Partnerships

The lease Salmon kept

In January 1922, Walter Salmon had less than four months left on his lease of the Hotel Bristol, at Fifth Avenue and Forty-second Street in New York. Then the landlord came to him with a bigger idea. Elbridge Gerry owned the lots next door, and he wanted a tenant who would tear down the old buildings and put up a $3,000,000 one across the whole tract. On January 25, a company Salmon owned and controlled signed that lease, which could run as long as eighty years. Salmon never mentioned it to Morton Meinhard, the wool merchant who had put up half the money to rebuild and run the Bristol and shared in what it earned.

Meinhard found out in February and sued. Their written agreement split the money and gave Salmon sole power to manage. The court decided the case on the duty the relationship itself carried, not on the agreement’s terms. That raises the question underneath partnership law: what do people who go into business together owe each other, and everyone else, beyond what they wrote down? Partners who write down less leave even more to that question. Each of the five disputes in the activity turns on a rule the partners never chose.

Salmon and Meinhard were joint venturers rather than partners, but New York’s highest court held them to the loyalty partners owe each other. Salmon had a fair argument. He had given the Bristol his time and work as well as money, and Meinhard, who gave only money, had already been well paid. The court even said Salmon had very likely acted in good faith, assuming that with the venture near its end he could take the new lease for himself.

Four of the seven judges ruled against him anyway, in Meinhard v. Salmon, 164 N.E. 545 (N.Y. 1928) (opens in a new tab). People bound by fiduciary ties, Chief Judge Benjamin Cardozo wrote, are held to a higher standard than people bargaining at arm’s length: “the punctilio of an honor the most sensitive.” In other words, a partner may not act the way a sharp competitor would. The chance at the new lease came to Salmon because he managed the venture. He could have told Meinhard about Gerry’s plan and let them both compete for it. He kept it to himself instead, so the court made him share, measuring Meinhard’s interest by half the new lease. Three judges dissented.

Florida’s partnership statute now spells the duty out. Under section 620.8404, Florida Statutes (opens in a new tab), the only fiduciary duties a partner owes are loyalty and care. Loyalty means turning over to the partnership any benefit a partner draws from its business or its property, including an opportunity that belonged to the firm. It also bars a partner from dealing with the partnership on behalf of someone whose interests are adverse to it, and from competing with it before dissolution.

Care asks less than you might expect. A partner breaches it only through gross negligence, recklessness, intentional misconduct, or a knowing violation of law. So a partner who misreads an invoice and pays a supplier twice has made a mistake, not a breach. The textbook’s Chapter 41 (opens in a new tab) gives its own example of a partner who is careless without being grossly negligent.

The statute also marks limits that Cardozo’s opinion did not spell out. A partner does not breach a duty just because the conduct serves the partner’s own interest. Under section 620.8103, the partnership agreement cannot eliminate loyalty, but it can name specific kinds of activity that do not violate it, if that is not manifestly unreasonable. And the partners can approve a particular deal that would otherwise be disloyal, after full disclosure of the facts. Disclosure and consent are the statute’s way out. Disclosure is the step Salmon skipped.

Partners without paperwork

Most business forms begin with a filing. An LLC or a corporation exists only once the state accepts its paperwork. A general partnership needs none. Under section 620.8202, two or more people who carry on a business together as co-owners for profit have formed a partnership, whether or not they meant to.

Take two friends who buy a used boat and start running fishing charters out of Destin. One books the trips and the other captains. They make the big decisions together and split what is left after fuel and dockage. Neither of them has ever said the word “partnership.” The statute does not need them to.

Sharing profits carries the most weight. A person who receives a share of a business’s profits is presumed to be a partner. The presumption gives way when the share is really payment for something else, such as wages, rent, or interest on a loan. So if the charter business pays its deckhand a tenth of each trip’s profit, the deckhand is still an employee. The share measures the deckhand’s pay; it is not a stake in the business.

Once the partnership exists, each partner is its agent. Under section 620.8301, a partner’s act that appears to carry on the firm’s business in the usual way binds the partnership. The exception is when the partner had no authority and the other side knew it or had been notified. If the captain orders a new fish finder from a marine supplier, the partnership owes for it, even if the other partner would have said no. It is much the same idea as apparent authority from Activity 1, built into the relationship.

Then come the default rules. What the partners never decided, section 620.8401 decides for them. Each partner gets an equal share of the profits, whatever each put in, and bears losses in the same proportion. Every partner has an equal say in management. A majority decides ordinary matters, but anything outside the ordinary course needs everyone’s consent. And no partner is entitled to pay for working in the business, beyond a share of the profits.

Picture the charter again. One partner runs the boat sixty hours a week, and the other put up most of the money and does little else. The statute splits the profits evenly between them and pays the captain nothing extra for the hours.

A partnership agreement replaces most of these defaults with the partners’ own deal. Section 620.8103 lets the agreement govern the partners’ relations with one another and lets the statute fill only the gaps. A few things are beyond its reach, and one of them matters in the next section: nothing in the agreement can restrict the rights of people outside the firm.

Who pays when the firm cannot

A partnership can own property, sign contracts, and sue in its own name. Its debts are still its partners’ debts. Section 620.8306 makes all the partners liable jointly and severally for every obligation of the partnership. Joint and several liability means a creditor can collect the whole amount from any one partner, not just that partner’s share.

Florida sets an order, though. Under section 620.8307, a creditor usually has to win a judgment against the partnership and try to collect it from the firm’s assets first. It also needs a judgment against the partner, which it can seek in the same lawsuit. Only when collection from the firm falls short can it go after what the partner owns. A few other cases open that door sooner: the firm’s bankruptcy, the partner’s agreement to skip the step, or a court’s permission, as when the firm’s assets are clearly insufficient. The partners, in effect, stand behind the firm the way a guarantor stands behind a loan.

Suppose three partners run a moving company that leases two trucks, and the business folds owing the leasing company $60,000. The partnership’s assets cover $15,000. The leasing company can collect the other $45,000 from whichever partner has money, and no deal among the partners changes that. The partner who pays can seek contribution from the other two for their shares. If they have nothing, that partner absorbs the loss.

A limited partnership exists to change that math for some of the owners. It has at least one general partner, who runs the business and carries the same personal liability as any partner in a general partnership. It also has one or more limited partners, who invest. A limited partner is not personally liable for the partnership’s debts just by being one. The money a limited partner invests can be lost, but the rest of that partner’s assets stay beyond the firm’s creditors. Unlike a general partnership, a limited partnership comes into being only when the Florida Department of State files its certificate (section 620.1201).

For most of the last century, the price of that shield was staying out of management. Under the older uniform acts, a limited partner who took part in control of the business could be held liable like a general partner. Florida’s current act, adopted in 2005, drops that rule. Section 620.1303 keeps a limited partner’s shield even when the limited partner takes part in managing and controlling the business. A source that warns limited partners to stay out of management may be describing the older rule, so check which act it follows.

When a partner leaves

Partners retire, fall out, go bankrupt, and die. Under the older uniform act, almost any partner’s departure dissolved the partnership. Florida’s act pulls apart two events that used to happen together: a partner leaving, and the firm ending.

A partner who leaves is dissociated. That happens when the partnership has notice that a partner wants out, and on a partner’s death, bankruptcy, or expulsion, among other events (section 620.8601). The partner’s right to help run the business ends, and so does the duty not to compete with it.

Whether the firm itself ends is a separate question, and the answer depends on whether the partners set a term. In a partnership with no set term, a partner’s notice of intent to withdraw causes dissolution (section 620.8801). A partner’s death or bankruptcy does not. The firm goes on, and under section 620.8701 it must buy out the departed partner’s interest. The price is what that partner would have received if the business had been sold, at the higher of its liquidation value or its value as a going concern.

Picture three architects who run a studio together with nothing in writing. When one of them dies, the studio keeps working, and it owes the partner’s estate a buyout. It does not owe the estate a seat at the table: under section 620.8401, no one becomes a partner without the consent of every partner.

A partnership for a set term or a single project works differently. A partner still has the power to walk away early, but doing so is usually wrongful, and the departing partner is liable for the damage the departure causes (section 620.8602).

After dissolution comes winding up. The partnership takes on no new business. It finishes what it started, sells what it owns, pays its creditors, and then pays the partners what their accounts show. When that is done, the partnership terminates (section 620.8802). Dissolution need not be the last word, though. Before winding up is finished, all the partners, including the one who gave notice, can agree to carry on as if the dissolution never happened.

What Salmon could have said

Cardozo pointed to how little it would have taken. Salmon could have told Meinhard that Gerry had a plan and left both of them free to bid for it. Had he done that, the court said, it would have faced a different question, and it declined to answer that one.

Every dispute in the activity can be traced to something that small: a clause the partners never wrote, or a conversation one of them never had. On the activity page, the Strategist asks you for that clause, one fact pattern at a time. Before it, the Foundation Builder asks the AI to cite Chapter 620 (opens in a new tab) by section number and to flag what it is unsure of. You have now seen the sections that carry most of the weight. Hold the AI’s citations against them, and start with the ones it flags.