Understanding the Acts of Partners Which Bind the Partnership and Its Partners Individually
What decisions and actions can and can’t a partner do without the consent of his or her co-partners and/or creating an unreasonable risk of legal liability to a partnership? The answer is not always clear or for that matter, simple. Many factors can come into play to answer that question.
A partner cannot generally obligate a partnership to something that he or she was not authorized to do on behalf of the partnership absent the prior consent or approval of the other partners. On the other hand, an innocent third party or creditor who knows nothing about any restrictions or limits upon a partner’s authority and extends an economic benefit to the partnership may recover from both the partnership and the individual partner he or she relied upon.
Partners Can Be Individually Liable for the Debts of the Partnership
Partners in NJ are individually liable for the obligations of their partnership if partnership assets are not sufficient to satisfy the claims of creditors. The partner’s personal assets may also be attached by making him/her a defendant in a lawsuit against the partnership. To the extent that an individual partner is required to pay more than his or her proportionate share of the partnership obligations, he/she is entitled to proceed against his or her co-partners for the excess monies paid. But beware, a partner with “deep pockets” may be forced to pay 100% of a partnership debt if the creditor proceeds exclusively against him or her because of their “deep pockets”. A partner caught in this vicious situation must then proceed against his or her co-partners for reimbursement (known as contribution) and hope each co-partner has the deep pockets to pay back. This concept is very important to understand as a member of a NJ partnership.
Acts That Will Bind a Partner and Partnership Under New Jersey Partnership Law
You should consult with an experienced NJ partnership law attorney as part of your due diligence partnership planning. Contact Fredrick P. Niemann, Esq. at (855) 376-5291 or email him at fniemann@hnlawfirm.com for a low-cost consultation. You’ll find Mr. Niemann easy to talk to and very approachable.
Newly Admitted Partners and Pre-existing Partnership Debts and Obligations
Absent a written and signed partnership to the contrary, a newly admitted partner to a NJ partnership is personally liable for the pre-existing debts of the partnership prior to their admission and then only to the extent of his/her ownership interest in the partnership. This limited personal liability for partnership debts is an important concept for individuals contemplating a buy-in into a partnership.
Again, unless a written and signed partnership agreement provides to the contrary, each partner in a partnership has equal say and voting rights concerning the decisions and operation of partnership business. Each partner has equal rights in the management, access and inspection of the partnership books and records, and to a formal accounting of partnership’s affairs. Partners have equal rights to the use, possession and benefits of partnership property if used for partnership purposes. Their ownership interest in the partnership and partnership property is not personal and therefore, is not assignable or subject to attachment or execution for the personal debts of the partner.
FIDUCIARY DUTIES OF A PARTNER TO OTHER PARTNERS
Can a partner compete against his or her partnership, or act against the economic interest of the partnership while still a member of the partnership? The short answer is “no”. A legally imposed duty of loyalty between partners requires that a partner refrain from doing things that are intended to or can reasonably be assumed to cause economic harm to the partnership. This duty of loyalty and fair dealing terminates upon a partner’s dissociation from the partnership. If the dissociation by a former partner is found to be wrongful then the partner may be subject to a damage claim by his or her former partner(s) for breach of contract, but if the dissociation is voluntary and there is no enforceable covenant not to compete, a dissociated partner may immediately begin to compete with the partnership for new business; subject again to reasonable restrictions that may have been imposed pursuant to the written partnership agreement signed by the partner who has withdrawn and which limits future permissible competition by him or her.
Fredrick P. Niemann Esq.
Has a partner placed the partnership at risk for liability or is threatening to leave the partnership? Contact me personally today to discuss your NJ partnership business matter. I am easy to talk to, very approachable and can offer you practical, legal ways to handle your concerns. You can reach me toll free at (855) 376-5291 or e-mail me at fniemann@hnlawfirm.com.
Written by Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a New Jersey Partnership Attorney