978-1305575080 Chapter 41 Solution Manual Part 1

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Chapter 41

PARTNERSHIPS

RESTATEMENT

The Uniform Partnership Act (UPA) and the Revised Uniform Partnership Act (RUPA) are in effect in 49 states, and

govern partnerships and the rights of partners.

A partnership is a voluntary association of two or more persons to carry on as co-owners of a business for profit.

In a general partnership, the parties contribute capital or services or both. A general partnership is not always

regarded as a separate entity.

For income and tax purposes, the partnership is simply an aggregate of the partners and the income and losses

simply flow through to the partners. Partners ’ rights are determined by agreement, or, if they have not provided

for such in their agreement, by the UPA.

The name of the partnership may require registration for protection. There are various classifications of partners

including general partners, nominal partners, silent partners, secret partners and dormant partners. Any person

competent to enter into contracts may be a partner.

The creation of a partnership may be by agreement or by implication. An agreement should carefully spell out all

terms and rights of the parties. However, often individuals create a partnership and partnership liability by their

conduct and its appearance to third parties. Several factors can influence the determination of whether a

partnership exists but, the sharing of profits creates a prima facie presumption that a partnership exists.

Partnership liability can arise through estoppel as when an individual allows himself to be held out as a partner so

that third persons are led to believe that the individual and his assets and credit worthiness are part of a

partnership.

Partners in a partnership have express authority as provided in their agreement and customary authority

according to the nature of the partnership business. There can be limitations on partner ’s authority provided in

the partnership agreement, but third parties must be aware of the limitations. There are also prohibited

transactions for partners including an agreement to cease business, to act as a surety, to submit the partnership

to arbitration, to confess a judgment or to assign for the benefit of creditors. All of these actions require

unanimous consent.

Duties of partners include loyalty and good faith, obedience, reasonable care, information sharing and

accounting of the financial status of the partnership. The rights of partners include management authority,

inspection of books, sharing of profits, contributions and indemnity. In the absence of an agreement, partners are

not entitled to compensation.

Partners are jointly liable on all partnership contracts and liable to other partners for any breach of duty. New

partners are liable to the extent of their capital contributions for obligations in existence at the time of their

admission and have full liability for any obligations incurred after admission.

Partnership creditors have priority on partnership assets and individual partners ’ creditors must first exhaust the

personal assets of the partner.

Partnership property consists of all property contributed by the partners or acquired for the firm or with its funds.

Title to partnership property may be carried in the name of the partnership or one or more of the partner ’s

individual names. Title to partnership property is held in tenancy in partnership which is similar to joint tenancy

for passage of title upon the death of one of the partners.

Creditors of individual partners can attach the value of a partner ’s interest, but not the partnership property itself.

Dissolution occurs when the partnership ceases to exists as a going concern. Dissolution can occur through the

conduct of the parties or by operation of law (death; bankruptcy of the partnership or any partner; or illegality, or

by decree of the court). Upon dissolution, the parties may continue in certain circumstances or wind up the firm ’s

obligation, liquidate and terminate. Distribution of partnership assets upon liquidation is controlled by the UPA.

STUDENT LEARNING OUTCOMES

LO.1: Explain how partnerships are created by agreement, and understand that only when the partnership

agreement does not resolve an issue does partnership law apply.

LO.2: Understand that no writing is needed to form a partnership, nor a tax ID number, nor a partnership name.

All that is needed is clear evidence that the partners carried on as co-owners of a business for profit.

LO.3: Distinguish between express authority and customary authority of a partner to act for a partnership.

LO.4: List the duties of partners to one another.

LO.5: Explain the nature and extent of a partner’s liability on firm contracts and torts.

LO.6: Describe how a partnership may be dissolved by the acts of partners, by operation of law, and by order

of the court.

INSTRUCTOR’S INSIGHTS

Break the chapter down into four components – related Learning Outcomes are indicated in ( ):

1. What is the nature of partnerships and how are they created?

Define partnership (LO.1)

List the characteristics of a partnership

Cover the rights, classification and nature of partners

2. What are the authorities of partners?

Discuss the authority of partners including express and customary authority (LO.3)

3. What are the duties, rights, and liabilities of partners?

Explain the duties and rights of partners (LO.4)

4. How do dissolution and termination of a partnership occur? (LO.6)

Define dissolution

List the methods of dissolution: by act of the parties; by operation of law; by court decree of dissolution

CHAPTER OUTLINE

I. What is the Nature of Partnerships and How are They Created?

A. Definition

CASE BRIEF: Ford v. Mitcham

298 So. 2d 34 (Ala. Civ. App. 1974)

FACTS: Ford and Mitcham were partners engaged in construction. Ford was killed at work. His widow

made a claim for workers’ compensation against the partnership. Mitcham opposed the claim

on the ground that Ford was a partner and not an employee.

ISSUE: Is Ford a partner or employee?

REASONING: While a working partner does work, a partner is not an employee. The essential element of an

employment relationship is the right of the employer to control the employee. Although a

partner is required to act in a proper manner, a partner is not subject to the control of the

partnership in the same sense as an employee and therefore is not an “employee ” of the

partnership for the purpose of workers’ compensation.

B. Characteristics of a partnership

1. Voluntary agreement

2. Contributions of capital, services, or both

C. Rights of partners – determined by their agreement and the Uniform Partnership Act or the Revised

Uniform Partnership Act

D. Partnership agreement (See Figure 41-1)

1. Can be oral or written

E. Determining existence of partnership

3. When partnership relationship is not clear, the following rules can help determine if a partnership

exists

a. Control – significant in determining whether an individual is a partner

b. Sharing profits and losses – strong evidence of partnership

CASE BRIEF: Byker v. Mannes

641 N.W. 2d 210 (Mich. 2002)

FACTS: Byker and Mannes agreed to engage in an ongoing business enterprise, to raise and

invest funds and share equally in the profits, losses and expenses of such enterprise. Over the

years, the parties pursued limited partnerships, sharing equally in commissions, financing fees

and termination costs. Byker and Mannes then created a subsequent entity, Pier 1000, Ltd., to

own and manage a marina. This venture was not successful, and they took profits from a prior

entity and borrowed money to continue its operations. The unsuccessful marina was later

returned to its previous owners in exchange for assumption of Byker’s and Mannes’ direct

obligations to that business. The nine year business relationship between plaintiff and

defendant ceased. Byker approached Mannes for him to share in the payments resulting from

losses that were incurred from their various entities. Mannes refused payment. Byker sued

contending there was a general partnership underlying all their business affairs. Mannes

asserted that he merely invested in separate business ventures with Byker and there were no

other understandings between them.

ISSUE: Do individuals have to be aware of their status as partners in order to have a legal partnership?

REASONING: Partnership is defined as an association of two or more persons, which may consist of husband

and wife, to carry on as co-owners of a business for profit. The intent to create a partnership is

not required if the acts and the conduct of the parties otherwise evidence that the parties

carried on as co-owners of a business for profit.

DISCUSSION POINTS: Have the students discuss the Byker v. Mannes case where one individual, who carried

on a business for profit, was dumfounded to find out that he was, by law, a partner.

F. Partners as to third persons

1. Partnership liability by estoppel

G. Partnership property

Often, as a business operates, the partners bring some of their personal items for use by the partnership

so that the partnership does not have to incur the expense of buying these items. These items are then

extensively used by the partnership, and over time, some of the partners forget whether these were

H. Tenancy in partnership

1. There is an equal right to use firm property for partnership business

2. Partners have no interest in specific items

I. Assignment of partner’s interest

1. Assignment is acceptable if it does not violate the partnership agreement

II. What are the Authorities of Partners?

A. Authority of majority of partners

1. Ordinary business functions

B. Express authority of individual partners

C. Customary authority of individual partners

1. Contracts

2. Sales

CASE BRIEF: Omnicom v. Giannetti Investment Co.

561 N.W. 2d 138 (Mich. App. 1997)

FACTS: Silvio Giannetti and his daughter and son-in-law, Anne Marie and Jerry Pruzinsky, are partners

in a general partnership known as Giannetti Investment Company (GIC) which owns and

operates Braugham Manor Apartments. Jerry entered into an access agreement with

Omnicom, a provider of cable television services, giving Omnicom the right to enter Braugham

Manor for purposes of installing, maintaining, and promoting cable service. Some time later,

when Silvio learned of the contract, he denied Omnicom access to the property, and Omnicom

was unable to repair a signal leakage problem and was forced to discontinue cable service.

Omnicom sued GIC for breach of contract. GIC contended that Jerry did not sign the agreement

in the partnership name, and thereby failed to bind GIC.

ISSUE: Did Jerry have the authority to contract with Omnicom?

REASONING: A contract executed in the name of a partner is binding on the partnership. The contract was

executed by Jerry in the usual course of GIC’s business, for it is a typical activity for an

apartment complex to contract for cable television.

D. Limitations on authority

1. Discuss limitations on liability in a partnership agreement

2. Third persons should check the partner’s authority

3. Secret limitations among partners are very seldom binding on outsiders. Use an example of a

partnership in which only one partner is authorized to make certain purchases on behalf of the

E. Prohibited transactions (See Figure 41-2 in text)

1. Remind the students that the relationships between the partner and the partnership and the principal

and the agent both contain fiduciary duties. Point out that the transactions discussed in this section

CASE BRIEF: Patel v. Patel

260 Cal. Rptr. 255 (Cal. App. 1989)

FACTS: The Patel family, consisting of parents and a son, was a partnership that owned and operated a

motel. The parents made a contract to sell the motel, but the son refused to sell. He claimed

that the contract of sale was not binding.

ISSUE: Did two partners have the authority to sell the hotel?

REASONING: The motel was not an asset held by the partnership for sale. It was an asset that was essential

for the running of the partnership/business. Accordingly, neither one partner nor a majority had

implied authority to sell the motel. To the contrary, the unanimous consent of all the partners

was required for the sale of the motel because such a sale would make it impossible to

continue the partnership business.

2. Cessation of business

3. Suretyship

III. What are the Duties, Rights, and Liabilities of Partners?

A. Duties of partners

1. Loyalty and good faith – owed to the partners and the partnership

B. Rights of partners as owners – unless agreed otherwise

1. Management – equal right

2. Inspection of books – equal right

3. Share of profits – by agreement or equal

4. Compensation – no compensation for work for partnership unless agreed

5. Repayment of loans – point out the risk of a partner’s payment of money into the partnership. The

C. Liability of partners and partnership

CASE BRIEF: PNC Bank, N.A. v. Farinacci

964 N.E. 2d 1124 (Ohio. App. 2011)

FACTS: Plaintiff, PNC Bank, sued defendants, two of the eight partners of Washington Square

Enterprises, for not paying the balance on their partnership’s line of credit, of $33,500. Joint and

several liability would allow the bank to obtain payment of the entire debt from either of the two

partners. Joint liability apportions the debt equally among all eight partners, allowing the bank to

collect just $4,190 from each of the two defendants.

ISSUE: Should the two partners be held jointly liable or jointly and severally liable for

the debt?

REASONING: In 2007 Ohio adopted the Revised Uniform Partnership Act (RUPA) effective January 1, 2010,

which provides that all partners are liable jointly and severally for the obligations of the

partnership. However, the new law states that the RUPA language does not apply to

partnerships formed prior to January 1, 2009; and the Washington Square Partnership was

formed in 1978. Under the applicable partnership law the two defendant partners are held jointly

liable for the debt.

3. Liability of new partners

a. Liability is limited as to existing debts and unlimited as to new debts – a new partner must buy

into the partnership because the new partner is acquiring a piece of the existing partners’

b. Finally, the new partner should pay careful attention to any clauses in the partnership

agreement that deal with the amount of time the partner must spend with the partnership. A

4. Effect of dissolution on partner’s liability – still liable unless released by creditors

D. Enforcement and satisfaction of creditor’s claim

IV. How do Dissolution and Termination of a Partnership Occur?

A. Effect of dissolution