Business Law Chapter 31 Homework Distinguish between the liability of incoming partner

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Chapter 31

OPERATION AND DISSOLUTION OF GENERAL

PARTNERSHIPS

I. Relationship of Partners and Partners with

Third Parties

A. Contracts of Partnership

1. Authority to Bind Partnership

a. Actual Express Authority

b. Actual Implied Authority

c. Apparent Authority

2. Partnership by Estoppel

B. Torts and Crimes of Partnership

C. Notice to a Partner

D. Liability of Incoming Partner

II. Dissociation and Dissolution of General

Partnerships Under RUPA

A. Dissociation

1. Wrongful Dissociations

2. Rightful Dissociations

3. Effect of Dissociation

B. Dissolution

1. Causes of Dissolution

a. Dissolution by Act of the Partners

b. Dissolution by Operation of Law

c. Dissolution by Court Order

2. Effects of Dissolution

a. Authority

b. Liability

C. Winding Up

1. Participation in Winding Up

2. Distribution of Assets

3. Marshaling of Assets

D. Dissociation without Dissolution

1. Non-dissolving Dissociations

2. Continuation after Dissociation

3. Dissociated Partner’s Power to Bind the

Partnership

4. Dissociated Partner’s Liability to

Third Persons

III. Dissolution of General Partnerships Under UPA

A. Dissolution

1. Causes of Dissolution

a. Dissolution by Act of the Partners

b. Dissolution by Operation of Law

c. Dissolution by Court Order

2. Effects of Dissolution

B. Winding Up

1. The Right to Wind Up

2. Distribution of Assets

3. Marshaling of Assets

C. Continuation After Dissolution

1. Right to Continue Partnership

a. Continuation after Wrongful

Dissolution

b. Continuation after Expulsion

c. Continuation Agreement of the Parties

2. Rights of Creditors

Cases in This Chapter

RNR Investments Limited Partnership v.

Peoples First Community Bank

Conklin Farm v. Doris Leibowitz

Horizon/CMS Healthcare Corp. v. Southern

Oaks Health Care, Inc.

Warnick v. Warnick

Chapter Outcomes

After reading and studying this chapter, the student should be able to:

Explain the contract liability of a partnership and the partners.

Explain the tort liability of a partnership and the partners.

Distinguish between the liability of incoming partner for debts arising

to creditors and partners.

TEACHING NOTES

This Instructor’s Manual will discuss both UPA and RUPA, with a

side-by-side comparison when appropriate. Note that the chapter in the

text discusses the RUPA but, where the RUPA has made signiticant

changes, the UPA is also discussed. The chapter summary in the text

re,ects only the RUPA.

I. RELATIONSHIP OF PARTNERS & PARTNERS WITHTHIRD

PARTIES

In the course of transacting business, the partnership and the partners also may

acquire rights over and incur duties to third parties. Because much of the law of

partnership is the law of agency, most problems arising between partners and

third persons require the application of principles of agency law. When a

partnership becomes liable to a third party, each partner has unlimited

personal liability for that obligation.

UPA RUPA

The UPA makes this relationship

explicit by stating that “[t]he law of

agency shall apply under this act”

The RUPA states that “[e]ach partner

is an agent of the partnership for the

purpose of its business.” In addition,

*** Chapter Outcome ***

Explain the contract liability of a partnership and the partners.

A. CONTRACTS OF PARTNERSHIP

If the partnership is bound on a transaction, then each general partner has

unlimited personal liability for that partnership obligation unless the partnership

is an LLP and the LLP statute shields contract obligations.

UPA RUPA

The UPA provides that

partners are jointly liable

on all debts and contract

obligations of the

Under the RUPA the partners are jointly and

severally liable for all contract obligations of

the partnership, which means that all of the

partners may be sued jointly in one action or

the partners as a group,

and the judgment must

be against all of the

obligors. Therefore, any

suit in contract against

however, only against property of the

defendant or defendants named in the suit;

and payment of any one of the judgments

satis/es all of them. The Revised Act, in

keeping with its entity treatment of

Authority to Bind Partnership

A partner may bind the partnership by her act if she has actual authority —

express or implied — or if she has apparent authority to perform the act. Where

there is neither actual authority nor apparent authority, the partnership is bound

only if it rati/es the act.

UPA RUPA

The UPA provides that the

following acts do not bind the

partnership unless authorized by

all of the partners:

1. assignment of partnership

property for the benefit of its

creditors;

2. disposal of the goodwill of the

The Revised Act omits the UPA’s list

of extraordinary acts that require

unanimous consent, leaving it to

the courts to decide the outer

limits of a partner’s agency power.

The Revised Act also authorizes the

optional, central /ling of a

statement of partnership authority

Actual Express Authority — A partner’s actual express authority may be

specifically set forth in the partnership agreement or in an additional oral or

written agreement between the partners. In addition, actual express authority

may arise from the partners’ majority decisions regarding ordinary matters

connected with partnership business. A partner who does not have actual

authority from all partners may not bind the partnership by any act that does not

apparently relate to the usual conduct of the partnership business.

Actual Implied Authority — A partner’s actual implied authority is neither

Apparent Authority — A partner’s apparent authority (which may or may not

be actual) is authority that a third person, from the partners’ conduct, would

reasonably assume to exist. But a third person may not rely on apparent

authority in a situation where he is put on notice or already knows that the

partner does not have actual authority.

UPA RUPA

Each partner is an agent of the partnership for the

purpose of its business. An act of a partner, including

the execution of an instrument in the partnership

name, for apparently carrying on in the ordinary

CASE 31-1

RNR INVESTMENTS LIMITED PARTNERSHIP v. PEOPLES

FIRST COMMUNITY BANK

Court of Appeal of Florida, First District, 2002

812 So.2d 561

http://scholar.google.com/scholar_case?case=957588625820748025&q_812+so.2d+561&hl=en&as_sclt=2,34

Van Nortwick, J.

RNR is a Florida limited partnership formed * * * to purchase vacant land in Destin, Florida, and

to construct a house on the land for resale. Bernard Roeger was RNR’s general partner and Heinz

Rapp, Claus North, and S.E. Waltz, Inc., were limited partners. The agreement of limited

partnership provides for various restrictions on the authority of the general partner. Paragraph 4.1

of the agreement required the general partner to prepare a budget covering the cost of acquisition

and construction of the project (defined as the “Approved Budget”). * * *

In June 1998, RNR, through its general partner, entered into a construction loan agreement,

note and mortgage in the principal amount of $990,000. From June 25, 1998 through Mar. 13,

2000, the bank disbursed the aggregate sum of $952,699, by transfers into RNR’s bank account.

All draws were approved by an architect, who certified that the work had progressed as indicated

and that the quality of the work was in accordance with the construction contract. No

representative of RNR objected to any draw of funds or asserted that the amounts disbursed were

not associated with the construction of the house.

* * *

RNR asserts that a copy of the limited partnership agreement was maintained at its offices.

Nevertheless, the record contains no copy of an Approved Budget of the partnership or any

evidence that would show that a copy of RNR’s partnership agreement or any partnership budget

was given to the Bank or that any notice of the general partner’s restricted authority was

provided to the Bank.

* * * [T]he trial court entered a summary final judgment of foreclosure in favor of the Bank.

* * *

* * * Section 301(1), [citation], a part of the Florida Revised Uniform Partnership Act

(FRUPA), provides:

Each partner is an agent of the partnership for the purpose of its business. An act of a partner,

including the execution of an instrument in the partnership name, for apparently carrying on

in the ordinary scope of partnership business or business of the kind carried on by the

partnership, in the geographic area in which the partnership operates, binds the partnership

unless the partner had no authority to act for the partnership in the particular manner and the

person with whom the partner was dealing knew or had received notification that the partner

lacked authority.

[Court’s footnote: RNR mistakenly argues that section 301(1) has no application to a limited

partnership because that section is part of the Florida Revised Uniform Partnership Act, not the

partnership, unless the third party “knew or had received a notification that the partner lacked

authority.” [Citation.] “Knowledge” and “notice” under FRUPA are defined in section 102. That

section provides that “[a] person knows a fact if the person has actual knowledge of the fact.”

* * *

“Absent actual knowledge, third parties have no duty to inspect the partnership agreement or

inquire otherwise to ascertain the extent of a partner’s actual authority in the ordinary course of

business * * * even if they have some reason to question it.” [Citation.] The apparent authority

provisions of section 301(1), reflect a policy by the drafters that “the risk of loss from partner

misconduct more appropriately belongs on the partnership than on third parties who do not

knowingly participate in or take advantage of the misconduct.” * * * [Citation.]

Under section 301(1), 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 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 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 partner lacked authority. [Citation.] Here, it is

undisputed that, in entering 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 fact as to whether the Bank had actual knowledge or notice of restrictions on the general

partner’s authority.

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 restrictions and was

* * *

Because there is no disputed issue of fact concerning whether the Bank had actual knowledge

or notice of restrictions on the general partner’s authority to borrow, summary judgment was

proper.

Affirmed.

Partnership by Estoppel

Partnership by estoppel imposes partnership duties and liabilities on a

nonpartner who has represented himself or has consented to be represented as

a partner. It extends to a third person to whom such a representation is made

and who justi/ably relies upon the representation.

*** Chapter Outcome ***

Explain the tort liability of the partnership and the partners.

B. TORTS AND CRIMES OF PARTNERSHIP

Both the UPA and the RUPA provide that a partnership is liable for the loss or

injury that a partner causes through any wrongful act or omission while acting

within the ordinary course of the partnership business or with the authority of

the partnership. A partnership is also liable if a partner in the course of

partnership business or while acting with authority of the partnership breaches a

trust by receiving money or property of a person not a partner, and the partner

misapplies the money or property.

If the partnership is liable, each partner has unlimited personal liability for the

partnership obligation unless the partnership is an LLP. The liability of partners for

UPA RUPA

The Revised Act makes the partnership liable for no-fault

torts by the addition of the phrase, “or other actionable

conduct.”

A partner is not criminally liable for the crimes of her partners unless she

authorized them or participated in them.

NOTE: See Figure 31-2.

C. NOTICE TO A PARTNER

Admissions or representations made by a partner regarding firm affairs may be

used as evidence against the firm if they were made within the scope of

authority. Notice given to a partner concerning partnership business is imputed

to the partnership.

UPA RUPA

A partnership is bound (1) by notice

to any partner of any matter

relating to partnership affairs; (2)

A partner’s knowledge, notice, or

receipt of a noti/cation of a fact

relating to the partnership is

by the knowledge of a partner

acting in a particular matter, if he

possessed or acquired such

effective immediately as knowledge

by, notice to, or receipt of a

noti/cation by the partnership,