914 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
ANSWER TO fiWHAT IF THE FACTS WERE DIFFERENT?” IN CASE 37.2
Suppose that instead of choosing Sutherland and Pearsall Development to be the general contractor, SP had
selected a party with no connection to any of 1515’s partners. Is it likely that the result in this case would have been
different? Why or why not? Possibly. In this case, the court cited the awarding of the contract in particular as evidence
of the general partner’s breach of fiduciary duty. If the contract had been awarded to an unrelated third party, Bracken
would have had to allege other facts to show a breach.
ANSWER TO fiTHE ETHICAL DIMENSION” QUESTION IN CASE 37.2
Did any of the parties involved in this case commit an ethical violation? Discuss. Bracken might be viewed as
violating ethics principles when he failed to repay the loan until a court ordered him to do so. Likewise, Sutherland and
Pearsall’s manipulation of the award of the general contract to themselves, through their affiliated companies, raises
ethical fired flags”—possible conflicts of interest and self-dealing. Also, each party’s apparent refusal to compromise on
the disputed issues without litigation could be seen as a stretch of ethical principles.
ADDITIONAL CASES ADDRESSING THIS ISSUE —
Recent cases in which partners were considered to have breached their fiduciary duties owed to other
partners include the following.
• McBeth v. Carpenter, 565 F.3d 171 (5th Cir. 2009): (general partner in partnership formed to buy property falsely
assured limited partners that any issues stemming from negotiations with city to secure property’s water entitlements
were not significant obstacles to closing the deal).
agreement).
the general partner for breach of fiduciary duty).
CHAPTER 37: PARTNERSHIPS AND LIMITED LIABILITY PARTNERSHIPS 915
D. DISSOCIATION AND DISSOLUTION
CASE SYNOPSIS—
Case 37.3: In re Dissolution of Midnight Star Enterprises, L.P.
Midnight Star Enterprises, L.P., consists of a casino, bar, and restaurant in South Dakota. The owners are: Midnight
Star Enterprises, Ltd. (MSEL), the general partner, which owns 22 partnership units; actor Kevin Costner, a limited
partner, who owns 71.50 partnership units; and Carla and Francis Caneva, limited partners, who own 3.25 partnership
units each. Costner also owns MSEL and thus controls 93.5 partnership units. MSEL filed a petition in a South Dakota
state court to dissolve the partnership. Paul Thorstenson, an accountant, set the firm’s fair market value at $3.1 million.
A competitor offered to buy the business for $6.2 million. The court ordered MSEL and Costner to buy the business for
that price within ten days or sell it. MSEL appealed.
…………………………………………………….…….……………………………………………………………………
Notes and Questions
Why is the fihypothetical transaction” valuation standard, involving a hypothetical buyer and seller, rather than an
actual offer with a real buyer, the proper standard to determine the fair market value of partnership property? The
court in this case noted that fiMSEL lists sound policy reasons why an offer cannot be the fair market value. For
example, what if a partnership solicited a ‘strawman’ to offer a low price for the business? What if a businessman, for
personal reasons, offers 10 times the real value of the business? What if the partnership, for personal reasons, such as
sentimental value, refuses to sell for that absurdly high offer? These arbitrary, emotional offers and rejections cannot
916 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
ANSWERS TO QUESTIONS AT THE END OF CASE 37.3
1. Why did the court hold that a forced sale of the property of the limited partnership was not appropriate? The
2. Under what circumstances might a forced sale of the property of a limited partnership on its dissolution be
appropriate? The court in this case points out that fiif the majority owners refuse to pay any amount owed to the
Canevas after revaluation, then a forced sale is appropriate.” Also, under such egregious circumstances as a general
partner’s breach of fiduciary obligation or other unfair dealings or deceptive conduct, a forced sale might be proper.
E. LIMITED LIABILITY LIMITED PARTNERSHIPS
The difference between a limited partnership and a limited liability limited partnership (LLLP) is that the liability of
the general partner in an LLLP is the same as the liability of the limited partner. That is, the liability of all partners
is limited to the amount of their investment.
TEACHING SUGGESTIONS
which passages reflect the fiduciary duties owed by each of the partners to the other partners.
2. In the absence of a written partnership agreement, ask students what factors they would look for in deciding
whether a group of individuals engaged in a common enterprise should be classified as partners. Is there any single
factor that would be enough to justify classifying an enterprise as a partnership or must there be several factors that
together have the filook and feel” of a partnership?
3. A court has the power to order the dissolution of a partnership when it believes that such an action is warranted.
Ask students to discuss some of the situations in which a court might order that a partnership be terminated. Do
adequate guidelines exist to help courts make informed decisions in such matters? What are some of the problems
that might arise when deciding whether a partnership should be dissolved?
4. Explain that creditors are often reluctant to permit a debtor such as a partnership to contract out of personal
claims (or difficult to reach). Many lenders, for example, insist that partners personally guarantee loans to the
partnership so that the lender will have recourse to the personal assets of the partners.
5. There are two important points that might be emphasized regarding the formation of a partnership. First, one of
the essential elements is that a partnership must be carried on for a profit. Nonprofit entities do not qualify. Second,
6. Ask students whether the roles played by general partners and limited partners in a limited partnership are truly
distinct or instead merely arbitrary designations. Is it reasonable to assume that limited partners at least indirectly
fimanage” the business of a limited partnership by funding the partnership and paying the salary of the general
partner? Would it be more useful to make all limited partners personally liable on partnership debts and thus avoid
arbitrary court decisions about what forms of conduct do or do not constitute managerial activities? If so, what effect
would this have on the investment world?
Cyberlaw Link
What are the legal and policy issues for the design, development, and operation of a partnership’s Web site?
Should online businesses adopt a limited liability form of business organization? Why or why not?
DISCUSSION QUESTIONS
1. What are the three essential elements necessary (but not necessarily sufficient) to form a partnership? The Uniform
2. What is a partnership by estoppel? Parties who are not partners can hold themselves out as partners and make
3. When will majority rule not govern decisions connected with partnership business? Although majority rule controls
shared control over the business.
4. When may a partner withdraw from a partnership? A partner has the power to dissociate from a partnership at any time.
5. Can a partnership be bound to new obligations after it has been dissolved? Yes, this is possible. To avoid liability for
6. What is the difference between a general partnership and a limited partnership? A partnership is a joint undertaking that
7. What consequences result from a limited partner’s attempt to manage the affairs of the limited partnership? A limited
8. What are the characteristics of a limited liability partnership (LLP)? An LLP is similar to an LLC. The difference between
9. What is the difference between an LLP and a limited liability limited partnership (LLLP)? The difference between a limited
10. Why does the law impose fiduciary obligations on general partners? General partners operate partnerships with little input
from the limited partners, whose liability would be affected if they offered much advice but whose investments are entrusted to
those general partners. Any time one’s property is entrusted to the care of another, fiduciary obligations can arise. What is the
motivation for a general partner to breach its fiduciary obligations to the limited partners? The most likely motivation is money.
CHAPTER 37: PARTNERSHIPS AND LIMITED LIABILITY PARTNERSHIPS 919
ACTIVITY AND RESEARCH ASSIGNMENTS
1. Ask students to compare the differences in the typical agency and partnership relationships. Although the law of
2. Ask students to discuss any of their own experiences working as employees (or partners) for a partnership. In particular,
3. Obtain copies of partnership agreement forms and ask students to discuss the significant provisions. What sorts of
concerns are addressed in each agreement? How might these agreements be improved? How do these agreements differ from
what a sole proprietor might be able to do?
4. After having discussed the structure and contents of partnership agreements, ask each student to draft a brief partnership
agreement.
5. Ask students to research their state’s statutes and case law on limited liability partnerships and limited liability limited
partnerships.
EXPLANATIONS OF SELECTED FOOTNOTES IN THE TEXT
Footnote 8: fiJax Restaurant” is a partnership that operates Jax Restaurant in Minnesota. Nicole Moren, one of the
partners, brought her two-year-old son Remington into the restaurant kitchen, set him on a counter, and began rolling out pizza
dough with a dough press. Remington reached his hand into the press, which crushed it, causing permanent injuries. Through
his father, Remington filed a suit in a Minnesota state court against the partnership, alleging negligence. The partnership filed a
complaint against Moren, arguing that it was entitled to indemnity for her negligence. The court issued a summary judgment in
Moren’s favor. The partnership appealed. In Moren v. Jax Restaurant, a state intermediate appellate court affirmed. Under the
UPA, a fipartnership is liable for loss or injury caused to a person * * * as a result of a wrongful act * * * of a partner acting in
the ordinary course of business of the partnership.” The filaw requires a partnership to indemnify its partners for the result of
their negligence.” Also, fithe conduct of a partner may be partly motivated by personal reasons and still occur in the ordinary
course of business of the partnership.”
What is meant by the phrase fiin the ordinary course of business”? This phrase has no special legal meaning; it is not a
legal term of art. It is a phrase in common use and includes any matter of normal and incidental daily customs and practices in
business.
Suppose that Moren’s predominant motive in bringing her son to the restaurant had been to benefit herself because
she wanted to feed him free pizza. Would the result have been different? Why or why not? No, the result would not have been
different. The court cited two decisions from other jurisdictions fithat address the issue in a persuasive fashion.” In one of those
cases, the court held that fieven if the predominant motive of the partner was to benefit himself or third persons, such does not
prevent the concurrent business purpose from being within the scope of the partnership.”
CHAPTER 37: PARTNERSHIPS AND LIMITED LIABILITY PARTNERSHIPS 921
Footnote 10: In 1978, Wilbur and Dee Warnick and their son Randall Warnick bought a ranch in Wyoming, for
$335,000 and formed a partnership—Warnick Ranches. Their capital contributions totaled $60,000, of which Randall paid 34
percent. Wilbur and Dee moved onto the ranch in 1981, but Randall lived and worked on the ranch only occasionally. In 1999,
Randall dissociated from the partnership and filed a suit in a Wyoming state court against the others and the partnership to
recover what he believed to be a fair buyout price. The court awarded Randall $115,783.13 (his cash contributions plus 34
percent of the partnership assets’ increase in value above all partners’ cash contributions), with interest. The defendants
appealed, arguing that $50,000 should be deducted from the appraised value of the assets for the estimated expenses of selling
them. In Warnick v. Warnick, the Wyoming Supreme Court affirmed, holding that fihypothetical costs of sale are not a required
deduction in valuing partnership assets.” Under UPA 701, the buyout price is fithe amount that would have been paid to the
dissociating partner following a settlement of partnership accounts upon the winding up of the partnership, if, on the date of
dissociation, the assets of the partnership were sold at a price equal to the greater of the liquidation value or the value based on
a sale of the business as a going concern without the dissociating partner.” The first step is to value the partnership’s assets
according to the two methods. Liquidation value refers to the prices of assets if they are sold separately, as opposed to the
value of the business as a whole. For this purpose, an asset’s price is the amount that fia willing and informed buyer would pay a
willing and informed seller, with neither being under any compulsion to deal.” Such a seller would factor the cost of a sale into
the price.
Why does UPA 701 provide two approaches for calculating the buyout price on a partner’s dissociation? The court
pointed out that the statute ficontemplates variations that could result from differing appraisal techniques and varying business
circumstances.” Assets that are a part of a going concern may have figreater value than the sum of the values of individual
assets.” But figoing concern value is lower than liquidation value if the assets cannot be liquidated because they are committed
to a going concern.” In that situation, fidedication to a going concern is considered an encumbrance.” Under UPA 701, fihowever
value is perceived, the higher of the two values is to be used.”
Was it unethical for Randall to file a suit against his parents to obtain money in this case? Why or why not? Randall’s
efforts towards the success of the ranch, in terms of time devoted to its operation, appears from the statement of facts to have
been small. His capital contribution to the partnership, after deductions for distributions and other items, represented less than
10 percent of the total. When he tried to withdraw from the partnership and asked his parents for his share of the money, they
could not agree on the amount. He retained counsel in an attempt to obtain what he felt was a fair price and ultimately this suit
ensued. Whether Randall was acting unethically in the circumstances is not clear. He may have been greedy or resentful, or
have had other base motivations, in which case filing the suit could have been unethical. The same might be surmised of his
parents. To all parties, it may have simply been business.
How and why might the value of a partnership interest in a going concern differ from the value of the same interest as a
result of a liquidation? The court explained in this case, fiApplication of the two methods to the same partnership may yield two
922 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
ANSWERS TO ESSAY QUESTIONS IN
STUDY GUIDE TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
BY HOLLOWELL & MILLER
1. What are the rights of partners in terms of management, interest in the partnership, compensation, inspection of books,
accounting, and property rights? The rights held by partners in a partnership center around the areas of management,
2. How does the concept of joint and several liability relate to partnerships? The issue of liability for partnership debts
and obligations is of critical importance for those who are presently in partnerships and those who are contemplating joining
them. Partners are jointly and severally liable for all partnership obligations, including contracts and torts. Joint and several
liability means that a third party may sue any one or more of the partners without suing all of them or the partnership itself. It
REVIEWING—
PARTNERSHIPS AND
LIMITED LIABILITY PARTNERSHIPS
CHAPTER 37: PARTNERSHIPS AND LIMITED LIABILITY PARTNERSHIPS 923
Grace Tarnavsky and her sons, Manny and Jason, bought a ranch known as the Cowboy Palace in March 2007, and
the three verbally agreed to share the business for five years. Grace contributed 50 percent of the investment and each
son contributed 25 percent. Manny agreed to handle the livestock and Jason agreed to handle the bookkeeping. The
Tarnavskys took out joint loans and opened a joint bank account into which they deposited the ranch’s proceed, and
from which they made payments toward property, cattle, equipment, and supplies. In September 2011, Manny
severely injured his back while bailing hay and became permanently unable to handle livestock. Manny therefore hired
additional laborers to tend the livestock, causing the Cowboy Palace to incur significant debt. In September 2012, Al’s
Feed Barn filed a lawsuit against Jason to collect $12,400 in unpaid debts. Ask your students to answer the following
questions, using the information presented in the chapter.
1. Was the relationship among Grace and her sons a partnership for a term or a partnership at will? This is a general
2. Did Manny have the authority to hire additional laborers to work at the ranch after his injury? Why or why not? In
3. Under the UPA, can Al’s Feed Barn bring an action against Jason individually for Cowboy Palace’s debt? Why or
why not? Al’s Feed Barn can bring action against Jason or Cowboy Palace. A partner is jointly and severally (separately,
4. Suppose that after his back injury in 2011, Manny sent his mother and brother a notice indicating his intent to
withdraw from the partnership. Does that mean he could not be held liable for the debt to Al’s Feed Barn? Why or why
not? A dissociated partner may be liable for partnership obligations entered into during a two-year period following
dissociation. In other words, the partner may be liable to a third party with whom the firm enters into a transaction if
the third party reasonably believed that the dissociated partner was still a partner. This same principle applies to the
DEBATE THIS:
A partnership should automatically end when one partner disassociates from the firm. Prior to a change in the
UPA, when a partner left the partnership, it had to be dissolved. That makes sense, given that any partnership is an
924 INSTRUCTOR’S MANUAL TO ACCOMPANY BUSINESS LAW, TWELFTH EDITION
association of named partners. A new partnership can be created without the partner who left. After all, one of the
major distinctions between a corporation and a partnership used to be that the corporation was not dependent on
people who owe shares in it. Now, it seems as if a partnership can live forever, too, even if partners come and go.