Dynamic business law 4e kubasek 4e CH36

Chapter 36
Partnerships: Nature, Formation, and
Operation

Copyright © 2017 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGrawHill Education.


Overview
• LO36-1: What is a partnership?
• LO36-2: What are the different ways in
which a partnership can be formed?
• LO36-3: What are the rights of partners as
they interact with each other?
• LO36-4: Are all members of a partnership
liable for interactions with third parties?
36-2


Chapter 36 Hypothetical Case 1
• Fresh out of law school and with dim traditional employment
prospects due to a tight job market for attorneys, best friends Scott
Griswold and John Turman decide to join forces, hang a shingle, and
start a new law practice. Griswold and Turman have decided to
operate their firm as a general partnership. The two legal eagles are
currently discussing the terms of their partnership, including the
name of the partnership, the division of partnership profits and
losses, the division of management duties, and each partner's
respective capital contributions.
• From an evidentiary standpoint, are Scott Griswold and John Turman
legally required to enter into a written partnership agreement? If
written documentation of their partnership agreement is not legally

required, should Griswold and Turman nevertheless put their
agreement in writing?

36-3


Chapter 36 Hypothetical Case 2
• The accounting firm of Cooper, Anderson, and Young had fallen on
hard times in recent months. Several clients had left the firm, and in
a slow economy, it was difficult to generate new clients. Cooper,
Anderson, and Young was a general partnership with three partners
(Anna Cooper, Thomas Anderson, and Miranda Young) and six
employees (four associate accountants, an office manager, and an
administrative assistant/receptionist).
Meeting payroll was especially challenging for the partnership this
month. In order to compensate the firm's employees, Young went to
The Bank of the Americas and obtained a $23,000 business loan and
signed her name, as well as the name of the partnership, to the loan
agreement. Young used the proceeds of the loan to compensate the
employees their full monthly salaries.

36-4


Chapter 36 Hypothetical Case 2
(cont'd)
• Upon discovering what Young had done, Cooper and Anderson were
furious. Both felt that since the firm had experienced a financial
downturn, the employees should have to take a substantial
reduction in their salaries for the month, or forego their salaries for

the month altogether (none of the three partners had received any
profit distribution for the current month; their partnership
agreement did not provide for partner salaries, and even if it had,
there were no other monies to distribute). Furthermore, Cooper and
Anderson were concerned about partnership liability for the
$23,000 loan, as well as their own personal liabilities for the loan.
• Is the general partnership of Cooper, Anderson, and Young
responsible for the $23,000 loan? Are Cooper and Anderson
personally liable for the loan?

36-5


Characteristics of Partnership
• Uniform Partnership Act definition: "Association of
two or more persons to carry on as co-owners a
business for profit"
• Voluntary and consensual relationship
• Between two or more individuals, partnerships,
corporations, or other forms of business
organization
• Engaged in numerous business transactions over
period of time
• Partners share profits and management of business

36-6


Business Arrangements
Where No Partnership Exists

• Employer shares profits with employee as payment
for work
• Landlord accepts share of profits for payment of rent
• Party receives share of profits for payment of debt
• Party receives share of profits for payment of
annuity to widow/representative of deceased
partner
• Party receives share of profits for payment from sale
of goodwill of business/other property
• Party receives share of profits for payment of
interest on a loan

36-7


Formation of Partnership
• Partnership agreement (articles of partnership)
should include:
•
•
•
•
•
•

Name of each partner
Name of partnership
Duration of partnership
How profits divided
Division of management responsibilities

Contributions from each partner
36-8


Partnership Duties and Rights
• Duties
• Loyalty
• Obedience
• Due care

• Rights
•
•
•
•
•
•

Share in management
Share in profits
Compensation
Partnership property
Inspect books
Conduct an accounting
36-9


Circumstances Triggering Partner's
Right to an Accounting
• Whenever partnership agreement provides for

an accounting
• Whenever copartners wrongfully exclude
partner from partnership/from access to
partnership books
• Whenever partner fails to disclose profit/benefit
from partnership (breach of fiduciary duty)
• Whenever circumstances render accounting just
and reasonable

3610


Interactions Between Partners and
Third Parties
• If partnership has liability, each partner has
unlimited personal liability (joint and several
liability)
• Joint and several liability: Third party can choose to
sue partners separately, or all partners jointly in one
action; partners are collectively, as well as individually,
liable for partnership debts

• All partners jointly and severally liable for
commission of tort by any partner
• Implied liability of partners when purchases made to
perpetuate partnership's business

3611

Chapter 36 Hypothetical Case 3
• The year 2014 was a nightmare for James Littleton. In January 2014, Littleton
was diagnosed with Type 2 (adult onset) diabetes. In June, Littleton's physician
expressed concern with the lack of circulation in his left leg, and in October, a
circulatory specialist recommended that the left leg be amputated to the knee;
reluctantly, but resigned to his fate, Littleton agreed.
On November 1, Littleton was admitted to Pinecrest General Hospital for
surgery. In what can only be described as a horrible and catastrophic mistake,
the surgeon misreads the diagnosis and surgical instructions and amputates
Littleton's right leg by mistake. Littleton's left leg is amputated the next day.
Confined to a wheelchair, but supported by the love, care and concern of his
family, Littleton visits the offices of a local Pinecrest law firm, Stephenson,
Gordon, and Ratcliff, which is a general partnership. Stephenson and Gordon
agree to represent Littleton in the medical malpractice lawsuit and sign a
contract of representation with Littleton, agreeing to represent him for the
standard one-third contingency fee, plus associated expenses.

3612


Chapter 36 Hypothetical Case 3
(cont'd)
• The statute of limitations for medical malpractice actions in the state is three
years. Due to oversight and neglect (rumor has it that both Stephenson and
Gordon have substance abuse problems), the firm fails to file a complaint against
the attending surgeon and Pinecrest General Hospital within the three-year
period. Even though he lacks legal training, Littleton knows he will be forever
barred from bringing a lawsuit against the doctor and the hospital.
Having experienced catastrophic neglect from two professions he once
respected, Littleton focuses his energy on bringing Stephenson, Gordon, and

Ratcliff to justice. He sues the general partnership, as well as the individual
attorneys Stephenson, Gordon, and Ratcliff, for legal malpractice.
Ratcliff's attorney moves for dismissal of the claim against his client individually,
arguing that Ratcliff was not an attorney of record for Littleton, and as a result,
should be dismissed personally from the lawsuit.
• Will Ratcliff succeed in his motion for dismissal?

3613


Chapter 36 Hypothetical Case 4
• Recall the Chapter 35 Hypothetical Case involving tailoring experts Frieda
Oglesby, Rena Fitts, and Will Bertrand, who decided to go into business together.
Their business, FitzWellby, is a business that provides in-home measuring and
fittings, and even on-site stitching, for busy executives who don't have time to
take their clothing to tailor shops. The business was formed as a general
partnership.
Recently, Oglesby, Fitts, and Bertrand agreed to welcome a fourth partner, Bob
Strahan, to the business. The partnership agreement was signed on October 10,
and Strahan invested $60,000 to become a partner.
Unbeknownst to any of the partners, trouble was brewing as the ink was drying.
On the evening of October 9, Bertrand dropped off a freshly tailored gown at the
lavish residence of client Veronica Treadwell, who was out of town at the time.
Per Treadwell's instructions, Bertrand used a code to open Treadwell's garage.
The interior door to the home had been left unlocked for him, so he left the
garment in the laundry room. Bertrand was to lock the door leading to the
garage behind him and close the garage upon leaving.

3614

Chapter 36 Hypothetical Case 4
(cont'd)
However, Bertrand received a panicked phone call from his daughter in the
midst of dropping off the gown. She was stranded and needed to be picked
up. Bertrand hastily hung up the gown and dashed out of Treadwell's
laundry room, forgetting to lock the door behind him or even close the
garage door.
When Treadwell returned from her vacation on October 12, she found her
garage door open, the door unlocked, and her home stripped of all her
valuables. Somewhere between Bertrand's errand on the evening of
October 9 and 4:00 p.m. on October 12, Treadwell had been robbed.
Treadwell files suit against FitzWellby and each of the four partners
individually for Bertrand's negligence.
• Is Bob Strahan, the new partner, personally liable? Can Strahan's $60,000 be
used to settle the lawsuit? Explain your response.

3615