ANSWERS TO PROBLEMS
1. John Palmer and Henry Morrison formed the limited partnership of Palmer & Morrison
for the management of the Huntington Hotel. The limited partnership agreement
provided that Palmer would contribute $400,000 and be a general partner and that
Morrison would contribute $300,000 and be a limited partner. Palmer was to manage the
dining and cocktail rooms, and Morrison was to manage the rest of the hotel. Nanette, a
popular French singer who knew nothing of the limited partnership affairs, appeared for
four weeks in the Blue Room at the hotel and was not paid her fee of $8,000.
Subsequently, the limited partnership became insolvent. Nanette sued Palmer and
Morrison for $8,000.
a) For how much, if anything, are Palmer and Morrison liable?
b) If Palmer and Morrison had formed a limited liability limited partnership, for
how much, if anything, would Palmer and Morrison be liable?
c) If Palmer and Morrison had formed a limited liability company with each as
members, for how much, if anything, would Palmer and Morrison be liable?
d) If Palmer and Morrison had formed a limited liability partnership with each as
general partners, for how much, if anything, would Palmer and Morrison be
liable?
Answer: Liability of Members of Limited Partnerships, LLCs, LLPs, and LLLPs.
(a) As an actual general partner, Palmer has personal, unlimited liability for the full $8,000.
The issue here is whether the limited partner Morrison is also liable as a general partner
because of his involvement in the management of the hotel. In general, a limited partner
2. A limited partnership was formed consisting of Webster as the general partner and
Stevens and Stewart as the limited partners. The limited partnership was organized in
strict compliance with the limited partnership statute. Stevens was employed by the
partnership as a purchasing agent. Stewart personally guaranteed a loan made to the
partnership. Both Stevens and Stewart consulted with Webster about partnership
business, voted on a change in the nature of the partnership business, and disapproved
an amendment to the partnership agreement proposed by Webster. The partnership
experienced serious financial difficulties, and its creditors seek to hold Webster, Stevens,
and Stewart personally liable for the debts of the partnership. Who, if any, is personally
liable?
Answer: Liabilities in a Limited Partnership. Webster is personally liable; Stevens and
Stewart are not. As a general partner Webster has unlimited, personal liability for
3. Fox, Dodge, and Gilbey agreed to become limited partners in Palatine Ventures, a
limited partnership. In a signed writing each agreed to contribute $20,000. Fox’s
contribution consisted entirely of cash; Dodge contributed $12,000 in cash and gave the
partnership her promissory note for $8,000; and Gilbey’s contribution was his promise to
perform two hundred hours of legal services for the partnership.
a What liability, if any, do Fox, Dodge, and Gilbey have to the partnership by way
of capital contribution?
b If Palatine Ventures had been formed as a limited liability company(LLC) with
Fox, Dodge, and Gilbey as members, what liability, if any, would Fox, Dodge,
and Gilbey have to the LLC by way of capital contribution?
Answer: Contributions in a Limited Partnership and an LLC.
(a)Under the RULPA, the contribution of a partner may be cash, property, or services
rendered or a promissory note or other obligation to contribute cash or property or to
4. Madison and Tilson agree to form a limited partnership with Madison as general
partner and Tilson as the limited partner, each to contribute $12,500 as capital. No
papers are ever filed, and after ten months the enterprise fails with liabilities exceeding
assets by $30,000. Creditors of the partnership seek to hold Madison and Tilson
personally liable for the $30,000. Explain whether the creditors will prevail.
Answer: Defective Formation of a Limited Partnership. Madison and Tilson are jointly
liable for the $30,000. Madison is liable because he was a general partner. Tilson is
5. Kraft is a limited partner of Johnson Enterprises, a limited partnership. As provided in
the limited partnership agreement, Kraft decided to leave the partnership and demanded
that her capital contribution of $20,000 be returned. At this time, the partnership assets
were $150,000 and liabilities to all creditors totaled $140,000. The partnership returned
to Kraft her capital contribution of $20,000?
a) What liability, if any, does Kraft have to the creditors of Johnson Enterprises?
b) If Johnson Enterprises had been formed as a limited liability company, what
liability, if any, would Kraft have to the creditors of Johnson Enterprises?
Answer: Liability for Distributions in Limited Partnerships and LLCs.
(a)Kraft is liable to the limited partnership and/or the creditors for $10,000 for six years;
for one year, Kraft is potentially liable for the other $10,000 if needed. Of the $20,000
distributied $10,000 is wrongful and $10,000 is rightful. The funds available for
6. Gordon is the only limited partner in Bushmill Ventures, a limited partnership whose
general partners are Daniels and McKenna. Gordon contributed $10,000 for his limited
partnership interest and loaned the partnership $7,500. Daniels and McKenna each
contributed $5,000 by way of capital. After a year, the partnership is dissolved, at which
time it owes $12,500 to its only creditor, Dickel, and has assets of $30,000.
c How should these assets be distributed?
d If Bushmill Ventures had been formed as a limited liability company with Gordon,
Daniels, and McKenna as members, how should these assets be distributed?
Answer: Distributions of Assets after Dissolution in Limited Partnerships and LLCs.
(a)In a limited partnership, Section 804 of RULPA provides-
Dickel: $12,500 as creditor
Gordon: $ 7,500 as creditor
7. Discuss when a limited partner does or does not have the following rights or powers: (a)
to assign his interest in the limited partnership, (b) to receive repayment of loans made to
the partnership on a pro rata basis with general creditors, (c) to manage the affairs of
the limited partnership, (d) to receive his share of the profits before the general partners
receive their shares of the profits, and (e) to dissolve the partnership upon his
withdrawing from the partnership
Answer: Rights in Limited Partnership.
(a)Yes. RULPA Section 702.
8. Discuss when a member of a limited liability company does or does not have the
following rights or powers: (a)to assign her interest in the LLC, (b)to receive repayment
of loans made to the LLC on a pro rata basis with general creditors, (c)to manage the
affairs of the LLC, and (d) to dissolve the LLC upon her withdrawing from the LLC.
Answer: Rights in LLC.
a) Yes.
b) Yes.
9. Albert, Betty, and Carol own and operate the Roy Lumber Company, a limited liability
partnership (LLP). Each contributed one-third of the capital, and they share equally in
the profits and losses. Their LLP agreement provides that all purchases more than $2,500
must be authorized in advance by two partners 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: Liability in an LLP. This problem has the same facts as Problem 1 in Chapter 32
but here the company is an LLP. Because the partnership is not liable in parts (a) and (c),
the answers remain the same as in Chapter 32. Depending upon the LLP statute, in part
10. In January, Dr. Vidricksen contributed $250,000 to become a limited partner in a
Chevrolet car agency business with Thom, the general partner. Articles of limited
partnership were drawn up, but no effort was made to comply with the state’s statutory
requirement of recording the certificate of limited partnership. In March, Vidricksen
learned that, because of the failure to file, he might not have formed a limited
partnership. At this time, the business developed financial difficulties and went into
bankruptcy on September 11. Eight days later, Vidricksen filed a renunciation of the
business’s profits. Is Dr. Vidricksen a general partner?
Answer: Liability of Limited Partner/Defective Formations. Vidricksen was a general
partner with Thom insofar as their relationship with third party creditors is concerned. A
11. Dale Fullerton was chairman of the board of Envirosearch and the sole stockholder in
Westover Hills Management. James Anderson was president of AGFC. Fullerton and
Anderson agreed to form a limited partnership to purchase certain property from
WYORCO, a joint venture of which Fullerton was a member. The parties intended to form
a limited partnership with Westover Hills Management as the sole general partner and
AGFC and Envirosearch as limited partners. The certificate filed with the Wyoming
secretary of state, however, listed all three companies as both general and limited
partners of Westover Hills Ltd. Anderson and Fullerton later became aware of this error
and filed an amended certificate of limited partnership, which correctly named
Envirosearch and AGFC as limited partners only. Subsequently Westover Hills Ltd.
became insolvent. What is the potential liability of Envirosearch and AGFC to creditors
of the limited partnership?
Answer: Limited Partnerships/Dissolution. Westover Hills Ltd. was held to be a limited
partnership for purposes of bankruptcy. Under the Uniform Limited Partnership Act, if
ANSWERS TO “TAKING SIDES” PROBLEMS
On April 5, Handy contracted to purchase land with the intent of forming
a limited liability company (LLC) with Ginsburg and McKinley for the
purpose of building a residential community on the property. On April 21,
they learned from Coastal, an environmental consulting &rm they had
hired, that the property contained federally protected wetlands. The
presence of wetlands adversely affected the property’s value and
development potential. Handy, Ginsburg, and McKinley abandoned
construction plans and instead decided to sell the property. To advertise
and promote that sale, they placed on the property a sign that stated the
property had “Excellent Development Potential.” Unaware of the
existence of wetlands, Pepsi acquired an option to purchase the property
from Handy on August 5. At that time, Willow Creek had not yet been
formed and Handy had not yet purchased the property. On August 18,
Handy, Ginsburg, and McKinley formed Willow Creek Estates, LLC. During
the option period, Pepsi hired a soil-engineering consultant to conduct an
environmental investigation of the property. In Handy’s written answers
to speci&c questions from the consultant about the property, Handy did
not disclose that the property contained wetlands or that Coastal had
already performed a written preliminary wetlands determination the
month before. On September 4, Willow Creek, LLC took title to the
property. Four months later Willow Creek, LLC sold the property to Pepsi
for more than twice the amount of its purchase price and did not disclose
the existence of wetlands on the property. After Pepsi learned that the
property contained wetlands, it brought an action for fraud against
Willow Creek, Handy, Ginsburg, and McKinley.
(a)What are the arguments that Handy, Ginsburg, and McKinley are
not individually liable to Pepsi for fraud?
(b)What are the arguments that Handy, Ginsburg, and McKinley are
individually liable to Pepsi for fraud?
(c) Explain who should prevail.
ANSWER:
(a)Handy, Ginsburg, and McKinley, as members and/or managers of a
limited liability company (LLC), are not obligated personally for any
