Agency & Partnership Professor Donald J. Kochan Class 23

Todays Materials Pages ; ; Pages ; ; Partnership Operation (cont.) Partnership Operation (cont.) Duty of Disclosure Duty of Disclosure Duty of Good Faith and Fair Dealing Duty of Good Faith and Fair Dealing Right to Accounting Right to Accounting Claims by Creditors Claims by Creditors

Duty of Full Disclosure: Walter v. Holiday Inns, Inc. Duty of Disclosure: How is it related to duty of care, duty of loyalty, and fiduciary duties? Duty of Disclosure: How is it related to duty of care, duty of loyalty, and fiduciary duties? Materiality issues Materiality issues item by item analysis of the specific facts... item by item analysis of the specific facts...

Duty of Full Disclosure: Walter v. Holiday Inns, Inc. Materiality cannot be determined in a vacuum. In business transactions, what is material must be evaluated in the context in which the statements or omissions occurred.... This is true as well in partnership buy-outs. 2 Alan R. Bromberg & Larry E. Ribstein, Bromberg and Ribstein on Partnership § 6.06, at 6:64 (1988) (in partnership buy- out transactions, [e]ven if a partner was subject to a duty of full disclosure and failed to disclose every fact in connection with a particular transaction, there is no liability unless the nondisclosed facts were such as might be expected to have induced action or forbearance by the other partners-that is, were material).... the sophistication of the complaining partner and the degree of access to partnership records are key factors to be considered.... Materiality cannot be determined in a vacuum. In business transactions, what is material must be evaluated in the context in which the statements or omissions occurred.... This is true as well in partnership buy-outs. 2 Alan R. Bromberg & Larry E. Ribstein, Bromberg and Ribstein on Partnership § 6.06, at 6:64 (1988) (in partnership buy- out transactions, [e]ven if a partner was subject to a duty of full disclosure and failed to disclose every fact in connection with a particular transaction, there is no liability unless the nondisclosed facts were such as might be expected to have induced action or forbearance by the other partners-that is, were material).... the sophistication of the complaining partner and the degree of access to partnership records are key factors to be considered....

Walter v. Holiday Inns, Inc. (cont.) As leading commentators in the law of partnerships have stated, The extent of the duty to disclose depends on the circumstances of the individual case... [and] may depend on the degree to which the parties have access to accurate financial records, on whether the nondisclosing partner managed the business and thus was familiar with the relevant information, and on the knowledgeability or degree of expertise of the party to whom the duty of disclosure is owed. 2 Alan R. Bromberg & Larry E. Ribstein, Bromberg & Ribstein on Partnership § 6.06, at 6:64 (1988) (citation and footnote omitted); see also id. § 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 by interpartner transactions even without direct disclosure.); 59A Am.Jur.2d Partnership § 441, at 463 (1987) (even... blatant misconduct [by a partner] does not always constitute a violation of the duty sufficient to afford relief-especially where the alleged wrongdoer is not in a position of dominance, management, or control) (footnote omitted). 59A Am.Jur.2d Partnership § 441, at 463 (1987)59A Am.Jur.2d Partnership § 441, at 463 (1987)

Duty of Good Faith and Fair Dealing UCC sec UCC sec Restatement of Contracts sec. 205 Restatement of Contracts sec. 205 UPA sec. 31(1)(d) – does not specifically mention UPA sec. 31(1)(d) – does not specifically mention RUPA sec. 404(d) and 103(b) – non- negotiability RUPA sec. 404(d) and 103(b) – non- negotiability Distinction from fiduciary duties and why does that matter? Distinction from fiduciary duties and why does that matter?

Right to an Accounting UPA sec 22 and RUPA sec 405 UPA sec 22 and RUPA sec 405 Monitoring and disciplinary tool Monitoring and disciplinary tool Examine relationships of the rules with trusts Examine relationships of the rules with trusts Consider that partnerships involve shared assets – analogy re your spouse running up the credit card Consider that partnerships involve shared assets – analogy re your spouse running up the credit card

Suits Among Partners: Shuler v. Birnbaum RUPA sec. 405 allows one partner to sue another or the partnership itself for rights and interests protected under the partnership agreement RUPA sec. 405 allows one partner to sue another or the partnership itself for rights and interests protected under the partnership agreement Generally, courts will not interfere in internal disputes between members of a partnership, preferring instead that the partners settle their differences among themselves or else dissolve and go out of business settling their affairs at that time by a final and full accounting with all partners joined (see Lord v Hull, 178 NY 9, 13). In this way, premature piece-meal judgments between partners which may later require adjustment when all the business of the partnership is reviewed 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 accounting, prior settlement, or adjustment of the partnership affairs (Lord v Hull, supra; Arnold v Arnold, 90 NY 580; Cohen v Erdle, 282 App Div 569). One exception to this rule permits a partner to maintain an action at law against his copartner when no complex accounting is required or when only one transaction is involved which is fully closed but unadjusted... Generally, courts will not interfere in internal disputes between members of a partnership, preferring instead that the partners settle their differences among themselves or else dissolve and go out of business settling their affairs at that time by a final and full accounting with all partners joined (see Lord v Hull, 178 NY 9, 13). In this way, premature piece-meal judgments between partners which may later require adjustment when all the business of the partnership is reviewed 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 accounting, prior settlement, or adjustment of the partnership affairs (Lord v Hull, supra; Arnold v Arnold, 90 NY 580; Cohen v Erdle, 282 App Div 569). One exception to this rule permits a partner to maintain an action at law against his copartner when no complex accounting is required or when only one transaction is involved which is fully closed but unadjusted...

Claims by Personal Creditors of a Partner Against the Partnership Interest/Assets of the Partner What is a partnership interest/asset? Ask what equity the partner has in the partnership assets What is a partnership interest/asset? Ask what equity the partner has in the partnership assets What is the entity theory? What is the entity theory? Key issues are what are partnership property and what are personal property, and then whether the wrong alleged is personal or an act of the partnership. Will discuss more later. Key issues are what are partnership property and what are personal property, and then whether the wrong alleged is personal or an act of the partnership. Will discuss more later.

Claims by Creditors of the Partnership: Rights Against Personal Assets of Individual Partners Distinctions between partnership assets and personal assets Distinctions between partnership assets and personal assets Partners v. Partners and Third Parties v. Partners and Individuals v. Individuals Partners v. Partners and Third Parties v. Partners and Individuals v. Individuals Priority Issues in Bankruptcy Priority Issues in Bankruptcy Jingle rule Jingle rule Winding up Winding up

Claims by Creditors of a Partner and Rights Against Partnership Assets Charging Order concept – what is it? Charging Order concept – what is it? UPA allows foreclosure on the interests of a partner and RUPA largely retains that. UPA allows foreclosure on the interests of a partner and RUPA largely retains that.

Tupper v. Kroc Mismanagement and misappropriation of funds in a real estate deal case Mismanagement and misappropriation of funds in a real estate deal case Receivership Issues Receivership Issues Charging Order and UPA sec. 28 Charging Order and UPA sec. 28 Accounting obligation issues Accounting obligation issues

Bauer v. Blomfield Co./Holden Joint Venture Withholding of partnership profits/distribution case Withholding of partnership profits/distribution case Entitlement to partnership profits does not necessarily give powers of control over partnership activities Entitlement to partnership profits does not necessarily give powers of control over partnership activities Payment of Commissions/Distributions/Good Faith Payment of Commissions/Distributions/Good Faith Really a contract interpretation case Really a contract interpretation case

Concluding Thoughts Consider these cases in relation to how a partnership agreement should be drafted Consider these cases in relation to how a partnership agreement should be drafted Proper drafting, including the identification of responsibilities, authorities, and obligations can avoid some of these problems Proper drafting, including the identification of responsibilities, authorities, and obligations can avoid some of these problems And, again, be careful who you choose to partner with. And, again, be careful who you choose to partner with.