{"id":156,"date":"2014-09-17T00:42:05","date_gmt":"2014-09-17T00:42:05","guid":{"rendered":"https:\/\/courses.candelalearning.com\/buslegalenv\/?post_type=chapter&#038;p=156"},"modified":"2015-04-16T19:57:05","modified_gmt":"2015-04-16T19:57:05","slug":"19-1-operation-relations-among-partners","status":"publish","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/chapter\/19-1-operation-relations-among-partners\/","title":{"raw":"Operation: Relations among Partners","rendered":"Operation: Relations among Partners"},"content":{"raw":"<div class=\"bcc-box bcc-highlight\">\r\n<h3>Learning Objectives<\/h3>\r\nBy the end of this section, you will be able to:\r\n<ul id=\"mayer_1.0-ch52_s02_l01\" class=\"im_orderedlist\">\r\n\t<li>Recognize the duties partners owe each other: duties of service, loyalty, care, obedience, information, and accounting.<\/li>\r\n\t<li>Identify the rights that partners have, including the rights to distributions of money, to management, to choice of copartners, to property of the partnership, to assign partnership interest, and to enforce duties and rights.<\/li>\r\n<\/ul>\r\n<\/div>\r\nMost of the rules discussed in this section apply unless otherwise agreed, and they are really intended for the small firm.<span id=\"mayer_1.0-fn41_001\" class=\"im_footnote\">\u201cThe basic mission of RUPA is to serve the small firm. Large partnerships can fend for themselves by drafting partnership agreements that suit their special needs.\u201d Donald J. Weidner, \u201cRUPA and Fiduciary Duty: The Texture of Relationship,\u201d <em class=\"im_emphasis\">Law and Contemporary Problems<\/em> 58, no. 2 (1995): 81, 83.<\/span> The Uniform Partnership Act (UPA) and the Revised Uniform Partnership Act (RUPA) do not dictate what the relations among partners must be; the acts supply rules in the event that the partners have not done so for themselves. In this area, it is especially important for the partners to elaborate their agreement in writing. If the partners should happen to continue their business beyond the term fixed for it in their agreement, the terms of the agreement continue to apply.\r\n<div id=\"mayer_1.0-ch41_s01_s01\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Duties Partners Owe Each Other<\/h2>\r\nAmong the duties partners owe each other, six may be called out here: (1) the duty to serve, (2) the duty of loyalty, (3) the duty of care, (4) the duty of obedience, (5) the duty to inform copartners, and (6) the duty to account to the partnership. These are all very similar to the duty owed by an agent to the principal, as partnership law is based on agency concepts.<span id=\"mayer_1.0-fn41_002\" class=\"im_footnote\">Revised Uniform Partnership Act, Section 404, Comment 3: \u201cIndeed, the law of partnership reflects the broader law of principal and agent, under which every agent is a fiduciary.\u201d<\/span>\r\n<div id=\"mayer_1.0-ch41_s01_s01_s01\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Duty to Serve<\/h3>\r\nUnless otherwise agreed, expressly or impliedly, a partner is expected to work for the firm. The partnership, after all, is a profit-making co-venture, and it would not do for one to loaf about and still expect to get paid. For example, suppose Joan takes her two-week vacation from the horse-stable partnership she operates with Sarah and Sandra. Then she does not return for four months because she has gone horseback riding in the Southwest. She might end up having to pay if the partnership hired a substitute to do her work.\r\n\r\n<\/div>\r\n<\/div>\r\n<div id=\"mayer_1.0-ch41_s01_s01_s02\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Duty of Loyalty<\/h3>\r\nIn general, this requires partners to put the firm\u2019s interests ahead of their own. Partners are <em class=\"im_emphasis\">fiduciaries<\/em> as to each other and as to the partnership, and as such, they owe a <span class=\"im_margin_term\"><span class=\"im_glossterm\">fiduciary duty<\/span><\/span> to each other and the partnership. Judge Benjamin Cardozo, in an often-quoted phrase, called the fiduciary duty \u201csomething stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.\u201d<span id=\"mayer_1.0-fn41_003\" class=\"im_footnote\"><em class=\"im_emphasis\">Meinhard v. Salmon<\/em>, 164 N.E. 545 (N.Y. 1928).<\/span> Breach of the fiduciary duty gives rise to a claim for compensatory, consequential, and incidental damages; recoupment of compensation; and\u2014rarely\u2014punitive damages. See Section 19.4.1 \"Breach of Partnership Fiduciary Duty\", <em class=\"im_emphasis\">Gilroy v. Conway<\/em>, for an example of breach of fiduciary duty.\r\n<div id=\"mayer_1.0-ch41_s01_s01_s02_s01\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Application of the Fiduciary Standard to Partnership Law<\/h3>\r\nUnder UPA, all partners are fiduciaries of each other\u2014they are all principals and agents of each other\u2014though the word <em>fiduciary <\/em>was not used except in the <em class=\"im_emphasis\">heading<\/em> to Section 21. The section reads, \u201cEvery partner must account to the partnership for any benefit, and hold as trustee for it any profits derived by him without the consent of the other partners from any transaction connected with the formation, conduct, or liquidation of the partnership or from any use by him of its property.\u201d\r\n\r\nSection 404 of RUPA specifically provides that a partner has a fiduciary duty to the partnership and other partners. It imposes the fiduciary standard on the duty of loyalty in three circumstances:\r\n\r\n(1) to account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner in the conduct and winding up of the partnership business or derived from a use by the partner of partnership property, including the appropriation of a partnership opportunity;\r\n\r\n(2) to refrain from dealing with the partnership in the conduct or winding up of the partnership business as or on behalf of a party having an interest adverse to the partnership; and\r\n\r\n(3) to refrain from competing with the partnership in the conduct of the partnership business before the dissolution of the partnership.\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch41_s01_s01_s02_s02\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Limits on the Reach of the Fiduciary Duty<\/h3>\r\nThis sets out a fairly limited scope for application of the fiduciary standard, which is reasonable because partners do not delegate open-ended control to their copartners. Further, there are some specific limits on how far the fiduciary duty reaches (which means parties are held to the lower standard of \u201cgood faith\u201d). Here are two examples. First, RUPA\u2014unlike UPA\u2014does not extend to the <em class=\"im_emphasis\">formation<\/em> of the partnership; Comment 2 to RUPA Section 404 says that would be inappropriate because then the parties are \u201creally dealing at arm\u2019s length.\u201d Second, fiduciary duty doesn\u2019t apply to a dissociated partner (one who leaves the firm\u2014discussed in Section 19 \"Dissociation\") who can immediately begin competing without the others\u2019 consent; and it doesn\u2019t apply if a partner violates the standard \u201cmerely because the partner\u2019s conduct furthers the partner\u2019s own interest.\u201d<span id=\"mayer_1.0-fn41_004\" class=\"im_footnote\">RUPA, Section 503(b)(2); RUPA, Section 404 (e).<\/span> Moreover, the partnership agreement may eliminate the duty of loyalty so long as that is not \u201cmanifestly unreasonable.\u201d<span id=\"mayer_1.0-fn41_005\" class=\"im_footnote\">RUPA, Section 103(2)(c).<\/span>\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch41_s01_s01_s02_s03\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Activities Affected by the Duty of Loyalty<\/h2>\r\nThe duty of loyalty means, again, that partners must put the firm\u2019s interest above their own. Thus it is held that a partner\r\n<ul id=\"mayer_1.0-ch41_s01_s01_s02_s03_l01\" class=\"im_itemizedlist im_editable im_block\">\r\n\t<li>may not compete with the partnership,<\/li>\r\n\t<li>may not make a secret profit while doing partnership business,<\/li>\r\n\t<li>must maintain the confidentiality of partnership information.<\/li>\r\n<\/ul>\r\nThis is certainly not a comprehensive list, and courts will determine on a case-by-case basis whether the duty of loyalty has been breached.\r\n\r\n<\/div>\r\n<\/div>\r\n<div id=\"mayer_1.0-ch41_s01_s01_s03\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Duty of Care<\/h3>\r\nStemming from its roots in agency law, partnership law also imposes a duty of care on partners. Partners are to faithfully serve to the best of their ability. Section 404 of RUPA imposes the fiduciary standard on the duty of care, but rather confusingly: how does the \u201cpunctilio of an honor the most sensitive\u201d\u2014as Judge Cardozo described that standard\u2014apply when under RUPA Section 404(c) the \u201cthe duty of care\u2026is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law\u201d? Recognize that a person can attend to business both loyally and negligently. For example, Alice Able, a partner in a law firm who is not very familiar with the firm\u2019s computerized bookkeeping system, attempts to trace a missing check and in so doing erases a month\u2019s worth of records. She has not breached her duty of care: maybe she was negligent, but not grossly negligent under RUPA Section 404(c). The partnership agreement may reduce the duty of care so long as it is not \u201cunreasonably reduce[d]\u201d; it may increase the standard too.<span id=\"mayer_1.0-fn41_006\" class=\"im_footnote\">RUPA, Section 103(2)(d); RUPA, Section 103.<\/span>\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch41_s01_s01_s04\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Duty of Obedience<\/h3>\r\nThe partnership is a contractual relationship among the partners; they are all agents and principals of each other. Expressly or impliedly that means no partner can disobey the partnership agreement or fail to follow any properly made partnership decision. This includes the duty to act within the authority expressly or impliedly given in the partnership agreement, and a partner is responsible to the other partners for damages or losses arising from unauthorized activities.\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch41_s01_s01_s05\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Duty to Inform Copartners<\/h3>\r\nAs in the agency relationship, a partner is expected to inform copartners of notices and matters coming to her attention that would be of interest to the partnership.\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch41_s01_s01_s06\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Duty to Account<\/h3>\r\nThe partnership\u2014and necessarily the partners\u2014have a duty to allow copartners and their agents access to the partnership\u2019s books and records and to provide \u201cany information concerning the partnership\u2019s business and affairs reasonably required for the proper exercise of the partner\u2019s rights and duties under the partnership agreement [or this Act].\u201d<span id=\"mayer_1.0-fn41_007\" class=\"im_footnote\">UPA, Sections 19 and 20; RUPA, Section 403.<\/span> The fiduciary standard is imposed upon the duty to account for \u201cit any property, profit, or benefit derived by [a] partner,\u201d as noted in RUPA Section 404.<span id=\"mayer_1.0-fn41_008\" class=\"im_footnote\">RUPA, Section 404(1).<\/span>\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch41_s01_s02\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">The Rights That Partners Have in a Partnership<\/h2>\r\nNecessarily, for every duty owed there is a correlative right. So, for example, if a partner has a duty to account, the other partners and the partnership have a right to an accounting. Beyond that, partners have recognized rights affecting the operation of the partnership.\r\n\r\nHere we may call out the following salient rights: (1) to distributions of money, (2) to management, (3) to choose copartners, (4) to property of the partnership, (5) to assign partnership interest, and (6) to enforce duties and rights.\r\n<div id=\"mayer_1.0-ch41_s01_s02_s01\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Rights to Distributions<\/h3>\r\nThe purpose of a partnership is ultimately to distribute \u201cmoney or other property from a partnership to a partner in the partner\u2019s capacity.\u201d<span id=\"mayer_1.0-fn41_009\" class=\"im_footnote\">RUPA, Section 101(3).<\/span> There are, however, various types of money distributions, including profits (and losses), indemnification, capital, and compensation.\r\n<div id=\"mayer_1.0-ch41_s01_s02_s01_s01\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Right to Profits (and Losses)<\/h3>\r\nProfits and losses may be shared according to any formula on which the partners agree. For example, the partnership agreement may provide that two senior partners are entitled to 35 percent each of the profit from the year and the two junior partners are entitled to 15 percent each. The next year the percentages will be adjusted based on such things as number of new clients garnered, number of billable hours, or amount of income generated. Eventually, the senior partners might retire and each be entitled to 2 percent of the firm\u2019s income, and the previous junior partners become senior, with new junior partners admitted.\r\n\r\nIf no provision is stated, then under RUPA Section 401(b), \u201ceach partner is entitled to an equal share of the partnership profits and is chargeable with a share of the partnership losses in proportion to the partner\u2019s share of the profits.\u201d Section 18(a) of the Uniform Partnership Act is to the same effect. The right to share in the profits is the reason people want to \u201cmake partner\u201d: a partner will reap the benefits of other partners\u2019 successes (and pay for their failures too). A person working for the firm who is not a partner is an associate and usually only gets only a salary.\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch41_s01_s02_s01_s02\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Right to Indemnification<\/h3>\r\nA partner who incurs liabilities in the normal course of business or to preserve its business or property is entitled to indemnification (UPA Section 18(b), RUPA Section 401(c)). The liability is a loan owing to the partner by the firm.\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch41_s01_s02_s01_s03\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Right to Return of Capital Contribution<\/h3>\r\nWhen a partner joins a partnership, she is expected to make a capital contribution to the firm; this may be deducted from her share of the distributed profit and banked by the firm in its capital account. The law provides that \u201cthe partnership must reimburse a partner for an advance of funds beyond the amount of the partner\u2019s agreed capital contribution, thereby treating the advance as a loan.\u201d<span id=\"mayer_1.0-fn41_010\" class=\"im_footnote\">UPA, Section 18(c); RUPA, Section 401(d).<\/span> A partner may get a return of capital under UPA after creditors are paid off if the business is wound down and terminated.<span id=\"mayer_1.0-fn41_011\" class=\"im_footnote\">UPA, Section 40(b); RUPA, Section 807(b).<\/span>\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch41_s01_s02_s01_s04\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Right to Compensation<\/h3>\r\nSection 401(d) of RUPA provides that \u201ca partner is not entitled to remuneration for services performed for the partnership, except for reasonable compensation for services rendered in winding up the business of the partnership\u201d; UPA Section 18(f) is to the same effect. A partner gets his money from the firm by sharing the profits, <em class=\"im_emphasis\">not<\/em> by a salary or wages.\r\n<h3>Rights to Management<\/h3>\r\nUnder UPA, all partners are fiduciaries of each other\u2014they are all principals and agents of each other\u2014though the word &lt;em class=\"im_emphasis\"&gt;fiduciary&lt;\/em&gt; was not used except in the &lt;em class=\"im_emphasis\"&gt;heading&lt;\/em&gt; to Section 21. The section reads, \u201cEvery partner must account to the partnership for any benefit, and hold as trustee for it any profits derived by him without the consent of the other partners from any transaction connected with the formation, conduct, or liquidation of the partnership or from any use by him of its property.\u201d\r\n\r\n<\/div>\r\n<\/div>\r\n<div id=\"mayer_1.0-ch41_s01_s02_s03\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Right to Choose Partners<\/h3>\r\nA business partnership is often analogized to a marriage partnership. In both there is a relationship of trust and confidence between (or among) the parties; in both the poor judgment, negligence, or dishonesty of one can create liabilities on the other(s). In a good marriage or good partnership, the partners are friends, whatever else the legal relationship imposes. Thus no one is compelled to accept a partner against his or her will. Section 401(i) of RUPA provides, \u201cA person may become a partner only with the consent of all of the partners.\u201d UPA Section 18(g) is to the same effect; the doctrine is called <span class=\"im_margin_term\"><span class=\"im_glossterm\">delectus personae<\/span><\/span>. The freedom to select new partners, however, is not absolute. In 1984, the Supreme Court held that Title VII of the Civil Rights Act of 1964\u2014which prohibits discrimination in employment based on race, religion, national origin, or sex\u2014applies to partnerships.<span id=\"mayer_1.0-fn41_013\" class=\"im_footnote\"><em class=\"im_emphasis\">Hishon v. King &amp; Spalding<\/em>, 467 U.S. 69 (1984).<\/span>\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch41_s01_s02_s04\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Right to Property of the Partnership<\/h3>\r\nPartners are the owners of the partnership, which might not include any physical property; that is, one partner could contribute the building, furnishings, and equipment and rent those to the partnership (or those could count as her partnership capital contribution and become the partnership\u2019s). But partnership property consists of all property originally advanced or contributed to the partnership or subsequently acquired by purchase or contribution. Unless a contrary intention can be shown, property acquired with partnership funds is partnership property, not an individual partner\u2019s: \u201cProperty acquired by a partnership is property of the partnership and not of the partners individually.\u201d<span id=\"mayer_1.0-fn41_014\" class=\"im_footnote\">RUPA, Section 203; UPA, Sections 8(1) and 25.<\/span>\r\n<div id=\"mayer_1.0-ch41_s01_s02_s04_s01\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Rights in Specific Partnership Property: UPA Approach<\/h3>\r\nSuppose that Able, who contributed the building and grounds on which the partnership business is conducted, suddenly dies. Who is entitled to her share of the specific property, such as inventory, the building, and the money in the cash register\u2014her husband and children, or the other partners, Baker and Carr? Section 25(1) of UPA declares that the partners hold the partnership property as <span class=\"im_margin_term\"><span class=\"im_glossterm\">tenants in partnership<\/span><\/span>. As spelled out in Section 25(2), the specific property interest of a tenant in partnership vests in the surviving partners, not in the heirs. But the heirs are entitled to the deceased partner\u2019s interest in the partnership itself, so that while Baker and Carr may use the partnership property for the benefit of the partnership without consulting Able\u2019s heirs, they must account to her heirs for her proper share of the partnership\u2019s profits.\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch41_s01_s02_s04_s02\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Rights in Specific Property: RUPA Approach<\/h3>\r\nSection 501 of RUPA provides, \u201cA partner is not a co-owner of partnership property and has no interest in partnership property which can be transferred, either voluntarily or involuntarily.\u201d Partnership property is owned by the entity; UPA\u2019s concept of tenants in partnership is abolished in favor of adoption of the entity theory. The result, however, is not different.\r\n\r\n<\/div>\r\n<\/div>\r\n<div id=\"mayer_1.0-ch41_s01_s02_s05\" class=\"im_section\">\r\n<h3 class=\"im_title im_editable im_block\">Right to Assign Partnership Interest<\/h3>\r\nOne of the hallmarks of the capitalistic system is that people should be able to dispose of their property interests more or less as they see fit. Partnership interests may be assigned to some extent.\r\n<div id=\"mayer_1.0-ch41_s01_s02_s05_s01\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Voluntary Assignment<\/h2>\r\nAt common law, assignment of a partner\u2019s interest in the business\u2014for example, as a mortgage in return for a loan\u2014would result in a legal dissolution of the partnership. Thus in the absence of UPA, which changed the law, Baker\u2019s decision to mortgage his interest in the car dealership in return for a $20,000 loan from his bank would mean that the three\u2014Able, Baker, and Carr\u2014were no longer partners. Section 27 of UPA declares that assignment of an interest in the partnership neither dissolves the partnership nor entitles the assignee \u201cto interfere in the management or administration of the partnership business or affairs, or to require any information or account of partnership transactions, or to inspect the partnership books.\u201d The assignment merely entitles the assignee to receive whatever profits the assignor would have received\u2014this is the assignor\u2019s transferable interest.<span id=\"mayer_1.0-fn41_015\" class=\"im_footnote\">UPA, Section 26.<\/span> Under UPA, this interest is assignable.<span id=\"mayer_1.0-fn41_016\" class=\"im_footnote\">UPA, Section 27.<\/span>\r\n\r\nUnder RUPA, the same distinction is made between a partner\u2019s interest in the partnership and a partner\u2019s transferable interest. The Official Comment to Section 101 reads as follows: \u201c\u2018Partnership interest\u2019 or \u2018partner\u2019s interest in the partnership\u2019 is defined to mean all of a partner\u2019s interests in the partnership, including the partner\u2019s transferable interest and all management and other rights. A partner\u2019s \u2018transferable interest\u2019 is a more limited concept and means only his share of the profits and losses and right to receive distributions, that is, the partner\u2019s economic interests.\u201d<span id=\"mayer_1.0-fn41_017\" class=\"im_footnote\">RUPA, Official Comment to Section 101.<\/span>\r\n\r\nThis transferable interest is assignable under RUPA 503 (unless the partners agree to restrict transfers, Section 103(a)). It does not, by itself, cause the dissolution of the partnership; it does not entitle the transferee to access to firm information, to participate in running the firm, or to inspect or copy the books. The transferee is entitled to whatever distributions the transferor partner would have been entitled to, including, upon dissolution of the firm, the net amounts the transferor would have received had there been no assignment.\r\n\r\nRUPA Section 101(b)(3) confers standing on a transferee to seek a judicial dissolution and winding up of the partnership business as provided in Section 801(6), thus continuing the rule of UPA Section 32(2). But under RUPA 601(4)(ii), the other partners may by unanimous vote expel a partner who has made \u201ca transfer of all or substantially all of that partner\u2019s transferable interest in the partnership, other than a transfer for security purposes [as for a loan].\u201d Upon a creditor <em class=\"im_emphasis\">foreclosure<\/em> of the security interest, though, the partner may be expelled.\r\n\r\n<\/div>\r\n<div id=\"mayer_1.0-ch41_s01_s02_s05_s02\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Involuntary Assignment<\/h2>\r\nIt may be a misnomer to describe an involuntary assignment as a \u201cright\u201d; it might better be thought of as a consequence of the right to own property. In any event, if a partner is sued in his personal capacity and a judgment is rendered against him, the question arises: may the judgment creditor seize partnership property? Section 28 of UPA and RUPA Section 504 permit a judgment creditor to obtain a <span class=\"im_margin_term\"><span class=\"im_glossterm\">charging order<\/span><\/span>, which charges the partner\u2019s interest in the partnership with obligation to satisfy the judgment. The court may appoint a receiver to ensure that partnership proceeds are paid to the judgment creditor. But the creditor is not entitled to specific partnership property. The partner may always pay off the debt and redeem his interest in the partnership. If the partner does not pay off the debt, the holder of the charging order may acquire legal ownership of the partner\u2019s interest. That confers upon the judgment creditor an important power: he may, if the partnership is one at will, dissolve the partnership and claim the partner\u2019s share of the assets. For that reason, the copartners might wish to redeem the interest\u2014pay off the creditor\u2014in order to preserve the partnership. As with the voluntary assignment, the assignee of an involuntary assignment does not become a partner. See Figure 19.1 \"Property Rights\".\r\n<div id=\"mayer_1.0-ch41_s01_s02_s05_s02_f01\" class=\"im_figure im_large im_editable im_block\">\r\n\r\n<span class=\"im_title-prefix\">Figure 19.1<\/span> Property Rights\r\n\r\n<a href=\"https:\/\/textimgs.s3.amazonaws.com\/buslegalenv\/section_22\/a610306550939fea3e65acf8f9a8fb68.jpg\" target=\"_blank\"><img src=\"https:\/\/textimgs.s3.amazonaws.com\/buslegalenv\/images\/sm_a610306550939fea3e65acf8f9a8fb68.jpg#fixme\" alt=\"\" \/><\/a>\r\n\r\n<\/div>\r\n<\/div>\r\n<\/div>\r\n<div id=\"mayer_1.0-ch41_s01_s02_s06\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Right to Enforce Partnership Rights<\/h2>\r\nThe rights and duties imposed by partnership law are, of course, valueless unless they can be enforced. Partners and partnerships have mechanisms under the law to enforce them.\r\n<div id=\"mayer_1.0-ch41_s01_s02_s06_s01\" class=\"im_section\">\r\n<h2 class=\"im_title im_editable im_block\">Right to Information and Inspection of Books<\/h2>\r\nWe noted in Section 19.1.1 \"Duties Partners Owe Each Other\" of this chapter that partners have a duty to account; the corollary right is the right to access books and records, which is usually very important in determining partnership rights. Section 403(b) of RUPA provides, \u201cA partnership shall provide partners and their agents and attorneys access to its books and records. It shall provide former partners and their agents and attorneys access to books and records pertaining to the period during which they were partners. The right of access provides the opportunity to inspect and copy books and records during ordinary business hours. A partnership may impose a reasonable charge, covering the costs of labor and material, for copies of documents furnished.\u201d<span id=\"mayer_1.0-fn41_018\" class=\"im_footnote\">RUPA Section 403(b).<\/span>\r\n\r\nSection 19 of UPA is basically in accord. This means that without demand\u2014and for any purpose\u2014the partnership must provide any information concerning its business and affairs reasonably required for the proper exercise of the partner\u2019s rights and duties under the partnership agreement or the act; and on demand, it must provide any other information concerning the partnership\u2019s business and affairs, unless the demand is unreasonable or improper.<span id=\"mayer_1.0-fn41_019\" class=\"im_footnote\">RUPA, Section 403(c)(1); RUPA, Section 403(c)(2).<\/span> Generally, the partnership agreement cannot deny the right to inspection.\r\n\r\nThe duty to account mentioned in Section 19.1.1 \"Duties Partners Owe Each Other\" of this chapter normally means that the partners and the partnership should keep reasonable records so everyone can tell what is going on. A formal accounting under UPA is different.\r\n\r\nUnder UPA Section 22, any partner is entitled to a formal account (or accounting) of the partnership affairs under the following conditions:\r\n<ol id=\"mayer_1.0-ch41_s01_s02_s06_s01_l01\" class=\"im_orderedlist im_editable im_block\">\r\n\t<li>If he is wrongfully excluded from the partnership business or possession of its property by his copartners;<\/li>\r\n\t<li>If the right exists under the terms of any agreement;<\/li>\r\n\t<li>If a partner profits in violation of his fiduciary duty (as per UPA 22); and<\/li>\r\n\t<li>Whenever it is otherwise just and reasonable.<\/li>\r\n<\/ol>\r\nAt common law, partners could not obtain an accounting except in the event of dissolution. But from an early date, equity courts would appoint a referee, auditor, or special master to investigate the books of a business when one of the partners had grounds to complain, and UPA broadened considerably the right to an accounting. The court has plenary power to investigate all facets of the business, evaluate claims, declare legal rights among the parties, and order money judgments against any partner in the wrong.\r\n\r\nUnder RUPA Section 405, this \u201caccounting\u201d business is somewhat modified. Reflecting the entity theory, the <em class=\"im_emphasis\">partnership<\/em> can sue a partner for wrongdoing, which is not allowed under UPA. Moreover, to quote from the Official Comment, RUPA \u201cprovides that, during the term of the partnership, partners may maintain a variety of legal or equitable actions, including an action for an accounting, as well as a final action for an accounting upon dissolution and winding up. It reflects a new policy choice that partners should have access to the courts during the term of the partnership to resolve claims against the partnership and the other partners, leaving broad judicial discretion to fashion appropriate remedies[, and] an accounting is not a prerequisite to the availability of the other remedies a partner may have against the partnership or the other partners.\u201d<span id=\"mayer_1.0-fn41_020\" class=\"im_footnote\">RUPA Official Comment 2, Section 405(b).<\/span>\r\n<div id=\"mayer_1.0-ch41_s01_s02_s06_s01_n01\" class=\"im_key_takeaways im_editable im_block textbox\">\r\n<h3 class=\"im_title\">Key Takeaway<\/h3>\r\nPartners have important duties in a partnership, including (1) the duty to serve\u2014that is, to devote herself to the work of the partnership; (2) the duty of loyalty, which is informed by the fiduciary standard: the obligation to act always in the best interest of the partnership and not in one\u2019s own best interest; (3) the duty of care\u2014that is, to act as a reasonably prudent partner would; (4) the duty of obedience not to breach any aspect of the agreement or act without authority; (5) the duty to inform copartners; and (6) the duty to account to the partnership.\r\n\r\nPartners also have rights. These include the rights (1) to distributions of money, including profits (and losses), indemnification, and return of capital contribution (but not a right to compensation); (2) to management; (3) to choose copartners; (4) to property of the partnership, and no partner has any rights to specific property; (5) to assign (voluntarily or involuntarily) the partnership interest; and (6) to enforce duties and rights by suits in law or equity. (Under RUPA, a formal accounting is not first required.)\r\n\r\n<\/div>\r\n<div class=\"bcc-box bcc-info\">\r\n<h3>Exercises<\/h3>\r\n<section id=\"self-check-questions\">\r\n<ol>\r\n\t<li>At the US Senate website, read about the history of treaties in the United States. What is an \u201cexecutive agreement,\u201d and why has the use of executive agreements grown so fast since World War II?<\/li>\r\n\t<li>Is NAFTA a treaty or an executive agreement? What practical difference does it make if it is one rather than the other?<\/li>\r\n<\/ol>\r\n<\/section><\/div>\r\n<div id=\"mayer_1.0-ch52_s02_s06_n02\" class=\"im_exercises im_editable im_block\"><\/div>\r\n<\/div>\r\n<\/div>\r\n<\/div>","rendered":"<div class=\"bcc-box bcc-highlight\">\n<h3>Learning Objectives<\/h3>\n<p>By the end of this section, you will be able to:<\/p>\n<ul id=\"mayer_1.0-ch52_s02_l01\" class=\"im_orderedlist\">\n<li>Recognize the duties partners owe each other: duties of service, loyalty, care, obedience, information, and accounting.<\/li>\n<li>Identify the rights that partners have, including the rights to distributions of money, to management, to choice of copartners, to property of the partnership, to assign partnership interest, and to enforce duties and rights.<\/li>\n<\/ul>\n<\/div>\n<p>Most of the rules discussed in this section apply unless otherwise agreed, and they are really intended for the small firm.<span id=\"mayer_1.0-fn41_001\" class=\"im_footnote\">\u201cThe basic mission of RUPA is to serve the small firm. Large partnerships can fend for themselves by drafting partnership agreements that suit their special needs.\u201d Donald J. Weidner, \u201cRUPA and Fiduciary Duty: The Texture of Relationship,\u201d <em class=\"im_emphasis\">Law and Contemporary Problems<\/em> 58, no. 2 (1995): 81, 83.<\/span> The Uniform Partnership Act (UPA) and the Revised Uniform Partnership Act (RUPA) do not dictate what the relations among partners must be; the acts supply rules in the event that the partners have not done so for themselves. In this area, it is especially important for the partners to elaborate their agreement in writing. If the partners should happen to continue their business beyond the term fixed for it in their agreement, the terms of the agreement continue to apply.<\/p>\n<div id=\"mayer_1.0-ch41_s01_s01\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Duties Partners Owe Each Other<\/h2>\n<p>Among the duties partners owe each other, six may be called out here: (1) the duty to serve, (2) the duty of loyalty, (3) the duty of care, (4) the duty of obedience, (5) the duty to inform copartners, and (6) the duty to account to the partnership. These are all very similar to the duty owed by an agent to the principal, as partnership law is based on agency concepts.<span id=\"mayer_1.0-fn41_002\" class=\"im_footnote\">Revised Uniform Partnership Act, Section 404, Comment 3: \u201cIndeed, the law of partnership reflects the broader law of principal and agent, under which every agent is a fiduciary.\u201d<\/span><\/p>\n<div id=\"mayer_1.0-ch41_s01_s01_s01\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Duty to Serve<\/h3>\n<p>Unless otherwise agreed, expressly or impliedly, a partner is expected to work for the firm. The partnership, after all, is a profit-making co-venture, and it would not do for one to loaf about and still expect to get paid. For example, suppose Joan takes her two-week vacation from the horse-stable partnership she operates with Sarah and Sandra. Then she does not return for four months because she has gone horseback riding in the Southwest. She might end up having to pay if the partnership hired a substitute to do her work.<\/p>\n<\/div>\n<\/div>\n<div id=\"mayer_1.0-ch41_s01_s01_s02\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Duty of Loyalty<\/h3>\n<p>In general, this requires partners to put the firm\u2019s interests ahead of their own. Partners are <em class=\"im_emphasis\">fiduciaries<\/em> as to each other and as to the partnership, and as such, they owe a <span class=\"im_margin_term\"><span class=\"im_glossterm\">fiduciary duty<\/span><\/span> to each other and the partnership. Judge Benjamin Cardozo, in an often-quoted phrase, called the fiduciary duty \u201csomething stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.\u201d<span id=\"mayer_1.0-fn41_003\" class=\"im_footnote\"><em class=\"im_emphasis\">Meinhard v. Salmon<\/em>, 164 N.E. 545 (N.Y. 1928).<\/span> Breach of the fiduciary duty gives rise to a claim for compensatory, consequential, and incidental damages; recoupment of compensation; and\u2014rarely\u2014punitive damages. See Section 19.4.1 &#8220;Breach of Partnership Fiduciary Duty&#8221;, <em class=\"im_emphasis\">Gilroy v. Conway<\/em>, for an example of breach of fiduciary duty.<\/p>\n<div id=\"mayer_1.0-ch41_s01_s01_s02_s01\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Application of the Fiduciary Standard to Partnership Law<\/h3>\n<p>Under UPA, all partners are fiduciaries of each other\u2014they are all principals and agents of each other\u2014though the word <em>fiduciary <\/em>was not used except in the <em class=\"im_emphasis\">heading<\/em> to Section 21. The section reads, \u201cEvery partner must account to the partnership for any benefit, and hold as trustee for it any profits derived by him without the consent of the other partners from any transaction connected with the formation, conduct, or liquidation of the partnership or from any use by him of its property.\u201d<\/p>\n<p>Section 404 of RUPA specifically provides that a partner has a fiduciary duty to the partnership and other partners. It imposes the fiduciary standard on the duty of loyalty in three circumstances:<\/p>\n<p>(1) to account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner in the conduct and winding up of the partnership business or derived from a use by the partner of partnership property, including the appropriation of a partnership opportunity;<\/p>\n<p>(2) to refrain from dealing with the partnership in the conduct or winding up of the partnership business as or on behalf of a party having an interest adverse to the partnership; and<\/p>\n<p>(3) to refrain from competing with the partnership in the conduct of the partnership business before the dissolution of the partnership.<\/p>\n<\/div>\n<div id=\"mayer_1.0-ch41_s01_s01_s02_s02\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Limits on the Reach of the Fiduciary Duty<\/h3>\n<p>This sets out a fairly limited scope for application of the fiduciary standard, which is reasonable because partners do not delegate open-ended control to their copartners. Further, there are some specific limits on how far the fiduciary duty reaches (which means parties are held to the lower standard of \u201cgood faith\u201d). Here are two examples. First, RUPA\u2014unlike UPA\u2014does not extend to the <em class=\"im_emphasis\">formation<\/em> of the partnership; Comment 2 to RUPA Section 404 says that would be inappropriate because then the parties are \u201creally dealing at arm\u2019s length.\u201d Second, fiduciary duty doesn\u2019t apply to a dissociated partner (one who leaves the firm\u2014discussed in Section 19 &#8220;Dissociation&#8221;) who can immediately begin competing without the others\u2019 consent; and it doesn\u2019t apply if a partner violates the standard \u201cmerely because the partner\u2019s conduct furthers the partner\u2019s own interest.\u201d<span id=\"mayer_1.0-fn41_004\" class=\"im_footnote\">RUPA, Section 503(b)(2); RUPA, Section 404 (e).<\/span> Moreover, the partnership agreement may eliminate the duty of loyalty so long as that is not \u201cmanifestly unreasonable.\u201d<span id=\"mayer_1.0-fn41_005\" class=\"im_footnote\">RUPA, Section 103(2)(c).<\/span><\/p>\n<\/div>\n<div id=\"mayer_1.0-ch41_s01_s01_s02_s03\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Activities Affected by the Duty of Loyalty<\/h2>\n<p>The duty of loyalty means, again, that partners must put the firm\u2019s interest above their own. Thus it is held that a partner<\/p>\n<ul id=\"mayer_1.0-ch41_s01_s01_s02_s03_l01\" class=\"im_itemizedlist im_editable im_block\">\n<li>may not compete with the partnership,<\/li>\n<li>may not make a secret profit while doing partnership business,<\/li>\n<li>must maintain the confidentiality of partnership information.<\/li>\n<\/ul>\n<p>This is certainly not a comprehensive list, and courts will determine on a case-by-case basis whether the duty of loyalty has been breached.<\/p>\n<\/div>\n<\/div>\n<div id=\"mayer_1.0-ch41_s01_s01_s03\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Duty of Care<\/h3>\n<p>Stemming from its roots in agency law, partnership law also imposes a duty of care on partners. Partners are to faithfully serve to the best of their ability. Section 404 of RUPA imposes the fiduciary standard on the duty of care, but rather confusingly: how does the \u201cpunctilio of an honor the most sensitive\u201d\u2014as Judge Cardozo described that standard\u2014apply when under RUPA Section 404(c) the \u201cthe duty of care\u2026is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law\u201d? Recognize that a person can attend to business both loyally and negligently. For example, Alice Able, a partner in a law firm who is not very familiar with the firm\u2019s computerized bookkeeping system, attempts to trace a missing check and in so doing erases a month\u2019s worth of records. She has not breached her duty of care: maybe she was negligent, but not grossly negligent under RUPA Section 404(c). The partnership agreement may reduce the duty of care so long as it is not \u201cunreasonably reduce[d]\u201d; it may increase the standard too.<span id=\"mayer_1.0-fn41_006\" class=\"im_footnote\">RUPA, Section 103(2)(d); RUPA, Section 103.<\/span><\/p>\n<\/div>\n<div id=\"mayer_1.0-ch41_s01_s01_s04\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Duty of Obedience<\/h3>\n<p>The partnership is a contractual relationship among the partners; they are all agents and principals of each other. Expressly or impliedly that means no partner can disobey the partnership agreement or fail to follow any properly made partnership decision. This includes the duty to act within the authority expressly or impliedly given in the partnership agreement, and a partner is responsible to the other partners for damages or losses arising from unauthorized activities.<\/p>\n<\/div>\n<div id=\"mayer_1.0-ch41_s01_s01_s05\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Duty to Inform Copartners<\/h3>\n<p>As in the agency relationship, a partner is expected to inform copartners of notices and matters coming to her attention that would be of interest to the partnership.<\/p>\n<\/div>\n<div id=\"mayer_1.0-ch41_s01_s01_s06\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Duty to Account<\/h3>\n<p>The partnership\u2014and necessarily the partners\u2014have a duty to allow copartners and their agents access to the partnership\u2019s books and records and to provide \u201cany information concerning the partnership\u2019s business and affairs reasonably required for the proper exercise of the partner\u2019s rights and duties under the partnership agreement [or this Act].\u201d<span id=\"mayer_1.0-fn41_007\" class=\"im_footnote\">UPA, Sections 19 and 20; RUPA, Section 403.<\/span> The fiduciary standard is imposed upon the duty to account for \u201cit any property, profit, or benefit derived by [a] partner,\u201d as noted in RUPA Section 404.<span id=\"mayer_1.0-fn41_008\" class=\"im_footnote\">RUPA, Section 404(1).<\/span><\/p>\n<\/div>\n<div id=\"mayer_1.0-ch41_s01_s02\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">The Rights That Partners Have in a Partnership<\/h2>\n<p>Necessarily, for every duty owed there is a correlative right. So, for example, if a partner has a duty to account, the other partners and the partnership have a right to an accounting. Beyond that, partners have recognized rights affecting the operation of the partnership.<\/p>\n<p>Here we may call out the following salient rights: (1) to distributions of money, (2) to management, (3) to choose copartners, (4) to property of the partnership, (5) to assign partnership interest, and (6) to enforce duties and rights.<\/p>\n<div id=\"mayer_1.0-ch41_s01_s02_s01\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Rights to Distributions<\/h3>\n<p>The purpose of a partnership is ultimately to distribute \u201cmoney or other property from a partnership to a partner in the partner\u2019s capacity.\u201d<span id=\"mayer_1.0-fn41_009\" class=\"im_footnote\">RUPA, Section 101(3).<\/span> There are, however, various types of money distributions, including profits (and losses), indemnification, capital, and compensation.<\/p>\n<div id=\"mayer_1.0-ch41_s01_s02_s01_s01\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Right to Profits (and Losses)<\/h3>\n<p>Profits and losses may be shared according to any formula on which the partners agree. For example, the partnership agreement may provide that two senior partners are entitled to 35 percent each of the profit from the year and the two junior partners are entitled to 15 percent each. The next year the percentages will be adjusted based on such things as number of new clients garnered, number of billable hours, or amount of income generated. Eventually, the senior partners might retire and each be entitled to 2 percent of the firm\u2019s income, and the previous junior partners become senior, with new junior partners admitted.<\/p>\n<p>If no provision is stated, then under RUPA Section 401(b), \u201ceach partner is entitled to an equal share of the partnership profits and is chargeable with a share of the partnership losses in proportion to the partner\u2019s share of the profits.\u201d Section 18(a) of the Uniform Partnership Act is to the same effect. The right to share in the profits is the reason people want to \u201cmake partner\u201d: a partner will reap the benefits of other partners\u2019 successes (and pay for their failures too). A person working for the firm who is not a partner is an associate and usually only gets only a salary.<\/p>\n<\/div>\n<div id=\"mayer_1.0-ch41_s01_s02_s01_s02\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Right to Indemnification<\/h3>\n<p>A partner who incurs liabilities in the normal course of business or to preserve its business or property is entitled to indemnification (UPA Section 18(b), RUPA Section 401(c)). The liability is a loan owing to the partner by the firm.<\/p>\n<\/div>\n<div id=\"mayer_1.0-ch41_s01_s02_s01_s03\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Right to Return of Capital Contribution<\/h3>\n<p>When a partner joins a partnership, she is expected to make a capital contribution to the firm; this may be deducted from her share of the distributed profit and banked by the firm in its capital account. The law provides that \u201cthe partnership must reimburse a partner for an advance of funds beyond the amount of the partner\u2019s agreed capital contribution, thereby treating the advance as a loan.\u201d<span id=\"mayer_1.0-fn41_010\" class=\"im_footnote\">UPA, Section 18(c); RUPA, Section 401(d).<\/span> A partner may get a return of capital under UPA after creditors are paid off if the business is wound down and terminated.<span id=\"mayer_1.0-fn41_011\" class=\"im_footnote\">UPA, Section 40(b); RUPA, Section 807(b).<\/span><\/p>\n<\/div>\n<div id=\"mayer_1.0-ch41_s01_s02_s01_s04\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Right to Compensation<\/h3>\n<p>Section 401(d) of RUPA provides that \u201ca partner is not entitled to remuneration for services performed for the partnership, except for reasonable compensation for services rendered in winding up the business of the partnership\u201d; UPA Section 18(f) is to the same effect. A partner gets his money from the firm by sharing the profits, <em class=\"im_emphasis\">not<\/em> by a salary or wages.<\/p>\n<h3>Rights to Management<\/h3>\n<p>Under UPA, all partners are fiduciaries of each other\u2014they are all principals and agents of each other\u2014though the word &lt;em class=&#8221;im_emphasis&#8221;&gt;fiduciary&lt;\/em&gt; was not used except in the &lt;em class=&#8221;im_emphasis&#8221;&gt;heading&lt;\/em&gt; to Section 21. The section reads, \u201cEvery partner must account to the partnership for any benefit, and hold as trustee for it any profits derived by him without the consent of the other partners from any transaction connected with the formation, conduct, or liquidation of the partnership or from any use by him of its property.\u201d<\/p>\n<\/div>\n<\/div>\n<div id=\"mayer_1.0-ch41_s01_s02_s03\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Right to Choose Partners<\/h3>\n<p>A business partnership is often analogized to a marriage partnership. In both there is a relationship of trust and confidence between (or among) the parties; in both the poor judgment, negligence, or dishonesty of one can create liabilities on the other(s). In a good marriage or good partnership, the partners are friends, whatever else the legal relationship imposes. Thus no one is compelled to accept a partner against his or her will. Section 401(i) of RUPA provides, \u201cA person may become a partner only with the consent of all of the partners.\u201d UPA Section 18(g) is to the same effect; the doctrine is called <span class=\"im_margin_term\"><span class=\"im_glossterm\">delectus personae<\/span><\/span>. The freedom to select new partners, however, is not absolute. In 1984, the Supreme Court held that Title VII of the Civil Rights Act of 1964\u2014which prohibits discrimination in employment based on race, religion, national origin, or sex\u2014applies to partnerships.<span id=\"mayer_1.0-fn41_013\" class=\"im_footnote\"><em class=\"im_emphasis\">Hishon v. King &amp; Spalding<\/em>, 467 U.S. 69 (1984).<\/span><\/p>\n<\/div>\n<div id=\"mayer_1.0-ch41_s01_s02_s04\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Right to Property of the Partnership<\/h3>\n<p>Partners are the owners of the partnership, which might not include any physical property; that is, one partner could contribute the building, furnishings, and equipment and rent those to the partnership (or those could count as her partnership capital contribution and become the partnership\u2019s). But partnership property consists of all property originally advanced or contributed to the partnership or subsequently acquired by purchase or contribution. Unless a contrary intention can be shown, property acquired with partnership funds is partnership property, not an individual partner\u2019s: \u201cProperty acquired by a partnership is property of the partnership and not of the partners individually.\u201d<span id=\"mayer_1.0-fn41_014\" class=\"im_footnote\">RUPA, Section 203; UPA, Sections 8(1) and 25.<\/span><\/p>\n<div id=\"mayer_1.0-ch41_s01_s02_s04_s01\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Rights in Specific Partnership Property: UPA Approach<\/h3>\n<p>Suppose that Able, who contributed the building and grounds on which the partnership business is conducted, suddenly dies. Who is entitled to her share of the specific property, such as inventory, the building, and the money in the cash register\u2014her husband and children, or the other partners, Baker and Carr? Section 25(1) of UPA declares that the partners hold the partnership property as <span class=\"im_margin_term\"><span class=\"im_glossterm\">tenants in partnership<\/span><\/span>. As spelled out in Section 25(2), the specific property interest of a tenant in partnership vests in the surviving partners, not in the heirs. But the heirs are entitled to the deceased partner\u2019s interest in the partnership itself, so that while Baker and Carr may use the partnership property for the benefit of the partnership without consulting Able\u2019s heirs, they must account to her heirs for her proper share of the partnership\u2019s profits.<\/p>\n<\/div>\n<div id=\"mayer_1.0-ch41_s01_s02_s04_s02\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Rights in Specific Property: RUPA Approach<\/h3>\n<p>Section 501 of RUPA provides, \u201cA partner is not a co-owner of partnership property and has no interest in partnership property which can be transferred, either voluntarily or involuntarily.\u201d Partnership property is owned by the entity; UPA\u2019s concept of tenants in partnership is abolished in favor of adoption of the entity theory. The result, however, is not different.<\/p>\n<\/div>\n<\/div>\n<div id=\"mayer_1.0-ch41_s01_s02_s05\" class=\"im_section\">\n<h3 class=\"im_title im_editable im_block\">Right to Assign Partnership Interest<\/h3>\n<p>One of the hallmarks of the capitalistic system is that people should be able to dispose of their property interests more or less as they see fit. Partnership interests may be assigned to some extent.<\/p>\n<div id=\"mayer_1.0-ch41_s01_s02_s05_s01\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Voluntary Assignment<\/h2>\n<p>At common law, assignment of a partner\u2019s interest in the business\u2014for example, as a mortgage in return for a loan\u2014would result in a legal dissolution of the partnership. Thus in the absence of UPA, which changed the law, Baker\u2019s decision to mortgage his interest in the car dealership in return for a $20,000 loan from his bank would mean that the three\u2014Able, Baker, and Carr\u2014were no longer partners. Section 27 of UPA declares that assignment of an interest in the partnership neither dissolves the partnership nor entitles the assignee \u201cto interfere in the management or administration of the partnership business or affairs, or to require any information or account of partnership transactions, or to inspect the partnership books.\u201d The assignment merely entitles the assignee to receive whatever profits the assignor would have received\u2014this is the assignor\u2019s transferable interest.<span id=\"mayer_1.0-fn41_015\" class=\"im_footnote\">UPA, Section 26.<\/span> Under UPA, this interest is assignable.<span id=\"mayer_1.0-fn41_016\" class=\"im_footnote\">UPA, Section 27.<\/span><\/p>\n<p>Under RUPA, the same distinction is made between a partner\u2019s interest in the partnership and a partner\u2019s transferable interest. The Official Comment to Section 101 reads as follows: \u201c\u2018Partnership interest\u2019 or \u2018partner\u2019s interest in the partnership\u2019 is defined to mean all of a partner\u2019s interests in the partnership, including the partner\u2019s transferable interest and all management and other rights. A partner\u2019s \u2018transferable interest\u2019 is a more limited concept and means only his share of the profits and losses and right to receive distributions, that is, the partner\u2019s economic interests.\u201d<span id=\"mayer_1.0-fn41_017\" class=\"im_footnote\">RUPA, Official Comment to Section 101.<\/span><\/p>\n<p>This transferable interest is assignable under RUPA 503 (unless the partners agree to restrict transfers, Section 103(a)). It does not, by itself, cause the dissolution of the partnership; it does not entitle the transferee to access to firm information, to participate in running the firm, or to inspect or copy the books. The transferee is entitled to whatever distributions the transferor partner would have been entitled to, including, upon dissolution of the firm, the net amounts the transferor would have received had there been no assignment.<\/p>\n<p>RUPA Section 101(b)(3) confers standing on a transferee to seek a judicial dissolution and winding up of the partnership business as provided in Section 801(6), thus continuing the rule of UPA Section 32(2). But under RUPA 601(4)(ii), the other partners may by unanimous vote expel a partner who has made \u201ca transfer of all or substantially all of that partner\u2019s transferable interest in the partnership, other than a transfer for security purposes [as for a loan].\u201d Upon a creditor <em class=\"im_emphasis\">foreclosure<\/em> of the security interest, though, the partner may be expelled.<\/p>\n<\/div>\n<div id=\"mayer_1.0-ch41_s01_s02_s05_s02\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Involuntary Assignment<\/h2>\n<p>It may be a misnomer to describe an involuntary assignment as a \u201cright\u201d; it might better be thought of as a consequence of the right to own property. In any event, if a partner is sued in his personal capacity and a judgment is rendered against him, the question arises: may the judgment creditor seize partnership property? Section 28 of UPA and RUPA Section 504 permit a judgment creditor to obtain a <span class=\"im_margin_term\"><span class=\"im_glossterm\">charging order<\/span><\/span>, which charges the partner\u2019s interest in the partnership with obligation to satisfy the judgment. The court may appoint a receiver to ensure that partnership proceeds are paid to the judgment creditor. But the creditor is not entitled to specific partnership property. The partner may always pay off the debt and redeem his interest in the partnership. If the partner does not pay off the debt, the holder of the charging order may acquire legal ownership of the partner\u2019s interest. That confers upon the judgment creditor an important power: he may, if the partnership is one at will, dissolve the partnership and claim the partner\u2019s share of the assets. For that reason, the copartners might wish to redeem the interest\u2014pay off the creditor\u2014in order to preserve the partnership. As with the voluntary assignment, the assignee of an involuntary assignment does not become a partner. See Figure 19.1 &#8220;Property Rights&#8221;.<\/p>\n<div id=\"mayer_1.0-ch41_s01_s02_s05_s02_f01\" class=\"im_figure im_large im_editable im_block\">\n<p><span class=\"im_title-prefix\">Figure 19.1<\/span> Property Rights<\/p>\n<p><a href=\"https:\/\/textimgs.s3.amazonaws.com\/buslegalenv\/section_22\/a610306550939fea3e65acf8f9a8fb68.jpg\" target=\"_blank\"><img decoding=\"async\" src=\"https:\/\/textimgs.s3.amazonaws.com\/buslegalenv\/images\/sm_a610306550939fea3e65acf8f9a8fb68.jpg#fixme\" alt=\"\" \/><\/a><\/p>\n<\/div>\n<\/div>\n<\/div>\n<div id=\"mayer_1.0-ch41_s01_s02_s06\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Right to Enforce Partnership Rights<\/h2>\n<p>The rights and duties imposed by partnership law are, of course, valueless unless they can be enforced. Partners and partnerships have mechanisms under the law to enforce them.<\/p>\n<div id=\"mayer_1.0-ch41_s01_s02_s06_s01\" class=\"im_section\">\n<h2 class=\"im_title im_editable im_block\">Right to Information and Inspection of Books<\/h2>\n<p>We noted in Section 19.1.1 &#8220;Duties Partners Owe Each Other&#8221; of this chapter that partners have a duty to account; the corollary right is the right to access books and records, which is usually very important in determining partnership rights. Section 403(b) of RUPA provides, \u201cA partnership shall provide partners and their agents and attorneys access to its books and records. It shall provide former partners and their agents and attorneys access to books and records pertaining to the period during which they were partners. The right of access provides the opportunity to inspect and copy books and records during ordinary business hours. A partnership may impose a reasonable charge, covering the costs of labor and material, for copies of documents furnished.\u201d<span id=\"mayer_1.0-fn41_018\" class=\"im_footnote\">RUPA Section 403(b).<\/span><\/p>\n<p>Section 19 of UPA is basically in accord. This means that without demand\u2014and for any purpose\u2014the partnership must provide any information concerning its business and affairs reasonably required for the proper exercise of the partner\u2019s rights and duties under the partnership agreement or the act; and on demand, it must provide any other information concerning the partnership\u2019s business and affairs, unless the demand is unreasonable or improper.<span id=\"mayer_1.0-fn41_019\" class=\"im_footnote\">RUPA, Section 403(c)(1); RUPA, Section 403(c)(2).<\/span> Generally, the partnership agreement cannot deny the right to inspection.<\/p>\n<p>The duty to account mentioned in Section 19.1.1 &#8220;Duties Partners Owe Each Other&#8221; of this chapter normally means that the partners and the partnership should keep reasonable records so everyone can tell what is going on. A formal accounting under UPA is different.<\/p>\n<p>Under UPA Section 22, any partner is entitled to a formal account (or accounting) of the partnership affairs under the following conditions:<\/p>\n<ol id=\"mayer_1.0-ch41_s01_s02_s06_s01_l01\" class=\"im_orderedlist im_editable im_block\">\n<li>If he is wrongfully excluded from the partnership business or possession of its property by his copartners;<\/li>\n<li>If the right exists under the terms of any agreement;<\/li>\n<li>If a partner profits in violation of his fiduciary duty (as per UPA 22); and<\/li>\n<li>Whenever it is otherwise just and reasonable.<\/li>\n<\/ol>\n<p>At common law, partners could not obtain an accounting except in the event of dissolution. But from an early date, equity courts would appoint a referee, auditor, or special master to investigate the books of a business when one of the partners had grounds to complain, and UPA broadened considerably the right to an accounting. The court has plenary power to investigate all facets of the business, evaluate claims, declare legal rights among the parties, and order money judgments against any partner in the wrong.<\/p>\n<p>Under RUPA Section 405, this \u201caccounting\u201d business is somewhat modified. Reflecting the entity theory, the <em class=\"im_emphasis\">partnership<\/em> can sue a partner for wrongdoing, which is not allowed under UPA. Moreover, to quote from the Official Comment, RUPA \u201cprovides that, during the term of the partnership, partners may maintain a variety of legal or equitable actions, including an action for an accounting, as well as a final action for an accounting upon dissolution and winding up. It reflects a new policy choice that partners should have access to the courts during the term of the partnership to resolve claims against the partnership and the other partners, leaving broad judicial discretion to fashion appropriate remedies[, and] an accounting is not a prerequisite to the availability of the other remedies a partner may have against the partnership or the other partners.\u201d<span id=\"mayer_1.0-fn41_020\" class=\"im_footnote\">RUPA Official Comment 2, Section 405(b).<\/span><\/p>\n<div id=\"mayer_1.0-ch41_s01_s02_s06_s01_n01\" class=\"im_key_takeaways im_editable im_block textbox\">\n<h3 class=\"im_title\">Key Takeaway<\/h3>\n<p>Partners have important duties in a partnership, including (1) the duty to serve\u2014that is, to devote herself to the work of the partnership; (2) the duty of loyalty, which is informed by the fiduciary standard: the obligation to act always in the best interest of the partnership and not in one\u2019s own best interest; (3) the duty of care\u2014that is, to act as a reasonably prudent partner would; (4) the duty of obedience not to breach any aspect of the agreement or act without authority; (5) the duty to inform copartners; and (6) the duty to account to the partnership.<\/p>\n<p>Partners also have rights. These include the rights (1) to distributions of money, including profits (and losses), indemnification, and return of capital contribution (but not a right to compensation); (2) to management; (3) to choose copartners; (4) to property of the partnership, and no partner has any rights to specific property; (5) to assign (voluntarily or involuntarily) the partnership interest; and (6) to enforce duties and rights by suits in law or equity. (Under RUPA, a formal accounting is not first required.)<\/p>\n<\/div>\n<div class=\"bcc-box bcc-info\">\n<h3>Exercises<\/h3>\n<section id=\"self-check-questions\">\n<ol>\n<li>At the US Senate website, read about the history of treaties in the United States. What is an \u201cexecutive agreement,\u201d and why has the use of executive agreements grown so fast since World War II?<\/li>\n<li>Is NAFTA a treaty or an executive agreement? What practical difference does it make if it is one rather than the other?<\/li>\n<\/ol>\n<\/section>\n<\/div>\n<div id=\"mayer_1.0-ch52_s02_s06_n02\" class=\"im_exercises im_editable im_block\"><\/div>\n<\/div>\n<\/div>\n<\/div>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-156\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Business and the Legal Environment. <strong>Authored by<\/strong>: Anonymous. <strong>Provided by<\/strong>: Anonymous. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"http:\/\/2012books.lardbucket.org\/books\/business-and-the-legal-environment\/\">http:\/\/2012books.lardbucket.org\/books\/business-and-the-legal-environment\/<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by-nc-sa\/4.0\/\">CC BY-NC-SA: Attribution-NonCommercial-ShareAlike<\/a><\/em><\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":5,"menu_order":125,"template":"","meta":{"_candela_citation":"[{\"type\":\"cc\",\"description\":\"Business and the Legal Environment\",\"author\":\"Anonymous\",\"organization\":\"Anonymous\",\"url\":\"http:\/\/2012books.lardbucket.org\/books\/business-and-the-legal-environment\/\",\"project\":\"\",\"license\":\"cc-by-nc-sa\",\"license_terms\":\"\"}]","CANDELA_OUTCOMES_GUID":"","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-156","chapter","type-chapter","status-publish","hentry"],"part":765,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/chapters\/156","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/wp\/v2\/users\/5"}],"version-history":[{"count":4,"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/chapters\/156\/revisions"}],"predecessor-version":[{"id":1014,"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/chapters\/156\/revisions\/1014"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/parts\/765"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/chapters\/156\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/wp\/v2\/media?parent=156"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/pressbooks\/v2\/chapter-type?post=156"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/wp\/v2\/contributor?post=156"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/clinton-buslegalenv\/wp-json\/wp\/v2\/license?post=156"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}