Corporations- Assignment 2

p. 79-88; 97-103; 109-116; 123-36

Partnerships
Fenwick v. Unemployment Compensation Commission
Facts: Fenwick hired Arline Chesire as a cashier and receptionist at his beauty shop. After about a year she
requested a raise. The two then entered into an agreement (which they called a partnership) where Chesire
would receive 20% of the net profits at the end of the year, if business warranted it. All aspects of her
employment remained the same.
The UCC disputed the existence of a partnership.
If she was deemed an employee, she would be Fenwicks 8th and deciding employee, and he would
have to make the statutorily required employer payments towards the unemployment compensation
fund.
History: The UCC held that Chesire was simply an employee.
The Supreme Court held that the parties were partners, and gave great weight to the fact that they had
called themselves partners.
Issue: Did a partnership exist?
Holding: No. Case reversed.
Reasoning:
The court noted 8 factors that are taken into consideration when determining the existence of a partnership:
(1) Intent of the parties.
Here, the agreement seemed to be nothing more than one to provide a possible increase in compensation.
(2) The right to share in profits.
Existed here.
(3) The obligation to share in losses.
Entirely absent here.
(4) Ownership and control of the partnership property and business.
Chesire didnt have any control.
(5) Community of power in administration.
Fenwick retained such power.
(6) Language in the agreement.
They did call themselves partners.
(7) The conduct of the parties toward third persons.
They did file partnership tax returns, however, they didnt hold themselves out as partners to anyone
else.
(8) Rights of the parties on dissolution.
Dissolution for Chesire would be the same thing as if she had quit employment.
The Uniform Partnership Act defines a partnership as an association of two or more persons to carry on as co-
owners a business for profit.
Here, the court noted that the element of co-ownership was lacking:
Fenwick contributed all the capital, managed the business and took over all the assets on dissolution.
Ownership was conclusively shown to be in him.
Furthermore, although the Act provides that sharing of profits is prima facie evidence of partnership, no such
inference shall be drawn if such profits were received in payment as wages of an employee.

Martin v. Peyton
Facts:
Halls firm was having some financial trouble. He reached out to some friends Peyton, Perkins, and Freeman
(defendants/respondents here) and they loaned $2,500,000 worth of good securities, so that the firm could use
them as collateral to secure bank advances. There were a few control-related provisions in the agreement e.g.,
trustees kept advised/informed, right to veto any business they find speculative, etc.
P claimed D were partners and, as such, liable for its debts.
D claimed they were creditors, not partners.
Side Note: Martin was the firms creditor.
Issue: Were the investors partners or creditors?
Holding: Creditors. Affirmed.
Reasoning:
Respondents measures taken as precautions to safeguard the loan were ordinary caution and did not imply an
association with the business.
In other words, the creditors rights didnt go so far as to place control of the day-to-day operations in
their hands and make them liable as partners

Fiduciary Obligation of Partners
Meinhard v. Salmon
Facts:
Salmon signed a 20-year lease on hotel property that he wanted to convert to shops and offices. He did so with
the help of his joint adventurer Meinhard. Near the end of the lease, Salmon agreed to a massive
redevelopment project with the lessor, who didnt know of Meinhard. When Meinhard found out about the
agreement, he sued.
History:
A referee awarded Meinhard a 25% interest (based on his half interest in half the property).
The Appellate Division increased it to 50%.
Issue:When a business partner fails to inform his co-partner of a business opportunity that arises as a result of
the partnership, does he breach his fiduciary duty?
Holding:Yes. While it lowered the plaintiffs award to 49%, the court affirmed the decision.
Reasoning:
Joint adventurers, like copartners, owe to one another, while the enterprise continues, the duty of the finest
loyalty.
Here, the trouble about his conduct is that he excluded his coadventurer from any chance to compete,
from any chance to enjoy the opportunity for benefit that had come to him alone by virtue of his agency.
This chance, if nothing more, he was under a duty to concede.
Basically, this case said that partners in a business owe fiduciary duties to one another when a business
opportunity arises during the course of the partnership.


Grabbing and Leaving
Meehan v. Shughnessy
Facts. Plaintiffs, Meehan and Boyle were senior partners at the Defendants firm, Parker Coulter. Meehan and
Boyle had a 10.8% share of the law firm. The firm said: okay now youre leaving, there were procedures for the
removal of clients. The Plaintiffs decided to leave, they gave thirty days notice (instead of the agreed upon three
months but this was waived by a partner in the firm), took other attorneys from the firm with them . They
recruited Meehan, Boyle, Cohen, Schafer, Black, and Fitzgerald to start their own firm. The letters to the clients
was on the Parker Coulter Letterhead. The partnership agreement provided rights for the parties after dissolution
that resolved the allocation of business immediately. Departing attorneys were entitled to receive their share of
their capital contribution and net income currently entitled, as well as a right to a portion of the firms
unfinished business. The main point of contention was the stealing of clients. They took 142 of the 350
contingent fee cases pending at Parker Coulter.
Issue. The issue is whether the conduct of Plaintiffs violated a fiduciary duty owed to the remaining partners of
the firm.
Holding. Lawyers can leave, clients can leave. You should send out a joint letter or an approved letter.
Relationships in the profession is very important. Why burn all these bridges?
The Ps conduct regarding their secret planning for their new law firm was not necessarily unacceptable. Ps
would have to engage in some initial planning for the new firm to ensure that they would have the necessary
resources to start their own firm. Ps conduct went too far concerning the retentions of all their former clients.
Ps left D at a disadvantage when they denied they were leaving and when they secured clients while Ds were
initially trying to plan for Ps departure. P violated the partnership agreement by violating their fiduciary duty,
but they will only held responsible for damages arising from their conduct. Ps are entitled to their share of
capital contribution and compensation.

Partnership Property
Putnam v. Shoaf
Facts:
Putnam was part owner of a business with the Charltons. It was operating at a loss and had a lot of debt, so she
conveyed her interest in the partnership to Shoaf by quit claim deed. It turned out that while Putnam was still a
partner, the old bookkeeper was embezzling money.
Lawsuits were filed and the partnership was awarded around $68,000.
Half of the money went to the Charltons, and the other half is the subject matter of this suit i.e., does it
go to Putnam or Shoaf?
Issue:Does Putnams conveyance of her interest in the partnership preclude her from receiving the money?
Holding:Yes.
Reasoning:When partner gave quitclaim deed conveying her partnership rights, she must have intended to
convey her interest in the partnership, as she had no other interest to convey.
Thus, if the partnership had an unknown asset at the time of the transfer of partnership interest, such as
an untapped oil reservoir, the former partner has no right to it.
Uniform Partnership Act Section 501: Partner not co-owner of partnership property
A partner is not a co-owner of partnership property and has no interest in partnership property which can be
transferred, either voluntarily or involuntarily.
Uniform Partnership Act Section 503: Transfer of partners transferable interest
(b) A transferee of a partners transferable interest in the partnership has a right:
(1) to receive, in accordance with the transfer, distributions to which the transferor would otherwise be entitled;
(2) to receive upon the dissolution and winding up of the partnership business, in accordance with the transfer,
the net amount otherwise distributable to the transferor;

The partnership interest is an undivided interest, like a joint tenancy.
untapped oil reservoir or a legal claim, the former partner has no right to it.
claim against a third party for damages to the partnership.

Rights of Partnership Management
National Biscuit Company v. Stroud
Facts:Stroud and Freeman owned a grocery store. Stroud advised plaintiff that he personally would not be
responsible for any additional bread sold by plaintiff to Strouds Food Center. However, Freeman went ahead
and ordered more bread.
Issue:Whether Freemans actions were binding on the partnership.
Holding:Yes.
Reasoning:
Freeman had equal rights in the management of the business, and by buying bread, acted within the scope of the
partnership.
Every partner is an agent of the partnership, so what either partner does is binding.
Partners are jointly and severally liable for the actions of the partnership.
Rule: As between a partner and a third party, this controls: Each partner has equal rights in the management
and conduct of the partnership business, and each partner is an agent of the partnership, so what either partner
does is binding.

-person partnership.
decisions.

Very important to have a dispute resolution mechanism in the partnership agreement. Options for
resolving disputes include:
Resolution (mediation, negotiation, etc.)
Buy-out (dissociation)
Dissolution (winding up) of the partnership

Summers v. Dooley
Facts:
Summers and Dooley owned a trash collecting business. Dooley became unable to work and hired an employee
to take his place. A few years later, Summers talked to Dooley about hiring a third employee. Even though
Dooley refused, Summers hired him anyway and paid him out of his own pocket.
Summers eventually sued Dooley because he was incurring the expenses on his own and wanted to be
reimbursed.
He argued that Dooley was estopped from denying the need and value of the employee, because he was
reaping the benefits.
History:The trial court granted Summers only partial relief, so he appealed.
Issue:Whether the partnership should bear the cost of Summers objected-to hiring.
Holding:No.
Reasoning:The expense was incurred for Summers individual benefitand not for the benefit of the partnership.
Furthermore, Dooley continually voiced his objection to the hiring.
Rule: As between partners and NO third party, this controls: 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.

Summers, against Dooleys prohibition, hired a third employee and paid him out of partnership funds.
Court ruled that because Dooley made active and repeated objections, the employee should not have been paid out of partnership
funds.
This shows that equal partner cases can go either way. The outcome here was the opposite of National Biscuit.

Day v. Sidley & Austin
Facts:
Day was a partner at Sidley & Austin. He was entitled to a certain percentage of the firms profits, and was also
privileged to vote on certain matters which were specified in the partnership agreement. However, he was never
a member of the executive committee, which managed the firms day-to-day business. The firm eventually
merged with another law firm and then relocated. Day had a problem with that, as well as the fact that he would
no longer be the sole chairman, so he resigned and then sued, arguing:
(1) Misrepresentation
Day relied on a provision that no Sidley partner would be worse off in any way as a result of the
merger.
(2) Breach of fiduciary duty
Day alleges this was breached by beginning negotiations on a merger without consulting the other
partners who were not on the Executive Committee and by not revealing information regarding changes
that would occur as a result of the merger.
Issues:
(1) Were there any misrepresentations?
(2) Was there a breach of fiduciary duty?
Holding:No.
Reasoning:
(1) Day could not have reasonably believed that no changes wouldve been made he read and signed the
Partnership Agreements which gave the Executive Committee the authority to decide policy questions.
Furthermore, nothing in the agreement mentioned anything about the Washington office or his status as
chairman.
(2) Courts have been primarily concerned with partners who make secret profits at the expense of the
partnership.
Here, failure to reveal information regarding changes in the internal structure of the firm does not
produce any profit for the offending partners nor any financial loss for the partnership as a whole.
What this Court perceives from Mr. Days pleadings and affidavits is that he may be suffering from a bruised
ego but that the facts fail to establish a legal cause of action.

In this case, Sidley was merging with another firm. Plaintiff was a partner at Sidley and chairman of the firms DC office.
According to the plaintiff, the firm had decided to appoint a co-chairman of the DC office without telling him. Without knowing this
fact, plaintiff had voted in favor of the merger.
There was no mention of a right to any position within the firm in the Partnership Agreement.
Other partners had no fiduciary obligation to maintain plaintiff in his position as sole chairman of the DC office.
Here, the partnership agreement seemed to work.