leading commentators in the law of partnerships have stated, “The As leading commentators in the law of partnerships have stated, “The extent of the duty to disclose depends on the circumstances of the extent of the duty to disclose depends on the circumstances of the

individual case ... [and] may depend on the degree to which the individual case ... [and] may depend on the degree to which the parties have access to accurate financial records, on whether the parties have access to accurate financial records, on whether the

nondisclosing partner managed the business and thus was familiar nondisclosing partner managed the business and thus was familiar with the relevant information, and on the knowledgeability or degree with the relevant information, and on the knowledgeability or degree of expertise of the party to whom the duty of disclosure is owed.” 2 of expertise of the party to whom the duty of disclosure is owed.” 2

Alan R. Bromberg & Larry E. Ribstein, Alan R. Bromberg & Larry E. Ribstein, Bromberg & Ribstein on Bromberg & Ribstein on PartnershipPartnership § 6.06, at 6:64 (1988) (citation and footnote omitted); § 6.06, at 6:64 (1988) (citation and footnote omitted); see see also id.also id. § 6:05, at 6:55-56 (“[I]f the partners have equal access to the § 6:05, at 6:55-56 (“[I]f the partners have equal access to the books, and if full information is disclosed in them, they may be bound books, and if full information is disclosed in them, they may be bound

by interpartner transactions even without direct disclosure.”); 59A by interpartner transactions even without direct disclosure.”); 59A Am.Jur.2d Am.Jur.2d PartnershipPartnership § 441, at 463 (1987) (“even ... blatant § 441, at 463 (1987) (“even ... blatant

misconduct [by a partner] does not always constitute a violation of misconduct [by a partner] does not always constitute a violation of the duty sufficient to afford relief-especially where the alleged the duty sufficient to afford relief-especially where the alleged wrongdoer is not in a position of dominance, management, or wrongdoer is not in a position of dominance, management, or

control”) (footnote omitted).”control”) (footnote omitted).”

Duty of Good Faith Duty of Good Faith and Fair Dealingand Fair Dealing

UCC sec. 1-203UCC sec. 1-203 Restatement of Contracts sec. 205Restatement of Contracts sec. 205

UPA sec. 31(1)(d) – does not UPA sec. 31(1)(d) – does not specifically mentionspecifically mention

RUPA sec. 404(d) and 103(b) – non-RUPA sec. 404(d) and 103(b) – non-negotiabilitynegotiability

Distinction from fiduciary duties and Distinction from fiduciary duties and why does that matter?why does that matter?

Right to an AccountingRight to an Accounting UPA sec 22 and RUPA sec 405UPA sec 22 and RUPA sec 405

Monitoring and disciplinary toolMonitoring and disciplinary tool

Examine relationships of the rules with Examine relationships of the rules with truststrusts

Consider that partnerships involve shared Consider that partnerships involve shared assets – analogy re your spouse running up assets – analogy re your spouse running up

the credit cardthe credit card

Suits Among Partners:Suits Among Partners:Shuler v. BirnbaumShuler v. Birnbaum

RUPA sec. 405 allows one partner to sue another or the partnership itself RUPA sec. 405 allows one partner to sue another or the partnership itself for rights and interests protected under the partnership agreementfor rights and interests protected under the partnership agreement

““Generally, courts will not interfere in internal disputes between Generally, courts will not interfere in internal disputes between members of a partnership, preferring instead that the partners settle members of a partnership, preferring instead that the partners settle

their differences among themselves or else dissolve and go out of their differences among themselves or else dissolve and go out of business settling their affairs at that time by a final and full accounting business settling their affairs at that time by a final and full accounting

with all partners joined (see with all partners joined (see Lord v HullLord v Hull, 178 NY 9, 13). In this way, , 178 NY 9, 13). In this way, premature piece-meal judgments between partners which may later premature piece-meal judgments between partners which may later

require adjustment when all the business of the partnership is reviewed require adjustment when all the business of the partnership is reviewed are avoided. Thus, it is the general rule that partners cannot sue each are avoided. Thus, it is the general rule that partners cannot sue each

other at law for acts relating to the partnership unless there is an other at law for acts relating to the partnership unless there is an accounting, prior settlement, or adjustment of the partnership affairs accounting, prior settlement, or adjustment of the partnership affairs

(Lord v Hull, supra; Arnold v Arnold(Lord v Hull, supra; Arnold v Arnold, 90 NY 580; , 90 NY 580; Cohen v ErdleCohen v Erdle, 282 App , 282 App Div 569). One exception to this rule permits a partner to maintain an Div 569). One exception to this rule permits a partner to maintain an action at law against his copartner when no complex accounting is action at law against his copartner when no complex accounting is

required or when only one transaction is involved which is fully closed required or when only one transaction is involved which is fully closed but unadjusted but unadjusted . . . . .”.”

Claims by Personal Creditors of a Partner Against Claims by Personal Creditors of a Partner Against the Partnership Interest/Assets of the Partnerthe Partnership Interest/Assets of the Partner

What is a “partnership interest/asset”? What is a “partnership interest/asset”? Ask what equity the partner has in Ask what equity the partner has in

the partnership assetsthe partnership assets What is the “entity theory”?What is the “entity theory”?

Key issues are what are partnership Key issues are what are partnership property and what are personal property and what are personal

property, and then whether the wrong property, and then whether the wrong alleged is personal or an act of the alleged is personal or an act of the

partnership. Will discuss more later.partnership. Will discuss more later.

Claims by Creditors of the Partnership:Claims by Creditors of the Partnership:Rights Against Personal Assets of Individual Rights Against Personal Assets of Individual

PartnersPartners

Distinctions between partnership Distinctions between partnership assets and personal assetsassets and personal assets

Partners v. Partners and Third Parties Partners v. Partners and Third Parties v. Partners and Individuals v. v. Partners and Individuals v.

IndividualsIndividuals Priority Issues in BankruptcyPriority Issues in Bankruptcy

Jingle ruleJingle rule Winding upWinding up

Claims by Creditors of a Partner and Claims by Creditors of a Partner and Rights Against Partnership AssetsRights Against Partnership Assets

““Charging Order” concept – what is Charging Order” concept – what is it?it?

UPA allows foreclosure on the UPA allows foreclosure on the interests of a partner and RUPA interests of a partner and RUPA

largely retains that.largely retains that.

Tupper v. KrocTupper v. Kroc

Mismanagement and misappropriation Mismanagement and misappropriation of funds in a real estate deal caseof funds in a real estate deal case

Receivership IssuesReceivership Issues

Charging Order and UPA sec. 28Charging Order and UPA sec. 28

Accounting obligation issuesAccounting obligation issues

Bauer v. Blomfield Co./Holden Bauer v. Blomfield Co./Holden Joint VentureJoint Venture

Withholding of partnership Withholding of partnership profits/distribution caseprofits/distribution case

Entitlement to partnership profits does Entitlement to partnership profits does not necessarily give powers of control not necessarily give powers of control

over partnership activitiesover partnership activities Payment of Payment of

Commissions/Distributions/Good FaithCommissions/Distributions/Good Faith Really a contract interpretation caseReally a contract interpretation case

Concluding ThoughtsConcluding Thoughts

Consider these cases in relation to how a Consider these cases in relation to how a partnership agreement should be draftedpartnership agreement should be drafted

Proper drafting, including the identification Proper drafting, including the identification of responsibilities, authorities, and of responsibilities, authorities, and

obligations can avoid some of these obligations can avoid some of these problemsproblems

And, again, be careful who you choose to And, again, be careful who you choose to partner with.partner with.