978-1285860381 Chapter 32 Solution Manual Part 1

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Suggested Additional Assignments

Research: Partnership Registrations

The Uniform Partnership Act (UPA) permits partnerships to file a statement with the local Secretary of

State containing basic information about the partnership. Assign each student a different state and ask

him or her to log on to the Web site of the Secretary of State (or call the office) to find out if any

partnerships have registered. What kinds of partnerships are most likely to register? Why?

Drafting Exercise: Partnership Terms

Ask students to break into small groups (three or four students) and prepare a list of the main terms that

they would want to have in a partnership agreement. A complete agreement will cover the important

issues, such as sharing profits and losses, management, voting rights, and term.

Chapter Overview

Chapter Theme

In the United States, at least 1.4 million partnerships involving 9 million partners file partnership returns

with the IRS. (Although a partnership is not a taxable entity, it must file an “informational return” with

the IRS.) There are undoubtedly millions of other businesses that the law would recognize as partnerships

who either do not realize that they are partnerships or do not know that they have to file with the IRS. In

short, despite their drawbacks, partnerships are common. Students need to know how to form a

partnership, how to avoid forming one, and how to exit without legal or financial penalty.

Quote of the Day

“He who has a partner has a master.” Italian proverb quoted in The Count of Monte Cristo by Alexandre

Dumas (1802-1870), French novelist and playwright.

Creating a Partnership

Is This a Partnership?

In many ways, this is the most important issue in partnership law. People generally understand that to

form a corporation they must take certain prescribed steps, but there are no clear-cut guidelines for

forming a partnership. The participants may have a partnership when they think they do not or,

conversely, they may not have one when they think they do. Impress upon students that in determining

whether parties are in a partnership, substance trumps form.

Factors that Matter

The association of two or more persons to carry on as co-owners a business for profit forms a

partnership, whether or not the persons intend to form a partnership.

Courts consider: Intention to make a profit? Sharing profits? (Charitable businesses cannot be

partnerships.) Sharing losses? Management of the business? Oral or written agreement? (but

actions speak louder than words!) Have you said you are partners? (may sway a court’s decision)

Example: Determining Partnership Status

Facts: Nancy Green borrowed money from Joseph DiFebo to make a down payment on four houses. She

bought all four properties in her name alone. The two parties signed this document:

Nancy R. Green and Joseph A. DiFebo are equal partners in the following Wilmington, Delaware

properties: 807 Pine Street, 427 East 3rd St., 611 East 7th Street, 613 East 7th Street.

On the death of Nancy R. Green, her half interest is left to her daughters, Kelly R. Green and Stacy R.

Green. On the death of Joseph A. DiFebo, his half interest is left to his daughters, Amy DiFebo and Beth

Durham. If Nancy R. Green survives Joseph A. DiFebo she makes all decisions on the above properties

DiFebo never asked Green for a share of the rentals from any of these buildings. He did perform some

repair work on them. When the city condemned one of the properties, Green refused to give DiFebo half

the proceeds. DiFebo testified that, in his mind, the money he transferred to Green established a

partnership between them. Green testified that at no time did she consider their arrangement to be a

partnership.

Issue: Were Green and DiFebo partners?

Holding: Green and DiFebo were not partners. Although they called themselves “equal partners,” they

did not share profits.

Question: What could DiFebo and Green have done to make this a partnership?

Answer: The court suggests that calling the document a partnership agreement and signing it as partners

Question: The court indicated that DiFebo and Green had used this document in lieu of a will.

According to the court’s interpretation, DiFebo was leaving half the value of the buildings to his

daughters if Green still owned the buildings when he died. Other than that, he got nothing. Does that

make sense? If he is not a part owner and partner, why are his daughters entitled to anything?

Question: Why did DiFebo think he and Green were partners if they did not divide profits?

Question: What did Green and DiFebo really intend?

Answer: It is simply not clear whether they were debtor/creditor, lovers, or partners. In the case where it

Question: What is the moral of this story?

Answer: There are three possibilities–they intended to be a partnership, they intended not to be a

partnership, or they made no decision and passively agreed to worry about that problem later. When a

You Be the Judge: Finch v. Raymer1

Facts: Tina Raymer ran a cleaning service, while Jeffrey Finch was a carpenter and boilermaker. A few

months after they began dating, he moved into her mobile home. When the mobile home caught fire, the

couple devised a business plan: Together, they would repair it, sell it, and then split the proceeds. But the

deal changed slightlyinstead, of splitting the profit, they deposited it in a joint checking account, along

with all their other income.

On that momentum, Raymer “flipped”—or bought, remodeled, and sold—another house. Then Raymer

decided she would like to build a house. She and Finch worked on the project together, visiting land and

meeting sellers. But on the day that Raymer bought land on Pack Hill Road Finch was at work. He knew

that both the mortgage and the deed to the property were in her name alone. Finch and Tina’s father then

worked together to build a house on the property, which the couple moved into. Raymer and Finch paid

the mortgage, their living expenses, and all business expenses out of their joint checking account.

Some months later, Finch sold a house that he had owned before he met Raymer and used the proceeds to

pay off the mortgage on Pack Hill. The couple then took out a loan on the Pack Hill house to flip 12 more

1 2013 Tenn. App. LEXIS 319; 2013 WL 1896323 Court of Appeals of Tennessee, 2013.

properties. All the proceeds from these sales went into their joint checking account, even though only nine

were jointly owned.

Raymer worked full time in this real estate business, managing the finances and also doing some of the

renovations. Finch worked part-time on the renovations between boilermaker jobs. As the couple’s profits

grew, they buried $80,000 in cash in an ammunition box underneath the Pack Hill house.

When the couple ultimately broke up, they divided the money in the ammunition box equally. Finch also

took half the funds in the joint checking account, and then removed his name, leaving Raymer with the

balance. All was smooth until it came to the Pack Hill property and furnishings. She claimed that it was

all hers.

Finch filed suit against Raymer, alleging that their partnership owned the Pack Hill property and he was

entitled to half its value. Raymer agreed that she and Finch were partners in the other properties but not in

Pack Hill.

You Be the Judge: Who owned Pack Hill – Raymer by herself or the partnership?

Argument for Raymer:

Finch and Raymer did have a partnership, to flip properties. But the Pack Hill house was different: It was

a personal residence, not partnership property. That house was never intended to be part of the partnership

business, to produce income or profit; she expected to live there forever. It was in Raymer’s name alone,

which Finch knew. Almost all the other properties were in joint names. All the partnership proceeds were

in the ammunition box under the house, which they split evenly.

Raymer worked full time in the business and Finch did not. It is only fair that she gets to keep Pack Hill.

Just because Finch was helping to support Raymer, does not mean that Pack Hill was partnership

property. People in romantic relationships often make unequal contributions to living expenses.

Obviously, their finances were tangled, but one fact remains—the house was in her name.

Argument for Finch:

To determine if a partnership exists, the courts look at all the circumstances, not just a few technicalities.

Finch’s name was not on the Pack Hill deed simply because he was at work and could not attend the

closing.

Finch and Raymer acted like partnership. They put all of their profits into their joint checking account, the

ammunition box, or real estate. Partnership funds and Finch’s profit from the sale of his house paid the

Pack Hill mortgage and maintenance expenses. Plus, Finch had sweat equity in the house—he built it

with his own hands. The house is half his.

Holding: Judgment for Finch. The court found for Finch because partnership funds had been used to

buy and maintain Pack Hill. It didn’t matter that the house was in her name. The burden was on her to

prove that Pack Hill was not partnership property, which she could not do.

Question: What is the definition of a partnership pursuant to the Uniform Partnership Act (UPA)?

Question: What factors do courts consider in determining whether a partnership exists?

Additional Case: Love v. The Mail on Sunday2

Facts: Mike Love and Brian Wilson were members of The Beach Boys. In the 1960’s, they wrote songs

together. The copyrights for these songs were later sold to Rondor, which paid the two men royalties

when the songs were played. In 2004, Wilson re-recorded some of these songs on a CD. This CD was

distributed in the United Kingdom by the newspaper The Mail on Sunday.

2 489 F.Supp. 2d 1100; 2007 U.S. Dist. LEXIS 41678, United States District Court for the Central District

of California, 2007.

Love sued Wilson, claiming the two men had a partnership and Wilson violated the partnership

agreement by re-recording the songs without Love’s permission. Wilson filed a motion for summary

judgment.

Issue: Did Mike Love and Brian Wilson have a partnership?

Holding: No, Wilson’s motion for summary judgment is granted. According to the court, a partnership is

an “association of two or more persons to carry on as coowners of a business for profit…whether or not

the persons intend to form a partnership.” Here, the collaboration and co-ownership of songs does not

show that they were engaged as co-owners of a business.

The assets that Love characterizes as partnership assets, the copyrights to their co-authored songs, are

not owned by Love or Wilson; they have been owned by Rondor since 1969. There is no evidence that

the entitlement to royalties runs through any partnership. Rondor pays royalties to both men individually.

Moreover, there is no evidence that the parties entered into an oral partnership agreement. In fact,

Love and Wilson never signed any written partnership agreement, they never discussed what would be

done with the songs that they wrote together, Love cannot recall any conversation with Wilson about the

need to inform each other about the use of the songs, Love never filed partnership tax returns in

connection with the royalties he received from the songs, and there is no partnership entity that exists to

collect the royalties. Most damaging, when asked directly whether he and Wilson entered into an oral

partnership, Love stated that they sat down and co-wrote songs together and that they never entered into a

formal agreement. Love characterized their partnership as a “songwriting partnership” and as

“collaborating.”

Love also claims that the copyright applications filed by Wilson list Love and Wilson as co-authors,

and this proves that a partnership existed. From the late 1960’s to 1994 Wilson’s mental problems

prevented him from actively participating in the creation of new music, yet Love’s only evidence that any

partnership continued past the 1960s is that he and Wilson “discussed collaborating on other songs on

several occasions.” None of these states shows that their relationship was anything other than song

collaboration. According to the court, Love’s mere “belief” that they had a legal partnership and his

repeated use of the term “partnership” cannot substitute for evidence that a legal partnership in fact

existed.

Question: The court said that a partnership is an association of two or more persons to carry on as

co-owners of a business for profit. Didn’t Love and Wilson write songs together for a profit?

Answer: Yes, Love and Wilson did write songs together, and those songs generated royalties.

Question: What would it take for them to be partners?

Answer: Among other things, they would have to agree to co-own a business for profit. In this case,

Question: What is the moral of this story?

Answer: Many of the problems that arise in lawsuits involve situations where no one clearly spells

out the nature of the relationship. (You might remember, there were many such cases in the contracts

Partnership by Estoppel

Partnership by estoppel involves people who do not want to be partners because they want to avoid

liability. Partnership by estoppel cases focus on the (alleged) partners’ relationships with outsiders.

Example: Partnership by Estoppel

Four lawyers shared a suite of offices. They used stationery that listed all four names. One lawyer

referred to another as his “partner.” A newspaper article said that one of the lawyers was a “senior

partner” in the firm. On the other hand, they did not have a partnership agreement, they did not share

profits, nor did they file a partnership income tax return. One of the lawyers stole money from a client.

The client sued the firm, asking a court to hold all four “partners” liable.

Question: Were these four lawyers, in fact, partners?

Question: Why would the three other lawyers be liable for the misdeeds of a non-partner?

Answer: The issue was not what their relationship really was. The issue was what their relationship

Question: So what is the moral of this story?

Relationship between Partners and Outsiders

Example: Agency law and the issue of authority

When the law firm of Plante & Moran passed over John Dorsey for partnership, he threatened to quit.

Five partners told him he would make it next year if he avoided any major mistakes. The partnership

agreement required a two-thirds majority to admit new partners. The partnership then had 60

partners. The next year, the partnership did not vote Dorsey in. He sued–and lost.

Question: Is a partnership liable for the promises that its partners make?

Question: In this case, five partners promised the associate that, as long as he committed no major

blunders, he would make partner the next year. Did the partners have authority to make this promise?

A partner has implied authority for conduct reasonably necessary to carry out authorized

Do the partners have apparent authority? Only if the partnership does something that

causes a third party reasonably to believe that the partners were authorized. In this case, the

Question: What if these five partners had promised an outsider that the firm would hire him as a

partner?

Answer: The issue again would be whether the partners had apparent authority. If the group met

Information

As agent, a partner has a duty to pass on all relevant information to the partnership. Whether or not a

partner actually fulfills this obligation, the law treats the partnership as if it had received notice.

Additional Case: Pettiette v. New York Life3

Tom Pettiette and his law partner, Martin Akins, received a contingency fee of $1.5 million. They could

not agree on how to split the fee, so they each purchased a $750,000 annuity contract from New York Life

Insurance Company. They figured that, during the term of the annuity, the money would be safe and each

would receive an income. They had agreed that, on a certain date, they would both redeem the annuities.

By that point, they figured, they would have decided how to divide the $1.5 million fee. Unfortunately,

when they went to redeem the annuities, they discovered that they had to pay a surrender charge and tax

penalty that greatly reduced the proceeds. Pettiette sued New York Life for failing to tell him about these

charges and penalties. New York Life had disclosed these facts in a prospectus that it had mailed to the

law firm. Akins admitted he had received a prospectus. Evidently, he had failed to give it to Pettiette.

Result? The trial court dismissed the case on a motion for summary judgment from New York Life. The

appeals court upheld the trial court’s decision. When Akins received the information, he had a duty to

pass it on to the partnership. Although he failed to do so, the partnership was treated as if it had been

notified.

Question: What is the partner’s duty?

Question: What is a consequence of this duty?

Tort Liability

A partnership is responsible for the intentional and negligent torts of a partner that occur in the ordinary

course of the partnership’s business or with the actual authority of the partners.

Additional Case: Phillips v. Carson

The Phillips and the Carsons had been friends for several years before Mr. Phillips died. Mrs. Phillips

hired Mr. Carson, a partner in a law firm, to handle her husband’s estate. She paid his firm $80,000. For

no extra charge, the firm handled a number of other legal matters for her.

One evening at a party, Carson told Phillips that he was having financial problems. Fearful that he

might be suicidal, she loaned him and his wife $270,000. To secure the loan, Carson gave her a mortgage

on property in Arizona. Later, Carson asked Phillips to release her mortgage so that he could sell the land.

He offered her a mortgage on land in Kansas and told her that this would put her in a better position.

Carson prepared a mortgage on the Kansas property but failed to file it with the Register of Deeds. All of

Carson’s correspondence with Phillips, whether relating to her husband’s estate or the loans, was typed on

firm letterhead by his secretary at the firm. Phillips knew that the secretary did both firm and personal

work for Carson.

Carson filed for bankruptcy protection. Because Phillips’s mortgage had never been filed, she became

an unsecured creditor with little chance of receiving repayment on her loan. She filed suit against Carson

and his law firm. The lower court found that Carson had been negligent for not filing the mortgage.

The trial court dismissed the claim against the law firm on a motion for summary judgment. The

appeals court reversed on the grounds that there was substantial evidence from which a trier of fact could

find the firm liable.

Question for Phillips: On what theory would the law firm be liable for Carson’s misdeeds?

Answer: There are two possibilities. A partnership is responsible for the intentional and negligent

torts of a partner that occurs either:

3 1993 Tex. App. LEXIS Court of Appeals of Texas, 1993

Question: Did Carson’s misdeeds occur in the ordinary course of the partnership’s business?

Phillip’s Answer: Absolutely.

Law Firm’s Answer: Yes, the firm was representing her, but only for probating her husband’s will.

Question: Did Carson act with the actual authority of his partners?

Question: What can partners do to prevent this type of liability?

Answer:

Choose their partners carefully.

Perhaps they should have been more alert to possible signs of trouble with Carson. If he

The firm should encourage its partners to keep personal and firm business separate. If

Paying the Debts of the Partnership

The basic rule of partnership liability is simply stated: all partners are personally liable for all debts of

the partnership.

Financial Rights

Sharing profit

Partners share profits equally, unless they agree otherwise.

Payment for Work Done

Even if partners do work for the partnership, they are not entitled to any payment beyond their share of

profits, unless the partnership agrees otherwise.

Case: Banker v. Estate of Banker4

Facts: Father Banker owned Peaceful Valley Campground (PV) but, if the name had been accurate, it

would have been Angry Family Battleground. Peaceful Valley operated as both a campground, with

cabins and RV sites. When Father Banker died without a will, each of his four sons inherited roughly ten

percent, while his widow got the rest. One son, Arnold, bought out his mother’s share, so he owned

roughly two-thirds.

4 911 N.Y.S.2d 691; 2010 N.Y. Misc. LEXIS 1145, SUPREME COURT OF NEW YORK, DELAWARE COUNTY, 2010

Because the four brothers had made no other arrangement, PV operated as a partnership. Arnold was the

only brother who worked in the business. He lived year round in a house on the campground where he

was on call 24 hours a day during the seven-month camping season. He dealt with routine camp business

(including reservations and maintenance) as well as emergencies. Off season, he made repairs and did

office work.

The partnership paid Arnold a salary of about $25,000 a year. It also paid his live-in girlfriend, Linda

Romeo, about $10,000 a year for office work and cleaning. In addition, PV paid some of Arnold’s

personal expenses. The other brothers had not agreed to these payments.

The brothers objected to payments from PV to Arnold, alleging that, as a partner, Arnold had no right to

payment for the work he performed.

Issue: Was Arnold entitled to any payment in addition to his share of partnership profits?

Excerpts from Justice Peckham’s Decision: The personal expenses of Arnold alleged to have been paid

from the partnership include meals and lodging, a truck, furniture and fixtures, and sunglasses. The meals

and lodging were trips related to campground business. The furniture and fixtures were actually two

additional cabins for the campground. The truck was purchased for use at the campground hauling

materials and supplies and canoes the camp rents out. The sunglasses were for Arnold’s use working

around the camp. [T]he objection to these expenses is denied.

There is no written partnership agreement and no proof was introduced that the partners ever agreed to

Arnold’s salary. [W]hen there is no written partnership agreement, the New York Partnership Law

effectively becomes the partnership agreement. Under the Partnership Law of New York, consent by all

the partners was needed [for a partner to receive] compensation for services rendered to the partnership.

No such consent was given by the three minority partners in the Peaceful Valley partnership. No consent

having been given, the payment of a salary violated the partnership agreement and the law and must be

refunded.

The work Ms. Romeo performed is the same type of work done by Arnold and could have been done by

him. The other partners did not agree to hire Ms. Romeo, nor to the payments made to her. [Arnold must

repay these amounts.]

Question: What does the law state on paying salaries for services rendered in partnership business?