Underwriting Manual: TX
15.16
Partnerships
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15.16.1
Definitions
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| The formulation of an all-encompassing definition of “partnership” is very difficult, if not impossible, because the lines of demarcation which distinguish a partnership from other joint interests and agency relationships are many times extremely fine and overlapping. |
| Uniform Partnership Act Definition: “An association of two or more persons to carry on as co-owners of a business for profit.” |
| Common Law Definition: “a contract of two or more competent persons to place their money, effects, labor or skill, or some or all of them, in lawful commerce or business, and to divide the profit and bear the loss in certain proportions (Chancellor Kent).” |
| Other Definitions Which May Have Been Predecessor of the Present Uniform Act: “A partnership is the association of two or more persons for the purpose of carrying on business together and dividing its profits between them.” |
15.16.2
Partnerships Prior To The Uniform Partnership A
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| The Uniform Partnership Act has been adopted by the District of Columbia and every state except Louisiana. Prior to these adoptions of the Uniform Partnership Act, partnership acquisitions of real property interests used to occur by one of the following methods: |
| · | The deed conveyed the land to all the partners, individually naming each partner as grantee; |
| · | The deed conveyed the land to a non-partner third person to hold title for the partnership; |
| · | The deed conveyed land to some of the partners, individually naming only the designated grantee partners, who were regarded as holding in trust for the partnership; or |
| · | The deed conveyed to the partnership by use of the partnership name. |
| Obviously, this last form was awkward because the partnership was not a legal entity. However, courts often sustained such conveyances by treating the grantor as “trustee” for the partnership or admitting parol evidence to identify persons intended to be grantees by a conveyance to the partnership. In some cases, conveyances were held to give each partner a share in the property as a tenant in common. |
15.16.3
Applicable Laws
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| Partnerships are creatures of statute, primarily governed by the provisions of the Uniform Partnership Act (UPA), the Uniform Limited Partnership Act (ULPA) and the Revised Uniform Limited Partnership Act (RULPA), as adopted with some variations by all except one state, but also controlled by contract, common law, judicial dicta, or civil law. |
| Interplay of the UPA and the ULPA |
| There is a clear and ever-present danger, when considering the law of limited partnerships or when drafting a limited partnership agreement, of ignoring the UPA provisions which apply to limited partnerships. |
| Section 6(2) of the UPA expressly states that: “(2) But any association formed under any other statute of this state, or any statute adopted by authority, other than the authority of this state, is not a partnership under this act, unless such association would have been a partnership in this state prior to the adoption of this act; but this act shall apply to limited partnerships except in so far as the statutes relating to such partnerships are inconsistent herewith.” |
| Therefore, where the ULPA is silent, then the UPA governs. |
See also Texas Bulletin TX2015004 – LEGISLATIVE UPDATE 2015 Relating to Registration requirements of Partnerships and Limited Liability Companies
15.16.4
Types Of Partnerships
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| Partnerships may take several forms affording partners varying powers and subjecting them to varying liabilities: |
| General Partnerships: Primarily governed by the Uniform Partnership Act. The Act does not refer to any special categories of general partnerships. It can be stated that every partnership that is not formed in accordance with the law concerning limited partnerships is a general partnership. |
| Limited Partnerships: A partnership which limits the liability of all but general partners and is governed by the Uniform Limited Partnership Act or is revised versions. |
| Mining Partnerships: A type of partnership existing under the laws of certain mining states as special business organizations with some attributes distinguishing them from general partnerships. However, a general partnership may engage in a mining enterprise where the partners, by agreement, dispose of the essential characteristics of a mining partnership and render their association a general partnership. |
| Special Partnerships: Among general partnerships, some jurisdictions distinguish between trading or commercial partnerships and nontrading or ordinary partnerships. |
| Traditionally, a trading partnership is one doing business commercially, that is, a business buying or selling for profit, while a partnership doing something other than buying and selling falls into the nontrading class. |
| In jurisdictions recognizing a distinction among general partnerships by classes, characterized as trading or commercial partnerships as opposed to nontrading or ordinary partnerships, the nontrading class includes partnerships for the practice of a profession, like the practice of law, medicine, construction and engineering, agriculture, or theater operations. |
| Subpartnerships: A subpartnership is a partnership formed between a member of a pre-existing partnership and a third person, for a division of the profits coming to the contracting member from the original partnership enterprise. |
| Universal Partnerships: A universal partnership is a statutorily defined partnership, created by an express writing of the parties, whereby they agree to make a common stock of all property they respectively possess, extended to all property or limited to personal property, and including the option to make the property common stock or only the fruits of the property common stock, and excluding such property as may accrue to one of the parties after entering into the partnership. |
15.16.5
Partnership Associations And Limited Partnership
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| In some states, there exists a type of business organization known either as a “partnership association” or a “limited partnership association”. It is sui generis, a hybrid creature which might be called a quasi-corporation, standing half the way between a limited partnership and a corporation, and representing a still further departure from the common-law liability of a member of a general partnership. In this respect, its nature is similar to that of a joint-stock company. |
| Such an organization is exclusively a creature of statute. It has been said to attain “corporateness”, and have practically every substantial attribute of a corporation. It is an entity separate and apart from its members, an artificial person capable of suing and being sued and of acquiring, holding, and conveying property, and the disposal of a member’s interest or this death or insolvency does not dissolve the association. It does not seem that it can be treated as a partnership under the Uniform Partnership Act, and it has been treated as a corporation for the purposes of state taxation. |
15.16.6
Types Of Partners
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| · | General partners are those who are in charge of the management and business affairs of the partnership and whose liability, for debts and obligations of the partnership, extends beyond the assets of the partnership to any property they may own as individuals. |
| · | Limited partners are those who don’t participate in the management and business affairs of the partnership and whose liability, for debts and obligations of the partnership, extends only to the amount of cash or other property contributed to the partnership. |
| · | Dormant partner a/k/a secret or silent partner, is usually one whose name is not used by the firm and who is generally unknown to those dealing with the partnership. The UPA defines a dormant partner “as unknown as a partner to the person with whom a contract is made and so far unknown as active in partnership affairs that the business reputation of the partnership could not be said to have been in any degree due to his connection with it”. |
| · | Managing or Active partner is one designated by the partnership agreement as the managing or active partner in the conduct of the business. |
| · | Nonvoting partner is one without an affirmative voice in the partnership decisions. |
| · | Junior partner is one who has smaller interest in the firm than the other partners. |
| · | Senior partner is one who has a greater interest in the firm than the other partners. |
15.16.7
Formation
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| · | Capacity to Become a Partner Since a partnership is a contractual relation the capacity of a person or entity to become a partner in partnership is dependent upon its capacity to enter a binding contract. The UPA defines a “person” capable of becoming a partner to include individuals, partnerships, corporations and other associations. Contractual disability (physical, mental, or legal) would result in a lack of capacity to become a partner. The person or entities who may be partners are: |
| ¨ | Individuals |
| ¨ | Partnerships |
| ¨ | Corporations |
| ¨ | Other associations authorized by statute. |
| ¨ | Trustees (provided that the trust instrument is valid and specifically empowers the trustee to act in said capacity). |
| ¨ | Executors and personal representatives (hypothetically possible but requiring a specific regulatory order from the Court administering the state). |
| NOTE: State law may prescribe some special requirements for the qualifications as partners of non-individuals. A married person can be a partner and, if this is the case, the spouse is not required to join in or consent to conveyances or other instruments affecting property, title to which is held in the partnership name, except in the event of dissolution and distribution or division of the partnership property among the partners. |
| · | Purpose or Objective of the Partnership Partnerships are generally formed to engage in a general and continuing business of a particular kind and not for an isolated or single transaction (there may be exceptions in some jurisdictions). This is a major factor distinguishing partnerships from joint ventures. A partnership formed for illegal purposes or to pursue a lawful purpose in an unlawful manner is invalid and its acts are unenforceable. |
| · | Name of the Partnership The Uniform Partnership Act assumes that partnerships will use a partnership name, and provides that real property may be required in the partnership name, and that a title so acquired can be conveyed only in the partnership name. While the Act does not impose any name requirements, it is customary for a partnership to adopt a name for the conduct of the joint business. However, in the absence of contrary statutory provisions, partners need not adopt a firm name. They may carry on their partnership business without one, provided their relation has the essential elements necessary for the valid formation of a partnership. Apart from any statutory restrictions, partners may generally adopt any name they choose, even if the name suggests a corporate form. |
| · | Filing Fictitious Name or Trade Name The Uniform Partnership Act does not impose any filing or recording requirements on partnerships with respect to firm names, but most states have enacted statutes regulating the use of names by a partnership when the name used does not show the names of the persons actually interested as partners in the business. These statutes generally require filing with designated public officials, information concerning the names and residences of the members of the partnership, also known as DBA (“Doing Business As”) certificates. They are commonly known as “fictitious name” statutes; their purpose being to protect the public against fraud and deceit; they are directed primarily against concealed partnerships. |
| · | Registration, Regulation, and Licensing In some states, it is entirely possible, that a partnership be organized with no more formalities than a verbal agreement. But, in most states, this does not seem to be the case. Texas cases would indicate that a partnership can be so formed. It must be noted that the requirements of recorded evidence relative to the formation of a partnership, in those states that require the same, vary greatly. Some statutes require that persons conducting a business in the state as members of a partnership must file a certificate in the office of the clerk of each county in which the partnership business is conducted, setting forth the name under which the business is conducted and its address, together with the names of all partners and all persons engaged in the business. The filing does not affect the contract between the partners, and serves only to notify the public and the creditors of the name. A partnership that does business in an industry or profession regulated by licensing requirements any have to obtain a licenses individually, depending on the particular business. A license granted for a partnership to sell certain articles may afford protection only for those acts that in law are the acts of the partnership. It follows that a license to an individual cannot be construed as a license to a partnership. A partnership engaged in a business affected with a public interest is subject to public control and regulation to the same extent as any individual or corporation. |
| · | Qualification of Foreign Partnerships Ordinarily, a partnership has the same right to do business in a state, without its permission and free from its control, as any natural person. However, the increasing recognition of partnerships as legal entities, seems to render it constitutionally permissible to require a foreign partnership to qualify to do business in a state by registration with the secretary of state. |
| · | Commencement and Duration There is a division of authority as to whether an agreement to enter into a partnership is per se sufficient to create a partnership or must be considered merely prospective and executory. Most jurisdictions hold, under the Uniform Partnership Act and under prior law, that a contract to form a partnership is executory only and does not form the partnership until the partnership business is actually carried on and performance of the contract begins. Under this view, when the parties fail to take the actions necessary to effectuate and executory agreement to form a partnership, a court order will not do so in their behalf. Other authority holds that under the Uniform Act an agreement to carry on business creates the partnership, and partnership remedies are available even if the business never begins operations. A partnership may be created to exist for a specified term or without any agreement as to its duration. The partnership articles may fix the term for the partnership. A partnership commenced for a specified duration ends at the expiration of the time specified or by dissolution or by death of a partner, unless contrary agreement is made. Once a partnership is shown to exist, there is a presumption that its existence continues until the contrary is shown, or until it is dissolved and its affairs wound up. |
| · | Contract, Articles or Agreement or Partnership A partnership is essentially a contractual relation. A contract, express or implied, is essential to its formation, but the contract may be implied from conduct and circumstances alone. No particular form of contract is necessary, and the contract need not be in writing, except for certain partnerships so defined by statute. The best evidence for the existence of a partnership, however, is a written partnership contract designation the parties as partners. The Uniform Partnership Act states that a partnership is as “association” of two or more persons, and insofar as the Act’s use of the term “association” it connotes a requirement for a voluntary meeting of the minds to form a partnership as a contractual relationship. It is considered a test of whether a partnership exists within the parties’ intent. The associational element of partnership, however, has been held to require the existence of an agreement to combine property, money, effects, skill, and knowledge to carry out a business enterprise. |
15.16.8
Acquisition Of Real Property
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| The Uniform Partnership Act, now generally adopted, removes much of the confusion resulting from the prior rule of law that a partnership as such could not take and hold title to real property in the partnership name. |
| The Act provides that any real estate may be acquired in the partnership name, that title so acquired can be conveyed only in the partnership name, and that a conveyance to a partnership in the partnership name, although without words of inheritance, passes the entire estate of the grantor unless a contrary intent appears. |
| Title to real property under the Uniform Partnership Act may be held either in the partnership name or in the name of some or all partners. The Act does not prevent a partnership from acquiring real estate in the names of the partners as co-tenants. |
| Since the Uniform Act provides that partners hold as tenants in partnership, thus modifying the common law, any real property purchased with partnership funds and conveyed to the partners is held by the grantees as tenants in partnership and not as tenants in common. |
| When the title to real property is held in the name of the partners or all partners it is considered that the partners hold the legal title, under an implied trust, for the benefit of the partnership. |
| There is a presumption that property acquired by partners, in a partnership business and for its purposes, constitutes partnership assets, although the legal title is taken in the name of one of the partners. The rule applies to real property as well as to personal property. Under the presumption, the individual partner holding legal title to property, it deemed as an asset of the partnership, does it as a trustee for the partnership. The intention of the partners is the controlling consideration in determining whether real property belongs to the partnership. |
| Some jurisdictions require that a statement of partnership (not to be confused with Articles of Co-Partnership or a Partnership Agreement) showing the identity of the partners, the name of the firm, and a statement that there are no other partners, be filed for record where a fictitious name is used. It is not an uncommon requirement that there be filed a statement or certificate of doing business under a fictitious name in order that the true identity of the partners may be known. |
| Examples of title vestings: 1. ABC, a ____________________ partnership. 2. ABC, a ____________________ partnership composed of ________________ and ________________________. 3. ABC, a ____________________ partnership composed of __________________ and ____________________, partners. 4. __________________ and _________________, partners of ______________ a __________________ partnership. |
15.16.9
Conveyance And Mortgage Of Real Property
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| · | Authorized Partner Partnership property should be conveyed or mortgaged in the same name in which the title was acquired. The question of the required signatories is dependent upon the partnership agreement. All general partners should join in the execution of instruments affecting the partnership property unless the recorded statement or certificate of partnership, signed by all the partners, delegates the authority to so execute to less than all or certain of the general partners. The delegation of authority for less that all general partners to act can also be made by agreement or some other document signed by all partners, both general and unlimited. Such delegation should be reflected in the public records. |
| · | Authority of Partner Under the Uniform Partnership Act when a partner executes a conveyance of partnership property it is necessary to determine the authority of the partner to act on behalf of the partnership. The Act makes each partner the agent of the partnership for the purpose of its business. Consequently, a conveyance of title (including leasing and mortgaging) to property in the ordinary course of business may be presumed to be within the apparent authority of the partner. The determination that a conveyance is given in the ordinary course of business is a matter of analyzing the facts of each case. However, most partnerships hold real property for use or long term investment it is necessary to require evidence of authority for most partnership conveyances. A partner must be specifically authorized as agent of the partnership to convey partnership property in other than the ordinary course of business. Unless authorized by all the partners, one or more but less than all the partners have no authority to convey the property in trust for creditors or do any other act which would make it impossible to carry on the ordinary business of the partnership. It is beyond the scope of title insurance to determine whether the transaction is or not in the ordinary course of business, and consequently, it becomes imperative to establish the authority of the partner who executes the conveyance or mortgage. This determination can be made through the examination of the partnership agreement, (or certificate of record, if any) and preferably through a statement of authority signed by all the partners. |
15.16.10
Mortgage To A Partner
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| May a partner be a creditor of his partnership and, as security for the loan, encumber partnership assets? The answer is yes, but this type of transaction presents an additional risk for any title insurance company. |
| In order to insure a mortgage, in cases where a “partner acts as a creditor of the partnership”, it is necessary to determine the following: |
| · | The validity of the mortgage under the UPA, ULPA, RULPA, or any other local law. |
| · | That the partnership agreement does not prohibit this type of transaction. |
| · | That the transaction is not a fraudulent transaction, and that it does not violate any provision of the Bankruptcy Act (Fraudulent or preferential transactions). |
| · | That the purpose of the loan is a bona fide business purpose. |
| · | That the loan funds are to be actually advanced to or for the benefit of the partnership. |
| Any title insurance policy will contain, among others, the following exception: |
| “Any claim by reason of the fact that the insured is a partner in the partnership.” |
| NOTE: This exception denies coverage of the risk that the creditors of the partnership, at the time of dissolution of the partnership or foreclosure of the mortgage, may challenge the mortgage because it gives the lender an unfairly preferred secured position. |
15.16.11
Mortgage of Partnerships Interest
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| The mortgaging of a partner’s interest in the partnership rather than partnership property is a personal property interest and may not be the subject of title insurance. |
15.16.12
Changes In Membership
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| A partner leaving the partnership or a new partner coming into the partnership does not necessarily affect the title to real property held in the partnership name under the Uniform Partnership Act, though pursuant to Section 29 of the UPA, a change in the membership of a partnership creates a “technical” dissolution of the partnership. |
| It is essential to ascertain the authority of signatories without regard for the fact that the membership in the partnership may have changed and to make the proper requirements in order to insure a title received from the continuing partnership as though there had been no change of membership. It is only necessary to secure authorization from current members of the partnership or consider partnership agreement. |
15.16.13
Judgment Liens And State Tax Liens
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| Judgment liens and state tax liens against a partner are not liens against property held in the partnership name UNLESS ARISING FROM A PARTNERSHIP DEBT. |
15.16.14
Federal Tax Liens
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| Federal tax lien searches must be made against the name of the partnership firm and also against the name of every general partner. |
| Any federal tax lien notice found of record must be shown as an exception in Schedule B of both the commitment and the policy unless waived by an appropriate Stewart legal representative. |
15.16.15
Bankruptcy
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| A partnership may be adjudged bankrupt either separately or jointly with one or more of its general partners. |
| If a partnership is subject to a bankruptcy, either separately from or jointly with any or all of the general partners, property held in the partnership name should be administered in the partnership bankruptcy. |
| If a partnership is not subject to a bankruptcy and less than all of the general partners are subject to a bankruptcy, property held in the name of the partnership firm cannot be administered in the bankrupt estate of an individual partner unless consent of all unadjudicated partners is obtained. |
| If a partnership is not subject to a bankruptcy but all of the individual general partners are subject to a bankruptcy, the partnership itself must be adjudged bankrupt and its property administered by the bankruptcy court. |
| Bankruptcy proceedings against individual general partners must be checked. Otherwise, the bankruptcy of an individual partner may be ignored where title to real property is vested in the partnership. |
| Where title is vested in the names of the general partners individually and the partnership has filed a bankruptcy petition, no insurance should be issued on the property. If a general partner has filed a bankruptcy petition, require consent by the bankruptcy trustee or debtor in possession to the sale, after appropriate court authorization. |
| A limited partnership is not affected by a limited partner becoming a debtor under the Bankruptcy Code. |
15.16.16
Dissolution And Winding Up
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| A partnership may be dissolved for a number of causes, but the partnership is not terminated until the winding up of affairs is totally completed. |
| If a partnership is being dissolved under the Uniform Partnership Act, it will become necessary to establish the specific authority of a partner to act for the firm even though it may appear that the conveyance is in the ordinary course of business. The partnership may continue to function until it has wound up for the partnership affairs. When in doubt, it should be required that all the partners sign for the partnership. |
| If the partnership conveys its title to one of the partners as part of the dissolution process, it will become necessary to require the signature of all the partners. |
| No specific rule can be formulated to state which specific act of the dissolved partnership constitutes an act of winding up. Generally, a properly authorized conveyance, if not made up to a member of the partnership, and the acceptance of a purchase money deed of trust as part of the consideration therefor, can be considered as an act of winding up. |
| State law does provide for the possible causes of partnership dissolution. These probable causes can be grouped as follows: |
| · | Voluntary - Termination of the term, completion of an undertaking specified in the agreement, or for any other reason agreed otherwise by all the members. |
| · | Disassociation of a partner by reason of: |
| ¨ | death |
| ¨ | retirement |
| ¨ | insanity Unless provided otherwise in the agreement or stipulated otherwise by all members. |
| · | By Operation of Law: |
| ¨ | Bankruptcy of one or more partners, or of the partnership. |
| ¨ | Business of the partnership becomes unlawful. |
| · | Decree of a Court of Competent Jurisdiction State codes usually provide that neither a conveyance by a partner of his interest in the partnership nor the retirement of a partner result in the dissolution of the partnership. Whether or not a transfer or retirement results in dissolution can often be established by reference to the articles of partnership, the recorded certificate (if a limited partnership) or some other document or agreement executed by the partners. NOTE: Because title problems relative to the dissolution of a partnership and subsequent winding up of its affairs are extremely difficult, complex and intricate, extreme care should be exercised. |
15.16.17
Examining Partnership Property
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| In any title examination of partnership property, the following questions must be considered: |
| · | Has it been ascertained that the property is or will become a partnership asset? |
| · | Is it a partnership or a joint venture? |
| · | Is it a general or a limited partnership? |
| · | If a general partnership, has a copy of it been furnished to the Company? |
| · | If the partnership agreement is neither recorded nor furnished, does the commitment show the pertinent requirement? |
| · | Is there any statutory provision relative to the registration, regulation or licensing of a general partnership? If any, has the same been complied with? |
| · | If the partnership is a limited partnership, has the certificate of limited partnership been properly executed and filed for record in accordance with the pertinent provisions including Secretary of State’s Office? |
| · | Does the certificate contain all the required information in accordance with the state statutes? |
| · | If the limited partnership is a foreign limited partnership, (does) (did) it qualify in the state where the property is located? |
| · | Has the transaction been executed prior to the filing of the certificate? Is the certificate defective? |
| · | Have the terms of the partnership agreement been raised as an exception? |
| · | Have all the general partners been searched and judgments and federal tax liens against them considered? |
| · | What types of entities comprise the partnership? Do they all qualify as parties? |
| · | Are all the non-individual partners in good legal standing? Have the pertinent requirements been made in regard to corporations, partnerships, etc." |
| · | If the partnership has conveyed or mortgaged the property, was the conveyance properly executed? |
| · | Have any events occurred which may have resulted in a dissolution or termination of the partnership? |