Meeting 19 - March 8, 1995

Minutes of nineteenth meeting of the Ad Hoc Partnership Laws Committee, held on March 8, 1995. These minutes were prepared by J. Dennis Hynes.

Persons attending the meeting: H. Gregory Austin, James Bretz, Clifford J. Calhoun, J. Dennis Hynes, Robert R. Keatinge, Charles P. Northrop, and James R. Walker.

It was noted at the commencement of the meeting that RUPA does not define the words "dissociation" and "dissolution." No action was taken, but perhaps the matter will be revisited at a later time.

The issue raised at the end of the last meeting, questioning the use of the word "knowledge" in § 702(a)(3), was then addressed. Section 702(a)(3) states that a partnership is bound by an act of a dissociated partner for two years after dissociation only if "the other party . . . (3) is not deemed to have had knowledge under Section 303(e) or notice under Section 704(c)." The phrase "is not deemed to have had knowledge" has an awkward and archaic ring to it, signalling that fictional reasoning is going on. Also, why is "knowledge" used in the first part of subsection (a)(3), which refers to § 303(e), and "notice" used in the second part, which refers to § 704(c), when both sections deal with a notification based on a public filing? (Section 303(e) deals with a recorded statement; § 704(c) deals with a statement filed with the secretary of state.) Why wasn't the word "notice" or "notification" used for both parts?

The word "notification" ordinarily is used to express the concept of notice by a public filing. As noted in the minutes from the last meeting, the Restatement (Second) of Agency § 9, cmt. f, defines "notification" as "a juristic act which determines the rights of the parties, sometimes irrespective of the knowledge by the recipient. It may be given to all persons . . . by filing a writing in a specified place, as the recording of a deed."

The effort to answer the above questions generated a lengthy discussion. Among other things, the point was made that the language in § 102 defining the words "notice," "notification," and "knows" does not include the concept of notification resulting from a public filing or recording. Section § 102 appears to contemplate individualized notice in the sense that it talks about a person "receiving" a notification, and defines the phrase "receives a notification" in § 102(d) to mean when the notification "comes to the person's attention or is duly delivered to the person's place of business." This seems too narrow because it does not include notice resulting from a public filing, yet the Act clearly contemplates such a circumstance in a number of its provisions. Unlike UPA, RUPA expressly utilizes the filing of statements as a vehicle for defining legal rights.

It was noted that the awkwardness of the language of §§ 102, 301, 702, and 704 may not only sound a little strange in 1995, but also may generate some confusion for people attempting to apply it. For example, § 301(1) denies apparent authority if the third person "knew or had received a notification" that the partner lacked authority. How does that mesh with §§ 303(e) and 704(c), both of which cut off apparent authority but neither of which contemplate "receipt" of notification as that is defined in § 102)(d)? Also, § 704(c) states that a person not a partner is "deemed to have notice" of dissociation 90 days after a statement of dissociation is filed, but § 301 does not contain the word "notice."

On a separate matter, Mr. Keatinge made the point in the course of discussion that those drafting RUPA embraced the principle "know your partner" as a fundamental premise of the Act. He noted that the language of § 301(1) is designed to bind a partnership to apparent authority even when the third person has "reason to know" that a partner is not authorized. This point was questioned by some committee members, who observed that this contravenes the policy underlying the agency concept of apparent authority. Apparent authority protects the reasonable expectations of third persons. If a third person has "reason to know" that authority is lacking, his expectation cannot be reasonable, it was argued. In this instance the principle "know your partner" may have been carried too far. And in any event, the language used in § 301 and § 102 makes difficult a clear understanding of the policy choice that was made by those drafting RUPA.

The point was made throughout the discussion that, although the language "deemed to have had knowledge" may be awkward, it nevertheless may be a precise use of the language of the Act and should not be abandoned too quickly. This also was true of the definitions contained in § 102 and of the language used in § 702. Mr. Austin volunteered to prepare a table reflecting the use throughout RUPA of the words "notice," "knowledge," "knows," "deemed to have had knowledge," "deemed to have notice," and "notification." He plans to have it ready for the April 12 meeting. We will then be able to return to this issue and perhaps will find that any restructuring of the language, although reflecting modern usage, may be more trouble than it is worth.

One matter that was resolved by the committee is to add the words "or has knowledge of" to § 102(a). That section then reads as follows:

The committee then turned its attention to § 703. It was observed that Virginia in its § 703(b) added the phrase "the obligation is one for which he is liable under § 306 and" between the words "only if" and "at" in the clause following the final comma. After some discussion, it was decided not to add this language on the reasoning that the phrase "as a partner" in the third line of § 703(b) already expresses this limitation. Also, the Texas decision to substitute the word "withdrawal" for "dissociation" was not adopted on the reasoning that this would generate too great a change in the wording of the Act. Also, the word "withdrawal" is too narrow, since dissociation also can be caused by death, bankruptcy, and other events. No changes were made to § 703.

Moving to § 704, a question was raised about the 90 day period there established for cutting off a dissociated partner's lingering apparent authority. (As a collateral matter not raised in the discussion, the language of the statute cross-refers to several sections within the Act but not to § 301, the general apparent authority section. The Comment to § 704 states in its part (2) that apparent authority is cut off under § 301 but, unlike all other cross-references in the Comment, § 704 itself does not include § 301. Nevertheless, the discussion proceeded on the assumption that all apparent authority is cut off 90 days after a statement of dissociation is filed.)

Several members of the committee thought the 90 day period was too short, particularly when one considers the rule of § 705, which allows a partnership to continue using the name of a dissociated partner (§ 705 is an expansion of the rule of UPA §41(10), which confined that privilege to the use of the name of a deceased partner only). Although sophisticated creditors may either insist on fresh authority for each major transaction or check the records of the Secretary of State every 90 days (most members of the committee thought this was unlikely, however), a concern was expressed for the small creditors, the hardware store and the lumber yard lending to a small construction company, for example, who might be hurt by a 90 day period. Also, the partnership invoking § 704 created the expectations which form the basis for the claim being made against it and should bear greater responsibility for terminating those expectations. A substitute period of six months was recommended.

Arguments in rebuttal included an appeal to uniformity, noting that it weighs heavily here. Also, an argument was made that if a creditor has not dealt with someone for 90 days, he should be asking questions.

Creditors enjoy greater protection under UPA § 35(1)(b)(II) (knowledge or notice of dissolution is required before apparent authority is cut off, and notice is defined in UPA § 3(2) as stating the fact or delivering a written statement to the creditor or at his business), but persons other than creditors can have their expectancy cut off immediately under UPA by publication in a newspaper in the place where the partnership business was carried on.

A vote was taken. It was decided 4-2 to stay with the 90 day period of § 704, subject to reconsideration by a fuller committee. It was noted that § 704 also covers the liability of the dissociated partner, but it was thought that the same time period should apply to both matters. No other questions were raised about § 704, nor were any questions raised about § 705.

The committee turned its attention to Article 8. Discussion immediately focused on the Casey amendment to § 801(2)(i), which states as follows:

The Casey amendment, which is designed to address the "continuity of life" characteristic for tax purposes, was approved by the Executive Committee of NCCUSL and is therefore considered adopted as part of RUPA. It uses the phrase "majority in interest" in place of "at least half of the remaining partners."

In response to a question about the meaning of "majority in interest," it was noted that the IRS has stated that it does not mean majority in number. Instead, it means both a majority in capital and a majority in profits. A question was raised whether the committee should define majority in interest. It is defined in the Texas act. It was suggested, since the phrase is only used once, that § 801(2)(i) instead say "majority in capital and profits."

This matter was left unresolved. We will return to this issue at our next meeting, on Wednesday, March 22.