Class 1
Content
CORPORATIONS (AND OTHER BUSINESS ORGANIZATIONS)
Daniel B. Graves Graves & Associates LLC May 23, 2007
Class Session Agenda
•Overview of “Corporations” •Why the “Corporations” Course is Probably Important to You •“Corporations” Course Overview—What We Are Planning to Study This Semester (Continued)
Class Session Agenda
Partnerships
How many have already had the Agency and Partnerships course?
•Formation •Partnership Agreements •Authority of Partners •Liability of Partners •Partnership Interests and Property •Fiduciary Duties of Partners •Partnership Dissociation, Dissolution, and Winding Up
INTRODUCTIONS WHO AM I? WHO ARE YOU?
Who’s Teaching this Class?
Dan Graves, Founder, Graves & Associates LLC, Birmingham, Alabama Previously, Partner, Balch & Bingham LLP, Birmingham, Alabama Previously, Associate General Counsel and Assistant Corporate Secretary, Compass Bancshares, Inc., Compass Bank, and their affiliated corporations Previously, Partner/Associate, Miller, Hamilton, Snider & Odom, Mobile, Alabama
Who’s Teaching this Class?
Chairman and Planning Committee Member, ABICLE Southeastern Corporate Law Institute; ABICLE Corporate Governance and Banking Law Planning Committees Former Special Prosecutor for Alabama Securities Commission and Mobile District Attorney University of Alabama, J.D. and B.A. Alabama Law Review, Managing Board and Student Works Editor
Who’s Teaching this Class, Anyway?
Author of corporate/securities law related law review articles and other articles Frequent lecturer/teacher on corporate, securities, and banking law topics
Class Meetings
12 class meetings—11 classes + final exam
Held on each Wednesday evening from 6:30 ‘til 8:40 P.M. Final exam on August 15th
BSL Attendance Policy Reminder
Law students must attend at least 2/3 of all class meetings Absence from more than 4 classes means that you will not have the pleasure of taking the final exam and you will receive no credit for the class
In-Person Class Time
Pursuant to order of the Supreme Court of Alabama, I am required to conduct a minimum time of in-person instruction as a condition to your taking the Alabama State Bar Examination. Please don’t whine to get out early. I have enough stress in my life and I don’t need any more from you. Thank you.
Your Grade
Final Exam 90% Writing Assignment 10% Class Participation + or – one grade level for those who are on the brink. Volunteer... don’t be a
deadbeat... get to know me... it will make a difference.
The Student/Teacher Contract
(or “Here’s the Deal”) “The 4 Ps”
Participation
Students’ learning is facilitated by participation backed by preparation.
The professor learns from students’ participation, questions, and feedback. “There is no such thing as a stupid question.” (I could, however, be proven wrong. Just kidding…sort of.) Be fearless!
Preparation
If you do not read and analyze the cases and the other assigned material, our class discussion will mean little to you. I will expect and assume that you have read the material. I will call on people. I also want volunteers.
If you are unprepared, you also run the risk of being the one who proves me wrong when I said that there is “no such thing as a stupid question.”
Presence
If you are not present for class, you will not learn as well and you cannot add your unique and interesting insights to any discussion we have in class.
If you are late and miss roll call, it is YOUR responsibility to see me after class for notation of your presence. You should not assume that I will remember your late/grand entrance.
Promptness
Students who enter the classroom late generally disrupt the class and distract the other students as well as the (very easily distracted) professor.
Please be on time.
PROFESSOR’S RESPONSIBILITIES
I owe you…
Preparation for class.
I intend to put in the time required to be prepared for class.
I owe you…
A concern for and devotion to your learning.
A willingness to listen to you and try to help you however I can. If you don’t “get it,” raise your hand in class and ask me. If you are lost, you can be pretty sure that you aren’t alone.
I owe you…
To strive to make the course a satisfying development experience that is as interesting and enjoyable as it can be under the circumstances.
I owe you…
Honesty
I will try to do my best up here, but you should not be surprised when it becomes obvious that I don’t know everything. If I do not know an answer to your question, I will say so and I will plan to get back to you.
WHY IS “CORPORATIONS” IMPORTANT TO YOU?
Law School Graduation
“Corporations” is part of the required law school curriculum.
You will not get out of here without it.
State Bar Exams
“Corporations” is tested on the Alabama State Bar Examination as well as other states’ exams
Corporate Law Practice
If you want to practice corporate/business law, you obviously need to know this subject matter.
Plaintiffs’ Law Practice
• Corporate entities have most of the money. Per IRS tax returns, corporations generate about 95% of all business revenue. • Corporate entities are the primary targets of plaintiffs’ litigation (see the first point noted above) • Successful plaintiffs’ litigation requires an understanding of corporate legal structures, duties, capitalization, and other corporate law fundamentals. Good trial lawyers are more than just good actors.
Business
Even if you have no intention of practicing law, an understanding of corporate law will aid you in your business or in your general awareness of business principles. In other words, you might avoid plaintiffs’ lawyers and your Wall Street Journal subscription will be more worthwhile.
Course Overview
Text “Corporations and Other Business Organizations: Cases and Materials” Concise Ninth Edition by Melvin Aron Eisenberg (Who, I would note, still does not publish a teacher’s manual to tell me what to do. Thanks a lot, Melvin!)
Course Overview
Other Materials Statutes, statutes, and more statutes. While they are pretty dull reading, they are the source for most corporate law. (See Course Syllabus and TWEN postings for statutory reading assignments.) Other TWEN postings; relevant periodicals
Course Overview
Partnerships The Corporate Form of Doing Business Corporate Structure (Management, Authority, Formalities, etc.) Stockholder Informational Rights and Proxy Voting Special Close Corporation Problems Alternative Orgs: LPs, LLCs, and LLPs
Course Overview
The Fiduciary Duty of Care The duty of directors to inform themselves and act with requisite care in the discharge of their duties.
Course Overview
The Fiduciary Duty of Loyalty The duty of directors, officers, dominant shareholders, and their affiliates to make full and fair disclosure of conflicts of interest and to act in the best interest of the corporation. Entails disinterestedness, good faith, and fairness
Course Overview
Insider Trading Statutory and Common Law Liabilities
Course Overview
Corporate Combinations and Tender Offers Mergers, P&A Transactions, Stock Purchase Transactions, etc. “Going Private” Transactions Tender Offers
PARTNERSHIPS
A “Quicky Overview”
What would be a pretty good, general description of a partnership?
An unincorporated business that is owned by 2 or more persons who are partners which operates to make money. Each of the partners has unlimited personal liability for their partnership’s liabilities. Each partner has fiduciary duties to his other partner(s). Each partner is an agent of the partnership and non-partner employees of the partnership are also agents of the partnership.
How is a legal partnership formed?
Martin v. Peyton (NYCA 1927)
Formation of Partnerships and Partners Compared with Lenders
Martin v. Peyton (NYCA 1927)
Knauth, Nachod & Kuhne (“KN&K), who were a banking and brokerage partnership, made various poor investments that put them at the brink of bankruptcy. They needed money badly. Mr. Hall, a partner of KN&K, went to his friend, Mr. Peyton, a partner of Peyton, Perkins & Freeman (“PP&F”), and arranged to borrow money for KN&K from PP&F. Messrs. Peyton and Freeman were named as “trustees” for this arrangement. The arrangement was documented in 3 written documents: an agreement, an indenture, and an option.
Martin v. Peyton (NYCA 1927)
KN&K presumably failed to pay one of its other creditors, Mr. Martin. Mr. Martin sued Messrs. Peyton and Freeman, the “trustees,” and contended that they were partners with KN&K by virtue of the arrangement and, as such, that they were liable for the debts of KN&K, including that of Mr. Martin. The lower court ruled for the defendants and Mr. Martin appealed to this court.
Martin v. Peyton (NYCA 1927)
What were the particular terms of the agreement between KN&K and PP&F?
Martin v. Peyton (NY Ct. App. 1927) $2.5 MM Loan Peyton, Perkins & Freeman Knauth, Nachod & Kuhne (Bankers & Brokers)
(1) 40% of KN&K profits until loan repaid (2) Right to inspect KN&K books and receive information PP&F thought important (3) “[T]hey (PP&F) may veto any business that they think highly speculative or injurious” (4) An option to buy 50% or less of KN&K later (5) “They may not bind the firm by any action of their own” nor initiate any transaction
Martin v. Peyton (NYCA 1927)
What was the question presented to the court in this case? “If as a whole a contract contemplates an association of two or more persons to carry on as co-owners a business for profit, a partnership there is.”
Martin v. Peyton (NYCA 1927)
• In other words, was the nature of the parties’ relationship a partnership or was it just a loan transaction?
• The question as presented reflects that this is a matter of contract law. Did their contract, taken as a whole, contemplate a partnership or just a loan?
Martin v. Peyton (NYCA 1927)
The parties negotiated their agreement extensively. They had capable, careful lawyers who drafted their written agreement. The contract stated expressly that PP&F would “not be liable for any losses or treated as partners.” If this is a contract law question and the contract says it’s not a partnership, wouldn’t the statement of intent in the agreement be determinative?
Martin v. Peyton (NYCA 1927)
No. “Mere words will not blind us to realities,” the court said. “Statements [of intent] are not conclusive.”
Language in a contract that disclaims a partnership is not dispositive. The intent of the parties is determined from all of the facts and circumstances as well as the contract terms.
Martin v. Peyton (NYCA 1927)
THE FORMULA FOR PARTNERSHIP
PARTNERSHIP =
the association of two or more persons + to carry on as co-owners + a business + for profit
Martin v. Peyton (NYCA 1927)
Elements of the parties’ agreement—are these indicative of satisfaction of the definition of “partnership”? (1) 40% of KN&K profits until loan repaid, secured by unmarketable securities: Court said: “In compensation for the loan” PP&F got profits until loan was repaid. Collateral securities instead of cash did not undermine the nature of the transaction as a loan.
Martin v. Peyton (NYCA 1927)
Elements of the parties’ agreement—are these indicative of satisfaction of the definition of “partnership”?
(2) Right to inspect books and receive information thought important Court said: “[A] proper precaution to safeguard the loan.”
Martin v. Peyton (NYCA 1927)
Elements of the parties’ agreement—are these indicative of satisfaction of the definition of “partnership”? (3) “[T]hey (PP & F) may veto any business that they think highly speculative or injurious”: Court said: A proper precaution to safeguard the loan. Speculative or injurious businesses enhanced risk of repayment. PP&F could not, however, initiate a transaction or bind KN&K as could a partner.
Martin v. Peyton (NYCA 1927)
Elements of the parties’ agreement— are these indicative of satisfaction of the definition of “partnership”? (4) An option to buy 50% or less later: Court said: An “unusual” provision, but, taken alone, not enough to show presence of a partnership.
Martin v. Peyton (NYCA 1927)
Elements of the parties’ agreement—are these indicative of satisfaction of the definition of “partnership”?
(5) “They may not bind the firm by any action of their own” nor initiate any transaction: Court said: PP&F could not initiate a transaction nor bind KNK as could a partner.
Martin v. Peyton (NYCA 1927)
Even though creditors of a partnership may have a right to receive profits of the partnership, have some management rights, have rights to confidential information, and have a right to buy-in to the partnership at a later date, such creditors are not necessarily partners if all of the facts, circumstances, and their written agreement, if any, indicate otherwise.
§ 10-8A-202, Code of Alabama (1975):
Formation of partnership. (a) Except as otherwise provided in subsection (b), the association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership.
NOTE: The same test we saw in Martin v. Peyton.
§ 10-8A-202, Code of Alabama (1975):
PARTNERSHIP =
the association of two or more persons + to carry on as co-owners + a business + for profit
Partnership Agreement
It is logical and notable that partnerships are commonly formed and operated through inadvertence—an intent to create a partnership, a written agreement, or a governmental filing are not conditions precedent to partnership existence—or as a result of oral agreements. It is always preferable to have written partnership agreement when there is an intent to form a partnership. The partners may ex ante determine their rights and obligations for foreseeable circumstances and, perhaps, avoid litigation.
§10-8A-101(6), Code of Alabama (1975):
(6) "Partnership agreement" means the agreement, written or oral, among the partners concerning the partnership, including amendments to the partnership agreement.
§ 10-8A-103, Code of Alabama (1975): Effect of partnership agreement; nonwaivable provisions. (a) Except as provided in subsection (b), relations among the partners and between the partners and the partnership are governed by the partnership agreement. To the extent the partnership agreement does not otherwise provide, this chapter governs relations among the partners and between the partners and the partnership.
§ 10-8A-104, Code of Alabama (1975):
(b) The partnership agreement may not: (1) vary the rights and duties under Section 108A-105 except to eliminate the duty to provide copies of statements to all of the partners; (2) unreasonably restrict the right of access to books and records under Section 10-8A-403(b);
§ 10-8A-104, Code of Alabama (1975):
(3) eliminate the duty of loyalty under Section 10-8A-404(b) or 10-8A-603(b)(3), but: (i) the partnership agreement may identify types or categories of activities that do not violate the duty of loyalty; or (ii) all of the partners or a number or percentage specified in the partnership agreement may authorize or ratify, after full disclosure of all material facts, a specific act or transaction that otherwise would violate the duty of loyalty;
§ 10-8A-104, Code of Alabama (1975):
(4) unreasonably reduce the duty of care under Section 108A-404(c) or 10-8A-603(b)(3); (5) eliminate the obligation of good faith and fair dealing under Section 10-8A-404(d), but the partnership agreement may prescribe the standards by which the performance of the obligation is to be measured, if the standards are not manifestly unreasonable;
§ 10-8A-104, Code of Alabama (1975):
(6) vary the power to dissociate as a partner under Section 10-8A-602(a), except to require the notice under Section 10-8A-601(1) to be in writing; (7) vary the right of a court to expel a partner in the events specified in Section 10-8A-601(5); (8) vary the requirement to wind up the partnership business in cases specified in Section 10-8A-801(4), (5), or (6); or (9) restrict rights of third parties under this chapter.
§ 10-8A-201, Code of Alabama (1975):
Partnership as entity. A partnership is an entity distinct from its partners.
NOTE: Until the adoption of the 1996 Alabama Uniform Partnership Act, Alabama traditionally followed the “aggregate” theory of partnerships to the effect that a partnership is merely an aggregation of its partners and not a separate legal entity. Under the entity concept, partnerships are separate legal entities and may sue and be sued in their own name and partners need not be joined as parties when the partnership is sued (except in limited equitable actions and in venue determinations).
§ 10-8A-202, Code of Alabama (1975):
(a)(3) A person who receives a share of the profits of a business is presumed to be a partner in the business, (with certain exceptions as listed in the statute)
NOTE: In 1927, this same presumption existed in Martin. “If nothing else appears the receipt…of a share of the profits of the business is enough.” But a presumption may be rebutted by evidence to the contrary, as it was in Martin.
Summers v. Dooley (Idaho SC 1971) The Rights of Partners in Management
Summers and Dooley entered a partnership agreement for the operation of a garbage collection business, which they operated together. If one was unable to work, the non-working partner provided a replacement at his own cost.
Summers v. Dooley (Idaho SC 1971)
Dooley became unable to work and he hired a replacement employee. Four years later, Summers approached Dooley about hiring an additional employee, but Dooley refused.
Nevertheless, Summers hired the employee anyway and paid him out of his own pocket.
Summers v. Dooley (Idaho SC 1971)
Dooley objected to the hiring. He claimed additional help was not required and he refused to pay for him out of profits of the partnership. Summers ignored Dooley and continued to operate the business using the 3rd man.
Summers v. Dooley (Idaho SC 1971)
Summers sued Dooley claiming that Summers had personally paid expenses relating to the 3rd man and Summers sought reimbursement out of profits of the partnership.
Summers v. Dooley (Idaho SC 1971)
Summers claimed that the refusal of his partner to consent, coupled with his partner’s retention of profits from the 3rd man’s work, should result in an estoppel of Dooley’s denial of the need for the 3rd man. Summers claimed that Dooley’s conduct ratified Summers’ action of hiring the 3rd man.
Summers v. Dooley (Idaho SC 1971)
Question Presented: Does an equal partner in a 2 man partnership have the authority to hire an employee (or do anything else, for that matter) in disregard of the objection of his partner and then charge his partner with costs resulting from his unilateral decision?
Summers v. Dooley (Idaho SC 1971)
A relevant Idaho statute provided that “[A]ny difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners…” This statute was derived from UPA section 18(8).
Summers v. Dooley (Idaho SC 1971)
Alabama Code section 10-8A-401(j) likewise provides that:
“A difference arising as to a matter in the ordinary course of business of a partnership may be decided by a majority of the partners. An act outside the ordinary course of business of a partnership and an amendment to the partnership agreement may be undertaken only with the consent of all of the partners.”
Summers v. Dooley (Idaho SC 1971)
Was Dooley unclear about his objection to the hiring or that he did not consent to payments out of partnership profits?
Summers v. Dooley (Idaho SC 1971)
No.
He continually objected and did not acquiesce. Therefore, he did not consent. There was no agreement of a majority of partners.
Summers v. Dooley (Idaho SC 1971)
HELD:
Reimbursement of expenses out of partnership profits denied.
Summers v. Dooley (Idaho SC 1971)
Ordinary partnership decisions require a majority decision of partners. In a 2-person partnership, both partners must, obviously, agree. A partner is not entitled to reimbursement of partnership expenses incurred over the other partner’s non-consent.
Well, that’s it for partnerships...
I hope that you enjoyed it. We are done with it. You have already gotten, or you will get, the complete version in the “Agency & Partnership” course.
WE WILL NOW MOVE ON TO “CORPORATIONS.”
END OF 5/23/2007 SLIDES
Daniel B. Graves Graves & Associates LLC May 23, 2007
Class Session Agenda
•Overview of “Corporations” •Why the “Corporations” Course is Probably Important to You •“Corporations” Course Overview—What We Are Planning to Study This Semester (Continued)
Class Session Agenda
Partnerships
How many have already had the Agency and Partnerships course?
•Formation •Partnership Agreements •Authority of Partners •Liability of Partners •Partnership Interests and Property •Fiduciary Duties of Partners •Partnership Dissociation, Dissolution, and Winding Up
INTRODUCTIONS WHO AM I? WHO ARE YOU?
Who’s Teaching this Class?
Dan Graves, Founder, Graves & Associates LLC, Birmingham, Alabama Previously, Partner, Balch & Bingham LLP, Birmingham, Alabama Previously, Associate General Counsel and Assistant Corporate Secretary, Compass Bancshares, Inc., Compass Bank, and their affiliated corporations Previously, Partner/Associate, Miller, Hamilton, Snider & Odom, Mobile, Alabama
Who’s Teaching this Class?
Chairman and Planning Committee Member, ABICLE Southeastern Corporate Law Institute; ABICLE Corporate Governance and Banking Law Planning Committees Former Special Prosecutor for Alabama Securities Commission and Mobile District Attorney University of Alabama, J.D. and B.A. Alabama Law Review, Managing Board and Student Works Editor
Who’s Teaching this Class, Anyway?
Author of corporate/securities law related law review articles and other articles Frequent lecturer/teacher on corporate, securities, and banking law topics
Class Meetings
12 class meetings—11 classes + final exam
Held on each Wednesday evening from 6:30 ‘til 8:40 P.M. Final exam on August 15th
BSL Attendance Policy Reminder
Law students must attend at least 2/3 of all class meetings Absence from more than 4 classes means that you will not have the pleasure of taking the final exam and you will receive no credit for the class
In-Person Class Time
Pursuant to order of the Supreme Court of Alabama, I am required to conduct a minimum time of in-person instruction as a condition to your taking the Alabama State Bar Examination. Please don’t whine to get out early. I have enough stress in my life and I don’t need any more from you. Thank you.
Your Grade
Final Exam 90% Writing Assignment 10% Class Participation + or – one grade level for those who are on the brink. Volunteer... don’t be a
deadbeat... get to know me... it will make a difference.
The Student/Teacher Contract
(or “Here’s the Deal”) “The 4 Ps”
Participation
Students’ learning is facilitated by participation backed by preparation.
The professor learns from students’ participation, questions, and feedback. “There is no such thing as a stupid question.” (I could, however, be proven wrong. Just kidding…sort of.) Be fearless!
Preparation
If you do not read and analyze the cases and the other assigned material, our class discussion will mean little to you. I will expect and assume that you have read the material. I will call on people. I also want volunteers.
If you are unprepared, you also run the risk of being the one who proves me wrong when I said that there is “no such thing as a stupid question.”
Presence
If you are not present for class, you will not learn as well and you cannot add your unique and interesting insights to any discussion we have in class.
If you are late and miss roll call, it is YOUR responsibility to see me after class for notation of your presence. You should not assume that I will remember your late/grand entrance.
Promptness
Students who enter the classroom late generally disrupt the class and distract the other students as well as the (very easily distracted) professor.
Please be on time.
PROFESSOR’S RESPONSIBILITIES
I owe you…
Preparation for class.
I intend to put in the time required to be prepared for class.
I owe you…
A concern for and devotion to your learning.
A willingness to listen to you and try to help you however I can. If you don’t “get it,” raise your hand in class and ask me. If you are lost, you can be pretty sure that you aren’t alone.
I owe you…
To strive to make the course a satisfying development experience that is as interesting and enjoyable as it can be under the circumstances.
I owe you…
Honesty
I will try to do my best up here, but you should not be surprised when it becomes obvious that I don’t know everything. If I do not know an answer to your question, I will say so and I will plan to get back to you.
WHY IS “CORPORATIONS” IMPORTANT TO YOU?
Law School Graduation
“Corporations” is part of the required law school curriculum.
You will not get out of here without it.
State Bar Exams
“Corporations” is tested on the Alabama State Bar Examination as well as other states’ exams
Corporate Law Practice
If you want to practice corporate/business law, you obviously need to know this subject matter.
Plaintiffs’ Law Practice
• Corporate entities have most of the money. Per IRS tax returns, corporations generate about 95% of all business revenue. • Corporate entities are the primary targets of plaintiffs’ litigation (see the first point noted above) • Successful plaintiffs’ litigation requires an understanding of corporate legal structures, duties, capitalization, and other corporate law fundamentals. Good trial lawyers are more than just good actors.
Business
Even if you have no intention of practicing law, an understanding of corporate law will aid you in your business or in your general awareness of business principles. In other words, you might avoid plaintiffs’ lawyers and your Wall Street Journal subscription will be more worthwhile.
Course Overview
Text “Corporations and Other Business Organizations: Cases and Materials” Concise Ninth Edition by Melvin Aron Eisenberg (Who, I would note, still does not publish a teacher’s manual to tell me what to do. Thanks a lot, Melvin!)
Course Overview
Other Materials Statutes, statutes, and more statutes. While they are pretty dull reading, they are the source for most corporate law. (See Course Syllabus and TWEN postings for statutory reading assignments.) Other TWEN postings; relevant periodicals
Course Overview
Partnerships The Corporate Form of Doing Business Corporate Structure (Management, Authority, Formalities, etc.) Stockholder Informational Rights and Proxy Voting Special Close Corporation Problems Alternative Orgs: LPs, LLCs, and LLPs
Course Overview
The Fiduciary Duty of Care The duty of directors to inform themselves and act with requisite care in the discharge of their duties.
Course Overview
The Fiduciary Duty of Loyalty The duty of directors, officers, dominant shareholders, and their affiliates to make full and fair disclosure of conflicts of interest and to act in the best interest of the corporation. Entails disinterestedness, good faith, and fairness
Course Overview
Insider Trading Statutory and Common Law Liabilities
Course Overview
Corporate Combinations and Tender Offers Mergers, P&A Transactions, Stock Purchase Transactions, etc. “Going Private” Transactions Tender Offers
PARTNERSHIPS
A “Quicky Overview”
What would be a pretty good, general description of a partnership?
An unincorporated business that is owned by 2 or more persons who are partners which operates to make money. Each of the partners has unlimited personal liability for their partnership’s liabilities. Each partner has fiduciary duties to his other partner(s). Each partner is an agent of the partnership and non-partner employees of the partnership are also agents of the partnership.
How is a legal partnership formed?
Martin v. Peyton (NYCA 1927)
Formation of Partnerships and Partners Compared with Lenders
Martin v. Peyton (NYCA 1927)
Knauth, Nachod & Kuhne (“KN&K), who were a banking and brokerage partnership, made various poor investments that put them at the brink of bankruptcy. They needed money badly. Mr. Hall, a partner of KN&K, went to his friend, Mr. Peyton, a partner of Peyton, Perkins & Freeman (“PP&F”), and arranged to borrow money for KN&K from PP&F. Messrs. Peyton and Freeman were named as “trustees” for this arrangement. The arrangement was documented in 3 written documents: an agreement, an indenture, and an option.
Martin v. Peyton (NYCA 1927)
KN&K presumably failed to pay one of its other creditors, Mr. Martin. Mr. Martin sued Messrs. Peyton and Freeman, the “trustees,” and contended that they were partners with KN&K by virtue of the arrangement and, as such, that they were liable for the debts of KN&K, including that of Mr. Martin. The lower court ruled for the defendants and Mr. Martin appealed to this court.
Martin v. Peyton (NYCA 1927)
What were the particular terms of the agreement between KN&K and PP&F?
Martin v. Peyton (NY Ct. App. 1927) $2.5 MM Loan Peyton, Perkins & Freeman Knauth, Nachod & Kuhne (Bankers & Brokers)
(1) 40% of KN&K profits until loan repaid (2) Right to inspect KN&K books and receive information PP&F thought important (3) “[T]hey (PP&F) may veto any business that they think highly speculative or injurious” (4) An option to buy 50% or less of KN&K later (5) “They may not bind the firm by any action of their own” nor initiate any transaction
Martin v. Peyton (NYCA 1927)
What was the question presented to the court in this case? “If as a whole a contract contemplates an association of two or more persons to carry on as co-owners a business for profit, a partnership there is.”
Martin v. Peyton (NYCA 1927)
• In other words, was the nature of the parties’ relationship a partnership or was it just a loan transaction?
• The question as presented reflects that this is a matter of contract law. Did their contract, taken as a whole, contemplate a partnership or just a loan?
Martin v. Peyton (NYCA 1927)
The parties negotiated their agreement extensively. They had capable, careful lawyers who drafted their written agreement. The contract stated expressly that PP&F would “not be liable for any losses or treated as partners.” If this is a contract law question and the contract says it’s not a partnership, wouldn’t the statement of intent in the agreement be determinative?
Martin v. Peyton (NYCA 1927)
No. “Mere words will not blind us to realities,” the court said. “Statements [of intent] are not conclusive.”
Language in a contract that disclaims a partnership is not dispositive. The intent of the parties is determined from all of the facts and circumstances as well as the contract terms.
Martin v. Peyton (NYCA 1927)
THE FORMULA FOR PARTNERSHIP
PARTNERSHIP =
the association of two or more persons + to carry on as co-owners + a business + for profit
Martin v. Peyton (NYCA 1927)
Elements of the parties’ agreement—are these indicative of satisfaction of the definition of “partnership”? (1) 40% of KN&K profits until loan repaid, secured by unmarketable securities: Court said: “In compensation for the loan” PP&F got profits until loan was repaid. Collateral securities instead of cash did not undermine the nature of the transaction as a loan.
Martin v. Peyton (NYCA 1927)
Elements of the parties’ agreement—are these indicative of satisfaction of the definition of “partnership”?
(2) Right to inspect books and receive information thought important Court said: “[A] proper precaution to safeguard the loan.”
Martin v. Peyton (NYCA 1927)
Elements of the parties’ agreement—are these indicative of satisfaction of the definition of “partnership”? (3) “[T]hey (PP & F) may veto any business that they think highly speculative or injurious”: Court said: A proper precaution to safeguard the loan. Speculative or injurious businesses enhanced risk of repayment. PP&F could not, however, initiate a transaction or bind KN&K as could a partner.
Martin v. Peyton (NYCA 1927)
Elements of the parties’ agreement— are these indicative of satisfaction of the definition of “partnership”? (4) An option to buy 50% or less later: Court said: An “unusual” provision, but, taken alone, not enough to show presence of a partnership.
Martin v. Peyton (NYCA 1927)
Elements of the parties’ agreement—are these indicative of satisfaction of the definition of “partnership”?
(5) “They may not bind the firm by any action of their own” nor initiate any transaction: Court said: PP&F could not initiate a transaction nor bind KNK as could a partner.
Martin v. Peyton (NYCA 1927)
Even though creditors of a partnership may have a right to receive profits of the partnership, have some management rights, have rights to confidential information, and have a right to buy-in to the partnership at a later date, such creditors are not necessarily partners if all of the facts, circumstances, and their written agreement, if any, indicate otherwise.
§ 10-8A-202, Code of Alabama (1975):
Formation of partnership. (a) Except as otherwise provided in subsection (b), the association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership.
NOTE: The same test we saw in Martin v. Peyton.
§ 10-8A-202, Code of Alabama (1975):
PARTNERSHIP =
the association of two or more persons + to carry on as co-owners + a business + for profit
Partnership Agreement
It is logical and notable that partnerships are commonly formed and operated through inadvertence—an intent to create a partnership, a written agreement, or a governmental filing are not conditions precedent to partnership existence—or as a result of oral agreements. It is always preferable to have written partnership agreement when there is an intent to form a partnership. The partners may ex ante determine their rights and obligations for foreseeable circumstances and, perhaps, avoid litigation.
§10-8A-101(6), Code of Alabama (1975):
(6) "Partnership agreement" means the agreement, written or oral, among the partners concerning the partnership, including amendments to the partnership agreement.
§ 10-8A-103, Code of Alabama (1975): Effect of partnership agreement; nonwaivable provisions. (a) Except as provided in subsection (b), relations among the partners and between the partners and the partnership are governed by the partnership agreement. To the extent the partnership agreement does not otherwise provide, this chapter governs relations among the partners and between the partners and the partnership.
§ 10-8A-104, Code of Alabama (1975):
(b) The partnership agreement may not: (1) vary the rights and duties under Section 108A-105 except to eliminate the duty to provide copies of statements to all of the partners; (2) unreasonably restrict the right of access to books and records under Section 10-8A-403(b);
§ 10-8A-104, Code of Alabama (1975):
(3) eliminate the duty of loyalty under Section 10-8A-404(b) or 10-8A-603(b)(3), but: (i) the partnership agreement may identify types or categories of activities that do not violate the duty of loyalty; or (ii) all of the partners or a number or percentage specified in the partnership agreement may authorize or ratify, after full disclosure of all material facts, a specific act or transaction that otherwise would violate the duty of loyalty;
§ 10-8A-104, Code of Alabama (1975):
(4) unreasonably reduce the duty of care under Section 108A-404(c) or 10-8A-603(b)(3); (5) eliminate the obligation of good faith and fair dealing under Section 10-8A-404(d), but the partnership agreement may prescribe the standards by which the performance of the obligation is to be measured, if the standards are not manifestly unreasonable;
§ 10-8A-104, Code of Alabama (1975):
(6) vary the power to dissociate as a partner under Section 10-8A-602(a), except to require the notice under Section 10-8A-601(1) to be in writing; (7) vary the right of a court to expel a partner in the events specified in Section 10-8A-601(5); (8) vary the requirement to wind up the partnership business in cases specified in Section 10-8A-801(4), (5), or (6); or (9) restrict rights of third parties under this chapter.
§ 10-8A-201, Code of Alabama (1975):
Partnership as entity. A partnership is an entity distinct from its partners.
NOTE: Until the adoption of the 1996 Alabama Uniform Partnership Act, Alabama traditionally followed the “aggregate” theory of partnerships to the effect that a partnership is merely an aggregation of its partners and not a separate legal entity. Under the entity concept, partnerships are separate legal entities and may sue and be sued in their own name and partners need not be joined as parties when the partnership is sued (except in limited equitable actions and in venue determinations).
§ 10-8A-202, Code of Alabama (1975):
(a)(3) A person who receives a share of the profits of a business is presumed to be a partner in the business, (with certain exceptions as listed in the statute)
NOTE: In 1927, this same presumption existed in Martin. “If nothing else appears the receipt…of a share of the profits of the business is enough.” But a presumption may be rebutted by evidence to the contrary, as it was in Martin.
Summers v. Dooley (Idaho SC 1971) The Rights of Partners in Management
Summers and Dooley entered a partnership agreement for the operation of a garbage collection business, which they operated together. If one was unable to work, the non-working partner provided a replacement at his own cost.
Summers v. Dooley (Idaho SC 1971)
Dooley became unable to work and he hired a replacement employee. Four years later, Summers approached Dooley about hiring an additional employee, but Dooley refused.
Nevertheless, Summers hired the employee anyway and paid him out of his own pocket.
Summers v. Dooley (Idaho SC 1971)
Dooley objected to the hiring. He claimed additional help was not required and he refused to pay for him out of profits of the partnership. Summers ignored Dooley and continued to operate the business using the 3rd man.
Summers v. Dooley (Idaho SC 1971)
Summers sued Dooley claiming that Summers had personally paid expenses relating to the 3rd man and Summers sought reimbursement out of profits of the partnership.
Summers v. Dooley (Idaho SC 1971)
Summers claimed that the refusal of his partner to consent, coupled with his partner’s retention of profits from the 3rd man’s work, should result in an estoppel of Dooley’s denial of the need for the 3rd man. Summers claimed that Dooley’s conduct ratified Summers’ action of hiring the 3rd man.
Summers v. Dooley (Idaho SC 1971)
Question Presented: Does an equal partner in a 2 man partnership have the authority to hire an employee (or do anything else, for that matter) in disregard of the objection of his partner and then charge his partner with costs resulting from his unilateral decision?
Summers v. Dooley (Idaho SC 1971)
A relevant Idaho statute provided that “[A]ny difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners…” This statute was derived from UPA section 18(8).
Summers v. Dooley (Idaho SC 1971)
Alabama Code section 10-8A-401(j) likewise provides that:
“A difference arising as to a matter in the ordinary course of business of a partnership may be decided by a majority of the partners. An act outside the ordinary course of business of a partnership and an amendment to the partnership agreement may be undertaken only with the consent of all of the partners.”
Summers v. Dooley (Idaho SC 1971)
Was Dooley unclear about his objection to the hiring or that he did not consent to payments out of partnership profits?
Summers v. Dooley (Idaho SC 1971)
No.
He continually objected and did not acquiesce. Therefore, he did not consent. There was no agreement of a majority of partners.
Summers v. Dooley (Idaho SC 1971)
HELD:
Reimbursement of expenses out of partnership profits denied.
Summers v. Dooley (Idaho SC 1971)
Ordinary partnership decisions require a majority decision of partners. In a 2-person partnership, both partners must, obviously, agree. A partner is not entitled to reimbursement of partnership expenses incurred over the other partner’s non-consent.
Well, that’s it for partnerships...
I hope that you enjoyed it. We are done with it. You have already gotten, or you will get, the complete version in the “Agency & Partnership” course.
WE WILL NOW MOVE ON TO “CORPORATIONS.”
END OF 5/23/2007 SLIDES
