Agency & Partnership Professor Donald J. Kochan

1. Agency & PartnershipProfessor Donald J. Kochan Class 23

2. Today’s Materials • Pages 677-682; 706-707; 710-724 • Partnership Operation(cont.) • Duty of Disclosure • Duty of Good Faith and Fair Dealing • Right to Accounting • Claims by Creditors

3. 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? • Materiality issues • “item by item analysis of the specific facts . . .”

4. 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. . . . “

5. 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).”

6. Duty of Good Faith and Fair Dealing • UCC sec. 1-203 • Restatement of Contracts sec. 205 • UPA sec. 31(1)(d) – does not specifically mention • RUPA sec. 404(d) and 103(b) – non-negotiability • Distinction from fiduciary duties and why does that matter?

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

8. 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 • “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 . . .”

9. 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 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.

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

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

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

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

14. Concluding Thoughts • 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 • And, again, be careful who you choose to partner with.