March 17, 2025 • 20 mins
Welcome back to the Law School Toolbox podcast! This is the second installment of our episodes on partnerships. Previously, we covered the creation of the three main types of partnerships – general partnerships, limited partnerships, and limited liability partnerships. Today we will focus on the power and liability of partners in a partnership.
In this episode we discuss:
- Authority of partners in a partnership
- Liability of partners in different partnership types:
- General partnership
- Limited partnership (LP)
- Limited liability partnership (LLP)
- Applying the rules to two hypos from previous California bar exams
Resources:
- "Listen and Learn" series (https://lawschooltoolbox.com/law-school-toolbox-podcast-substantive-law-topics/#listen-learn)
- California Bar Examination – Essay Questions and Selected Answers, July 2023 (https://www.calbar.ca.gov/Portals/0/documents/admissions/Examinations/July-2023-CBX-Questions-and-Selected-Answers.pdf)
- California Bar Examination – Essay Questions and Selected Answers, July 2014 (https://www.calbar.ca.gov/Portals/0/documents/admissions/gbx/July2014CBX_SelectedAnswersEssays1-6_R.pdf)
- Podcast Episode 464: Listen and Learn – Partnership Formation (https://lawschooltoolbox.com/podcast-episode-464-listen-and-learn-partnership-formation/)
Download the Transcript
(https://lawschooltoolbox.com/episode-495-listen-and-learn-partnership-liability/)
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Thanks for listening!
Alison & Lee
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Lee Burgess (00:01):
Welcome back to the Law School Toolbox podcast.
Today we're covering the topic ofliability in partnerships, as part
of our "Listen and Learn" series.
Your Law School Toolbox hosts are AlisonMonahan and Lee Burgess, that's me.
We're here to demystify the lawschool and early legal career
experience, so you'll be the bestlaw student and lawyer you can be.
(00:23):
We're the co-creators of the Law SchoolToolbox, the Bar Exam Toolbox, and the
career-related website CareerDicta.
Alison also runs TheGirl's Guide to Law School.
If you enjoy the show, pleaseleave a review or rating on
your favorite listening app.
And if you have any questions,don't hesitate to reach out to us.
You can reach us via the contactform on LawSchoolToolbox.com,
and we'd love to hear from you.
And with that, let's get started.
(00:54):
Hello, and welcome back tothe "Listen and Learn" series.
This is the second installment ofour episodes covering partnerships.
In part one, we focused on the threemain types of partnerships - general
partnerships, limited partnerships,and limited liability partnerships,
and the creation of all three.
Today we will cover the power andliability of partners in a partnership.
(01:15):
Understanding these concepts is crucialfor anyone interested in business law,
but is also highly tested on the MEE.
So, if you're preparing for the bar exam,this topic is important for you too.
So let's get started with part two.
As I mentioned, we'll cover the power andliability of partners in a partnership.
(01:36):
Basically, what does a partner getto do, and what are they stuck with?
We'll look at different scenariosaffecting partnerships in the three
main types of partnerships we coveredin an earlier episode - general
partnerships, limited partnerships,and limited liability partnerships.
One tip on this topic (01:53):
The bar exam usually tests the formation
of LPs and LLPs in conjunction witha partner's personal liability.
So, be sure you understandand analyze both.
Feel free to listen to the priorpartnerships episode now, if a
review of those three types would behelpful before diving into part two.
(02:17):
Let's start out on a positive note.
What authority does a partner have becausethey are involved in a partnership?
First, a partner has the authorityto bind a partnership - that is,
commit a partnership to something.
In general, each partner is an agentof the partnership and generally has
authority to bind the partnershipfor the purpose of its business,
(02:38):
including entering into contracts.
More specifically, a partnerhas three types of authority,
depending on the situation - expressactual authority, implied actual
authority, and apparent authority.
First, a partner has expressactual authority to bind the
partnership upon receiving thatauthority from the partners.
(03:00):
Differences among the partners as toacts within the ordinary course of the
partnership business need only to beapproved by a majority of the partners.
Acts outside the ordinary course ofbusiness must be approved unanimously.
If the partnership agreement is silenton the scope of the partner's authority,
(03:20):
a partner has authority to bind thepartnership to usual and customary
matters, unless the partner knows that,a) other partners might disagree; or
b) for some other reason consultationwith fellow partners is appropriate.
Hiring an employee, for example, isnormally within the ordinary course
of partnership business, unless thepartnership agreement states otherwise.
(03:45):
In sum, if the partners give anotherpartner authority to bind the
partnership, they have express authority.
That is easy to remember,because the authority has to be
expressed by the other partners.
But what if it hasn't?
A partner has implied actual authority- also known as incidental authority - to
(04:06):
take actions that are reasonablyincidental or necessary to achieve
the partner's authorized duties.
I know that sounds a little vague,but it's fairly straightforward.
Basically, if a partner has beenauthorized to carry out certain
duties, they have implied authorityto take reasonable and necessary
steps to carry out those duties.
(04:29):
And finally there is apparent authority.
A partner has apparent authority to bindthe partnerships for all acts apparently
conducted within the ordinary course ofthe partnership business, or the kind of
business carried on by the partnership.
However, a partner's act will not bindthe partnership if, [1] the partner
(04:49):
lacked authority; and [2] the thirdparty knew [actual knowledge], or had
notice that the partner lacked authority.
This makes sense, right?
The partner didn't have apparentauthority if they knew they
didn't have the authority.
So, what makes an action withinthe ordinary course of business?
How do you know?
(05:10):
The rule states that an action ortransaction is within the ordinary
course of business if it is normal andnecessary for managing the business.
That is, a person would reasonablyconclude the act is directly
and necessarily embraced withinthe partnership business.
That still isn't super clear, I know.
(05:31):
So, as you might guess by now, that'swhere the legal argument often lies.
If you get a question like this onan exam, flex your legal analysis
muscles and make your best argumentfor why the action is, or is not,
within the ordinary course of business.
Before we move on, I haveone more thing to mention.
If the act conducted is outside thescope of business, there must be
(05:55):
a manifestation by the partnershipthat the partner had authority
in order to bind the partnership.
If not, the partner didnot have authority to act.
Apart from the three types of authoritywe just covered, which govern a partner's
authority during the course of apartnership's business, there are also
rules guiding a partner's authority duringa partnership's winddown or dissolution.
(06:20):
We don't have time to cover those today,but I wanted to flag them for your review.
Now that we know what a partnercan do, let's discuss what they
are stuck with, or must do.
That is, what are they liable forbecause of their role as a partner?
That answer depends onthe type of partnership.
If the partner is part of a generalpartnership, their liability
(06:44):
is different than if they are apart of a limited partnership or
limited liability partnership.
We touched on this a bit in theprior episode, but one of the main
considerations in choosing to forma general partnership, limited
partnership, or limited liabilitypartnership hinges on the liability each
(07:05):
partner takes on in the partnership.
So, let's dive into thedifferent ramifications.
For general partnerships, the rule isthat general partners are personally
liable for all obligations of thepartnership, unless otherwise agreed
by the claimant or provided by law.
Let's stop here for a second.
(07:26):
You may be thinking, "Wow, that'sreally broad", and you'd be right.
Unless the law states otherwise, orthe person suing has otherwise agreed,
partners are completely personally liable.
Partners in a general partnershiphave a lot on the line personally if
something goes awry in the partnership.
If you see a general partnershipmentioned on the exam, you should
(07:48):
immediately be thinking about the broadpersonal liability of its partners.
But, timing is importantwhen considering liability.
In general partnerships, incomingpartners admitted into an already
existing partnership are not liablefor obligations incurred prior to
their admission, even if the incomingpartner has notice of a claim.
(08:11):
Even though that partner is notpersonally liable for the debts of the
partnership, he is still at risk oflosing any capital contributions he
made to the partnership that are usedto satisfy partnership obligations.
That means though the claimant can'tcome after the new or incoming partner
personally, if they had to make somesort of financial contribution to the
(08:34):
partnership in order to join, that money,which is now property of the partnership,
can be used to pay the claimant.
Okay, so let's say there's a lawsuitand the general partnership loses.
Now what?
Generally, a judgment creditorcannot levy execution of the judgment
against a partner's personal assetsfor a partnership debt, unless, [1] a
(08:58):
judgment has been rendered against thepartner; and [2] the partnership assets
have been exhausted or insufficient.
In other words, the partner is protectedunless the judge specifically holds
them personally liable, and eventhen, the judgment must be paid out
from the general partnership first.
Only if debt still remains at that pointwill the partner be personally liable.
(09:23):
Okay, so that's pretty broad.
We know from the previous episodethat partners in a limited
partnership are more protected.
They're less liable than partnersin a general partnership.
But let's get more specific.
Unlike in general partnerships,limited partners are generally not
personally liable for the obligationsof the limited partnership.
(09:45):
However, certain exceptionsto this rule exist.
First, limited partners are alwaysliable for their own misconduct,
or when they sign a personalguarantee for an obligation.
That is, they aren't excused ifthey do something wrong or take
the liability on explicitly.
Second, even if a partner is notpersonally liable for the debts of
(10:07):
the partnership, they are at riskof losing any capital contributions
to make the partnership, justlike in general partnerships.
Third, and finally, thepartner's role in the limited
partnership makes a difference.
A limited partner may become personallyliable if that partner participates in
the management or control of the business.
(10:29):
If a limited partner's control andmanagement activities are so extensive as
to be substantially the same as those ofa general partner, then some jurisdictions
have held the partner to be liable inthe same manner as a general partner.
Whether the limited partner isliable and the extent of the
liability depends on the applicableact enacted in the jurisdiction.
(10:51):
We're not going to get into thenitty-gritty of the four different
rules today; I just want you to knowthat different tests exist for partners
involved in management, and it would bewise to study those four rules so you can
apply them if they are relevant in yourjurisdiction or in a particular question.
One exam tip (11:08):
If you don't know from the facts which rule applies, you should
analyze each of them, explaining whatthe outcome would be under each scenario.
So, be sure to review them.
Okay, so we have one more typeof partnership to review before
we dive into some hypotheticals- limited liability partnerships.
(11:30):
LLPs are the most protective oftheir partners - that is, partners
carry the least personal liabilitywhen they are part of an LLP.
The rule for LLPs is this (11:39):
An obligation incurred by a limited liability
partnership is solely the obligation ofthe LLP - that is, a partner in an LLP is
not liable for partnership obligations.
However, certain exceptionsto this rule exist.
First, as in LPs, partners are alwaysliable for their own misconduct
(12:02):
or when they sign a personalguarantee for the obligation.
Second, and again like in LP or GP,even if a partner is not personally
liable for the debts of the partnership,they are at risk of losing any
capital contributions made to it.
Third, obligations incurred beforea partnership becomes an LLP are
(12:22):
treated as obligations of the priorpartnership entity - i.e. general
partnership or limited partnership- meaning if the partnership converted
from a GP to an LLP, the rules ofGP liability apply to obligations
incurred while the partnership was a GP.
Again, timing matters.
(12:43):
One final rule to cover, and thatis about the partnership's liability
for the partner's actions- the flipside of what we've been discussing.
A partnership is liable for loss or injurycaused to a person, or for a penalty
incurred because of, [1] the wrongfulact, omission, or actionable conduct
of a partner that is [2] acting in theordinary course of partnership business.
(13:09):
Now that we've covered all the rules,let's check our knowledge by applying
these rules to some hypotheticals.
This first hypo is taken from theJuly 2023 California bar exam:
"Amy, Bob, and Carl are partnersin the ABC law firm, which operates
under a general partnership agreement.
ABC provides all firm attorneys withcell phones to facilitate prompt
(13:32):
attorney-client communications.
ABC has a policy that all firm attorneysmust carry their work-provided cell
phones with them at all times, and thatall client emails must be responded
to immediately - at least with apersonal acknowledgement of receipt.
After work one day, Amy was drivingin heavy traffic to attend a
baseball game when she received anurgent email from an ABC client.
(13:56):
While briefly stopped in traffic,Amy attempted to answer the email
on her work-provided cell phone.
Due to this distraction, Amy negligentlycaused a car accident that was the
actual and proximate cause of seriousinjuries to the other driver, Priya.
Priya sued Amy, ABC, Bob, and Carl fordamages arising from the car accident.
(14:18):
The judge found Amy tobe personally liable.
Should she also find ABC, Bob, and Carlto be liable for Priya's injuries?"
What do you think?
Let's break it down a bit.
Priya is suing thegeneral partnership, ABC.
She is suing the partner whocaused the accident, Amy, who
the judge has found to be liable.
(14:39):
And she is suing the two otherpartners, Bob and Carl, who were not
directly involved in the accident.
Let's start with ABC.
A partnership is not liable forevery action taken by its partners.
Nonetheless, a partnership willstill be liable for the tortious
conduct of its partners when thepartners were acting in the ordinary
course of the partnership business.
(15:00):
Partners are the agentsof the partnership.
Assuming Amy was acting in theordinary course of business, ABC
is still liable for her conduct,even though it was tortious.
Here, Amy negligently caused acrash while attempting to answer
an email from an ABC client.
Though ABC may try to argue thatABC was acting outside the scope
(15:21):
of the partnership business.
That is unconvincing.
As we were told, ABC provides all itsattorneys with cell phones to facilitate
prompt attorney-client communications.
Moreover, ABC has a policy requiringall firm attorneys to carry their
work-provided phones with them atall times, and that all client emails
must be responded to immediately.
(15:42):
Therefore, in attempting to respondto an urgent email from a firm client
while sitting in traffic - i.e.immediately, as per the firm policy
- Amy was acting within the ordinarycourse of the partnership business.
She was performing the kind of workshe performs for the partnership,
dealing with client matters, and wasacting to further the partnership
business by responding to a firm client.
(16:03):
This is true even though Amy wasdriving, and even though she was
responding outside of work hours.
Nothing in the rule indicates anyexcuses or valid reasons for violating
the seemingly absolute policy.
Therefore, ABC will likely be foundliable for the damages Priya suffered.
So, what does that mean for Bob and Carl?
Bob and Carl are Amy's partners in theABC law firm, a general partnership.
(16:27):
General partnerships do not provideits partners with limited liability.
In other words, general partnersare personally liable for
the partnership obligations.
Because ABC should be found liable forAmy's actions at issue here, Bob and Carl,
as well as Amy - as partners in a generalpartnership - are personally liable
for the obligations of ABC law firm.
(16:48):
Therefore, Priya may be able torecover from Bob and Carl in their
personal capacity, assuming thatABC's assets are insufficient
to cover its liability to Priya.
If ABC's assets are insufficient, Priyacan recover from Bob and Carl personally.
Again, because they are general partnersin a general partnership, Bob and Carl
may be held personally liable to Priya.
(17:11):
With that hypo, we can really seethe risks of a general partnership to
the personal assets of its partners.
Let's look at one more with anothertype of partnership before we sign off.
This one is adapted from theJuly 2014 California bar exam:
"Alice's and Bob's law firm, AB Law,is a limited liability partnership.
The firm represents Sid,a computer manufacturer.
(17:34):
In the course of representing Sid,Alice learned that Sid planned
a tender offer for the publiclytraded shares of chip maker, Chipco.
Alice bought 10,000 Chipco shares.
By buying the 10,000 Chipcoshares, she drove up the price
that Sid had to pay by $1 million.
When Alice sold the 10,000 Chipcoshares, she realized a $200,000 profit.
(17:58):
Sid sues Alice, AB Law, and Bob.
Should they be found liable?
Discuss."
We know that AB Law is a limitedliability partnership, and that an LLP
is a special type of partnership thataffords limited liability to all its
partners, created by filing a statement ofqualification with the secretary of state.
(18:19):
In an LLP, the individual partners arenot personally liable for any damages
sustained by the partnership itself.
Alice, however, remains liable forher own misconduct, even though she
is protected by the LLP structure.
For that reason, if misconduct is found,Alice is likely to be found liable.
Bob, on the other hand, ismerely a partner in the LLP and
(18:40):
has limited liability, even ifAB Law is found to be liable.
Sid likely won't prevail against Bob.
Finally, there is AB Law.
A partnership is liable for its partner'swrongful actions if the partner is acting
in the ordinary course of business.
Alice's misconduct has led to a loss bySid of $1 million and has resulted in a
(19:02):
gain to Alice, not AB Law, of $200,000.
The purchasing of shares for personalprofit is outside the scope of
a law firm's business activity.
And there is nothing in the factsindicating the firm gave Alice authority
to conduct this transaction, nor thatAlice thought she had such authority.
Because Alice was acting in her personalcapacity and for her personal gain, though
(19:26):
she was using knowledge gleaned fromher work at AB Law, AB Law's unlikely
to be found liable for her malfeasance.
Because the partnership is not liable,Bob is further insulated from any
personal liability for Alice's actions.
I know that was a lot of ground to covertoday, but I hope the hypothetical helped
(19:46):
make some of these rules more concrete.
There are a lot of moving pieces inthese questions, so read carefully.
Take your time and make sure you'reanswering each part of the question.
You're well on your wayto mastering partnerships.
Okay, that's a wrap for today.
Glad you could join me.
If you enjoyed this episode of theLaw School Toolbox podcast, please
(20:08):
take a second to leave a review andrating on your favorite listening app.
We'd really appreciate it.
And be sure to subscribeso you don't miss anything.
If you have any questions orcomments, please don't hesitate
to reach out to myself or Alisonat lee@lawschooltoolbox.com or
alison@lawschooltoolbox.com.
Or you can always contactus via our website contact
form at LawSchoolToolbox.com.
(20:28):
Thanks for listening, and we'll talk soon!
Welcome back to the Law School Toolbox podcast.
Today we're covering the topic ofliability in partnerships, as part
of our "Listen and Learn" series.
Your Law School Toolbox hosts are AlisonMonahan and Lee Burgess, that's me.
We're here to demystify the lawschool and early legal career
experience, so you'll be the bestlaw student and lawyer you can be.
(00:23):
We're the co-creators of the Law SchoolToolbox, the Bar Exam Toolbox, and the
career-related website CareerDicta.
Alison also runs TheGirl's Guide to Law School.
If you enjoy the show, pleaseleave a review or rating on
your favorite listening app.
And if you have any questions,don't hesitate to reach out to us.
You can reach us via the contactform on LawSchoolToolbox.com,
and we'd love to hear from you.
And with that, let's get started.
(00:54):
Hello, and welcome back tothe "Listen and Learn" series.
This is the second installment ofour episodes covering partnerships.
In part one, we focused on the threemain types of partnerships - general
partnerships, limited partnerships,and limited liability partnerships,
and the creation of all three.
Today we will cover the power andliability of partners in a partnership.
(01:15):
Understanding these concepts is crucialfor anyone interested in business law,
but is also highly tested on the MEE.
So, if you're preparing for the bar exam,this topic is important for you too.
So let's get started with part two.
As I mentioned, we'll cover the power andliability of partners in a partnership.
(01:36):
Basically, what does a partner getto do, and what are they stuck with?
We'll look at different scenariosaffecting partnerships in the three
main types of partnerships we coveredin an earlier episode - general
partnerships, limited partnerships,and limited liability partnerships.
One tip on this topic (01:53):
The bar exam usually tests the formation
of LPs and LLPs in conjunction witha partner's personal liability.
So, be sure you understandand analyze both.
Feel free to listen to the priorpartnerships episode now, if a
review of those three types would behelpful before diving into part two.
(02:17):
Let's start out on a positive note.
What authority does a partner have becausethey are involved in a partnership?
First, a partner has the authorityto bind a partnership - that is,
commit a partnership to something.
In general, each partner is an agentof the partnership and generally has
authority to bind the partnershipfor the purpose of its business,
(02:38):
including entering into contracts.
More specifically, a partnerhas three types of authority,
depending on the situation - expressactual authority, implied actual
authority, and apparent authority.
First, a partner has expressactual authority to bind the
partnership upon receiving thatauthority from the partners.
(03:00):
Differences among the partners as toacts within the ordinary course of the
partnership business need only to beapproved by a majority of the partners.
Acts outside the ordinary course ofbusiness must be approved unanimously.
If the partnership agreement is silenton the scope of the partner's authority,
(03:20):
a partner has authority to bind thepartnership to usual and customary
matters, unless the partner knows that,a) other partners might disagree; or
b) for some other reason consultationwith fellow partners is appropriate.
Hiring an employee, for example, isnormally within the ordinary course
of partnership business, unless thepartnership agreement states otherwise.
(03:45):
In sum, if the partners give anotherpartner authority to bind the
partnership, they have express authority.
That is easy to remember,because the authority has to be
expressed by the other partners.
But what if it hasn't?
A partner has implied actual authority- also known as incidental authority - to
(04:06):
take actions that are reasonablyincidental or necessary to achieve
the partner's authorized duties.
I know that sounds a little vague,but it's fairly straightforward.
Basically, if a partner has beenauthorized to carry out certain
duties, they have implied authorityto take reasonable and necessary
steps to carry out those duties.
(04:29):
And finally there is apparent authority.
A partner has apparent authority to bindthe partnerships for all acts apparently
conducted within the ordinary course ofthe partnership business, or the kind of
business carried on by the partnership.
However, a partner's act will not bindthe partnership if, [1] the partner
(04:49):
lacked authority; and [2] the thirdparty knew [actual knowledge], or had
notice that the partner lacked authority.
This makes sense, right?
The partner didn't have apparentauthority if they knew they
didn't have the authority.
So, what makes an action withinthe ordinary course of business?
How do you know?
(05:10):
The rule states that an action ortransaction is within the ordinary
course of business if it is normal andnecessary for managing the business.
That is, a person would reasonablyconclude the act is directly
and necessarily embraced withinthe partnership business.
That still isn't super clear, I know.
(05:31):
So, as you might guess by now, that'swhere the legal argument often lies.
If you get a question like this onan exam, flex your legal analysis
muscles and make your best argumentfor why the action is, or is not,
within the ordinary course of business.
Before we move on, I haveone more thing to mention.
If the act conducted is outside thescope of business, there must be
(05:55):
a manifestation by the partnershipthat the partner had authority
in order to bind the partnership.
If not, the partner didnot have authority to act.
Apart from the three types of authoritywe just covered, which govern a partner's
authority during the course of apartnership's business, there are also
rules guiding a partner's authority duringa partnership's winddown or dissolution.
(06:20):
We don't have time to cover those today,but I wanted to flag them for your review.
Now that we know what a partnercan do, let's discuss what they
are stuck with, or must do.
That is, what are they liable forbecause of their role as a partner?
That answer depends onthe type of partnership.
If the partner is part of a generalpartnership, their liability
(06:44):
is different than if they are apart of a limited partnership or
limited liability partnership.
We touched on this a bit in theprior episode, but one of the main
considerations in choosing to forma general partnership, limited
partnership, or limited liabilitypartnership hinges on the liability each
(07:05):
partner takes on in the partnership.
So, let's dive into thedifferent ramifications.
For general partnerships, the rule isthat general partners are personally
liable for all obligations of thepartnership, unless otherwise agreed
by the claimant or provided by law.
Let's stop here for a second.
(07:26):
You may be thinking, "Wow, that'sreally broad", and you'd be right.
Unless the law states otherwise, orthe person suing has otherwise agreed,
partners are completely personally liable.
Partners in a general partnershiphave a lot on the line personally if
something goes awry in the partnership.
If you see a general partnershipmentioned on the exam, you should
(07:48):
immediately be thinking about the broadpersonal liability of its partners.
But, timing is importantwhen considering liability.
In general partnerships, incomingpartners admitted into an already
existing partnership are not liablefor obligations incurred prior to
their admission, even if the incomingpartner has notice of a claim.
(08:11):
Even though that partner is notpersonally liable for the debts of the
partnership, he is still at risk oflosing any capital contributions he
made to the partnership that are usedto satisfy partnership obligations.
That means though the claimant can'tcome after the new or incoming partner
personally, if they had to make somesort of financial contribution to the
(08:34):
partnership in order to join, that money,which is now property of the partnership,
can be used to pay the claimant.
Okay, so let's say there's a lawsuitand the general partnership loses.
Now what?
Generally, a judgment creditorcannot levy execution of the judgment
against a partner's personal assetsfor a partnership debt, unless, [1] a
(08:58):
judgment has been rendered against thepartner; and [2] the partnership assets
have been exhausted or insufficient.
In other words, the partner is protectedunless the judge specifically holds
them personally liable, and eventhen, the judgment must be paid out
from the general partnership first.
Only if debt still remains at that pointwill the partner be personally liable.
(09:23):
Okay, so that's pretty broad.
We know from the previous episodethat partners in a limited
partnership are more protected.
They're less liable than partnersin a general partnership.
But let's get more specific.
Unlike in general partnerships,limited partners are generally not
personally liable for the obligationsof the limited partnership.
(09:45):
However, certain exceptionsto this rule exist.
First, limited partners are alwaysliable for their own misconduct,
or when they sign a personalguarantee for an obligation.
That is, they aren't excused ifthey do something wrong or take
the liability on explicitly.
Second, even if a partner is notpersonally liable for the debts of
(10:07):
the partnership, they are at riskof losing any capital contributions
to make the partnership, justlike in general partnerships.
Third, and finally, thepartner's role in the limited
partnership makes a difference.
A limited partner may become personallyliable if that partner participates in
the management or control of the business.
(10:29):
If a limited partner's control andmanagement activities are so extensive as
to be substantially the same as those ofa general partner, then some jurisdictions
have held the partner to be liable inthe same manner as a general partner.
Whether the limited partner isliable and the extent of the
liability depends on the applicableact enacted in the jurisdiction.
(10:51):
We're not going to get into thenitty-gritty of the four different
rules today; I just want you to knowthat different tests exist for partners
involved in management, and it would bewise to study those four rules so you can
apply them if they are relevant in yourjurisdiction or in a particular question.
One exam tip (11:08):
If you don't know from the facts which rule applies, you should
analyze each of them, explaining whatthe outcome would be under each scenario.
So, be sure to review them.
Okay, so we have one more typeof partnership to review before
we dive into some hypotheticals- limited liability partnerships.
(11:30):
LLPs are the most protective oftheir partners - that is, partners
carry the least personal liabilitywhen they are part of an LLP.
The rule for LLPs is this (11:39):
An obligation incurred by a limited liability
partnership is solely the obligation ofthe LLP - that is, a partner in an LLP is
not liable for partnership obligations.
However, certain exceptionsto this rule exist.
First, as in LPs, partners are alwaysliable for their own misconduct
(12:02):
or when they sign a personalguarantee for the obligation.
Second, and again like in LP or GP,even if a partner is not personally
liable for the debts of the partnership,they are at risk of losing any
capital contributions made to it.
Third, obligations incurred beforea partnership becomes an LLP are
(12:22):
treated as obligations of the priorpartnership entity - i.e. general
partnership or limited partnership- meaning if the partnership converted
from a GP to an LLP, the rules ofGP liability apply to obligations
incurred while the partnership was a GP.
Again, timing matters.
(12:43):
One final rule to cover, and thatis about the partnership's liability
for the partner's actions- the flipside of what we've been discussing.
A partnership is liable for loss or injurycaused to a person, or for a penalty
incurred because of, [1] the wrongfulact, omission, or actionable conduct
of a partner that is [2] acting in theordinary course of partnership business.
(13:09):
Now that we've covered all the rules,let's check our knowledge by applying
these rules to some hypotheticals.
This first hypo is taken from theJuly 2023 California bar exam:
"Amy, Bob, and Carl are partnersin the ABC law firm, which operates
under a general partnership agreement.
ABC provides all firm attorneys withcell phones to facilitate prompt
(13:32):
attorney-client communications.
ABC has a policy that all firm attorneysmust carry their work-provided cell
phones with them at all times, and thatall client emails must be responded
to immediately - at least with apersonal acknowledgement of receipt.
After work one day, Amy was drivingin heavy traffic to attend a
baseball game when she received anurgent email from an ABC client.
(13:56):
While briefly stopped in traffic,Amy attempted to answer the email
on her work-provided cell phone.
Due to this distraction, Amy negligentlycaused a car accident that was the
actual and proximate cause of seriousinjuries to the other driver, Priya.
Priya sued Amy, ABC, Bob, and Carl fordamages arising from the car accident.
(14:18):
The judge found Amy tobe personally liable.
Should she also find ABC, Bob, and Carlto be liable for Priya's injuries?"
What do you think?
Let's break it down a bit.
Priya is suing thegeneral partnership, ABC.
She is suing the partner whocaused the accident, Amy, who
the judge has found to be liable.
(14:39):
And she is suing the two otherpartners, Bob and Carl, who were not
directly involved in the accident.
Let's start with ABC.
A partnership is not liable forevery action taken by its partners.
Nonetheless, a partnership willstill be liable for the tortious
conduct of its partners when thepartners were acting in the ordinary
course of the partnership business.
(15:00):
Partners are the agentsof the partnership.
Assuming Amy was acting in theordinary course of business, ABC
is still liable for her conduct,even though it was tortious.
Here, Amy negligently caused acrash while attempting to answer
an email from an ABC client.
Though ABC may try to argue thatABC was acting outside the scope
(15:21):
of the partnership business.
That is unconvincing.
As we were told, ABC provides all itsattorneys with cell phones to facilitate
prompt attorney-client communications.
Moreover, ABC has a policy requiringall firm attorneys to carry their
work-provided phones with them atall times, and that all client emails
must be responded to immediately.
(15:42):
Therefore, in attempting to respondto an urgent email from a firm client
while sitting in traffic - i.e.immediately, as per the firm policy
- Amy was acting within the ordinarycourse of the partnership business.
She was performing the kind of workshe performs for the partnership,
dealing with client matters, and wasacting to further the partnership
business by responding to a firm client.
(16:03):
This is true even though Amy wasdriving, and even though she was
responding outside of work hours.
Nothing in the rule indicates anyexcuses or valid reasons for violating
the seemingly absolute policy.
Therefore, ABC will likely be foundliable for the damages Priya suffered.
So, what does that mean for Bob and Carl?
Bob and Carl are Amy's partners in theABC law firm, a general partnership.
(16:27):
General partnerships do not provideits partners with limited liability.
In other words, general partnersare personally liable for
the partnership obligations.
Because ABC should be found liable forAmy's actions at issue here, Bob and Carl,
as well as Amy - as partners in a generalpartnership - are personally liable
for the obligations of ABC law firm.
(16:48):
Therefore, Priya may be able torecover from Bob and Carl in their
personal capacity, assuming thatABC's assets are insufficient
to cover its liability to Priya.
If ABC's assets are insufficient, Priyacan recover from Bob and Carl personally.
Again, because they are general partnersin a general partnership, Bob and Carl
may be held personally liable to Priya.
(17:11):
With that hypo, we can really seethe risks of a general partnership to
the personal assets of its partners.
Let's look at one more with anothertype of partnership before we sign off.
This one is adapted from theJuly 2014 California bar exam:
"Alice's and Bob's law firm, AB Law,is a limited liability partnership.
The firm represents Sid,a computer manufacturer.
(17:34):
In the course of representing Sid,Alice learned that Sid planned
a tender offer for the publiclytraded shares of chip maker, Chipco.
Alice bought 10,000 Chipco shares.
By buying the 10,000 Chipcoshares, she drove up the price
that Sid had to pay by $1 million.
When Alice sold the 10,000 Chipcoshares, she realized a $200,000 profit.
(17:58):
Sid sues Alice, AB Law, and Bob.
Should they be found liable?
Discuss."
We know that AB Law is a limitedliability partnership, and that an LLP
is a special type of partnership thataffords limited liability to all its
partners, created by filing a statement ofqualification with the secretary of state.
(18:19):
In an LLP, the individual partners arenot personally liable for any damages
sustained by the partnership itself.
Alice, however, remains liable forher own misconduct, even though she
is protected by the LLP structure.
For that reason, if misconduct is found,Alice is likely to be found liable.
Bob, on the other hand, ismerely a partner in the LLP and
(18:40):
has limited liability, even ifAB Law is found to be liable.
Sid likely won't prevail against Bob.
Finally, there is AB Law.
A partnership is liable for its partner'swrongful actions if the partner is acting
in the ordinary course of business.
Alice's misconduct has led to a loss bySid of $1 million and has resulted in a
(19:02):
gain to Alice, not AB Law, of $200,000.
The purchasing of shares for personalprofit is outside the scope of
a law firm's business activity.
And there is nothing in the factsindicating the firm gave Alice authority
to conduct this transaction, nor thatAlice thought she had such authority.
Because Alice was acting in her personalcapacity and for her personal gain, though
(19:26):
she was using knowledge gleaned fromher work at AB Law, AB Law's unlikely
to be found liable for her malfeasance.
Because the partnership is not liable,Bob is further insulated from any
personal liability for Alice's actions.
I know that was a lot of ground to covertoday, but I hope the hypothetical helped
(19:46):
make some of these rules more concrete.
There are a lot of moving pieces inthese questions, so read carefully.
Take your time and make sure you'reanswering each part of the question.
You're well on your wayto mastering partnerships.
Okay, that's a wrap for today.
Glad you could join me.
If you enjoyed this episode of theLaw School Toolbox podcast, please
(20:08):
take a second to leave a review andrating on your favorite listening app.
We'd really appreciate it.
And be sure to subscribeso you don't miss anything.
If you have any questions orcomments, please don't hesitate
to reach out to myself or Alisonat lee@lawschooltoolbox.com or
alison@lawschooltoolbox.com.
Or you can always contactus via our website contact
form at LawSchoolToolbox.com.
(20:28):
Thanks for listening, and we'll talk soon!
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