978-1285860381 Chapter 32 Solution Manual Part 2

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Additional Case: Hooper v. Hooper

Facts: Charles Hooper owned Lako, a scrap metal business, and invited his brother William to join

him as partner. They were each entitled to 50 percent of the profits of the partnership, but they agreed

that they would take out only what was necessary to live, and the remainder would stay in the

business. The two brothers also agreed that Lako would hold and manage real estate and stocks they

had inherited from their grandfather. These inherited holdings generated most of most of the

partnership’s income.

Ten years after forming the partnership, William was injured in a car accident. Although William

never returned to the office, he did do some partnership work at home. William and Charles had a

major disagreement over a settlement offer from an insurance company on a Lako building that had

been destroyed by fire. William wanted to take the settlement but Charles wanted to hold out for more.

Charles became so angry that he communicated with William only through his girlfriend, and refused

to give William any information about the partnership.

William filed suit, asking the court to order an accounting and to dissolve the partnership. Charles

alleged that he was entitled to payment for the services he performed for the partnership after

William’s accident. The lower court found for William and Charles appealed.

Issue: Is a partner entitled to compensation for the services he provides the partnership?

Holding: In the absence of an express or implied agreement, a partner is not entitled to any

compensation for his services to the partnership other than his share of the profits. Therefore, Charles

is not entitled to payment for the services he performed.

Question: Who started Lako?

Question: Over the life of the partnership, who did the most work for Lako?

Question: In fairness, should Charles be entitled to payment for his extra work?

Answer: Maybe in fairness he should be, but not in law. In the absence of an explicit agreement, a

Question: Was there an agreement that the partnership would pay more to Charles?

Answer: Charles may have felt that he was entitled to more, but there is no evidence of any

Partnership Property

All partnership property belongs to the partnership as a whole, not to the individual partners.

Right to Transfer a Partnership Interest

Without the approval of the other partners, a partner cannot sell her partnership share. She can only

transfer her economic interest in the partnership, that is, her right to receive partnership profits and

losses. A new partner can only be admitted to a partnership by unanimous consent of the other

partners.

Additional Case: Warren v. Warren 1

Jon Warren was an equal partner with his father and brother in J-W Foods, a grocery store in

Huntsville, Arkansas. When Jon and his wife divorced, the trial court held that Sue should become the

owner of a one-sixth interest in the grocery store (one-half of Jon’s one-third interest).

Question: Is there a problem with this decision?

1675 S.W.2d 371 (Ark. Ct. App. 1984).

Answer: All partnership property belongs to the partnership as a whole, not to the individual

Question: How could Sue enforce this award if she is not actually a partner?

Comment: This case illustrates the concepts underlying partnership law. Imagine the horror of Jon,

his father, and his brother if they had to be partners with Jon’s ex-wife. This potentially antagonistic

relationship runs counter to the whole theory of partnerships as a mutually supportive, fiduciary

relationship.

Management Rights

Right to Manage

Each and every partner has equal rights in the management and conduct of the business, unless the

partners agree otherwise.

Management Duties—Duties of Care

Partners are liable to the partnership for gross negligence, reckless conduct, intentional misconduct, or

a knowing violation of the law. Partners are not liable for negligence.

Case: Moren v. Jax Restaurant2

Facts: Jax is a pizza restaurant in Foley, Minnesota owned by two sisters—Nicole Moren and Amy

Benedetti. They operated it as a partnership. One afternoon, Moren ended her regular shift at 4:00

p.m. and left to pick up her two-year-old son Remington from day care. When her sister called her to

say that one of the cooks had not come to work, Moren returned to the restaurant with Remington.

Moren’s husband said he would pick the child up in about 20 minutes.

Because Moren did not want Remington running around the restaurant, she brought him into the

kitchen with her, set him on top of the counter, and began rolling out pizza dough using the

dough-pressing machine. As she was making pizzas, Remington reached his hand into the dough press.

His hand was crushed, causing permanent injuries. His father brought suit on Remington’s behalf

against the partnership for negligence. The partnership, in its turn, sued Moren, arguing that she had to

reimburse the partnership for any payments to Remington. The district court granted summary

judgment to Moren. The restaurant appealed.

Issue: Is Moren liable to the partnership for her own negligence?

Holding: Judgment for Moren affirmed. Her conduct was in the ordinary course of the partnership’s

business, which means that the partnership is liable to Remington. However, her conduct was ordinary

negligence, not gross negligence or intentional misconduct, which means that she is not required to

indemnify the partnership

Question: Why did the father sue his wife’s partnership?

Answer: He sued the partnership because it carried liability insurance. He was not trying to reach

Question: What would happen if the partnership did not have liability insurance?

Question: Why would the partnership be liable to Remington? Wasn’t it his mother’s fault he was

injured, not the partnership’s?

2 679 N.W.2d 165; 2004 Minn. App. LEXIS 459 Court of Appeals of Minnesota, 2004

Question: Why doesn’t Moren have to indemnify the partnership? After all, she was the careless

one.

Question: Does this rule make sense? What policy considerations are behind it?

Con”ict of Interest

A partner has a conflict of interest whenever the partnership does business with him, a member of his

family, or a business partly or fully owned by him. Unless the other partners consent to the business

relationship in advance, the partner must turn over all of its profits to the partnership.

Case: Marsh v. Gentry3

Facts: Tom Gentry and John Marsh were partners in a business that bought and sold racehorses. The

partnership paid $155,000 for Champagne Woman, who subsequently had a foal called Excitable Lady.

The partners decided to sell Champagne Woman at the annual Keeneland auction. Gentry purchased

the horse personally for $135,000, without telling Marsh. Later, he told Marsh that someone from

California had approached him about buying Excitable Lady. Marsh agreed to the sale. Although he

repeatedly asked Gentry the name of the purchaser, Gentry refused to tell him. Not until 11 months

later, when Excitable Lady won a race at Churchill Downs, did Marsh learn that Gentry had been the

purchaser.

Issue: Did Gentry violate his fiduciary duty when he bought partnership property without telling his

partner?

Holding: Yes, Gentry did violate his fiduciary duty. A partner has an absolute right to know if his

partner purchases partnership property.

Question: Why didn’t Gentry tell Marsh he wanted to purchase the two horses?

Question: Marsh agreed to the price for the private sale of Excitable Lady. Why would Marsh

care whether he sold to a partner or to a stranger?

Answer: In a sale to a stranger, Marsh would assume that he knew at least as much, if not more,

Question: What damages would Gentry be required to pay?

Question: How would you measure profits in this case?

Answer: It would be complicated. If Gentry subsequently sold the horses, then the difference

between what he had paid for them and what he sold them for would be a start. Of course, he

Terminating a Partnership

If the partners have not agreed how long their partnership will last, they have a partnership at will,

and any of them can leave at any time, for any reason.

With a term partnership, the partners have agreed in advance how long it will last. At the end of

the specified term, the partnership automatically ends.

3 642 S.W.2d 574, 1982 Ky. LEXIS 315 Supreme Court of Kentucky, 1982

Winding Up

Any partner who has not wrongfully dissociated has the right to take part in the winding up. During

this process, partners may complete unfinished business, but they do not have the right to take on new

work.

Case: Jefferson Insurance. Co. v. Curle4

Facts: Steven Shelley and Michael Curle were partners in a roofing business. During the process of

winding up, Shelley canceled the partnership’s general liability insurance policy without telling Curle.

While finishing a project, Curle left a hole in a roof, covering it only with tar paper. A painter, Dennis

Whitsett, fell through the hole. When he sought to recover from the partnership for his serious injuries,

Curle and Shelley asked the insurance company to pay the claim. The trial court found that the policy

did not cover Shelley, but did cover Curle and the partnership. Jefferson Insurance appealed.

Issue: Were the partnership and Curle bound by Shelley’s decision, during the winding up process, to

cancel the policy, even though he had not told Curle?

Holding: Judgment for Curle and the partnership reversed. The decision was binding on the

partnership and Curle. The cancellation was within Shelley’s authority in winding up the partnership’s

affairs.

Question: Why did the trial court decide that the insurance policy protected Curle and the

partnership, but not Shelley?

Answer: T he decision was based on a prior version of Tennessee law, but, in essence, the trial

Question: Is it fair to hold Curle liable when he did not know the policy had been canceled?

Question: Curle clearly would have been liable if Shelley had canceled the policy before the

partnership was in the winding up process. Why should winding up make any difference?

Answer: During the winding up process, partners tend to have less contact with each other and

Question: Why is the liability of the partners the same?

Answer: Someone will be harmed by Shelley’s action. Either the insurance company will have to

Question: Whose negligence harmed Whitsett, the painter?

Question: Is it fair to hold Shelley liable when he did not know Curle had left the hole uncovered?

Answer: This case illustrates the risk of a partnership. On the one hand, Curle was liable because

Multiple Choice Questions

1. CPA QUESTION Which of the following is not necessary to create a partnership?

(a) Execution of a written partnership agreement

(b) Agreement to share ownership of the partnership

4 771 S.W.2d 424, 1989 Tenn. App. LEXIS 30 Tennessee Court of Appeals, 1989

(d) Intention of creating a relationship recognized as a partnership

2. If a partner dissociates, he is entitled to ____.

(a) Force the termination of the partnership

(b) Receive indemnification from liability for present partnership debt

(d) Receive only his share of the value of the partnership assets when it ultimately liquidates

3. CPA QUESTION Cobb, Inc., a partner in TLC Partnership, assigns its partnership interest to

Bean, who is not made a partner. After the assignment, Bean asserts the right to (1) participate in

the management of TLC and (2) Cobb’s share of TLC’s partnership profits. Bean is correct as to

which of these rights?

(a) 1 only

(b) 2 only

(d) Neither 1 nor 2

4. CPA QUESTION Ted Fein, a partner in the ABC Partnership, wishes to withdraw from the

partnership and sell his interest to Gold. All of the other partners in ABC have agreed to admit

Gold as a partner and to hold Fein harmless for the past, present, and future liabilities of ABC. A

provision in the original partnership agreement states that the partnership will continue upon the

death or withdrawal of one or more of the partners. As a result of Fein’s withdrawal and Gold’s

admission to the partnership, Gold ____.

(a) is personally liable for partnership liabilities arising before and after his admission as a partner

(b) has the right to participate in the management of ABC

(d) must contribute cash or property to ABC in order to be admitted with the same rights as the

other partners

5. Blackriver Partnership is in the process of winding up. It has three partners: Jason, Keira and

Lancelot. The partnership has assets of $90,000, but debts of $60,000, including $30,000 it owes to

Jason. Who gets what?

(a) Each partner receives $10,000.

(b) Each partner receives $30,000.

(d) Jason receives $40,000 and the other two get $10,000 each.

Case Questions

1. ETHICS Arthur, John, and George formed a partnership to drill and maintain cesspools for two

years. After less than two months, John and George sent a letter to Arthur informing him that they

were dissolving the partnership. Arthur sued the two other men, asking the court to declare that the

partnership still existed and he had the right to continue in the business. Do John and George have

the power to dissolve a term partnership before the end of the term? Aside from the legal issue, is it

fair to Arthur for the court to allow his two partners to walk away from their partnership? He had

counted on a two-year commitment; they gave only two months.

Answer: The court refused to re-create the partnership. It held that the defendants could terminate

2. You Be the Judge: WRITING PROBLEM Hebert, an artist, entered into an

agreement with Randy for the reproduction and distribution of his paintings. Herbert was to receive

50 percent of the gross sales revenues. Randy was responsible for all losses and for management of

the business. Before leaving on a trip to Israel, where he feared he might be in some danger, Randy

signed a partnership agreement with Herbert stating that they jointly owned the business. Shortly

after Randy returned from the trip, the two men terminated their business relationship, and Herbert

revoked his authorization for the sale of prints. When Randy continued selling the prints, Herbert

filed suit. Randy argued that the two had formed a partnership and that he was authorized to sell

assets of the partnership. Were Herbert and Randy partners? Argument for Herbert: A partnership

agreement does not create a partnership. Randy alone managed the business. Herbert shared only

revenues, not profits or losses. Argument for Randy: Herbert and Randy both provided services to

the business: Randy paid for the printing, and Herbert did the artwork. These two men signed a

partnership agreement, and they obviously intended to be partners.

Answer: The court found that no partnership existed. Their signed agreement was similar to the

3. Seventy-Three Land, Inc., sued Maxlar Partners for the balance due on a note made by the

partnership. Max, a partner, asked the court to dismiss the claim against him personally because the

plaintiff had not first tried to collect against the partnership. Does Max have a valid claim?

Answer: Creditors with contract claims against a partnership must first exhaust partnership assets

4. Pedro and Juan have a business selling ties with fraternity insignia. Pedro finds out that an online

shirt business is for sale. It sounds like a great idea — customers send in their measurements and

get back a custom-made shirt at a price no higher than off-the-rack shirts at the local department

store. Does Pedro have to let Juan in on the great opportunity?

5. Brothers Sydney and Ashley were partners in a real estate partnership in Pennsylvania. They

received identical salaries. Sydney moved to Florida to establish residency so that he could obtain

a divorce there. His lawyer told him not to return to Pennsylvania until he had resolved his marital

problems. After Sydney had been gone almost a year, Ashley decided to increase his own salary to

compensate for the additional work he was doing. Does Ashley have the right to pay himself more

if he is doing more work?

Answer: Ashley was not entitled to additional compensation in return for his additional work

Discussion Questions

1. Mike Love and Brian Wilson were members of the Beach Boys. In the 1960s, 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

called Good Vibrations. This CD was distributed in the United Kingdom by the newspaper The

Mail on Sunday. Love sued Wilson, arguing that the two men had a partnership and Wilson had

violated the partnership agreement by re-recording the songs without Love’s permission. Did Mike

Love and Brian Wilson have a partnership?

Answer: In Love v. The Mail on Sunday, 2007 U.S. Dist. LEXIS 41678, the court ruled that there

2. Dutch, Bill, and Heidi were equal partners in a lawn care business. Bill and Heidi wanted to

borrow money from the bank to buy more trucks and expand the business. Dutch was dead set

against the idea. When the matter came to a vote, Bill and Heidi voted in favor, Dutch against.

Dutch was so annoyed that he told the bank not to lend the money and, further, that he would not

be responsible for repaying the loan. The bank loaned the money, the business failed, and the bank

sued all three partners. Is Dutch liable on the loan?

Answer: Yes. Bill and Heidi’s vote was binding on the partnership and on all of the partners.

3. Carrie and Laura started a business together to sell bridesmaids dresses online. Carrie spent

months preparing the financials and meeting with potential investors while Laura designed dresses

and found suppliers. Once Carrie was finished with the financials and had identified some potential

investors, Laura announced that she preferred to work with Scott and Carrie was out of the

business. What rights does Carrie have?

Answer: A partner can only be expelled if the partnership agreement permits. Here, there is no

4. Lucan and Alison agreed to practice law together. Their stationery said, “The Lucan and Alison

Partnership” and they told everyone they were partners. They signed a partnership agreement

providing that Lucan would receive a “guaranteed annual draw of $100,000.” The rest of the profits

went to Alison. Are they partners?

5. Is there any good reason to be in a partnership? If so, for what sort of business would it make

sense?

Answer: It is an easy and cheap form of organization, but the liability is an important issues.

Perhaps a short-term project with someone whom you trust and without much money or potential