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ANSWERS TO PROBLEMS
1. Albert, Betty, and Carol own and operate the Roy Lumber Company. Each contributed
one-third of the capital, and they share equally in the profits and losses. Their
partnership agreement provides that two partners must authorize all purchases over
$2,500 in advance and that only Albert is authorized to draw checks. Unknown to Albert
or Carol, Betty purchases on the firm’s account a $5,500 diamond bracelet and a $5,000
forklift and orders $5,000 worth of logs, all from Doug, who operates a jewelry store and
is engaged in various activities connected with the lumber business. Before Betty made
these purchases, Albert told Doug that Betty is not the log buyer. Albert refuses to pay
Doug for Betty’s purchases. Doug calls at the mill to collect, and Albert again refuses to
pay him. Doug calls Albert an unprintable name, and Albert then punches Doug in the
nose, knocking him out. While Doug is lying unconscious on the ground, an employee of
Roy Lumber Company negligently drops a log on Doug’s leg, breaking three bones. The
firm and the three partners are completely solvent. What are the rights of Doug against
Roy Lumber Company, Albert, Betty, and Carol?
Answer: Authority to Bind Partnership/Liability of Partners.
(a) The Roy Lumber Company Partnership is not liable for the logs; Betty is personally
liable for the price of the logs. No act of a partner in contravention of a restriction on
authority shall bind the partnership to persons having knowledge of the restriction.
2. Paula, Fred, and Stephanie agree that Paula and Fred will form and conduct a
partnership business and that Stephanie will become a partner in two years. Stephanie
agrees to lend the firm $50,000 and take 10 percent of the profits in lieu of interest.
Without Stephanie’s knowledge, Paula and Fred tell Harold that Stephanie is a partner,
and Harold, relying on Stephanie’s sound financial status, gives the firm credit. The firm
later becomes insolvent, and Harold seeks to hold Stephanie liable as a partner. Should
Harold succeed?
Answer: Partnership by Estoppel. Harold should not succeed in holding Stephanie liable as
a partner. The agreement to become a partner in two years did not create a present
3. Simmons, Hoffman, and Murray were partners doing business under the firm name of
Simmons & Co. The firm borrowed money from a bank and gave the bank the firm’s note
for the loan. In addition, each partner guaranteed the note individually. The firm became
insolvent, and a receiver was appointed. The bank claims that it has a right to file its
claim as a firm debt and also that it has a right to participate in the distribution of the
assets of the individual partners before partnership creditors receive any payment from
such assets.
(a) Explain the principle involved in this case.
(b) Is the bank correct?
Answer: Marshaling of Assets.
Under the UPA the principle involved is that of marshaling of assets. U.P.A. Section
40(g). The Revised Act has abolished the marshaling of assets doctrine.
4. Anthony and Karen were partners doing business as the Petite Garment Company. Leroy
owned a dye plant that did much of the processing for the company. Anthony and Karen
decided to offer Leroy an interest in their company, in consideration for which Leroy
would contribute his dye plant to the partnership. Leroy accepted the offer and was duly
admitted as a partner. At the time he was admitted as a partner, Leroy did not know that
the partnership was on the verge of insolvency. About three months after Leroy was
admitted to the partnership, a textile firm obtained a judgment against the partnership in
the amount of $50,000. This debt represented an unpaid balance that had existed before
Leroy was admitted as a partner.
The textile firm brought an action to subject the partnership property, including the dye
plant, to the satisfaction of its judgment. The complaint also requested that, in the event
the judgment was unsatisfied by sale of the partnership property, Leroy’s home be sold
and the proceeds applied to the balance of the judgment. Anthony and Karen own
nothing but their interest in the partnership property.
What should be the result (a) with regard to the dye plant and (b) with regard to Leroy's
home?
Answer: Liability of Incoming Partner.
(a) The dye plant may be sold.
(b) Leroy's home cannot be sold.
5. Jones and Ray formed a partnership on January 1, known as JR Construction Co., to
engage in the construction business, each partner owning a one-half interest. On
February 10, while conducting partnership business, Jones negligently injured Ware,
who brought an action against Jones, Ray, and JR Construction Co. and obtained
judgment for $250,000 against them on March 1. On April 15, Muir joined the
partnership by contributing $100,000 cash, and by agreement each partner was entitled
to a one-third interest. In July, the partners agreed to purchase new construction
equipment for the partnership, and Muir was authorized to obtain a loan from XYZ Bank
in the partnership name for $200,000 to finance the purchase. On July 10, Muir signed a
$200,000 note on behalf of the partnership, and the equipment was purchased. In
November, the partnership was in financial difficulty, its total assets amounting to
$50,000. The note was in default, with a balance of $150,000 owing to XYZ Bank. Muir
has substantial resources, while Jones and Ray each individually have assets of $20,000.
What is the extent of Muir's personal liability and the personal liability of Jones and Ray
as to (a) the judgment obtained by Ware and (b) the debt owing to XYZ Bank?
Answer: Liability of Incoming Partner.
(a) Muir is not personally liable for the Ware judgment. . A person admitted as a partner
into an existing partnership is not personally liable for any partnership obligation incurred
6. Lauren, Matthew, and Susan form a partnership, Lauren contributing $100,000; Matthew
$50,000; and Susan her time and skill. Nothing is said regarding the division of profits.
The firm later dissolves. No distributions to partners have been made since the
partnership was formed. The partnership sells its assets for a loss of $90,000. After
payment of all firm debts, $60,000 is left. Lauren claims that she is entitled to the entire
$60,000. Matthew contends that the distribution should be $40,000 to Lauren and
$20,000 to Matthew. Susan claims the $60,000 should be divided equally among the
partners. Who is correct? Explain.
Answer: Distribution of Assets. Neither Lauren, nor Matthew, nor Susan, is correct. Under
the Revised Act, where the agreement is silent as to sharing profits, the partners share the
profits equally. The instant agreement is silent as to both profits and losses. Hence,
7. Adams, a consulting engineer, entered into a partnership with three others for the
practice of their profession. The only written partnership agreement is a brief document
specifying that Adams is entitled to 55 percent of the profits and the others to 15 percent
each. The venture is a total failure. Creditors are pressing for payment, and some have
filed suit. The partners cannot agree on a course of action.
How many of the partners must agree to achieve each of the following objectives?
(a) To add Jones, also an engineer, as a partner, Jones being willing to contribute a
substantial amount of new capital.
(b) To sell a vacant lot held in the partnership name, which had been acquired as a future
office site for the partnership.
(c) To move the partnership's offices to less expensive quarters.
(d) To demand a formal accounting.
(e) To dissolve the partnership.
(f) To agree to submit certain disputed claims to arbitration, which Adams believes will
prove less expensive than litigation.
(g) To sell all of the partnership's personal property, Adams having what he believes to
be a good offer for the property from a newly formed engineering firm.
(h) To alter the respective interests of the parties in the profits and losses by decreasing
Adams's share to 40 percent and increasing the others' shares accordingly.
(i) To assign all the partnership's assets to a bank in trust for the benefit of creditors,
hoping to work out satisfactory arrangements without filing for bankruptcy.
Answer: Rights Among Partners. In the absence of an agreement to the contrary, all four
partners stand on an equal footing in the management of the firm notwithstanding their
unequal shares in the profits. R.U.P.A Section 401(b), U.P.A. Section 18(e).
8. Charles and Jack orally agreed to become partners in a tool and die business. Charles,
who had experience in tool and die work, was to operate the business. Jack was to take
no active part but was to contribute the entire $500,000 capitalization. Charles worked
ten hours a day at the plant, for which he was paid nothing. Nevertheless, despite
Charles’s best efforts, the business failed. The $500,000 capital was depleted, and the
partnership owed $500,000 in debts. Prior to the failure of the partnership business, Jack
became personally insolvent; consequently, the creditors of the partnership collected the
entire $500,000 indebtedness from Charles, who was forced to sell his home and farm to
satisfy the indebtedness. Jack later regained his financial responsibility, and Charles
brought an appropriate action against Jack for (a) one-half of the $500,000 he had paid
to partnership creditors and (b) one-half of $80,000, the reasonable value of Charles’s
services during the operation of the partnership. Who will prevail and why?
Answer: Right to Share in Profits. Charles cannot recover for (a) or (b).
(a) Since Charles and Jack had no specific agreement regarding the division of profits
and losses, profits were to be divided equally and, hence, losses were to be shared
9. Glenn refuses an invitation to become a partner of Dorothy and Cynthia in a retail
grocery business. Nevertheless, Dorothy inserts an advertisement in the local newspaper
representing Glenn as their partner. Glenn takes no steps to deny the existence of a
partnership between them. Ron, who extended credit to the firm, seeks to hold Glenn
liable as a partner. Is Glenn liable? Explain.
Answer: Partnership by Estoppel. Glenn is not liable as a partner by estoppel because he
10. Hanover leased a portion of his farm to Brown and Black, doing business as the
Colorite Hatchery. Brown went upon the premises to remove certain chicken sheds that
he and Black had placed there for hatchery purposes. Thinking that Brown intended to
remove certain other sheds, which were Hanover’s property, Hanover accosted Brown,
who willfully struck Hanover and knocked him down. Brown then ran to the Colorite
truck, which he had previously loaded with chicken coops, and drove back to the
hatchery. On the way, he picked up George, who was hitchhiking to the city to look for a
job. Brown was driving at seventy miles an hour down the highway. At an open
intersection with another highway, Brown in his hurry ran a stop sign, striking another
vehicle. The collision caused severe injuries to George. Immediately thereafter, the
partnership was dissolved, and Brown was insolvent. Hanover and George each bring
separate actions against Black as copartner for the alleged tort committed by Brown
against each. What judgments as to each?
Answer: Torts of Partnership.
(a) Hanover may recover against Black as the assault and battery committed by Brown
was in connection with a dispute which concerned property of the partnership and was,
11.Martin, Mark, and Marvin formed a retail clothing partnership named M Clothiers and
conducted a business for many years, buying most of their clothing from Hill, a
wholesaler. On January 15, Marvin retired from the business, but Martin and Mark
decided to continue it. As part of the retirement agreement, Martin and Mark agreed in
writing with Marvin that Marvin would not be responsible for any of the partnership
debts, either past or future. On January 15 the partnership published a notice of Marvin’s
retirement in a newspaper of general circulation where the partnership carried on its
business.
Before January 15, Hill was a creditor of M Clothiers to the extent of $10,000, and on
January 30, he extended additional credit of $5,000. Hill was not advised and did not in
fact know of Marvin’s retirement and the change of the partnership. On January 30, Ray,
a competitor of Hill, extended credit for the first time to M Clothiers in the amount of
$3,000. Ray also was not advised and did not in fact know of Marvin’s retirement and the
change of the partnership.
On February 1, Martin and Mark departed for parts unknown, leaving no partnership
assets with which to pay the described debts. What is Marvin’s liability, if any, (a) to Hill
and (b) to Ray?
Answer: Rights of Creditors
Under the Revised Act: (a) Marvin is liable to Hill for $15,000; (b) Marvin is liable to
Ray for $3,000.
A partner’s dissociation does not of itself discharge the partner’s liability for a partnership
obligation incurred before dissociation. Section 703(a). An agreement as to continuing
liability of a retiring partner, though binding on the parties making it, is not binding on an
12. Ben, Dan, and Lilli were partners sharing profits in proportions of one-fourth,
one-third, and five-twelfths, respectively. Their business failed, and the firm was
dissolved. At the time of dissolution, no financial adjustments between the partners were
necessary with reference to their respective partners’ accounts, but the firm’s liabilities to
creditors exceeded its assets by $24,000. Without contributing any amount toward the
payment of the liabilities, Dan moved to a destination unknown. Ben and Lilli are
financially responsible. How much must each contribute?
Answer: Contribution of Partners. Ben must contribute $9,000; Lilli, $15,000.
