VII. March 3, 1992 Draft - Revised Uniform Partnership Act (RUPA)

1. March 17, 1992: Correspondence from Gerald V. Niesar to H. Lane Kneedler. *

The Subcommittee commented that it had serious concerns with thequestion of fiduciary duties of partners in the March 3, 1992 draft inregard to: § 404 - the duty of good faith and fair dealing (they felt this isnot a fiduciary duty and would cause confusion), applying fiduciary dutiesin contract negotiations and the proposed ban against contracting away thefiduciary duties. The Subcommittee proposed alternative language forseveral of Article 4 provisions to achieve those suggested changes.

2. March 17, 1992 - A copy of the proposed Subcommittee revisions § 801, § 901, §902, § 904, § 905 and § 906 and a suggested new § 704 (c).

3. March 17, 1992 - Correspondence from James L. Jerue to H. Lane Kneedler.*

This letter supplemented the October 29, 1990 and July 26, 1991 letters.The Subcommittee proposed a provision based upon the Revised UniformLimited Partnership Act § 901(1) and suggested new subsections be addedto § 104 and believe the relationship between § 307 and § 308 should beclarified with respect to purported partners.

4. April 1, 1992 - Correspondence from Gerald V. Niesar to the Ad HoeSubcommittee Distribution List.

Enclosed were the following commentaries:

a. "What Was Accomplished in Dallas" -- a synopsis of the varioustopics which were discussed during the March 13-14, 1992 RUPASubcommittee Meeting.

b. March 27, 1992: Correspondence from Lauris G. L. Rall to GeraldV. Niesar.

Summary of actions taken by the NCCUSL Drafting Committee atthe March 19-22, 1992 meeting. Specifically, the followingsections were discussed:(1) § 801 - Events of Dissolution.

The NCCUSL Drafting Committee did not favor thedeferral of dissolution for 90 days upon a partnerwithdrawing by death or otherwise wrongfully, and

Comment Letter to the RUPA Drafting Committee.

believed it would be preferable to choose the original UPAapproach or the Ad Hoe Subcommittee approach.

(2) § 404 - Fiduciary Duties.

The Ad Hoc Subcommittee proposed draft to take "the dutyof good faith" out of the "fiduciary duties" section was wellreceived. Subsections relating to § 401's "good faith" werediscussed, and they noted it should also be included into §404.

(3) Article 9 - Mergers and Conversions.

Significant new changes in this provision were made andadopted by the NCCUSL Drafting Committee in Chicago,such as, when a general partnership merged with a limitedor general partnership in a state which adopts this versionof RUPA. Clarification was also made in § 905(c)regarding liabilities of the constituent partnerships in amerger.

(4) Articles 1, 2 and 3.

Discussions on which section the NCCUSL DraftingCommittee adopted and what new sections were proposed.Clarification of certain terms were also made.

(5) Article 4.

A capital account for each partner in § 401 was adopted bythe NCCUSL Drafting Committee, as well as § 403(c),which added a duty of each partner to furnish informationregarding the partnership.

(6) General.

Throughout RUPA including Articles 5, 6 & 7 - technicalchanges were made. Administrative discussions were alsoheld regarding the time frame for the Act's completion.

I .

\ '

FOR DISCUSSION ONLY RECEIVED ~t~R ~

UNIFORM PARTNERSHIP ACT (199_)

NATIONAL CONFERENCE OF COMMISSIONERS

ON UNIFORM STATE LAWS

. March 3, 1992, Draft

UNIFORM PARTNERSHIP ACT (199_)

without Prefatory Note And Comments

The ideas and conclusions herein set forth, including drafts of proposed legislation, have not been passed upon by the National Conference of Commissioners on Uniform state Laws. They do not necessarily reflect the views of the Committee, Reporters or commissioners. Proposed statutory language, if any, may not be used to ascertain .legislative meaning of any promulgated final law.

DRAFTING COMMITTEE TO REVISE UNIFORM PARTNERSHIP ACT

H. LANE KNEEDLER, Office of Attorney General, ' 101 North Eighth Street, Richmond, VA 23219, Chair

GEORGE H. BUXTON, III, P.O. Box 5389, Oak Ridge, TN 37831 ROBERT H. CORNELL, Suite 3700, 525 Market Street, San Francisco,

CA 94105 WILLIAM C. GARDNER, 4366 Argyle Terrace, N.W., Washington,

DC 20011 THOMAS L. JONES, University of Alabama, School of Law,

P.O. Box 5557, University Station, Tuscaloosa, AL 35486 MORRIS W. MACEY, Suite 700, 133 Carnegie Way, N.W., Atlanta,

GA 30303 FRANCIS J. PAVETTI, P.O. Box 829, Court House Square Building,

New London, CT 06320 HAROLD E. READ, JR., 5631 East Desert Vista Trail, Cave Creek,

AZ 85331 HOWARD J. SWIBEL, suite 1200, 120 South Riverside Plaza, Chicago,

IL 60606 M. GAY TAYLOR, Office of Legislative Research, 436 State Capitol,

Salt Lake City, UT 84114 DONALD J. WEIDNER, Florida state University, College of Law, 425

West Jefferson Street, Tallahassee, FL 32306, Reporter JOHN W. LARSON, Florida State Univer$ity, College of Law, 425 West

Jefferson Street, Tallahassee, FL 32306, Assistant Reporter DWIGHT A. HAMILTON, Suite 600, 1600 Broadway, Denver, CO 80202,

President (Member Ex Officio) WILLIAM J. PIERCE, 1505 RoxburY Road, Ann Arbor, MI 48104,

Executive Director K. KING BURNETT, P.O. Box 910, 115 Broad Street, Salisbury,

MD 21803, Chair. Division A (Member Ex Officio)

Review Committee

JOHN FOX ARNOLD, 714 Locust Street, st. Lo~s, MO 63101, Chair L. S. JERRY KURTZ, JR., 1050 Beech Lane, Anchorage, AK 99501 ROGER P. MORGAN, P.O. Box 588, Mystic, CT 06355

Copie~ of this Act and copies of all Uniform and Model Acts and other printed matter issued by the Conference may be obtained from:

NATIONAL CONFERENCE OF COMMISSIONERS ON UNIFORM STATE LAWS

676 North st. Clair Street, Suite 1700 Chicago, Illinois 60611

312/915-0195

REVISED UNIFORM PARTNERSHIP ACT

contents (Text Only)

ARTICLE I. GENERAL PROVISIONS

REV. 03/03/92

Section Paqe 101. Definitions. ...•..•••.•.••.... ... 1 102. Applicability to Limited Partnerships. ... . .. 2 103. Knowledqe and Notice. • • . . • . . . . . • . . . . . . .. 2

. 104. Supplemental Principles of Law •..• )l( . . . . . . . . .. 4 105. Effect of partnership Aqreement; Non~ivable Provisions.. 4

201. 202. 203.

ARTICLE II. NATURE OF PARTNERSHIP

Definition and Existence of Partnership. Partnership Owns Partnership Property. When Property Is Partnership Property.

ARTICLE III. RELATIONS OF PARTNERS TO PERSONS DEALING WITH PARTNERSHIP

6 7 8

301. Partner Agent of Partnership as to Partnership Business. 9 302. Transfer of Partnership Property 4. • • • • • • • • • • • • 10 303. Statement of Partnership Authority. . . . . • • . . . . .. 11 304. Notice of Denial of Status as Partner or Authority. . . . . 15 305. Partnership Liable for Partner's Actionable Conduct. . .. . 16 306. Partner's Liability. ••.•...... ....•.. 16 307. Action Against Partnership and Partners. ....... 16 308. Purported Partner. .•.....•..••.•. ... 18 309. Liability of Incoming Partner. ..•...•. .... 19

401. 402. 403. 404. 405. 406. 407.

501.

502. 503. 504.

ARTICLE IV. RELATIONS OF PARTNERS TO ONE ANOTHER AND TO PARTNERSHIP

Rules Determining Partner's Rights and D~ties .... . . Distributions in Kind. ................. . Partner's Right to Information ... . ........ . Partner's Limited Fiduciary Duties . .......... . Partner's Liability to Partnership. . . .•.... . .. Remedies of Partnership and Partners. . continuation of Partnership Beyond Fixed Term. . •....

ARTICLE V. ASSIGNEES AND CREDITORS OF PARTNER

Partner ' Has No Transferable Interest in Partnership Property. ................ II • • • • • •

Nature of Partner's Transferable Interest in Partnership . . Assignment of Partner's Transferable Interest. . .. . Partner's Transferable Interest SUbject to Charging Order.

i

20 22 22 22 24 24 25

27 27 27 28

ARTICLE VI. PARTNER'S DISSOCIATION

section 601. Events Causing Partner's Dissociation ....•. 602. Partner's Wrongful Dissociation. . ...•.... 603. Effect of Partner's Dissociation ..•.....

701.

702.

703.

704. 705.

801.

802. 803. 804. 805. 806. 807. 808.

901. 902. 903. 904.

ARTICLE VII. PURCHASE OF DISSOCIATED PARTNER'S INTEREST

Purchase of Dissociated Partner's Interest When Business Not Wound Up • • . . . . . • . . • • • . • • .

Dissociated Partner's Power to Bind Partnership When Business Not Wound Up . . . • . • • . • • . . • . .

Dissociated Partner's Liability to Other Persons When Business Not Wound Up . . . • •. •••..••

statement of Dissociation • . . • . • • • . . . . Continued Use of Partnership Name . . . . . . . • •

ARTICLE VIII. WINDING UP PARTNERSHIP BUSINESS

Events Causing Dissolution and Winding Up of Partnership Business. .........q D. . . . . . . . . . .

Dissolution Deferred for Uifletl;'\ Days . . . • • . . Winding Up Partnership Business. ..•... • .•. . Right to Wind Up Partnership Busin~ss. •.. • .•. . Partner's Power to Bind Partnership After Dissolution statement of Dissolution • . • . . • • • • . . . . . . . . Partner's Liability to other Partners After Dissolution Settlement of Accounts Among Partners • • . . . . . . .

ARTICLE IX. CONVERSIONS AND MERGERS

Conversion of Partnership to Limited Partnership • • • • . Conversion of Limited partnership to General Partnership Effect of Conversion; Entity Unchanged ' . . . • . . . . Merger of Partnerships . . • . • • . . . • . .. . . .

ARTICLE X. MISCELLANEOUS PROVISIONS

Page 31 33 34

36

39

40 41 41

42/, 44 46 47 48 48 49 49

51 52 53 5.4

1001. Uniformity of Application and Construction . • . . 58 1002. Short Title . . . . . . . .. ...• ...•..... 58 1003. Severability . . . . . . . . . . . . . . . . 58 1004. When Act Takes Effect. . . . . . . • . • . . . • . • . . . 58 1005. Repeals . . . . . . . . . . . . . . ,. ~ . . . . II • • • • • 58 1006. Application to Existing Relationships . . • . • . . 59

ii

1 2

3

4

5

6 7 8 9

1i) 11

12

13

section 101. section 102. section 103. Section 104. section 105.

UNIFORM PARTNERSHIP ACT (199_>

ARTICLE 1

GENERAL PROVISIONS

Definitions.

TEXT ONLY REV.03/03/92

Applicability to Limited Partnerships. Knowledge and Notice. Supplemental Principles of Law. _~ Effect of Partnership Agreement; NOne) ~aivable Provisions

SECTION 101. DEFINITIONS. In this [Act]:

(1) "Business" includes every trade, occupation, and

14 profession.

15 (2) nDebtor in bankruptcy" means a person who is the

16 subject o'f: t:

(i) an order for rel.ief under)l1 tIe 11 of the

18 united States Code;

19 (ii) a comparable order under a successor statute

20 of general application; or

21 (iii) a comparable order under a state insolvency

22 act.

23 (3) "Distribution" means a transfer of cash or other

24 property from a partnership to a partner in the partner's

25 capacity as a partner.

1

1 (4) "Partnership agreement" means an agreement,

2 written or oral, among the partners concerning the

3 partnership business.

4 (5) "Partnership at will" means a partnership in

5 which the partners have not agreed to remain partners until

6 the expiration or completion of a definite term or

7 undertaking.

8 (6) "Person" means an individual, corporation,

9 business trust, estate, trust, partnership, association,

10 joint venture, government, governmental SUbdivision,

11 agency, or instrumentality, or any other legal or

12 commercial entity.

13 (7) "Property" means al,;L property, real, personal,

14 or mixed, tangible or intangible, or any interest therein.

15 (8) "state" ~eans a state of the United states, the

16 District of Columbia, tpe Commonwealth of Puerto Rico, or

17 any territory or insular possession subject to the

18 jurisdiction of the United states.

19 (9) "Transfer" includes an as!!ignment, conveyance,

20 lease, mortgage, deed, a~d encumb~ance.

21 SECTION 102. APPLICABILITY TO LIMITED PARTNERSHIP.

22 This [Act] governs a limited partnership in a case not

23 provided for in the [state] Limited Partnership Act.

24 SECTION 103. KNOWLEDGE AND NOTI'CE.

25 (a) A person knows a fact if the person has

26 knowledge of it.

2

1

2

~) 4

5

6

(j ,~ 9

10

r1f) \ '-.

,t" 12\ • 'Of ... '1 r . '

or

Q ' , .

, .... ... ". , ~ "1 (, /1 , '- Ck"~/~(;" ~',. r

.• J _,-," '- ' : " , ( " ) ' .1) 1'- I, ".j~..1 ."', -K.. '~./,.,; , A /') : .,~\ '

(b) A person has notice of a fact if the person:

(1) knows of it;

(2) has received a notice 010 lIoLificaLiol'i' of it;

(3) has reason to know it exists from all of the

facts known to that person at the time in question.

(c) A person notifies, or gives a notice~r

pptif;Qaeiemrto, another by taking steps reasonably

requ~red to inform the other person in the ordinary course

of business, whether or not the other person learns of it. o ' 0 °1 '~ f ·:- ,:f

(d) A person rece~ves not~ce &17 5QQ'UH QQ if:l I'-

Do*ificaLiort when it:

~,,4\ . 13 I ,,1"

(1) comes to the person's attention; or ( ,.,/ \l': ' . .. . f .1"14

, () " _. ( .J

(2) is duly delivered at the person's place of

15

16

19

20

21

22

business , or at any other place held out by the person as

the place for receiving communications. D-

(e) Except as provided in subsection (f), notice~ , t-

a J)oti:f;i.sat:ioli received by a partnership becomes effective

for a particular transaction when 1t ; is brought to the

attention of the individual conduoting the transaction and

in any event when it would have been brought to that

individual's attention if the partnership had exercised due

23 diligence. A partnership exercises due diligence if it

24 maintains reasonable routines for communicat i ng signi ficant

25 information to the individual conducting the transaction

26 and there is reasonable compliance with the routines . Due

3

1 diligence does not require an individual acting for the

2 partnership to communicate information unless the

3 communication is part of the individual's regular duties or

4 the individual has reason to know of the transaction and

5 that the transaction would be materially affected by the

6 information.

7 (f) Receipt of notice by a partner of a matter

8 relating to partnership affairs becomes effective

9 immediately as notice to the partnership, except in the

10 case of fraud on the partnership committed by or with the

11 consent of the partner.

12 SECTION 104. SUPPLEMENTAL PRINCIPLES OF LAW.

13 (a) Unless displaced by. particular provisions of

14 this [Act], the principles of law and equity, including the

15 law merchant and the law relative to capacity to contract,

16 principal and agent, estoppel, fraud, misrepresentation,

17 duress, coercion, mistake, ' bankruptcy, and other validating·

18 or invalidating cause, supplement this [Act].

19

20

21

, ~~~ 23

24

(b) If an obligation to pay igterest arises under

this [Act] and the rate is not specified, the rate is that

specified in [applicable statute].

SECTION 105. EFFECT OF PARTNERSHIP AGREEMENT; NO~ WAIVABLE PROVISIONS.

(a) This [Act] governs relations among the partners

25 and between the partners and the partnership except to the

4

1 extent

rct~ the partnership agreement provides otherwise.

y/ The partnership agreement may not: I j ~~

t";/'v-. /1 tY-r (1) unreasonably restrict a partner's r~d#ce'ss /to

/'-

4 books and records under section 403(b);

5 (2) eliminate the duty of good faith and fair

6 dealing under Section 404(b);

7 (3) vary the power to withdraw as' a partner under

8 section 601(1), except to require the notice to be in

9 writing;

10 (4) vary the right to expulsion of a partner by a

11 court in the events specified in section 601(5);

12 (5) vary the requirement to wind up the

13 partnership business in the events specified in sections

14 801(4), (5), or (6); or

15 (6) restrict rights of thir.d parti~s under this

16 [Act] •

5

1

2

3 4 5

6

7

section 201. section 202. section 203.

SECTION 201.

ARTICLE 2

NATURE OF PARTNERSHIP

Definition and Existence of Partnership. Partnership Owns Partnership Property. When Property Is Partnership Property.

DEFINITION AND EXISTENCE OF PARTNERSHIP.

(a) A partnership is an entity resulting from the

8 association of two or more persons to carry on as co-owners

9 a business for profit.

10 (b) An association created pursuant to a statute

11 other than this [Act], the [State] Limited Partnership Act,

12 or a statute of another jurisdiction comparable to this

G) [Act] or the Limited Partnership Act~ not a partnership.

14 (c) Except as provided by section 308, persons who

15 are not partners as to each other are not partners as to

16 other persons.

17 (d) In determining whether a partnership exists, the

18 following rules apply:

19 (1) Joint tenancy, tenadcy;in common, tenancy by

20 the entireties, joint property, common property, or part

21 ownership does not by itself establish a partnership, even

22 if the co-owners share profits made by the use of the

23 property.

24 (2) The sharing of gross returns does not by ,

25 itself establish a partnership, even if the persons sharing

6

1 them have a joint or common right or interest in property

2 from which the returns are derived.

3 (e) The receipt by a person of a share of the

4 profits of a business is prima facie evidence that the

5 person is a partner in the business, but that inference may

6 not be drawn if the profits were received in payment:

7 (1) of a debt by installments or otherwise;

8 (2) for services as an independent contractor, or

9 of wages or other compensation to an employee;

(3) of rent; 10

11 (4) of an annuity or other retirement or health

12 benefit to a beneficiary, representative, or designee of a

13 deceased or retired partner;

14 (5) of interest or other charge on a loan, even

15 if the amount of payment varies with the profits of the

16 business, including a direct or indirect present or future

17 ownership interest in the collateral, or rights to income,

18 proceeds, or increase in value derived from the collateral;

19 or

20 (6) of consideration for the sale of the goodwill

21 of a business or other property by installments or

22 otherwise.

23 SECTION 202. PARTNERSHIP OWNS PARTNERSHIP PROPERTY.

24 Property transferred to or otherwise acquired by a

25 partnership becomes property of the partnership and not of

26 the partners individually.

7

1 SECTION 203. WHEN PROPERTY IS PARTNERSHIP PROPERTY.

2 (a) Property is partnership property when acquired

3 (i) in the partnership name or (ii) in the name of one or

4 more pa·rtners with an indication in the instrument

5 transferring title to the property of the persons' capacity

6 as partners or of the existence of a partnership, if the

7 name of the partnership is not mentioned.

8 (b) Property is acquired in the partnership name by

a transfer e£ QQRve!Janccr%' (i) the partnership in its name

or (ii) g-;ne or more partners in their capacity as

partners ifi ~A8 ,a"Re~8h~if the name of the partnership

12 is indicated in the instrument transferring title to the

13 property.

14 (c) Property is presumed to be partnership property

15 if purchased with partnership funds, even if not acquired

16 in the partnership name or in the name of one or more

17 partners with an indication in the instrument transferring

18 title to the property of the persons' capacity as partners ... .

19 or of the existence of a partnership~

20 (d) Property acquired in the name of one or more of

~ the partners~without an indication in the instrument

22 transferring title to the property of the persons' capacity

23 as partners or of the existence of a partnership and

~ without use of partnership fund~is presumed to be the

eJ separate property of that partner~even if used for

26 partnership purposes.

8

1

2

3

4 5 6 7 8 9

10 11 12 13 14 15

16

section

section section section

Section

section section section Section

301.

302. 303. 304.

305.

306. 307. 308. 309.

ARTICLE 3

RELATIONS OF PARTNERS TO PERSONS

DEALING WITH PARTNERSHIP

Partner Agent of Partnership as to Partnership Business. Transfer of partnership Property. Statement of Partnership Authority. Notice of Denial of Status as Partner or Authority. Partnership Liable for Partner's Actionable Conduct. Partner's Liability. Action Against Partnership and Partners. Purported Partner. Liability of Incoming Partner.

SECTION 301. PARTNER AGENT OF PARTNERSHIP AS TO

17 PARTNERSHIP BUSINESS. Subject to section 303:

18 (1) Each partner is an agent of the partnership for

19 the purpose of its business, and the act of each partner,

20 including the execution of an instrument in the partnership

.21 name, for apparently carrying on in the usual way the

22 ' partnership business or business of the kind carried on by

23 the partnership binds the partnership, unless the partner ... . .., 24 has no authority to act for the partnership in the

25 particular matter and the person with whom the partner is

26 dealing knows that the partner lacks authority.

27 (2) An act of a partner which is not apparently for

28 carrying on in the usual way the partnership business or

29 business of the kind carried on by the partnership does not

9

1 bind the partnership unless authorized by the other

2 partners.

3

4

5

6

8

9

10

11

13

14

15

16

17

18

20

21

22

23

24

25

26

(3) An act of a partner in contravention of a

restriction on authority does not bind the partnership to

persons knowing of the restriction.

TRANSFER OF PARTNERSHIP PROPERTY. SECTION 302. ~(P.j)

Except as limited by a statement of authority (a) I"-

pursuant to section 303:

(1) Title to partnership property held in the

partnership name may be transferred by an instrument of

transfer executed by any partner in the partnership name. -t' h~~

(2) Title to partnership property whieft is held

in the name of one or more partners with an indication in

the instrument transferring title to the property to them

of their capacity as partners or of the existence ,of a

partnership, if the name of the partnership is not

mentioned, may be transferred by an instrument of transfer

executed by the persons in whose name title is held. ... -t~~~~~

(3) Property transferred ul'rder 9lt1sse~~ieh (1) er A

~ may be recovered by the partnership if it proves that

the act of the person executing the instrument of transfer

did not bind the partnership under Section 301, unless the

property had been transferred by the transferee or a person

claiming through the transferee to a holder for value

without notice that the person executing the instrument of

transfer lacked authority.

10

2

3

4

10

-I ;"c. t ··· (b) Title to partnership property \Taiga is held in

the name of one or more persons other than the partnership,

without an indication in the instrument transferring title

to the property of the persons' capacity as partners or of ~ ---,

the existence of a partnership, may be transferred by the \\

persons in whose name title is held to a transferee~ho J . " gives value without notice that it is partnership proper~ -:::----:----:--;--::-:-:--.--:-.--:---:------_.- --- - - _. '.

~free of any claims of the partnership or the part~~~~

SECTION 303. STATEMENT OF PARTNERSHIP AUTHORITY.

Ca) A partnership may execute and file in the office

11 of [the Secretary of State] a statement of partnership

12 authority.

13 (b) A statement of partnership authority:

14 (1) must list the name of the partnership and the

15 mailing address of an office of the partnership in this

16 State, if there is one, otherwise the principal executive

17 office of the partnership;

18 (2) must list the names and mailing addresses of

19 all of the partners or of an agent~a~ointed and maintained

20 by the partnership;

21 (3) must be signed and acknowledged by all of the

22 partners, if there are 10 or fewer partners, and by at

23 least 10 partners, if there are more than 10 partners;

24 «3) must be signed and acknowledged by at least

25 two partners;)

11

1 (4) must specify the partners required to sign a

2 transfer of real property held in the name of the

3 partnership; and

4 (5) may contain any other matters the partnership

5 chooses, including ~he authority, or limitations upon the

6 authority, of some or all of the partn~rs to enter into

7 . other transactions on behal f of the partnership.

8 (c) If a statement of partnership authority lists an

9 agent, the agent shall maintain a list of all of the

10 partners and make it available to any ·other person on

11 request for good cause shown.

12

13

14

15

16

17

18

19

20

21

22

23

(d) An amendment to a statement of partnership

authority must meet the requirsments for execution of an

original statement unless otherwise provided in the

statement.' A notice o~ denial under Seqtion 304 is not an

amendment under this subsection.

( e) Even if a filed statement of partnership

authority or an amendment thereto does not conform to

all of the requirements of subsecti on; (b) Fnd ( C5~t operates with respect to other pe~sons as p r ovided i n

subsections (h) and (i) if it is

the number of partners specified in sUbsection (b) (3).

(f) Partners filing a statement of partnership

24 authority, or an amendment thereto, shall promptly send

25 copies of the statement or amendment to all of the partners

26 or other persons named as partners. Failure to send a copy

12

1 under this subsection does not affect the validity of the

2 statement or amendment.

3 (g) A person may sign and acknowledge a statement of

4 partnership authority, or an amendment thereto, by an

5 attorney in fact.

6 (h) A filed statement of partnership authority

7 supplements the authority of a partner under Section 301 to

8 enter into transactions on behalf of the partnership as

9 follows:

10 (1) Except as provided in paragraph (2), a grant

11 of authority to a partner contained in a statement of

12 partnership authority is conclusive, in favor of a person

13 who gives value without knowledge to the contrary, that a

14 partner stated to be authorized to transfer partnership

15 property or enter into other transactions on behalf of the

16 partnership is authorized.

17 (2) A grant of authority to a partner contained

18 in a statement of partnership authority to transfer real ... .

19 property is conclusive in favor of a~erson who gives value

20 without knowledge of an actual lack of authority only if

21 the title to the real property is recorded in the

22 partnership name and the statement, or a certified copy

23 thereof, is recorded in the place for recording transfers

24 of that property.

25 (i) A filed statement of partnership authority

26 limits the authority of a partner under Section 301 to

13

1 enter into transactions on behalf of the partnership as

2 follows:

3 (1) Except as provided in paragraph (2), a

4 limitation on the authority of a partner contained in the

5 statement is effective against a person not a partner only

6 if the person knows of the limitation.

7 (2) A limitation on the authority of a partner to

8 transfer real property contained in the statement is

9 effective against a person not a partner if title to the

10 property is recorded in the partnership name and the

11 statement, or a certified copy thereof, is recorded in the

12 place for recording transfers of that property.

13 (j) A partnership may record, in the place for

14 recording transfers of real property, a certified copy of

15 . the statement of partnership authority, or any amendment

16 thereto or notice of denial thereof, that has been filed in

17 the office of [the Secretary of State].

18 (k) A partnership may cancel a statement of ... .

19 partnership authority by filing an amendment that

20 identifies the statement and states that it is canceled. A

21 statement of partnership authority that is not otherwise

22 canceled is canceled by operation of law upon the

23 expiration of five years after the day on which it is filed

with [the Secretary of State].. . . >'~./'¢ ': ~(r/r,·/~~ftJ OVvtd.., hR..,(()/f/( f- ',..;lfl(.'1('f· \ ~· ( ,! <.. f(j'o.~ (rl'" l ,· .... ~. 11!1'>"<I ·: ·f, "'~ }.J

(1) The [Secretary of State] may collect a tee for A

24

/\ ...

26 the filing of a statement of partnership authority, or any

14

o .~

1(\ amendment thereto~ __ i_.~m~~~i~[1t~hlEercoiffffI1CCee~r~sr1r~e~s~p~o~nmsSiib6ilee' for]

3 SECTION 304. NOTICE OF DENIAL OF STATUS AS PARTNER OR

4 AUTHORITY.

5 (a) A partner or other person named as a partner in

6 a statement of partnership authority, or the person's legal

7 representative, may sign, acknowledge, and file in the

8 office of [the Secretary of State] a notice of denial

9 stating the name of the partnership and the fact that is

10 being denied.

11 (b) A person named as a partner in a statement of

12 partnership authority may deny present or previous

13 membership in the partnership by filing a notice of denial

14 as provided in subsection (a). However, the filing of a

15 notice of denial does not relieve a departin9 partner of

16 compliance with Articles 6, 7, and 8.

17 (c) If a partner, or a person named as a partne~ in

18 a filed statement of partnership authority, denies a

19 supplemental grant of authority contained in the statement,

20 the statement with respect to the ,grant of authority ceases

21 to be effective against a person not a partner. But if the

22 statement is recorded in the place for recording transfers

23 of real p'roperty, the denial is not effective unless it, or

24 a certified copy, is also recorded in the same place.

25 (d) A present or former partner filing a notice of

26 denial shall promptly send a copy of the notice to the

15

1

2

4

5

6

other persons named as partners in the statement of

partnership authority and to any agent named in the . 7P !/.fl.':' ,<.,..,-t 1.,

statement. Failure to send a copy ahele!: this subsection I'\..

does not affect the validity of the denial with respect to

other persons.

SECTION 305. PARTNERSHIP LIABLE FOR PARTNER'S

7 ACTIONABLE CONDUCT.

8 (a) A partnership is liable for loss or injury

~ caused to a perso~or for a penalty incurred as a result of

~ actionable conduc!)by an act or omission of a partner

11 acting in the ordinary course of business of the

12 partnership or with the actual or apparent authority of the

13 partne~ship.

14 (b) If, in the course of its business, a partnership

15 receives money or property of· a person not a partner which

16 is misapplied by a partner while it is in the custody of

17 the partnership, the partnership is liable for the loss.

18 SECTION 306. PARTNER'S LIABILITY. All partners are

19 ."... , .

liable jointly and severally for all~bl~gat~ons of the

20 partnership as provided in section 307 unless otherwise

21 agreed by the claimant or provided by law.

22 SECTION 307. ACTION AGAINST PARTNERSHIP AND PARTNERS.

23 (a) A partnership may sue and be sued in the

24 partnership name.

16

1 (b) An action may be brought against the partnership

2 and any or all of the partners in the same action or in

3 separate actions.

4 (c) A judgment against a partnership is not by

5 itself a judgment against a partner. A judgment against a

6 partnership may not be satisfied from a partner's assets

7 unless there is a judgment against the partner.

8 (d) A judgment creditor of a partner may not levy

9 execution against the assets of the partner to satisfy a

10 judgment based on a claim that could have been successfully

11 asserted against the partnership unless:

12 (1) a judgment based on the same claim has been

13 obtained against the partners~ip and a writ of execution

14 against the partnership on the judgment against it has been

15 returned unsatisfied in whole or in part:

~ (2) an involuntary case under)ritle 11 of the

17 United states Code has been commenced against the -

18 partnership and has not been dismissed within 60 days after

19 commencement, or the partnership has'commenced a voluntary

~ case under)ritle 11 of the United .st:tes Code and the case

21 has not been dismissed;

22

23

@ 25

26

(3) the partner has agreed that the creditor need

not exhaust partnership assets; CL.

(4) ~ court grants permission to the judgment

creditor to levy execution against the assets of a partner

based on a finding that partnership assets subject to

17

1 execution within this state are clearly insufficient to

2 satisfy the judgment, that exhaustion of partnership assets

3 is excessively burdensome, or that the grant of permission

4 is an appropriate exercise of the court's inherent

5 equitable powers; or

6 (5) liability is imposed on the partner by law or

7 contract independent of the existence of the partnership.

8 SECTION 308. PURPORTED PARTNER.

9 (a) If a person, by words spoken or written or by

10 conduct, purports to be a partner, or consents to being

11 represented by another as a partner, in a partnership or

12 with one or more persons not partners, the purported

13 partner is liable to a person to whom the representation is

14 made, who, relying on the representation, gives credit to

' 15 the actual or purported pa~nership'. If the representation,

16 either by the purported partner or by a person with the

17 purported partner's consent, is made in a public manner,

18 the purported partner is liable to a person who gives

19 credit in reliance upon the purported partnership even if ~

20 the purported partner is not aware of being held out as a

21 partner to the claimant. If partnership liability results,

22 the purported partner is liable as if the purported partner

23 were a partner. If no partnership liability results, the

24 purported partner is liable jointly and severally with any

25 other person consenting to the representations.

18

1 (b) If a person is represented to be a partner in an

2 existing partnership, or with one or more persons not

3 partners, the purported partner is an agent of persons

4 consenting to the representation to bind them to the same

5 extent and in the same manner as if the purported partner

6 were a partner, with respect to persons who give credit in

7 reliance upon the representation. If all of the members of

8 the existing partnership consent to the representation, a

9 partnership act or obligation results. If fewer than all

10 of the members of the existing partnership consent to the

11 representation, the person acting and the persons

12 consenting to the representation are jointly and severally

13 liable.

14 (c) A person is not a partner in a partnership

15 solely because the person is named by another in a

16 statement of partnership authority.

17 (d) A person does not continue to be a partner

18 solely because of a failure to amend a statement of

19 partnership authority to reflect t'he';'person's dissociation

20 from the partnership.

21 SECTION 309. LIABILITY OF INCOMING PARTNER. A

22 person admitted as a partner into a partnership is liable

23 for all obligations of the partnership arising before the

24 person's admission as if the person had been a partner when

25 the obligations were incurred, but the liability maybe

26 satisfied only out of partnership property.

19

1

2

3

4 5 6 7 8 9

10 11 12

13

section

section Section section Section section section

ARTICLE 4

RELATIONS OF PARTNERS TO ONE ANOTHER

401-

402. 403. 404. 405. 406. 407.

AND TO PARTNERSHIP

Rules Determining Partner's Rights and Duties. Distributions in Kind. Partner's Right to Information. Partner's Limited Fiduciary Duties. Partner's Liability to Partnership. Remedies of Partnership and Partners. continuation of Partnership Beyond Definite Term or Particular Undertaking.

SECTION 401. RULES DETERMINING PARTNER'S RIGHTS AND

14 DUTIES.

15 (a) A partnership shall credit each partner with an

16 amount equal to the cash plus xhe value of any other

17 property the partner contributes to the partnership.

18

19

20

21 J

22

23

(b) A partnership shall credit each partner with an

equal share of the profits of the partnership and charge

each partner with a share of the losses, whether capital or

operating, of the partnership in proportion to the

partner's share of the profits.

(c) A partnership shall indemnify each partner for

24 payments reasonably made and personal liabilities

25 reasonably incurred by the partner in the ordinary and

26 proper conduct of -the business of the partnership or for

27 the . preservation of its business or property.

20

1 (d) A partnership shall repay a partner who, in aid

2 of the partnership, makes any payment or advance beyond the

3 amount of capital the partner agreed to contribute.

4 (e) A payment made by a partner which gives rise to

5 a partnership obligation under subsection (c) or Cd) is

6 treated as a loan to the partnership. Interest accrues

7 from the date of the payment or advance.

8 (f) Each partner has equal rights in the management

9 and conduct of the business of the partnership.

10 (g) A partner may use or possess partnership

11 property only on behalf of the partnership.

12 (h) A partner is not entitled to remuneration for

13 services performed for the partnership, except reasonable

14 compensation for services rendered in winding up the

15 business of the partnership.

16 (i) A person may become a partner only with the

17 consent of all of the partners.

18 (j) A difference arising as to a matter in the

19 ordinary course of business of th~p~rtnership may be

20 decided by a majority of the partners. An act outside the

21 ordinary course of business of the partnership and an

22 amendment to the partnership agreement may be undertaken

23 only with the consent of all of the partners.

24 (k) A partner's right to a liquidating distribution

25 is determined by the partner's capital account. A

26 partner's capital account is increased by the partner's

21

1 contributions and share of the profits and decreased by the

2 partner's distributions and share of the losses. ,

\ ~ ; (1) This section does not limit the obligations of a

-4 partnership to other persons under section 301.

5 SECTION 402. DISTRIBUTIONS IN KIND. A partner has

6 no right to receive a distribution in kind and may not be

7 required to accept a distribution in kind.

8 SECTION 403. PARTNER'S RIGHT TO INFORMATION.

9 (a) A partnership shall keep its books and records,

10 if any, at its principal place of business.

11 (b) A partnership shall provide partners and their

12 agents and attorneys access to its books and records. It

13 shall provide former partners access to books and records

14 pertaining to the period they were partners. A partnership

15 shall provide the opportunity to inspect and copy books and

16 records during ordinary business hours. A partnership may-

17 impose a reasonable charge, covering the costs of labor and

18 material, for copies of documents furnished.

19 (c) A partnership, on deman~,~shall furnish to a

20 partner, and the legal representative of a deceased partner

21 or partner under legal disability, to the extent just and

22 reasonable, complete and accurate information concerning

23 the partnership.

24 SECTION 404. PARTNER'S LIMITED FIDUCIARY DUTIES.

25 (a) The only fiduciary duties a partner owes to the

26 partnership and the other partners are the duty of good

22

1 faith and fair dealing, the duty of loyalty, and the duty

2 of care, as set forth in this section.

3 (b) A partner owes a duty of good faith and fair

4 dealing to the partnership and the other partners

5 in all matters related to the formation, conduct, buyout,

6 and liquidation of the partnership. The duty may not be

7 eliminated by agreement, but the parties by agreement may

8 identify specific conduct that does not violate the duty if

9 the 90nduct is not manifestly unreasonable.

10 (c) A partner's duty of loyalty to the partnership

11 and the other partners is limited to the following:

12 (1) to account to the partnership and hold as

13 trustee for it any property, profit, or benefit derived

14 by the partner, without the informed consent of the other

15 partners, from a transaction connected with the formation,

16 conduct, or liquidation of the partnership or from a use by

17 the partner of partnership property;

18 (2) to refrain from dealing with the partnership

19 as, or on behalf of, an adverse pa~~ without the informed

20 consent of the other partners; and

21 (3) to refrain from competing with the

22 partnership without the informed consent of the other

23 partners.

24 (d) A partner does not violate either the duty of

25 good faith and fair dealing or the duty of loyalty merely

26 because the partner's conduct furthers the partner's

23

1 individual interest. A partner may purchase, for the

2 partner's own account or otherwise, the assets of the

3 partnership in a foreclosure sale or upon liquidation of

4 the partnership.

5 (e) A partner owes a duty of care to the partnership

6 and the other partners to act in the conduct of the

7 business of the partnership in a manner that does not

8 constitute gross negligence or willful misconduct. An

9 erro~ in judgment or a failure to use ordinary skill and

10 care is not gross negligence.

11 (f) This section applies to a person winding up the

12 partnership business as the personal or legal .

13 representative of the last suryiving partner as if the

14

15

16

17 "

18

19

20

21

22

23

24

25

person were a partner.

SECTION 405. PARTNER'S LIABILITY ,TO PARTNERSHIP. A

partner is liable to the partnership for a breach of the

partnership agreement or other wrongful conduct.

SECTION 406. REMEDIES OF PARTNERSHIP AND PARTNERS.

(a) A partnership may main~aiD an action against a

partner for a breach of the partnership agreement or other

wrongful conduct.

(b) A partner may maintain an action for legal or

equitable relief, including an accounting as to partnership

business, to:

(1) enforce a right of the partner under Section

26 401;

24

1 (2) enforce a right under section 701 to have the

2 partnership cause a dissociated partner's interest in the

3 partnership to be purchased;

4 (3) compel a dissolution and winding up of 'the

5 partnership business under Section 801;

6 (4) enforce a right in connection with a

7 dissolution and winding up of the partnership business,

8 pursuant to Article 8;

9 (5) enforce a right of the partner under the

10 partnership agreement; or

11 (6) otherwise protect the rights and interests of

12 the partner.

13 SECTION 407. CONTINUATION OF PARTNERSHIP BE,YOND . 14 DEFINITE TERM OR PARTICULAR UNDERTAKING.

15

16

17

18

19

@) 21

22

24

25

26

(a) If a partnership for a definite term or,

particular undertaking is continued, without an express

agreement, after the expiration of the term or completion

of the undertaking, the rights and duties of the partners

remain the same as they were at the Qxpiration or '"

completion~so far as is consistent with a partnership at

will.

(b) A continuation of the business by the partners -t h () ~ -I ",~-,t

or &oYeA at 1!hcItt as habitually acted therein during the term

or undertaking, without any settlement or liquidation of

the partnership business, is prima facie evidence of an

agreement that the business will not be wound up.

25

1 (c) The accrual of, and any time limitation on, a

2 right of action for a remedy under this section is governed

3 by otherwise applicable law. A right to an accounting upon

4 a dissolution and winding up does not revive a claim

5 otherwise barred by applicable law.

26

1 ARTICLE 5

2 TRANSFEREES AND CREDITORS OF PARTNER

3 section 501. Partner's Interest in Partnership Property 4 Not Transferable. 5 section 502. Partner's Transferable Interest in 6 Partnership. -7 section 503. Transfer of Partner's Transferable Interest. 8 section 504. Partner's Transferable Interest Subject to 9 Charging Order.

10 SECTION 501. PARTNER'S INTEREST IN PARTNERSHIP PROPERTY

11 NOT TRANSFERABLE. A partner has no interest that can be

12 transferred, either voluntarily or involuntarily, in

13 partnership property.

14 SECTION 502. PARTNER'S TRANSFERABLE INTEREST IN

15 PARTNERSHIP.

16 (a) The only transferable interest of a partner in

17 the partnership is the partner's interest in distributions.

18 The ,interest is personal property.

19 (b) A transferee of a partner's transferable

20 interest in the partnership has the right to cause a

21 winding up of the partnership busine$s as provided in

22 Section 801(6).

23 SECTION 503. TRANSFER OF PARTNER'S TRANSFERABLE

24 INTEREST.

25 (a) A transfer of a partner's transferable interest

26 in the partnership:

27 (1) is permissible, in whole or in part;

28 (2) does not by itself cause a winding up of

27

1 the partnership business; and

2

3

(3) does not, as against the other partners,

entitle the transferee, during the continuance of the

partnership, to participate in the management or conduct of .. t-f_s.-, :. " /'.~ y .• V,.-L

the partnership business, to require access to information~ J 6 or an account of partnership transactions, or to inspect

7 the partnership books or records.

8 (b) A transferee of a partner's transferable

9 interest in the partnership is entitled to receive, in

10 accordance with the transfer, distributions to which the

11 transferor would otherwise be entitled. Upon transfer, the

12 transferor retains all of the rights and obligations of a

13 partner other than the intere~t in distributions.

14 (c) If an event causes a dissolution and winding up

15 of -the _partnership business under section 801, a

16 transferee is entitled to receive, in accordance with the

17 transfer, the net amount otherwise distributable to the

18 transferor. The transferee may require an account only

19 from the date of the last account agteed to by all of the

20 partners.

21 (d) Upon receipt of notice of a transfer, the

22 partnership shall give effect to the transferee's rights

23 under this section.

24 SECTION 504. PARTNER'S TRANSFERABLE INTEREST SUBJECT TO

25 CHARGING ORDER.

28

1 (a) On application to a court by a judgment creditor

2 of a partner or partner's transferee, the court that

3 entered the judgment, or any other court, may charge the

4 transferable interest of the debtor partner or transferee

5 with payment of the unsatisfied amount of the judgment

6 with interest thereon. The court, then or later, may

7 appoint a receiver of the debtor's share of the

8 distributions due or to become due to the debtor in respect

9 of the partnership, and make all other orders, directions,

10 accounts, and inquiries the debtor might have made or which

11 the circumstances of the case may require.

12 (b) A charging order constitutes a lien on the

13 judgment debtor's transferable. interest in the partnership.

14 The court may order a foreclosure of the charging order at

15 any time and upon conditions it considers appropriate. The

16 purchaser at the foreclosure sale has the rights of a

17 transferee.

18 (c) At any time before foreclosure,. an interest

19 charged may be redeemed by the judgroant debtor or:

20 (1) with separate property, by one or more of the

21 partners; or

22 (2) with partnership property, by one or more of

23 the partners with the consent of all of the partners whose

24 interests are not so charged or sold.

29

1 (d) This [Act] does not deprive a partner of any

2 right under the exemption laws with respect to the

3 partner's interest in the partnership.

4 (e) This section provides the exclusive remedy by

5 which a judgment creditor of a partner or a partner's

6 transferee may satisfy a judgment out of the judgment

7 debtor's transferable interest in the partnership.

30

1

2

3 4 5

6

section 601. section 602. section 603.

SECTION 601.

ARTICLE 6

PARTNER'S DISSOCIATION

Events Causing Partner's Dissociation. Partner's Wrongful Dissociation. Effect of Partner's Dissociation.

EVENTS CAUSING PARTNER'S DISSOCIATION. A

7 partner is dissociated from a partnership upon:

8 (1) receipt by the partnership of notice of the

CJV partner's express will to withdraw as a partner~~r upon

10 any later date specified in the notice;

11 (2) an event agreed to in the partnership agreement

12 as causing the partner's dissociation; . 13 (3) the part~er's expulsion pursuant to the

14 partnership agreement;

15 (4) the partner's expulsion by the unanimous vote of

16 the other partners if:

17 (i) it is unlawful to carry on the partnership

18 business with that partner; ,

19 (ii) there has been a transfer of all or

20 substantially all of that partner's transferable interest

21 in the partnership to a transferee who has not been

22 admitted as a partner, other than a transfer for security

23 purposes or subjecting the partner's interest to a charging

24 order that has not been foreclosed;

31

1 (iii) within 90 days after the partnership

2 notifies a corporate partner that it will be expelled

3 because it has filed a certificate or articles of

4 dissolution, or the equivalent, or because its charter has

5 been revoked or the jurisdiction of its incorporation has

6 suspended its right to conduct business, there is no

7 reinstatement of its charter or its right to conduct

8 business; or

9 (iv) an event causes a dissolution and winding up

10 of the business of a partnership that is a partner;

11 (5) the partner's expulsion by a court, on

12 application by another partner, upon a jUdicial

13 determination that:

14 (i) the partner has engaged in conduct that

15 adversely and materially affects the partnership business;

16 (ii) the partner has wilfully or persistently

17 committed a material breach of the partnership agreement or

18 of a duty owed to the partnership or the other partners ~

19 under section 404; or ,

20 (iii) the partner has engaged in conduct relating

21 to the partnership's business that makes it not reasonably

22 practicable to carry on the business in partnership with

23 that partner;

24 (6) the partner's becoming a debtor in bankruptcy or

25 executing an assignment for the benefit of creditors;

26 (7) in the case of a partner who is an individual:

32

1

2

(i) the partner's death;

(ii) the appointment of a [general conservator]

3 for the partner; or

4 (iii) a judicial determination that the partner

5 has otherwise become incapable of performing the partner's

6 obligations under the partnership agreement;

7 (8) in the case of a partner that is a trust or is

8 acting as a partner by virtue of being a trustee of a

9 trust, the distribution by the trust of its entire

10 transferable interest in the partnership, but not merely

11 the sUbstitution of a successor trustee;

12 (9) in the case of a partner that is an estate or is

13 acting as a partner by virtue ~f being a [personal

14 representa~ive] of an estate, the distribution of the

15 estate's entire transferable interest in the partnership,

16 but not merely the substitution of a new representative; or

17 (10) in the case of a partner that is not an

18 individual, partnership, corporation, trust, or estate, the

19 termination of the partner. ~ ~

20 SECTION 602. PARTNER'S WRONGFUL DISSOCIATION.

21 (a) A partner's dissociation is wrongful only if:

22 (1) it is in breach of an express provision of

23 the partnership agreement; or

24 (2) in the case of a partnership for a definite

25 term or particular undertaking, before the expiration of

26 the term or the completion of the undertaking:

33

1 (i) a partner withdraws by express will,

2 unless the withdrawal follows the premature dissociation of

3 another partner and results in a dissolution of the

4 partnership under section 801(a) (2) (i) or (ii);

5 (ii) a partner is expelled by a court upon its

6 determination that:

7 (A) the partner has engaged in conduct that

8 adversely and materially affects the partnership business;

9 (B) the partner has wilfully or

10 persistently committed a material breach of the partnership

11 agreement or of a duty owed to the partnership or the other

12 partners under Section 404; or

13 (C) the partner has engaged in conduct

14 relating to the partnership's business that makes it not

15 reasonably practicable to carry on the business in

16 partn~rship with that partner; or

17 (iii) a partner that is not an individual, a

18 trust other than a business trust, or an estate is expelled

19 or dissociated as a result of havihg;wilfully caused its

20 dissolution or termination.

21 (b) A wrongfully dissociating partner is liable to

22 the partnership and to the other partners for damages

23 caused by the dissociation. The liability is in addition

24 to any other liability of the partner to the partnership or

25 to the other partners.

26 SECTION 603. EFFECT OF PARTNER'S DISSOCIATION.

34

1 (a) A dissociated partner's interest in the

2 partnership must be purchased under Article 7 unless that

3 partner's dissociation causes a dissolution and winding up

4 of the partnership business under Article 8.

5 (b) Upon a partner's dissociation, that partner's

6 right to participate in the management and conduct of the

7 partnership business under section 401(f) is terminated

8 unless that partner's dissociation causes a dissolution and

9 winding up of the partnership business under Article 8.

35

1

2

3 4 5 6 7 8 9

10

11

ARTICLE 7

PURCHASE OF DISSOCIATED PARTNER'S INTEREST

section 701-

section 702.

section 703.

Section 704. section 705.

SECTION 701.

Purchase of Dissociated Partner's Interest When Partnership Business Not Wound Up. Dissociated Partner's Power to Bind Partnership When Business Not Wound Up. Dissociated Partner's Liability to Other Persons When Business Not Wound Up. Statement of Dissociation. continued Use of Partnership Name.

PURCHASE OF DISSOCIATED PARTNER'S

12 INTEREST WHEN PARTNERSHIP BUSINESS NOT WOUND UP.

13

14

15

16

@ tV 19

20

22

23

24

25

(a) If a partner is dissociated from a partnership

under Section 601 without causing a dissolution and winding

up of the partnership business under Section 801, the •

partnership shall cause the dissociated partner's interest ~{ ... v.r'~:~-

in the partnership to be purchased for a price determined

in.~~~ut~~ction (b). r-

(b) The buyout price of a dissociated partner's

·interest is the amount that would have been distributable

to that partner if, on the date of the event causing the ~

."

dissociation, the assets of the partnership were sold at a

price equal to the greater of the liquidation value or the

value based on a sale of the entire business as a going

concern without the dissociated partner and the partnership

26 were wound up as of that date. In either case, the sale

27 price of the partnership assets must be made on the basis

28 of the amount that would be paid by a willing buyer to a

36

1 willing seller, neither being under any compulsion to buy

2 or sell, and with knowledge of all relevant facts.

3 Interest must be paid from the date of dissociation to the

4 date of payment.

5 (c) Any damages for wrongful dissociation under

6 section 602(b), and all other amounts owing, whether or not

7 presently due, from the dissociated partner to the

8 partnership, shall be offset against the buyout price.

9 (d) A partnership shall indemnify a dissociated

10 partner against all partnership liabilities incurred before

11 the dissociation, except liabilities then unknown to the

12 partnership, and against all partnership liabilities

13 incurred after the dissociation, except liabilities

14 incurred by an' act of the dissociated partner under

15 section 702. For'purposes of this section, a liabili~y

16 known only to the dissociated partner is not known by the

17 partnership.

18 (e) If no agreement for the purchase of a

19 dissociated partner's interest is re~hed within 120 days

20 after a written demand for payment, the partnership shall

21 pay, or cause to be paid, in cash to the dissociated

22 partner the net amount the partnership estimates to be the

23 buyout price, including any offsets under SUbsection (c)

24 and ,accrued interest, and an explanation of how the

25 estimated amount was calculated. The payment must be

26 accompanied by a statement of partnership liabilities as of

37

1 the date of dissociation, the latest available partnership

2 balance sheet and income statement, if any, and a written

3 notice stating that the payment is in full satisfaction of

4 the obligation to purchase unless, within 120 days after

5 the written notice, the dissociated partner commences an

6 action to determine the buyout price, any offsets under

7 subsection (c), or other terms of the obligation to

8 purchase. If a deferred payment is authorized under

9 subsection (g), in lieu of a cash payment, the partnership

10 may tender a written offer to pay the net amount it

11 estimates to be the buyout price, including any offsets

12 under sUbsection (c), stating the time of payment, the

13 amount and type of security, apd the other terms and

14 conditions of the obligation.

15 (f) A dissociated partner may maintain an action,

16 pursuant to Section 406(b) (2), to determine the buyout

17 price of the dissociated partner's interest, any offsets

18 under sUbsection (c), or other terms of the purchase

19 obligation. The action must be comm~ced within 120 days

20 after the partnership has tendered payment, pursuant to

21 sUbsection (e), or an offer to pay, pursuant to sUbsection

22 (g), or within one year after written demand if no payment,

23 or offer to pay, is tendered. The court shall determine

24 the .buyout price of the dissociated partner's interest, and

25 any amount due under sUbsection (c), and enter judgment for

26 any additional payment or refund. If deferred payment is

38

1 authorized under subsection (g), the court shall also

2 determine the security and other terms of the obligation to

3 purchase. The court may assess attorney's fees and the

4 fees and expenses of appraisers or other experts for a

5 party to the action, in amounts the court finds equitable,

6 against any other party, if the court finds that the other

7 party acted arbitrarily, vexatiously, or not in good faith,

8 including the partnership's failure to pay, pursuant to

9 subsection (e), or offer to pay, pursuant to subsection

10 (g) •

11 (g) A partner who wrongfully dissociates before the

12 expiration of a definite term or the completion of a

13 particular undertaking is not entitled to payment o.f any

14 portion of the buyout price until the expiration of the

15 term or completion of the undertaking,' unless the partner

16 establishes to the satisfaction of the court that earlier

17 payment will not cause undue hardship to the business of

18 the partnership. Any ueferred payments must be adequately

19 secured and bear interest.

20 SECTION 702. DISSOCIATED PARTNERfS POWER TO BIND

21 PARTNERSHIP WHEN BUSINESS NOT WOUND UP. Subject to Section

22 704, for two years after a partner dissociates under

23 section 601 without causing a dissolution and winding up of

24 the .partnership business, the partnership is bound by an

25 act of the dissociated partner that would have bound the

26 partnership under section 301 before dissociation if the

39

1 other party to the transaction reasonably believes when

2 entering the transaction that the dissociated partner is a

3 partner at that time and does not have notice of the

4 partner's dissociation.

5 SECTION 703.' DISSOCIATED PARTNER'S LIABILITY TO OTHER

6 PERSONS WHEN BUSINESS NOT WOUND UP.

7 (a) A partner's dissociation does not of itself

8 discharge the partner's liability for a partnership

9 obligation incurred before dissociation.

10 (b) Subject to Section 704, a partner who

11 dissociates under section 601 without causing a dissolution

12 and winding up of the partnership business is liable as a

13 partner to the other party in a transaction entered into by

14 the partnership within two years after the partner's

15 dissociation, if the other party reasonably . believes 'when

16 entering the transaction that the ~issociated partner is a

17 partner at that time and does not have notice of the

18 dissociation.

19 (c) A dissociated partner i"5 teleased from liability

20 for a partnership obligation incu~red before the

21 dissociation by an agreement of the partnership creditor,

~ ~dissociated partner, and ~partners continuing the

23 business.

24 (d) A dissociated partner is released from liability

25 for a partnership obligation if the partnership creditor,

26 with notice of the partner's dissociation but without the

40

1 partner's consent, agrees to a material alteration in the

2 nature or time of payment of a partnership obligation.

3 SECTION 704. STATEMENT OF DISSOCIATION.

4 (a) A dissociated partner or the partnership may

5 execute and file in the office of [the Secretary of State]

6 a statement that the partner is dissociated from the

7 partnership and may record a certified copy of the

8 statement in the place for recording transfers of real

9 property.

10

11

12

13

16

17

o 19

(b) A partnership is not bound by an act of a

dissociated partner under section 702, and a dissociated

partner is not liable for a partnership transaction under

Section 703(b), if a statement-of dissociation is filed - ,-1 ~ w'2- '-, ~'I.

more than 90 days before the act or transaction. p~elJi:lie. j

~the statement of dissociation must a~so be recorded in

the place for recording transfers of real property to be

effective in a transaction that concerns partnership real

property({':' .. .

SECTION 705. CONTINUED USE OF PARTNERSHIP NAME.

20 continued use of a partnership's rrame~ or a dissociated

21 partner's name as part thereof, by the partners continuing

22 the business does not of itself make the dissociated

23 partner liable for an obligation of the partners continuing

24 the ·business.

41

1

2

3 4 5 6 7 8 9

10 11 12 13

14

section 801.

section 802. section 803. section 804. section 805.

section 806. Section 807.

section 808.

ARTICLE 8

WINDING UP PARTNERSHIP BUSINESS

' Events Causing Dissolution and Winding Up of Partnership Business. Dissolution Deferred for Ninety Days. Winding Up Partnership Business. Right to Wind Up Partnership Business. Partner's Power to Bind Partnership After Dissolution. statement of Dissolution. Partner's Liability to Other Partners After Dissolution. Settlement of Accounts Among Partners.

SECTION 801. EVENTS CAUSING DISSOLUTION AND WINDING UP

15 OF PARTNERSHIP BUSINESS. Except as provided in Section

16 802, a partnership is dissolved, and its business must be

17 wound up, only upon:

18

19

cJ

(1) in a partnership at will, receipt by the

partnership of notice from a partner, · other than a partner Q. -to

who has dissociated under .Sections 601(2)~(10), o~ the /"¥

21 partner's express wil~to withdraw as a partner or wind up

22 the partnership busines,s, or upon any later date specified

23 in the notice;

24 (2) in a partnership for a definite term or

25 particular undertaking:

26 (i) receipt by the partnership of notice,

27 within 90 days after a partner's wrongful dissociation

28 under Section 602, of any other partner's express will to

29 withdraw as a partner or wind up the partnership business;

-:'J.

42

1

2

4

5

7

8

9

10

11

12

(ii) receipt by the partnership of notice,

within 90 days after a partner's dissociation by death or -t ;.,

otherwise under sections 601(6)-t:laotl'g'h (10), of any other

partner's express will to withdraw as a partner or wind up

the partnership business;

(iii) ~ express will of all the partners,

except those who have transferred all or substantially all

of their transferable interests in .the partnership, other

than . for security purposes, or those whose interest is

subject to a charging order that has not been foreclosed;

or

(iv)

completion of the

agree to continue

the expiration of the term or the VN/.U ~

undertaking~u~ if all the partners 1~t,.J(,...;. r '.....(c~

the business, the partnership agreement "-

15 is deemed amended retroactively' to provide that the

16 termination or completion does not result in the

17 dissolution and winding up of the partnership business;

18

19

22

23

24

(3) an event agreed to in the partnership

agreement resulting in the winding~u~ of the partnership u IE ~· ~

i all the partners -agree to continue the . ,!:-: INW r ~ ( "'-"I-.(...

business, the partnership agreement is deemed amended ,... retroactively to provide that the event does not result in

the dissolution and winding up of the partnership business;

(4) an event that makes it unlawful for all or

25 substantially all of the business of the partnership to be

26 continued, but any cure of illegality within 90 days after

43

1 notice to the partnership of the event is effective

2 retroactively to the date of the event for purposes of this

3 section;

(5)

6

f"A. \ /.. ..A "A" ~ ( d.P '/. ~ ~. ..,I

it a ee~£L;-on application by a partner, ~

(i) the economic purpose of the partnership is

7 likely to be unreasonably frustrated;

8 (ii) another partner's conduct in matters

9 relating to the partnership business is such that it is not

10 reasonably practicable to carry on the business in

11 partnership with that partner; or

12

13

14

G) 16

18

(iii) it is not otherwise reasonably •

practicable to carry on the partnership business in

conformity with the. partnership agreement; or ;:.. ; fA :'i~.J... ~ ~e ·;c \-

(6) if a court, on application by a transferee , of , a partner's transferable interest under section 503 or 504,

>-Qea--e~l«eoe~s that it is equitable to wind up the partnership

business: ......,..-...-~_. __ ,..... -- . ..... _- ... - . - - oJ .. . _- ....

. ~ i)yt~-~ the expiratloli of the te~ _ 00 ~f the undertak~gW' i f the p:t:ner Ship was for a

definite term or particular undertaking, or

(ii~~~y ~if the partnership was a

partnership at Wil~t the time of the transfer or entry of

the .charging ordeJ( qo

SECTION 802. DISSOLUTION DEFERRED )T.UIil'i'l{ DAYS.

/'.

44

1

2

8

9

10

11

12

@ (9

15

18

(i9) '----"

20

21

22

(a) Except as provided in subsection (b), a

partnership is not dissolved until the expiration of 90

days after receipt of a notice to the partnership under <;".') I Ct.. ')

section 801(1);J" 801(2) (i)~ or4ii), and its business may

be continued until that time as if no notice were received.

Within that time, the partner who gave the notice may waive

the right to have the partnership business wound up. If

there is no waiver within that time, the partnership is

dissolved and its business must be wound up.

(b) Notwithstanding SUbsection (a), upon receipt by

a partnership of notice from at least half of the partners

of their express will to withdraw as partners or to wind up

the partnership business Y- "\2(1.)

pursu~nt to section 801(1) ~ :,)

801(2) (i) or (ii), the partnership .) '" .

is dissolved and its

business must be wound up.

(c) A partner who withdraws under Section 801(1) ~ '< Yo!. (~ ) :.,)

801(2) (i) or (ii) may not participat~ in the management and ..) .-

conduct of the partnership business if it is continued

under SUbsection (b) :9~ut may partic~ate in winding up the

business under section 804(a) if the partnership is

dissolved after 90 days.

(d) Notwithstanding section 807(a), a partner who

23 dissociates under section 601(1) and whose 'dissociation

24 res~lts in a dissolution and winding up of the partnership

25 business under Section 802(a) is not liable to the other

26 partners for, and shall be indemnified by them against, any

45

1 partnership liability incurred after the partner's

2 dissociation that is not appropriate for winding up the

3 partnership business, except a partnership liability

4 incurred by the dissociated partner's act under section

5 805(2). A partnership liability for which the dissociated

6

8

9

10

11

12

13

14

17

Q) @ 20

21

22

23

24

pa~tner is not liable to the other partners under this ~,-, ........ ;('

subsection aRall be excluded in determining the net amount

distributable to that partner under sections 803 and 808 if

the partnership business is wound up as a result of the

partner's dissociation.

(e) If a partner dissociates under section 601(1)

and the partnership. business is continued under section

802(a), but is thereafter wound up as a result of that

partner's dissociation, the capital account of the MlA4-r

dissociated partner 8Ral~ not be credited with a share of . ~~ .

any prof1t, ~ charged w1th a share of any loss, from new

business undertaken by the remaining partners before

-----dissolution, ihe dissociated partner's capital account (VI\lVl.j-' ~ ltbali be credited with a share of an)i. profit and charged

I

with a share of any loss from partnership business

undertaken before the partner's dissociation and from any

transaction that is appropriate for winding up the

partnership business.

SECTION 803. WINDING UP PARTNERSHIP BUSINESS.

46

1 (a) A partnership continues after dissolution until

2 the winding up of its business is completed, at which time

3 the partnership is terminated.

4 (b) In winding up a partnership's business, the

5 assets of the partnership must be applied to discharge its

6 liabilities, and any surplus must be applied to pay in cash

7 the net amount distributable to each partner, if any.

8 SECTION 804. RIGHT TO WIND UP PARTNERSHIP BUSINESS.

9 (a) After dissolution, the partners who have not

10 wrongfully dissociated may wind up a partnership's

11 business. However, the [designate the appropriate court]

~.) ~9~~ for good cause, may wind up a partnership's business

13 upon application of a partner,· partner's legal

14 representative, or transferee.

15 (b) The legal representative of the last surviving

16 partner may wind up a partnership's business.

17

18

19

20

21

22

23

24

(c) A person winding up a partnership's business

may preserve the partnership business or property as a

. . ~ .. go~ng concern for a reasonable t~me,~prosecute and defend

actions, whether civil, criminal, 'or administrative, settle

and close the partnership's business, dispose of and convey

the partnership's property, discharge the partnership's

liabilities, distribute the assets of the partnership

pursuant to section 808, and perform other necessary acts.

47

1 SECTION 805. PARTNER'S POWER TO BIND PARTNERSHIP AFTER

2 DISSOLUTION. Subject to section 806, a partnership is

3 bound by a partner '.s act after dissolution that:

4 (1) is appropriate for winding up the partnership

5 business; or

6 (2) would have bound the partnership under

7 section 301 before dissolution, if the other party to the

8 transaction does not have notice of the dissolution.

9

10

11

12

13

15

16

17

18

19

20

SECTION 806. STATEMENT OF DISSOLUTION.

(a) Any partner, other than a dissociated partner,

may execute and file, in the office of [the Secretary of

State], a statement that the partnership has dissolved and

is winding up its busi~ess. • 1 Y"~

(b) Unless otherwise stated in ~ statement of

dissolution, the statement does not amend a grant of

authority or a restriction on authority in an existing

statement of partnership authority except to limit the

grant of authority to acts appropriate for winding up the

partnership business.

(c) A statement of dissolution has the same effect

21 as a limitation of authority in a statement of partnership

22 authority under section 303(i), except that 90 days after

23 it is filed with [the S,ecretary of State] the statement of

~ dissolution is ~otice that the partnership has

25 dissolved and its business is being wound up.

48

1 SECTION 807. PARTNER'S LIABILITY TO OTHER PARTNERS

2 AFTER DISSOLUTION.

3 (a) Except as provided in subsection (b) and Section

4 802(d), after dissolution a partner is liable to the other

5 partners for the partner's share of any partnership

6 liability incurred under Section 805.

7 (b) The other partners are not liable .to a partner

8 who, with knowledge of the winding up, incurs a partnership

9 liability under Section 805(2) by an act that is not

10 appropriate for winding up the partnership business.

11 SECTION 808. SETTLEMENT OF ACCOUNTS AMONG PARTNERS.

12 (a) Upon winding up the partnership business, each

13 partner is entitled to a settlement 'of all partnership

14 accounts.

15 (b) In settling accounts among the partners upon

16 winding up the partnership business:

17 (1) The assets of the partnership must be applied

18 in the following order:

19 (i) to creditors, inc1u~ing partners who 'are

20 creditors, in satisfaction of liabilities of the

21 partnership: and

22 (ii) to partners, in accordance with their

23 right to distributions.

24 (2) Partnership assets must be applied to satisfy

25 partnership liabilities before partners are required to

26 make additional contributions.

49

" Cl 2

3

4

5 ./ -6

7

8

9

10

11

12

13

14

4j 16

17

18

-f •.• 1,., ,< J .,""', ~'\,..,. .. ~ t I 1 ,1.1

(3) The partners shall contribute, ~s ~le.iued by

section 401(b), the amount necessary to satisfy partnership

liabilities. If any partner fails to contribute, the other

partners shall contribute their share of the liabilities

and, in the ~roportions in which they share the

losses, the additional amount necessary to pay the

liabilities.

(4) An assignee for the benefit of creditors of a

part~ership or a partner, or any person appointed by a

court to represent creditors of a partnership or a partner,

may enforce a partner's obligation to contribute to satisfy

partnership liabi·lities.

(5) A partner, or partner's legal representative

or transferee, may recover any contributions the partner

made under paragraph (3)~ the extent the.amount ~xceeded the partner's share of the liability.

(6) The estate of a deceased partner is liable

for the contributions specified in paragraph (3).

50

1 ARTICLE 9

2 CONVERSIONS AND MERGERS

3 section 901. Conversion of Partnership to Limited 4 Partnership. 5 section 902. Conversion of Limited Partnership to General 6 Partnership. 7 section 903. Effect of Conversion; Entity Unchanged. 8 Section 904. Merger of Partnerships.

9 SECTION 901. CONVERSION OF PARTNERSHIP TO LIMITED

10 PARTNERSHIP.

11

12

13

14

15

16

17

18

(a) A partnership formed under ~8 ~~.viai.Ra o~ this (Act]~~r any predecessor partnership actaf~y convert

~~~~r to a limited partnership a~, •• vi.e. ~ this section.

(b) The terms and conditions of a conversion of a •

partnership to a limited partnership mu~t b~ approved by

the unanimous vote of all the partners~~or a~y lesser vote A

specified for conversion in the partnership agreement.

(c) After the conversion is approved by the

19 partners, the partnership shall file a certificate of

20 limited p~rtnership that satisfies the requirements of ~

~

21 [Section 201 of the Revised Uniform Limited Partnership

22 Act] and includes:

23 (1) a statement that the partnership was

24 converted to a limited partnership from a general

25 partnership;

26 (2) its former name; and

51

1 (3) a statement of the number of votes cast by

2 the partners for and against the conversion and, if the

3 vote is less than unanimous, the percentage of votes that

4 is required to approve the conversion under the partnership

5 agreement.

6 (d) The conversion takes effect when the certificate

7 of limited partnership is filed, or at any later date

8 specified in the certificate.

9

10

11

(~ '@

14

16

- . (e) A partner who becomes a limited partner as a

result of the conversion remains liable as a general

partner for an obligation incurred by the partnership

before the conversion takes effect~~-1; the other party ..., t'1..~

to _ transaction with the partnership reasonably beli,eves

when entering the transactiQn tha~ the limited partner is a + he. (p :.r:{~ v li /i t· · ~ general partner, for an obligation incurred by the

~ .

partnership within 90 days after the qonversion takes

17 effect. The converting partner's liability for all other

18

19

20

21

22

@ eJ 25

26

obligations of the partnership incurred after the or" .. • •

conversion takes effect is that of a~l~m~ted partner as

provided in the [state] Limited Partnership Act.

SECTION 902. CONVERSION OF LIMITED PARTNERSHIP TO

GENERAL PARTNERSHIP.

(a) A limited partnership formed under tA&l pr'wisjQP~ ~he [State] Limited Partnership Act, or any predecessor

limited partnership act, may convert to a general 7? L L/\.A--v<Nv t. -t {) .

partnership iWF'pl:OHit;l&c;iI iiaR this section.

52

1 (b) Notwithstanding a provision to the contrary in a

2 limited partnership agreement, the terms and conditions of

3 a conversion of a limited partnership to a general

4 partnership must be approved by the unanimous vote of all

5 the partners.

6 (c) After the conversion is approved by the

7 partners, the limited partnership shall cancel its

8 certificate of limited partnership pursuant to section [203

9 of the Revised Uniform Limited Partnership Act).

10 (d) ·The conversion takes effect when the certificate

11 of limited partnership is canceled.

12 (e) A limited partner who becomes a general partner

13 as a result of the conversion ~emains liable only as a

14 limited partner for an obligation incurred by the

15 partne!ship before the conversion takes effect. The

@ partner is I iable as a general partner, i.e!! PE e, ided iii this-

~ ~nQcr, for an obligation of the partnership incurred after

18 the conversion takes effect.

19 SECTION 903. EFFECT OF CONVERSION; ENTITY UNCHANGED.

20 (a) A partnership that has 'converted pursuant to

~ this article is for all ~rposes the same entity that

22 existed before the conversion .

23 (b) When a conversion takes effect: 1:

(1) j1tle to all property owned by the converting

25 partnership remains vested in the converted partnership

53

1 without further act or deed and without reversion or

2 impairment; ~

(2) }11 liabilities of the converting partnership

4 continue as liabilities of the converted partnership; and 'V

(3) ~y proceeding pending against the

6 partnership may be continued as if the conversion did not

7 occur.

8 SECTION 904. MERGER OF PARTNERSHIPS.

9 _ (a) Pursuant to a plan of merger approved-ee­-.0 ,' .; ' .. l ,~" ",.-1 -j 0 p~e%idea in subsection (c), partnerships may be merged as

.c~/lO(Ar provided i~ thi& eeet±on: 11

.I\. 12 (1) One or more general partnerships formed under

@ ;the p r oHi&ieR8 ~~is [Act], or any predecessor

14 partnership act, may merge with one or more other

partnerships formed under tbe prmrj 5; OP& ~this [Act], or

16 any predecessor partnership act, or the partnership ~. t::..

jurisdictio~~ •

statute

of ano~her state or foreign A..

18 (2) One or more partnerships formed under~

~ ~o"i.iehs o~this [Act)~r any preciecessor partnership

~ act~ay merge with one or more limited partnerships formed

o ..under :thE pfooieiePle o~the [State] Limited Partnership

22 Act, or any predecessor limited partnership act, or the

23 limited partnership statute of another state or foreign

24 jurisdiction.

25 (b) The plan of merger must set forth:

54

1 (1) the name of each partnership that is a party

2 to the merger;

3 (2) the name of the surviving partnership into

4 which the other partnerships will merge;

5 (3) whether the surviving partnership is a

6 general or a limited partnership and the status of each

7 partner;

8

9

10

11

12

13

14

17

18

(4) the terms and conditions of the merger;

(5) the manner and basis of converting the

ownership interests of each party to the merger into

partnership interests or debt obligations, or other

ownership interests, of the surviving partnership, or into

cash or other property in whol~ or part; and

(6) the address of the surviving partnership',s Ao

place of business where a copy of the plari of merger I:Jill

"-......8a maintained.

(c) The plan of merger must be approved:

(1) in the case of a general partnership that is

19 a party to the merger, by the unanimgus v?~e . of all the

20 partners, or any lesser vote specified for merger in the

21 partnership agreement; and

22 (2) in the case of a limited partnership that is

23 a party to the merger, by the vote required for approval of

24 a m~rger by the applicable statute of the state or foreign

25 jurisdiction where the other partnership is,., ,:formect or '

26 organized, and, in the absence of a specifically applicable

55

1 statute, by the unanimous vote of all the partners,

2 notwithstanding a provision to the contrary in the

3 partnership agreement.

4 (d) After a plan of merger is approved, and at any

5 time before the merger takes effect, the plan may be

6 amended or abandoned as provided in the plan.

7 (e) The merger takes effect on the later of:

8 (1) the approval of the plan of merger by the

9 partners of each party to the merger, as provided in

10 subsection (c);

11 (2) the filing of all documents required by

12. statute to be filed by each party to the merger; or

13 (3) the effective date, if any, specified in the

14 plan of merger.

15 (f) The surViving partnership shall promptly file

16 all notices and documents relating to the merger required

17 by all applicable ·statutes governing the partnerships that

18 are parties to the merger, i~cluding articles of merger or

19 the amendment or cancellation of a~s~tement of partnership

20 authority or certificate of limited partnership.

21 (g) A surviving foreign partnership is deemed to

22 appoint irrevocably the [Secretary of State] of this state

23 as its agent for service of process in any proceeding to

24 enforce an obligation of a domestic partnership that is a ~A~lt

25 party to the merger. The partnership .w~ promptly notify

26 the [Secretary of State] of its current mailing address.

56

1 (h) When a merger takes effect: t 0

(1) ~ery et:liGlr- partnership that is a party to o .; ,.. .:?r -/ fr", >" ..... .1

merger ~8IiP~ the surviving partnershipv'ceases to the

4 exist; <:

(2) ~itle to all property owned by each of the

6 merged partnerships vests in the surviving partnership

7 without further act or deed and without reversion or

8 impairment:

9 (3) all liabilities of every partnership that is

10 a party to the merger become the liabilities of the

11 surviving partnership:

12 (4) any proceeding pending against a partnership

13 that is a party to the merger ~ay be continued as if the

14 merger did not occur or the surviving partnership 'may be

15 substituted in the proceeding ,for a partnership whose'

16 existence ceased under paragraph (1); and

17 (5) a partnership that is not the surviving

18 partnership in the merger is deemed to have wound up its

19 business. ..

57

1

2

3 4 5 6 7 8

9

section 1001. Section 1002. section 1003. section 1004. section 1005. section 1006.

ARTICLE 10

MISCELLANEOUS PROVISIONS

Uniformity of Application and Construction. Short Title. Severability. When Act Takes Effect. When Legislation Repealed. Application to Existing Relationships.

SECTION 1001. UNIFORMITY OF APPLICATION AND

10 CONSTRUCTION. This [Act] shall be applied and construed to

11 effectuate its general purpose to make uniform the law with

12 respect to the subject of this [Act] among states enacting

13 it.

14 SECTION 1002. SHORT TITLE. This [Act] may be cited as •

the Uniform Partnership Act, 199~

16 SECTION 1003. SEVERABILITY CLAUSE. ·If any provision of

17 this [Act] or its application to any person or circumstance

18 is held invalid, the invalidity does not affect other

19 provisions or applications of this [Act] whiCh can be given

20 effect without the invalid provisi9n .or application, and to

21 this end the provisions of this [Act] are severable.

22 SECTION 1004. EFFECTIVE DATE. This [Act] take effects

23

24 SECTION 1005. REPEALS. The following acts and parts of

25 acts are repealed: [the Uniform Partnership Act as amended

26 and in effect immediately prior to the adoption of this

27 [Act]].

58

1

2

SECTION 1006. APPLICATION TO EXISTING RELATIONSHIPS.

(a) This [Act) does not impair the obligations of a

3 contract existing when the [Act) goes into effect or affect

4 an action or proceeding begun or right accrued before this

5 [Act) takes effect.

6 (b) Except as otherwise stated in this section and

7 in section 1006, this [Act) applies to all partnerships in

8 existence on its effective date that were formed under the

9 [Sta~e) Partnership Act or any predecessor statute

10 providing for the formation, operation, and liquidation of

11 partnerships.

12 (c) The [State Execution Law) shall apply to the

13 satisfaction of a judgment aga~nst the partnership or a

14 partner obtained by a creditor of the partnership if the

15 suit giving rise to the judgment was commenced before the

16 effective date of this [Act).

59

IlrlT TO:

• UN .UNCISCO

,.5 MAlHT SIIEE!

SAN fRANCISCO' CA 94' 05

, I 5 • 143 • 9100

;.\X 4 IS. 2,4,) • 9276

• LOS ANGILES

'H SOUTH flOWER STREET

:05 ANGElES' CA 90071

2: J • 687 • 8000

fAX 113'687'6255

• WASHINGTON. D.C.

\75 !YE STREET' N W

... ASHINGTON • 0 C 20005

202 • 789 • 88'8

'AX 202' 789 • .'594

i • ;'\l(KL'\ :'\.-\ & '-rITTl~G i "15.2<43 • 9100

GERALD V. NIESAR

I A W J f F :

Mr. Lane Kneedler Office of Attorney General 101 North 8th Street Richmond, Virginia 23219

March 17, 1992

Re: RUPA -- Fiduciary Duty Ouestions

Dear Mr. Kneedler:

This is a comment letter on behalf of the Subcommittee on the Proposed Revised Unifonn PartnersJrip Act of the ABA Committee on Partnerships and Incorporated Business Orgaruzations (the "Subcommittee"). On December 7, 1990, we submitted a comment letter specifically addressing the issue of a partner's accountability as a fiduciary. In certain areas the Subcommittee is still seriously concerned about the current draft RUPA regarding this issue. The purpose of this letter is to provide our further comments with supporting infonnation. We have also provided suggested alternate language as Exhibit A and an explanation regarding our proposals will be found below.

1. Concerns With Draft RupA.

The Subcommittee has three principal areas of serious concern with what we understand to be the current (March 3, 1992) draft RUPA to the extent it deals with the question of fiduciary duties of partners. These areas are:

(1) Section 404 begins with the phrase "The only fiduciary duties a partner owes to the partnership and the other partners are the duty of good faith and fair dealing .... " The Subcommittee believes that the duty of good faith and fair dealing is not a fiduciary duty and that its inclusion as one of the "fiduciary duties" of a partner to the others will cause continuing confusion and misconstruction of the purpose of Section 404, and a fundamental change in existing law;

0VN7S5\DCC037OS

- --\ Ill\.! :\:\ .\

,\:.11111:\(; I • Mr. Lane Kneedler March 17, 1992 Page 2

(2) Subsection 404(a), by reference to the duty of good faith and fair dealing which has previously been defined as one of the fiduciary duties, arguably continues the exceedingly untenable and litigation-fostering concept that parties to a prQPosed contract (partnership) are fiduciaries to each other in the pre-fonnation stage; and

(3) Subsection 404(a) compounds the pre-formation stage problem by specifically providing that "The duty may not be eliminated by agreement, but the parties by agreement may identify specific conduct that does not violate the duty if the conduct is not manifestly unreasonable."

We address below in more detail our comments regarding these three problems.

1. "Duty of Good Faith and Fair Dealing" as a Fiduciary Duty.

The Subcommittee believes that the duty of good faith and fair dealing is a concept of general contract law and is not to be confused as creating a special relationship duty -- a fiduciary duty. The Uniform Commercial Code, Section 1-201(19), defines "good faith" to mean "honesty in fact in the conduct or transaction concerned. II Section 1-203 of the uec further provides: "Obligation of Good Faith -- Every contract or duty within this Act imposes an obligation of good faith in its performance or enforcement." While draft RUP A uses the term "good faith and fair dealing," we presume that the concepts addressed are intended to be the same as those set forth . as the duty of good faith in the Uniform Commercial Code sections cited above.

The Subcommittee does not dispute the notion that partners, by virtue of their contract relationship with each other, owe each other a duty of good faith. We are convinced, however, that characterization of that duty as a special relationship duty, or fiduciary duty, generates considerable mischief and will spawn considerable litigation.

A fiduciary duty arises out of a special relationship, not a garden variety contract relationship. As with all other aspects ofRUPA, we must be mindful of spill­over problems that can be created by well-meaning but perhaps incompletely thought through creative activity. If the duty of good faith and fair dealing between partners is a fiduciary duty, how long will it be before some court is persuaded that the same

0VN7SS\DCC037OS

Mr. Lane Kneedler March 17, 1992 Page 3

duty in UCC governed contracts is also a fiduciary dUty? We think that step in logic would be inevitable and not long in coming.

2. Applying FiduciarY Duties to the Preformation Stage.

As lawyers advising persons engaged in contract negotiations, we fmd inconceivable the notion that they can be at ann's length in their bargaining while at the same time fiduciaries vis-a-vis each other. Nonetheless, that is what draft Section 404(a) would support.

One might argue that UPA § 21 provides for fiduciary duties in the pre­fonnation stage. However, while § 21 is referred to as the UP A Section codifying fiduciary duties, this appears more an accident of mis-labeling than a design of the UPA itself. The only use of the word "fiduciary" is in the section caption. (Indeed, California relabeled the section to eliminate this misnomer.) Section 21 merely prescribes a duty to account to the partnership for profits derived from any transaction connected with the fonnation , conduct or liquidation of the partnership, or use of its property by the charged partner. Somehow this was mislabeled as a fiduciary duty in the UPA.

We agree that the notion of fiduciary relationships existing between and among partners has become finnly established in decisional law of partnerships. Our concern is not that the duty is stated to exist; it is with the failure of draft RUPA to properly circumscribe the duty so that it is relevant to the business context of general partnerships. Section 21(1) of UPA sets forth an entirely appropriate standard of accountability when one partner derives a personal profit from a transaction that should benefit the partnership. One searches Section 21 in vain to find the notion that one who may have earned a secret profit through a pre-fonnation transaction is, therefore, a general fiduciary to those with whom he or she is negotiating a fundamental business relationship . At this stage in their hoped-for relationship the prospective partners are, in fact, adverse parties, bargaining at ann's length for the best deal each can achieve in the proposed partnership. How can they be fiduciaries to one another? We must not confuse a duty to deal honestly, and without fraud, with the special relationship that is fundamental to the existence of a fiduciary duty.

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Mr. Lane Kneedler March 17, 1992 Page 4

The practical problems of proposed § 404(a) becomes more apparent when one considers the implications of advising these so-called "fiduciaries" in their negotiations with each other. Would any lawyer represent a Trustee in connection with negotiations for a contract with the Trustee's beneficiary? Perhaps some might if the beneficiary had independent counsel advising him or her. Even then, we submit, the

. path of negotiations would be exceedingly narrow with precipitous drops on either side.

We are aware that a very few cases in recent years have found, or at least stated, that a general partner is a fiduciary to proposed limited partners.! Each of the cases where this result was reached was a garden variety securities fraud case which could and should have based general partner liability on Rule lOb-5 or the state law equivalent. In one case (Eisenbaum) the court used the "pre-formation fiduciary" wild card to extend the applicable securities law statute of limitations on the grounds that the statute is tolled when the "fiduciary" fails to tell the beneficiary that he/she has a

I lawsuit. At least two courts, in similar cases, have expressly decided against the . notion that the fiduciary relation arises prior to the partnership relationship.2

Many cases have held that there is no fiduciary duty to disclose prior to the formation of a partnership relationship. 3 As the court said in Walker v! Patterson, "unless there is something to limit them other than the fact that partnership is intended, parties negotiating to that end deal with each other at arm's length. "4 Although some cases recognize a duty to disclose pre-formation transactions, such disclosure is required only in connection with a transaction occurring after the partnership has begun and the parties are already fiduciaries.' The duty in these cases arises in connection with the conduct of the business. Referring to an additional fiduciary duty

t in formation of the partnership is unnecessary and confusing.

3. The Fiduciary Duty May Not be Eliminated.

The proposed ban against freedom to contract away the fiduciary duty makes definition of the scope of that duty all the more important. We seriously question, however, the wisdom of any ban against contracting away the duty.

Preliminarily, we note that § 404(a) is directly contrary to existing Delaware limited partnership law on this subject. 6 Thus, we start with the understanding that § 404 (a) 's proposed prohibition would probably ensure non-uniformity on this point.

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Mr. Lane Kneedler March 17, 1992 Page 5

More importantly, however, we point out that we are not now considering a default provision that will apply if the parties do not have a written agreement. We are addressing here a very fundamental provision that would only be debated if the partners specifically addressed the matter, presumably in writing. Most of our Subcommittee's deliberations have been focused on the smaller partnership where the default rules are more likely to apply. This discussion is focused more on major commercial transactions, structured with the assistance of sophisticated business counsel, which are the only situations where it is likely the partnership agreement will specifically contract away or severely limit partner fiduciary duties.

It would appear that when the legislature denies contracting parties the power to specify the tenns of their agreement, the legislature bears a heavy burden of proof to substantiate why such power is being denied. Put another way, when the legislature imposes a particular protection on persons who do not desire that protection, there must be an overriding state policy reason why that imposition is appropriate. And in the commercial context, the instances where that state policy can be demonstrated must be rare, indeed.

Again, we must return to our Subcommittee's constant touchstone -­eliminating, or at least minimizing, litigation as a post-transaction renegotiating lever. Here we refer you to the cases cited in the Endnotes. In each case, we submit, the fiduciary claim was injected as a wild card to boost the plaintiff s litigation posture but with no legitimate influence on the outcome. In this regard, we include even Eisenbaum, which essentially abrogates statutes of limitation in limited partnership securities law cases.

It is this litigation-spawning minefield that businessmen and women may wish I to avoid by contracting away fiduciary duty obligations. In addition to the cases cited I above, innumerable citations can be made to partnership disputes which drag on long I past any useful or legitimate resolution because of the fiduciary duty claims. A good I example is Wilson v. Button,' where the aggrieved partner claimed that his partner's

I enforcement of a right to a salary as set forth in the partnership agreement was a breach of fiduciary dUty! The Commissioners were apparently aware of this recurring

I type of problem since they permit identification of "specific conduct that does not violate the duty if the conduct is not manifestly unreasonable." Where does Wilson

I fit into this? We submit that the § 404(a) fonnulation allows litigation over every

I 0VN755\DCC037(H

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Mr. Lane Kneedler March 17, 1992 Page 6

agreement, and litigation regarding a matter of fact which is where lawyers get rich and the business people get frustrated.

n. Suggested Alternative Language

Enclosed with this letter as Exhibit A are suggested provisions for various sections in draft RUPA that will resolve the difficulties we discussed above. The following discussion relates to Exhibit A.

We have revised § 404 by deleting subparagraph (b) which deals with the duty of "good faith and fair dealing." As will be discussed, we have suggested that this concept be deleted from the Act, but we: suggest that if it is desired to include it specifically in RUPA, the proper place would be in Section 401.

A further change to Section 404 is suggested in draft RUPA subparagraph (c) which we have relettered (b) in Exhibit A. One change proposed in subparagraph (b)(l) is deletion of the word "informed" preceding consent (a change also suggested for subparagraph (b)(3)). It would seem that if the applicable standard is "infonned consent," there will be litigation generated over the type and level of information the charged partner must have given to the other partners before their consent will be deemed given. Certainly, the requirement of consent requires the other partners'

1 knowledge that the charged partner is acting andlor benefitting in a way that would be a breach of the duty of loyalty without such consent. Injecting the adjective

I "informed" imposes a standard that cannot be satisfied by reference to any objective I criteria. Generally speaking, in commercial relationships one assumes knowledge of i a set of facts constitutes acceptance or c()nsent to the activity unless the aggrieved l party gives some notice or takes some action. That should be sufficient in a I partnership context as well. If one person knows his partner is developing a property i adjoining the partnership property, is that not sufficient to require the first partner to 1 voice his objection? Or must he first know all of the costs involved, his partner's

overall plans, the possible uses of the property, etc.? How far must one go for infonned consent? We submit this fonnulation will be another litigation-generating excuse for post-transaction renegotiations and should, therefore, be deleted from RUPA.

0VN75.5\DCC03705

i • Mr. Lane Kneedler March 17, 1992 Page 7

A second proposed change to Section 404(b)(1) is to defme the scope of applicability as "from a transaction connected with the conduct or winding-up of the business of the partnership." We have addressed above the problems of implying that fiduciary duties may apply in the pre-formation period. To make it clear that such duties arise only upon formation of the partnership, we believe the word "formation" must be deleted from Section 404. The other suggested changes are to conform the language more closely with that used in other places in RUPA.

We have deleted subparagraph (b)(2) [(c)(2) in draft RUPA] , because it appears redundant with subparagraph (1). Moreover, we were concerned that it might be used as a hammer against a partner who has a legitimate complaint or claim against his partners or the partnership. In this regard, it appears to prohibit a partner from suing the partnership although we understand that the archaic notion, that an aggrieved partner's only remedy is to dissolve and seek an accounting, has long since been rejected by the Drafting Committee. Finally, we noticed that the proposed official comments regarding subparagraph (2) state that it is derived for the law of agency which requires an extremely high standard of loyalty toward the principal. Again, we are struck by the danger of relying too heavily on agency law where the agent is also a principal, as in a partnership relationship. Further, the sentence would appear to be in direct conflict with subparagraph (d) which specifically contemplates some level of adverse interest.

Exhibit A suggests reversing the order of subparagraphs (d) and (e) of Draft RUPA Section 404. This puts the subparagraph defining "duty of care" before the paragraph explaining conduct that does not constitute a violation of that duty.

The changes we have suggested to Exhibit A subparagraph (d) are merely to

I add words that conform the scope of the duty (conduct and windin~ up of the busipess) (gross negligence or willful misconduct) with the rest of Section 404.

I i Finally, as to the former subparagraph (d) which is also subparagraph (d) in , Exhibit A, the changes in the first section are merely to make it consistent with the !

remainder of Section 404 as discussed above. The second sentence has been deleted because it may be used to argue that other conduct not mentioned is, therefore, not permitted. Indeed, the sentence in Draft R UP A sets up an argument against a

I partner's right to initiate a foreclosure action. One of the issues upon which it is impossible to opine today is whether a partner who holds a mortgage on partnership

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Mr. Lane Kneedler March 17, 1992 Page 8

I property, or who leases property to the partnership, may enforce against the partnership his rights as mortgagee or lessor without being met by a claim that such action is a breach of fiduciary duty. Inserting the sentence relating to bidding on assets in a foreclosure sale would be a very powerful argument that initiatin~ the foreclosure action is going too far and, therefore, a breach of fiduciary duty. Since there are hundreds of actions which should be permissible, inserting one example only serves to provide the "pregnant affirmative" argument against all others.

With regard to our proposed revision of Section 401, we begin by observing that we do not really propose that the new subparagraph (1) be added. Our finn conviction is, as discussed in Part I of this letter, that the duty of good faith need not be explicitly included in RUPA. Courts have long since implied this duty in contract relationships; therefore, to add it now to RUPA may support an argument that the law is being changed. (We do not understand the Drafting Committee to be suggesting a change in the law in this regard; if a change is being suggested, we are unable to discern what it is.) However, if the Committee believes it is necessary to include specific reference to the duty of good faith, we believe it must be removed from Section 404 for the reasons discussed in Part I, and the most logical place to put it is in Section 401.

Our final proposed change in Exhibit A is to Section 403, which we found to be closely related to the matters discussed above. We have two problems with the Draft Rupa version of subparagraph 403(c). First, we believe that in addition to the partnership's duty, the duty to furnish information should apply to the partners as well. If the duty is only on the partnership, we see endless arguments on the question of whether any actual person ever had the duty to provide information. Secondly, we strongly believe the duty to furnish information is an ongoing duty, not one that arises only when a demand is made. In many cases, only one or a limited number of partners may have access to valuable or important information concerning the partnership. How is the uninformed partner to know that she or he should make a

, demand for it? Or should the prudent partner give a note to each other partner every I Monday morning demanding all important information? Simply put, partners

possessed of important information germane to the partnership should be expected to pass it on without demand. Of course, the corollary is that they clearly would also be obligated to provide that information on demand.

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Mr. Lane Kneedler March 17, 1992 Page 9

We trust the foregoing will be helpful in the Drafting Committee's deliberations of these most important aspects of partnership law. Questions regarding this letter should be addressed to Gerald Niesar «415) 243-9100) or Marty Lubaroff «302) 651-7610). Gerald Niesar plans to attend that part of the Drafting Committee session during which the fiduciary duty questions will be discussed in order to answer any questions that may arise concerning the deliberation of the Subcommittee.

GVN:cmm

0VN7SS\DCC037OS

-, . I

Ve I truly yours,

~~, I' II! JAcr ,---erald V. Niesar

for Subcommittee on RUP A

Exhibit A

Section 404. Partner's Limited Fiduciary Duties.

(a) The only fiduciary duties a partner owes to the partnership and the other partners are the duty of loyalty and the duty of care, as set forth in this section.

(b) [Delete - see comment letter and lor possible new § 401(1).]

(b) A partner's duty of loyalty to the partnership and to other partners is limited to the following:

(1) to account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner, without the consent of the other partners, from a transaction connected with the conduct or winding-up of the business of the partnership or from a use by the partner of the partnership property; and

[(2) Delete]

(2) to refrain from competing with the partnership without the consent of the other partners.

(d) A partner owes a duty of care to the partnership and the other partners to act in the conduct and winding-up of the business of the partnership in a manner that does not constitute gross negligence or willful misconduct. An error in judgment or a failure to use ordinary sk:i11 and care is not gross negligence or willful misconduct.

(c) A partner does not violate the duty of loyalty or the duty of care merely because the partner's conduct furthers the partner's individual interest. [Delete second sentence from March 3, 1992 draft.]

(e) This section applies to a person winding-up the partnership business as the personal or legal representative of the last surviving partner as if the person were a partner.

Section 401. Rules Detenninin2 Partner's Ri2hts and Duties .

(a)-(k) [March 3, 1992 draft]

[New] (1) A partner owes to the partnership and the other partners a duty of good faith in the conduct and winding-up of the business of the partnership. The duty of good faith means honesty in fact in the conduct or transaction concerned. The duty of good faith may not be disclaimed by agreement, but the partners may by agreement determine the standards by which the performance of such duty is to be measured if such standards are not manifestly unreasonable.

(m) [March 13, 1992 draft as (1)]

[The changes above would require a change to Section 105(b)(2) so that it reads: II (2) disclaim the duty of good faith under Section 401 (1); "]

Section 403. Partner's Ri~ht to Infonnation.

(a) March 3, 1992 draft.

(b) March 3, 1992 draft.

(c) Each partner and the partnership shall furnish, to a partner and the legal representative of a deceased partner or partner under legal disability to the extent just and reasonable, complete and accurate infonnation concerning the partnership.

DVII1JJb8CC(D7OS

ENDNOTES

1. Elk River Assoc. v. Huskin, 691 P.2d 1148 (Colo. App. 1984); Tobias v. First City Nat. Bank and Trust Co., 709 F.Supp. 1266 (S.D.N.Y. 1989); Eisenbaum v. Western Energy Resources. Inc., 267 Ca. Rptr. 5 (Cal. App. 1990).

2. Winslow v. Wong, 713 F.Supp. 1103 (N.D. ill. 1989); Waite v. Sylvester, 560 A.2d 619 (N.H. 1989); Phoenix Mut. Life Ins. v. Shady Grove Pla7f' Ltd. , 937 F.2d 603 (4th Cir. 1991), aff'g 734 F.Supp. 1181 (0. Md. 1990), "a fiduciary relationship hardly arises when commercial parties engage in contract [joint venture] negotiations" 734 F.Supp. at 1192; also to same effect; Walker v. Patterson, 166 Minn. 215; 208 N.W. 3 (1926); Densmore Oil Co. v. Densmore, 64 Pa. 43 (1870).

3. Waite, Winslow and Phoenix; Walker v. Patterson, 166 Minn. 215,208 N.W. 3 (1926); Densmore Oil Co. v. Densmore, 64 Pa, 43 (1870).

4. 166 Minn. at 220-21; 208 N.W. at 3.

5. See, e.g., Jaffa v. Shacket, 114 Mich. App. 626, 319 N.W. 2d 604 (1982) (transfer to partnership after partnership formed of property acquired prior to formation of partnership; partnership agreement specifically required transfer of land by partners "at their cost"); Starr y. International Realty, 271 Or. 396, 533 P. 2d 165 (1975) (failure to disclose side compensation to broker-partner in connection with property sold to partnership; court assumes existing partnership relationship).

6. Del. Revised Uniform Limited Partnership Act. § 17-1101. Construction and application of the chapter and partnership agreement.

( c) It is the policy of this chapter to give maximum effect to the principle of freedom of contract and to the enforceability of partnership agreements.

(d) To the extent that, at law or in equity, a partner has duties (including fiduciary duties) and liabilities relating thereto to a limited partnership or to another partner, (I) any such partner acting under a partnership agreement shall not be liable to the limited partnership or to any such other partner for the partner's good faith reliance on the provisions of such partnership agreement, and (2) the partner's duties and liabilities may be expanded or restricted by provisions in a partnership agreement.

7. Wilson v. Button, 404 F.2d 309 (5th Cir. 1968).

1

2 SOB COMMITTEE REVISIONS

3/17/92

3 SECTION 801. EVENTS CAUSING DISSOLUTION AND WINDING UP

4 OF PARTNERSHIP BUSINESS. Except as provided in section

5 802, a partnership is dissolved, and its business must be

6 wound up, only upon:

7 (1) in a partnership at will, receipt by the

8 partnership of notice, or upon any later date specified in

9 the notice:

10 (a) from a majority of the partners of their

11 express will to wind up the partnership business; or

12 (b) from a partner, other than a partner who

13 is dissociated under sections 601(2) through (iO), of that

14 p~rtner's express will to withdraw as a partner;

15 (2) in a partnership for a definite term, or

16 particular undertaking:

17 (i) within 90 days after a ' partner's wrongful

18 dissociation under section 602 or a partner's dissociation

19 by death or otherwise under Sections 601(6) through (10),

20 receipt by the partnership of notice:

21 (a) from a major~ty of the other partners

22 of their express will to wind up the partnership business;

23 or

24 (b) from another partner of that partner's

25 express will to withdraw as a partner;

1

1 (ii) by the express will of all the partners,

2 except those who have transferred all or substantially all

3 of their transferable interests in the partnership, other

4 than for security purposes, or those whose interest is

5 subject to a charging order that has not been foreclosed;

6 or

7 (iii) the expiration of the term or the

8 completion of the undertaking; but if all the partners

9 agree to continue the business, the partnership agreement

10 is deemed amended retroactively to provide that the

11 expiration or completion does not result in the dissolution

12 and winding up of the partnership business;

13 (3) an event agreed to in the partnership

14 . agreement resulting in the winding up of the partnership

15 business; but if all the partners agree to continue the

16 business, the partnership agreement is deemed amended

17 retroactively to provide that the event does not result in

18 the dissolution and winding up of the partnership business;

19 (4) an event that makes it unlawful for all or

20 substantially all of the business of the partnership to be

21 continued, but any cure of illegality within 90 days after

22 notice to the partnership of the event is effective

23 retroactively to the date of the event for purposes of this

24 section;

25 (5) a court's decree, on application by a

26 partner, that:

2

1 (i) the economic purpose of the partnership is

2 likely to be unreasonably frustrated;

3 (ii) another partner's conduct in matters

4 relating to the partnership business is such that it is not

5 reasonably practicable to carryon the business in

6 partnership with that partner; or

7 (iii) it is not otherwise reasonably

8 practicable to carry on ~he partnership business in

9 conformity with the partnership agreement; or

10 (6) a court's decree, on application by a

11 transfer~e of a partner's transferable interest, that it is

12 equitable to wind up the partnership business:

13 (i) after the expiration of the term or

14 completion of the undertaking, if the partnership was for a

15 definite term or particular undertaking; or

16 (ii) at any time, if the partnership was a

17 partnership at will at the time of the transfer or entry of

18 the charging order.

3

1

2

3 4 5 6 7 8 9

10

11

section 901.

section 902.

section 903. section 904. section 905. section 906.

SECTION 901.

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ARTICLE 9

CONVERSIONS AND MERGERS

Conversion of Partnership to Limited Partnership. Conversion of Limited Partnership to General Partnership. Effect of Conversion; Entity Unchanged. Merger of Partnerships. Effect of Merger. Statement of Merger.

CONVERSION OF PARTNERSHIP TO LIMITED

12 PARTNERSHIP.

13 (a) A partnership formed under this [Act] or any

14 predecessor partnership act may convert to a limited

15 partnership pursuant' to this section.

16 (b) The terms and conditions of a conversion of a

17 partnership to a limited partner~hip must be approved by

18 the unanimous vote of all the partners or by any lesser

19 vote specified for conversion in the partnership agreement.

20 (c) After the conversion is approved by the

21 partners, the partnership shall file a certificate of

22 limited partnership that satisfies the requirements of

23 [Section 201 of the Revised Uniform Limited Partnership

24 Act] and includes:

25 (1) a statement that the partnership was

26 converted to a limited partnership from a general

27 partnership;

28 (2) its former name; and

51

1 (3) a statement of the number of votes cast by

2 the partners for and against the conversion and, if the

3 vote is less than unanimous, the percentage of votes that

4 is required to approve the conversion under the partnership

5 agreement.

6 Cd) The conversion takes effect when the certificate

7 of limited partnership is filed or at any later date

8 specified in the certificate.

9 (e) A partner who becomes a limited partner as a

10 result of the conversion remains liable as a general

11 partner for an obligation incurred by the partnership

12 before the conversion takes effect. If the other party to

13 a transaction with the partnership reasonably believes when

14 entering the transaction that the limited partner is a

15 general partner, the partner. is liable for an obligation

16 incurred by the partnership within 90 days after the

17 conversion takes effect. The converting partner's

18 liability for all other obligations of the partnership

19 incurred after the conversion takes effect is that of a

20 limited partner as provided in the [state] Limited

21 Partnership Act.

22 SECTION 902. CONVERSION OF LIMITED PARTNERSHIP TO

23 GENERAL PARTNERSHIP.

24 (a) A limited partnership formed under the [State]

25 Limited Partnership Act or any predecessor limited

52

1 partnership act may convert to a general partnership

2 pursuant to this section.

3 (b) Notwithstanding a provision to the contrary in a

4 limited partnership agree~ent, the terms and conditions of

5 a conversion of a limited partnership to a general

6 partnership must be approved by the unanimous vote of all

7 the partners.

8 (c) After the conversion is approved by the

9 partners, the limited partnership shall cancel its

10 certificate of limited partnership pursuant to section [203

11 of the Revised Uniform Limited Partnership Act].

12 (d) The conversion takes effect when the certificate

13 of limited partnership is· canceled.

14 (e) A limited partner who becomes a general partner

15 as a result of the conversion remains liable only as a

16 limited partner for an obligation incurred by the

17 partnership before the conversion takes effect. The

18 partner is liable as a general partner for an obligation of

19 the partnership incurred after the conversion takes effect.

20 SECTION 903. EFFECT OF CONVERSION; ENTITY UNCHANGED. .

21 (a) A partnership that has converted pursuant to

22 this article is for all purposes the same entity that

23 existed before the conversion.

24 (b) When a conversion takes effect:

25 (1) Title to all property owned by the converting

26 partnership remains vested in the converted partnership

53

1 without further act or deed and without reversion or

2 . impairment;

3 (2) All liabilities of the converting partnership

4 continue as liabilities of the converted partnership; and

5 (3) Any proceeding pending against the

6 partnership may be continued as if the conversion did not

7 occur.

8 SECTION 904. MERGER OF PARTNERSHIPS.

9 (a) Pursuant to a plan of merger approved as

10 provided in subsection (c), partnerships may be merged as

11 follows:

12 (1) One or more general partnerships formed under

13 this [Act], or any predecessor partnership act, may merge

14 with one or more other· general partnerships formed under

15 this [Act], or any predecessor partnership act, or the

16 general partnership statute of another state or foreign

17 jurisdiction;

18 (2) One or more general partnerships formed under

19 this [Act], or any predecessor partnership act, may merge

20 with one or more limited partnerships formed under the

21 provisions of the [State] Limited Partnership Act, or any

22 predecessor limited partnership act, or the limited

23 partnership statute of another state or foreign

24 jurisdiction.

25 [ReCOmmendation: (a) Pursua~t to a plan of merger

26 approved as provided in SUbsection (c), a general

54

1 partnership may be merged with one or more general or

2' ' limited partnerships.]

3 (b) The plan of merger must set forth:

4 (1) the name of each partnership that is a party

5 to the merger;

6 (2) the name of the surviving partnership into

7 which the other partnerships will merge;

8 (3) whether the surviving partnership is a

9 general or a limited partnership and the status of each

10 partner;

11 (4) the terms and conditions of the merger;

12 (5) the mann.er and basis of converting the

13 interests of each party to the merger into partnership

14 interests or debt obligations, or other interests, of the

15 surviving partnership, or into cash or other property in

16 whole or part; and

17 (6) the address of the surviving partnership's

18 principal place of business.

19 (c) The plan of merger must be approved:

20 (1) in the case of a general partnership that is

21 a party to the merger, by the unanimous vote of all the

22 partners, or any lesser vote specified for merger in the

23 partnership agreement; and

24 (2) in the case of a limited partnership that is

25 a party to the merger, by the vote required for approval of

26 a merger by the applicable statute of the state or foreign

55

1 jurisdiction where the other partnership is organized, and,

2 in the absence of a specifically applicab~e statute, by the

3 unanimous vote of all the partners, notwithstanding a

4 provision to the contrary in the partnership agreement.

5 (d) After a plan of merger is approved, and at any

6 time before the merger takes effect, the plan may be

7 amended or abandoned as provided in the plan.

S (e) The merger takes effect on the later of:

9 (1) the approval of the plan of merger by each

10 party to the merger, as provided in sUbsection (c);

11 (2) the filing by each party to the merger of any

12 documents required by statute to be filed as a precondition

13 to the effectiveness of the merger; or

14 (3) the effective date, if any, specified in the

15 plan of merger.

16 SECTION 905. EFFECT OF MERGER.

17 Ca) When a merger takes effect:

lS (1) Every partnership that is a party to the

19 merger other than the surviving partnership is deemed to be

20 dissolved;

21 (2) Title to all property owned by each of the

22 merged partnerships vests in the surviving partnership

23 without further act or deed and without reversion or

24 impairment;

56

1 (3) All liabilities of every partnership that is

2 a party to the merger become the liabilities of the

3 surviving partnership; and

4 (4) Any proceeding pending against a partnership

5 that is a party to the'merger may be continued as if the

6 merger did not occur or the surviving partnership may be

7 substituted as a party to the proceeding.

8 (b) A surviving foreign partnership is deemed to

9 appoint irrevocably the [Secretary of state] of this State

10 as its agent for service of process in any proceeding to

11 enforce an obligation of a domestic partnership that is a

12 party to the merger. The partnership shall promptly notify

13 the [Secretary of State] of its current mail,ing address and

14 of any future change of address. ' Upon receipt of process,

15 the [Secretary of State] shall mail a copy of the process

16 to the surviving foreign partnership.

17 (c) A partner of the surviving partnership is liable

18 for:

19 (1) all obligations of a party to the merger for

20 which the partner was personally liable before the merger;

21 (2) all obligations of the surviving partnership

22 incurred before the merger by a party to the merger, other

23 than those for which the partner is personally liable under

24 paragraph (1), but the liability may be satisfied only out

25 of partnership property; and

57

1 (3) all obligations of the surviving partnership

2 incurred after the merger takes effect.

3 (q) If the liabilities incurred before the merger by

4 a party to the merger are not satisfied out of the

5 surviving partnership's property, the former partners of

6 that party shall contribute, pursuant to section 401(b),

7 the amount necessary to satisfy that party's partnership

8 liabilities. If any partner fails to contribute, the other

9 former partners of that party shall contribute their share

10 of the liabilities and, in the proportions in which they

11 shared losses, the additional amount necessary to satisfy

12 the liabilities.

13 [Alternative: (d) If the liabilities incurred before

14 the merger by a party to the merger are not satisfied out

15· of the surviving partnership's property, the former

16 partners of that party shall contribute the amount

17 necessary to satisfy that party's partnership liabilities

18 in the manner provided in section 808(b) as if the merged

19 party were dissolved.]

20 (e) A partner of a party to the merger who does not

21 become a partner of the surviving partnership is, for the

22 purposes of Article 7, deemed dissociated from the

23 partnership of which that partner was a partner before the

24 merger.

58

1 SECTION 906. STATEMENT OF MERGER.

2 (a) The surviving partnership in a merger may

3 execute and file in the office of the [Secretary of State]

4 a statement that one or more partnerships have merged and

5 may record a certified copy of the statement in the place

6 for recording transfers of real property.

7 (b) A statement of merger shall include:

8 (1) the name of each partnership that is a party

9 to the merger;

10 (2) the name of the surviving partnership into

11 which the other partnerships are merged;

12 (3) the address of the surviving partnership's

13 principal place of business; and

14 (4) ' whether the surviving partnership is a

15 general or a limited partnership.

16 (c) Title to real property of the surviving

17 partnership which before the merger was held in the name of

18 another party to the merger is, for the purposes of Section

19 302, deemed held in the surviving partnership's name if a

20 certified copy of the statement of merger, or other indicia

21 of the surviving partnership's interest, is recorded in the

22 place for recording transfers of that property.

59

'r~~;'I~ \ &,... ·100;1 ...... ,' '

1 SECTION 906. STATEMENT OF MERGER.

2 (a) At least two partners of the surviving

3 partnership in a merger may execute, declare to be accurate

4 under penalty of perjury, and file in the office of the

5 [Secretary of State] a statement that one or more

6 partnerships have merged into the surviving partnership and

7 may record a certified copy of the statement in the place

8 for recording transfers of real property.

9 (b) A statement of merger shall include:

10 (1) the name of each partnership that is a party

11 to the merger;

12 (2) the name of the surviving partnership into

13 which the other partnerships are merged;

14 (3) the address of the surviving partnership's

15 principal place of business; and

16 (4) whether the surviving partnership is a

17 general or a limited partnership.

18 (c) Title to real property of the surviving

19 partnership which before the merger was held in the name of

20 another party to the merger may, for the purposes of

21 Section 302, be c6nverted into property held in the

22 surviving partnership's name by recording a certified copy

23 of the statement of merger in the place for recording

24 transfers of that property.

59

(a) At least two partners of the survlvlng partnership may exeoute, declare to be accurate unde~ penalty of perjury and file, in the office of [the secretary of Statel, a 'statement that one or more partnerships have merged into the surviving partnership. The statement shall include the name of each partnership which is a party to the merqer and the .name and the the address of the chief executive office of the surviving partnership.

(b) The statement of merqer shall have the s~e effect as a statement of dissolution under Section 806 for all qeneral partnerships who are parties to the merger other than the survivinq partnership.

(a) Title to real property of the survivinq partnership which was held in the name of one of the other qeneral partnership parties prior to the merger may, for the purposes of Section 302, be converted into property held in the survivinq partnership's. name by recording a certified copy of the statement of merqer in the place for recording transfers of '. that real property.

~\ /, . .- 2/esm/0716It.

3.18.92 ,

'---- ---./ ------

IRVINE , CA

L.OS ANGEL.ES, CA

Io4AOISON, WI Io4IAMI , FL. NEW 'fORK, N'f

WASHINGTON,O .C .

KATTEN MUCHIN & ZAVIS 525 WEST MONROE STREET· SUITE 1600

CHICAGO, ILLINOIS 60661-3693

March 17, 1992

Mr. H. Lane Kneedler Office ' of the Attorney General 101 North Eighth Street Richmond, Virginia 23219

TEL.EPHONE 13121902-5200

TEL.ECOPIER 1312) 902-1061

TEL.EX 298264 ATL.AW UR

WRITER'S OIRECT OIAL. NUMBER

312-902-5293

Re: Revised Uniform partnership Act sections 101-309 - ABA Subcommittee comments

Dear Lane:

I'm writing to provide some additional comments on sections 101-309 of the March 3, 1992 draft of the Revised Uniform Partnership Act ("RUPA") to be presented to the National Conference of Commissioners on Uniform state Laws ("NCCUSL"). These comments have been prepared by members of the Ad hoc Subcommittee on RUPA (the "Subcommittee") of the ABA Committee on Partnerships and Unincorporated Business Organizations (Section of Business Law) and reflect the general agreement of the majority of the members of the Subcommittee that attended its meetings in Washington, D.C. on November 8, 1991 and in Denver, Colorado on January 10-11, 1992.

This letter supplements both the October 29, 1990 letter and the July 26, 1991 letter (together the "Prior Letters") previously submitted on behalf of the Subcommittee regarding this portion of RUPA. A number of suggestions made in the Prior Letters have been incorporated into the current draft of RUPA; the NCCUSL Drafting Committee has decided not to adopt other suggestions made in the Prior Letters. Two of the comments made in the Prior Letters are remade in this letter due to the Subcommittee's strong feeling that they should be incorporated into RUPA. other points not adopted by the Drafting Committee that the Subcommittee feels would improve RUPA but are not central to it are not remade herein.

As a final introductory note, we continue to believe that a number of style changes could be made to improve RUPA. However, we understand that RUPA will undergo a comprehensive review for

A L.AW PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS

KATTEN MUCHIN & ZAVIS

Mr. H. Lane Kneedler March 17, 1992 Page 2

style and will reserve our style comments, at least as to Articles 1 through 3, for a later time. If our understanding is incorrect, please let me know.

1. ~oreign Partnerships. At the Subcommittee's discussions 1n Washington, it became clear that practitioners disagree as to the application of general partnership law to partnerships that operate in more than one state. Some Subcommittee members believe that a mUltistate partnership can select a state of formation and be confident that that state's laws will govern its internal affairs and its relationships with third parties. other members believe that the law that applies to a mul tistate partnership can vary in each state in which the partnership operates. Preservation in RUPA of the lack of statutory clarity on this issue present in the UPA could create confusing and inappropriate results, particularly as the state-by­state process of adopting RUPA is taking place and if and when non-uniform provisions are incorporated into RUPA as adopted by the various states. We feel strongly that a general partnership with mUltistate operations should be entitled to rely on one state's law applying to relations among its partners and with third parties. In light of our discussions, we believe it is extremely important that RUPA include a provision based upon Revised Uniform Limited Partnership Act section 901(1) that would read as follows:

"Subject to the Constitution of this State, the laws of the state under which a general partnership not formed under the laws of this state is organized shall govern its organization and internal affairs and its relations with persons who are not partners."

2. Freedom of Contract. The primacy of the partnership agreement in governing partner and partnership relations is traditional in American partnership law and is memorialized in RUPA section 105. Given the importance of this principle, we suggest that it be established more definitively by inclusion of one additional RUPA SUbsection and amendment of RUPA section 105(a).

First, we suggest that the following SUbsection be added to RUPA Section 104:

. 1 " LAW PARTNE"SH.P .NCLUD'NG PRO~[SSION"L CORPORATIONS

KATTEN MUCHIN & ZAVIS

Mr. H. Lane Kneedler March 17, 1992 Page 3

"(c) It is the policy of this [Act] to give maximum effect to the principle of freedom of contract and to the enforceability of partnership agreements."

This subsection is based on section 17-1101 (c) of the Delaware Revised Uniform Limited partnership Act, which has been very well received by practitioners.

Second, we suggest that Section 105 (a) be revised to read in its entirety as follows:

"(a) Except as provided in section 105(b), the partnership agreement governs relations among the partners and between the partners and the partnership. To the extent the partnership agreement does not provide, this [Act] governs relations among the partners and between the partners and the partnership."

These two provisions would help assure that, except as otherwise required by RUPA section 105(b), the partners' wishes as to how their relationship should be structured will be respected.

3. Liability of Purported Partners. We believe that the relationship between Sections 307 and 308 with respect to purported partners should be clarified.

We believe that a purported partner who is liable together with a partnership through application of sections 308 (a) and 308 (b) should have the benefit of the "exhaustion" requirement of Section 307. If a partnership accepts credit based on a representation made by or with the consent of a purported partner and all partners approve, it is appropriate for the recipient of the credit (the partnership) to have primary liability. Under RUPA, this will be consistent with the expectation of those who extend credit to , a partnership. Although a comment to Section 308 states that Section 307 applies to Section 308(b), we feel that a strong possibility of different interpretations in different states will be present if the ability of purported partners to rely on Section 307 under these circumstances is not mentioned specifically in the statute.

A LAW PARTNERSHIIi INCLUDING PROP'ESSIONAL CORPORATIONS

KATTEN MUCHIN & ZAVIS

Mr. H. Lane Kneedler March 17, 1992 Page 4

We suggest that the following language be added to section 308 as a new section 308(c) (with relettering of existing sUbsections (c) and (d».

"(c) If a partnership liability or obligation results under section 308 (b), the provisions of Section 307 shall apply to liabilities or obligations of both actual and purported partners."

We hope that these comments will be helpful to the Drafting Committee. Please contact me at 312-902-5293 or one of our Subcommittee's liaisons to the Drafting Committee if you would like clarification of the matters covered in this letter.

tfully,

7~ -/ td: // James -. ,:i"erue - on be alf of the

JLJ:pls cor036/571-2/99000/rho

cc: Allan G. Donn Harry J. Haynsworth IV Edward S. Merrill Gregory P. L. Pierce John H. Small Donald J. Weidner

AD HOC SUBCOMMITTEE MEMBERS:

Gerald V. Niesar, Chairman Norwood B. Beveridge Michael L. Gravelle George C. Hook Alan Kailer Robert R. Keatinge Martin I. Lubaroff Thurston R. Moore

Ad hoc Subcommitte on RUPA

Paul McCarthy William G. Pusch Lauris G. L. Rall Larry E. Ribstein Frederic A. Rubenstein Anthony Van Westrum Robert H. Zimmerman

A LAW PARTNERSHIP INCLUDING PRO'ESSIONAL CORPORATIONS

REPLY TO:

• SAN FRANCISCO

595 MARKET STREET

SA N FRANCISCO' CA 94105

415 • 243 • 9100

FAX 415·243·9276

• LOS ANGELES

"4 SOUTH FLOWER STREET

LOS ANGELES· CA 90071

213 '687 '8000

FAK 213.687' 6255

• WASHINGTON, D.C.

1575 lYE STREET ' N W

WASHIN{;TON .0 C 20005

202 • 789 • 8848

FAX 202 ' '89 • 7594

GERALD V. NIESAR

415. 243. 9100

LAW OFFICES

April 1, 1992

TO:

FROM:

Distribution List --r;RUP A Subcommittee

Gerald V. Niesar .,...---

~ RE: Report; Schedule; Trivia

We held a two-day meeting in Dallas which was very productive. Our host, Alan Kailer, not only provided an excellent array of fine foods, he produced Alan Bromberg. Professor Bromberg was very complimentary and I think it fair to summarize his views as a conclusion that we are on the right track and doing a good job. We certainly appreciate Alan Kailer's and his firm's hospitality and the participation and support of Professor Bromberg.

Next Meeting. We have decided against the Saturday session in Orlando for two principal reasons. First, the session conflicts with an all-day meeting of the Ad Hoc Committee on Partnerships in Bankruptcy. Second, we were not, and still are not, sure we could accomplish much in Orlando since no final draft RUPA is available. Therefore, we will be part of the full Partnership Committee meeting Friday morning, April 10, and we will not have a separate working session at Orlando.

Enclosed are the following:

1. Summary: "What Was Accomplished in Dallas." (Note: the extensive "Fiduciary issue" comment letter was sent to you earlier.)

2. Copy of Lauris Ralls' typically thorough report on the Chicago deliberation of the Drafting Committee (March 19-22).

3. Copy of final Ierne/Gravelle letter on certain issues in Sections 101-301.

At this point, it appears that we should await the final version of the Draft RUPA to be submitted to the full NCCUSL, and then hold a Friday/Saturday meeting to formulate a position on that Draft as a whole. Possibly by the time we meet in Orlando we will have enough information to schedule that meeting.

Hope to see you in Orlando.

GVN7SSI201SSFRM.7SS

WHAT WAS ACCOMPLISHED IN DALLAS RUPA Subcommittee Meeting

March 13-14, 1992

1. Formulated a position on fiduciary connection and closely related provisions, e.g., "duty of good faith ll to be deleted from RUPA and moved to other section. The letter will be finalized and sent on March 16 or 17. (NiesarlLubaroff)

2. Discussed Sections 801 and 802 and closely related matters relating to the "break-up" provisions. Rejected the "compromise;" concluded we could not support it or the previous RUPA draft giving each partner a "license to kill." (Rall)

3. Discussed the Statement of Dissociation (§ 704) and relationship of this to § 303 (Statement of Partnership Authority) and overall choice of law and conflict of law issues. (Van Westrum)

4. Discussed the concept of "capital accounts " (or any other specific accounting methodology) being included in R UP A. This was stimulated by Doc Merrill's memo and proposed language. The unanimous agreement was that no specific accounting procedures should be included in RUPA because it adds a level of complication. For instance, it requires integrating into the "capital account" section(s) all financial impact provisions such as provisions for contribution to cover shortfalls (§ 807(b)(3)), accounting for unliquidated liabilities and appreciated assets, etc. No one could articulate a benefit that would result from adding this new concept to the statute. (Rall -- when the subject comes up for discussion at Drafting Committee).

5. The January _ 1992 draft letter on § 101-301 by Jim Jerne was discussed, especially with respect to the "foreign partnership" issues. Mike Gravelle will review comments from the discussion with Jim Jerne and get the letter completed and sent in time for the March 19-22 Drafting Committee meeting. (Gravelle/Jerne) .

6. It was decided that in Orlando we will have no separate meeting, but a good portion of the full Partnership Committee meeting (10:00-12:30 Friday morning, April 10) will be devoted to discussion of where this Subcommittee's deliberations are and what should be its future activities.

7. In Chicago, Lauris Rall will be at the whole meeting March 19-22. Mike Gravelle will attend when the Section 101-301 issues will be covered. Gerry Niesar will attend for discussion of the fiduciary duty issues. Thurston Moore will attend at least part of the meeting, probably March 21-22.

GVN7~~\201~~PRM. 7~~

8. We discussed the draft merger/conversion provisions. This will be the subject of a comment letter. (Pusch)

9. We decided that an overall "style review" was not useful at the Dallas meeting because there are still so many major portions of the Act unresolved that the effort might be largely academic. Regarding this comment, it should be noted that our use of "style review" refers to a comprehensive review of the entire act for internal consistency, minor substantive matters not previously addressed, review to determine whether redrafting properly and fully addressed the matters at issue, and spelling.

GVN755\20 l!i5FRM. 755

THACHER PROFFIIT & WOOD

Memorandum

To: Gerald V. Niesar, Chairman ABA Subcommittee on the Revised Uniform Partnership Act

FROM: Lauris G. L. Rail

DATE: March 27, 1992

RE: Meetings of NCCUSL RUPA Drafting Committee in Chicago, illinois on March 19-22. 1992

As you requested, I attended the above-referenced meetings on behalf of our RUPA Subcommittee. Thurston Moore attended the meetings on March 19th and Michael Gravelle attended the meetings on March 21st.

The following is a brief summary report of the actions taken by the NCCUSL Drafting Committee during these meetings, organized by topics discussed, generally in the order discussed, together with my observations on some of these actions.

Section 801: Events of Dissolution

The meetings began with a discussion of the alternatives proposed by our Subcommittee and NCCUSL with respect to the dissolution framework for at will partnerships and term partnerships in which a partner leaves before the end of the term (by death or otherwise wrongfully), together with the views of the NCCUSL Review Committee on this subject. As we discussed in our Dallas meetings, the Review Committee was not in favor of the so-called Allan Donn compromise adopted by the NCCUSL Drafting Committee in Richmond. (That compromise provided for the deferral of dissolution for 90 days following a partner withdrawal under the circumstances described above, but with the absolute right of the single partner to cause dissolution at the end of that period.) The Review Committee believes that either the original UPA approach under which the partnership dissolves immediately or the ABA Subcommittee approach permitting continuation by the remaining partners would be preferable to the compromise rule.

I indicated that the Subcommittee had discussed the compromise in our Dallas meetings and found the new rule to be illusory, that the power of the single partner to destroy the partnership was not sufficiently diluted by deferral, and that the continuation rule continued to be the correct solution. Thurston Moore reported that the Subcommittee had acted in part with the understanding that the recommendations of the NCCUSL Review Committee would cause a reconsideration of the Donn compromise. After a limited amount of further discussion, the NCCUSL Committee agreed to continue its support of the Donn compromise. NCCUSL leadership, present at the meeting, suggested that the draft RUPA which is to be submitted to the NCCUSL annual conference this August for adoption contain alternative provisions

-2-

embodying the ABA approach. This suggestion was rejected by the Chairman of the NCCUSL Drafting Committee. However, it appears that some effort will be made to inform the NCCUSL members of the ABA Subcommittee position so that there will be some debate of the proposals at the annual conference.

Section 404: "Fiduciaryll Duties

The Subcommittee's comment letter to this section was introduced and Thurston Moore discussed some of the Subcommittee's reasoning and analysis. The NCCUSL Committee was generally receptive to the Subcommittee's proposed new draft: the "duty of good faith" was moved out of the "fiduciary" duties section; neither that duty nor the duty of loyalty are applicable to "formation"; the subsection forbidding acting adversely to the partnership was revised to restrict only acting on behalf of another person having an interest adverse to the partnership; the word "informed" was dropped before the word "consent"; the sentence describing certain mortgagee actions as an example of activity which merely furthers self-interest was deleted, and in its place language similar to RULPA Section 107 was adopted.

The new subsection relating to "good faith" in Section 401 adopted by NCCUSL on March 19th was not as favorable as the proposed draft of that section in the Subcommittee's comment letter. The concept of fair dealing was linked with good faith and the narrow definition of "honesty in fact" was not adopted. The opposition to the Subcommittee's draft was based on the principle that good faith among partners was a stronger duty than good faith in UCC commercial dealings. Thurston Moore objected to the broader formulation of good faith as an independent duty (even if not a fiduciary duty), arguing that the relevant cases indicated that good faith was a dependent duty, obligating a partner to discharge his duties of loyalty and due care, and otherwise under the partnership agreement, in good faith. He drafted a revised Section 404 which I previously sent to you. This revised section was taken up by the NCCUSL Drafting Committee on March 22nd, the last day of these meetings, under considerable time pressure. Although the title of Section 404 was changed to "Standards of Conduct", the approach taken was similar to that in previous drafts of this section. There will be a statement that the only two fiduciary duties are the duty of loyalty and the duty of care. The "obligation" to discharge these duties and to exercise the rights and perform the duties in the partnership agreement, all in good faith, will also be included in Section 404. But it is framed as a dependent obligation and not as an independent fiduciary duty. The other positive changes described in the previous paragraph were continued in this "final" draft of Secti?n 404.

Article 9: Mergers and Conversions

Certain significant changes were made to the merger and conversion provisions, since we last reviewed them, and these changes were adopted by the NCCUSL Committee in Chicago. First, the merger provision will permit a general partnership to merge with either a limited or general partnership in a state which adopts this version of RUPA, without regard to the state of formation of either of the constituent partnerships. There was substantial discussion concerning

THACHER PROFFTIT & WOOD

-3-

the need for the laws of any foreign state in which one of the partnerships is organized (particularly limited partnerships) to permit a merger, but a provision to this effect was not adopted, even though other provisions in Article 9 refer to domestic and foreign partnerships. Secondly, the liabilities of the partners of the constituent partnerships in a merger have been clarified in Section 905(c): a partner of the surviving partnership will be liable for the obligations of a non-surviving constituent partnership (of which he was not a member) incurred before the merger only to the extent of the surviving partnership's property. This is the position our Subcommittee believed to be correct following our discussions in Dallas. This section will need additional changes to clarify that limited partners of a surviving or constituent partnership will receive different treatment than that set forth therein. Finally, in response to our comment, a new section will be added to draft Article 9 to clarify that the statutory conversion and merger procedures described therein are not exclusive, and thus partnerships may merge and convert under common law, to the extent permitted.

In general, there seems to be significant uncertainty as to the procedures for mergers and conversions, especially as they would apply to multistate partnerships and mergers between partnerships located in different jurisdictions. I believe we should focus on the "final" draft of RUPA to be presented to the NCCUSL convention this summer, and prepare commentary which would be available to NCCUSL concerning any defects in these provisions, in advance of their consideration of R UP A for adoption.

Articles 1, 2 and 3

A considerable amount of time was spent on these Articles. Our Subcommittee's comment letter, prepared by Jim Jerue and presented by Mike Gravelle, fared relatively well. First, Section 105(a) was rewritten, to reflect the supremacy of the partnership agreement, as we had suggested. However, our proposed addition to Section 104, formhlly adopting the policy of freedom of contract, will not be reflected in the statute, but may be included in the Official Commentary for the section. Also, our addition to Section 308, clarifying that a purported partner is allowed the benefits of the "jingle" rule with respect to exhaustion of partnership assets (contained in Section 307) was accepted. Finally, the NCCUSL Committee did adopt a new Section 107 to the effect that the laws of the state in which the partnership has its "chief executive office" (a term borrowed from the UCC), will govern its organization and internal affairs. There was significant discussion as to which state's laws would determine the rights of creditors and other third parties with respect to the partnership. NCCUSL's position at this time is for the statute to remain silent on this subject except to the extent of the rules relating to the filing and effect of the various statements which a partner or the partnership may file now under RUPA. A new section proposed by the NCCUSL Property Subcommittee will provide that a Statement of Partnership Authority, Denial of Status as a Partner or Authority, Dissociation, Dissolution, Merger or any amendment or cancellation of the foregoing will have effect only with respect to partnership property located in or transactions which take place in the state where filed (or where a certified copy of the statement is filed).

THACHER PROFFITI' & WOOD

-4-

In addition, the NCCUSL Property Subcommittee proposed numerous other changes to these sections. Among the most active members of this Subcommittee are Doc Merrill, Greg Pierce and Carlyl Welborn, all either active Partnership Committee members or ABA Real Property Section members. I do not believe we need to make substantial additional commentary at this time to the sections reviewed by this group.

Article 4

Following significant debate, the NCCUSL Committee adopted the proposal by the California State Bar representatives to include provisions in Section 401 for a capital account for each partner. These changes resulted in additional changes to Section 808, settlement of partners' accounts, to reflect the use of capital accounts. I expressed our Subcommittee's view that the inclusion of capital accounts for allocations and liquidations as a default rule seemed over! y complicated and unnecessary.

The change suggested by our Subcommittee to Section 403(c), adding the duty of each partner to furnish information concerning the partnership, was approved by the NCCUSL Subcommittee. However, deleting the requirement that there be a "demand" for the information was not approved.

There was considerable discussion as to whether Section 407(a) conflicted with Section 801(2)(iv), providing for the dissolution of a term partnership at the expiration of the term. Section 407 could be interpreted to provide a contrary result. We should consider whether commentary to this section would be appropriate. We have previously suggested that Section 801(2)(iv) be deleted.

The changes made to Section 404 have been previously discussed herein.

General

There were numerous drafting and technical changes made throughout RUPA, including revisions to Articles 5, 6 and 7 not discussed above. It would be appropriate to review the next draft of RUPA, prior to promulgation of the draft to be used at the annual NCCUSL Convention, and make some additional drafting and technical changes which the Reporters could at least consider for inclusion.

The NCCUSL Drafting Committee apparently will not meet again until just prior to presentation of RUPA to the annual convention in San Francisco. NCCUSL leadership announced at the Chicago meetings that the Drafting Committee would have the floor for one and a half days, starting on a Friday and continuing into Saturday night, if needed (will there be anyone on the floor for Articles 6, 7 and 8?). Then, if amendments proposed by the floor need to be drafted, the Drafting Committee will be given time at the Monday session to present them. NCCUSL leadership also indicated that the Drafting Committee would be required to

THACHER PROFFITT & WOOD

-5-

begin with Article 1 of RUPA and read the Act in its entirety, even though last summer's "final" reading reached Section 308. The Drafting Committee agreed with this decision, although it was clear that they did not like it.

As a result of those decisions, and based upon the objections raised by the NCCUSL Review Committee, the level of debate on the first three Articles at last year's convention (which accorded a little less than half the time to RUPA than will apparently be allocated this year), and my participation in the NCCUSL Drafting Committee meetings this past year, I do not believe that the Act can be completed within the time frame proposed by NCCUSL leadership for this year's convention. Certainly there may be changes to the convention schedule if the RUPA reading starts slowly. And, as stated many times in my reports to you, this is my first experience with the NCCUSL process. NCCUSL leadership believes that they cannot afford another year of drafting RUPA. I do not know the annual budget for this process (for example, compensation for Reporters). I guess only time will tell.

Meanwhile, as noted herein, I believe we should encourage close review of the proposed RUPA by all members of the Partnership Committee, and, to the extent possible, we should collect drafting and technical changes to forward to the Reporters. I do not believe that the Reporters or the NCCUSL Style Committee will make all of the changes to RUPA which the collective wisdom of our Subcommittee would believe to be necessary or appropriate. In addition, given the announced intention of NCCUSL to make the ABA position known at the time of the convention, consideration should be given to preparing a "final" comment letter which would be sent by the Partnership Committee (at the recommendation of the RUPA Subcommittee?) to NCCUSL on or before July 1st (assuming that is early enough).

I look forward to seeing you in Orlando.

xc: John Small Thurston Moore Michael Gravelle

THACHER PROFFITT & WOOD

APR 2 '92 15:33 FROM BAKER-MCKENZIE CHGO SENT 8V!eHICABO-KMZ,. 1-'8-82 i 2:21PM;

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