Partnership Hypos Flashcards
A and B agree to start a ski school. A agreed to lend B money to purchase a skimobile for the school. Later, A told C, a skimobile vendor: “B, my partner, and I are starting a ski school and we would like to buy a skimobile.” C offered to sell A and B a skimobile. C agreed to allow B to take it for a test ride. Before B’s test drive, however, A and B decide to not go further in setting up the ski school. Nevertheless, B takes the skimobile out for a test-ride and totally destroys it.
Can C recover damages from A?
Issue: Is A liable to C when A told C of an alleged partnership between A and B,
Rule: In general, Partnership is an association of (1) two or more persons (2) carrying on as co-owners (3) for profit. Further, no formalities are required for partnership entity formation. Partnerships are jointly and severally liable for the debts of the partnership. The exception to this rule lies within Partnership by Estoppel in which anyone representing themselves as a partnership to a third party will be liable as if a partnership does exist.
Analysis: Here, we know that AB partnership had not formed a partnership but rather only agreed to a lending relationship. Although there were two or more persons carrying on as co-owners, they were not working together for profit. On the other hand, because A held B out as their partner to C, they became a partnership by means of estoppel. Thus, it does not matter that a valid partnership did not exist because A and B had partnership by estoppel. When A and B represented themselves to C, they became bound to C as if a partnership really had existed. Per partnership rules, general partners are personally liable to creditors for debts assumed/torts committed by another partner.
Conclusion: Therefore, A is liable to C for damages caused by A’s partner B.
What if the agreement is silent on profits and losses?
Issue: What if the agreement is silent on profits and losses?
Rule: Absent agreement, profits are shared equally. Absent agreement, losses are shared like profits.
Analysis: Here, the partnership agreement was silent on the allocation of profits/losses. Because of this, default rules will apply to their partnership profits and losses. Profits shall be shared equally between partners. Losses shall be shared in the same way that profits are.
Conclusion: Therefore, if an agreement is silent on profits and losses, default partnership rules apply to profits and losses attained by the partnership.
What if the agreement stipulates: “Profits are shared 60/40.” How are losses shared?
Issue: What if the agreement stipulates: “Profits are shared 60/40.” How are losses shared?
Rule: Absent agreement, profits are shared equally. Absent agreement, losses are shared like profits.
Analysis: Here, we are not aware of any prior or subsequent agreement in which it was stipulated that losses would be shared differently than profits.
Conclusion: Therefore, losses are shared 60/40.
What if the agreement stipulates: “Losses are shared 60/40.” How are profits shared?
Issue: What if the agreement stipulates: “Losses are shared 60/40.” How are profits shared?
Rule: Absent agreement, profits are shared equally. Absent agreement, losses are shared like profits.
Analysis: Here, we are not aware of any prior or subsequent agreement in which it was stipulated that losses would be shared differently than profits. Therefore, it is a fair assumption that because losses are shared in the same way that profits are, profits must also be shared 60/40.
Conclusion: Therefore, profits are shared 60/40.
What if Partner A puts up all of the money. Partner B does all of the work. Partner C gives the partnership its name. Partner D does nothing. How are profits shared?
Issue: How are profits shared in a partnership in which each partner has a different and not proportional role within the partnership?
Rule: Absent agreement, profits are shared equally. Absent agreement, losses are shared like profits.
Analysis: Here, it does not matter the amount or value of work each partner puts into the partnership. Absent an agreement stating otherwise, profits are to be shared equally. On the other hand, had the partners chosen to insert contrary payment terms into their partnership agreement, those would be honored instead of applying the default partnership rules related to partnership profits/losses.
Conclusion: Therefore, A, B, C, and D are all entitled to an equal share of the profits.
A and B dissolve their partnership. In winding up, they liquidate the partnership assets and have a total of $1 million to distribute. How should that amount be distributed, if (1) the partnership owes $600,000 to trade creditors; (2) Partner A loaned the partnership $100,000; and (3) Partner B made capital contributions of $200,000?
Issue: What is the order in which repayment shall occur following a partnership dissolution?
Rule: In general, there are three levels of priority for repayment and each level must be satisfied before moving to the next. First, partnerships must repay their creditors starting with outside creditors and ending with inside creditors. Next, capital contributions of partner’s must be repaid. Finally, partners will share any remaining profits. If one level is not satisfied, the levels below it will not be allowed compensation.
Analysis: Here, we know that the first party to receive payment should be outside creditors. Thus, the trade creditors shall be paid first. Next, partners who have loaned money to the partnership should be repaid. Finally, capital contributions to partner’s should be repaid.
Conclusion: Therefore, the order of repayment shall be trade creditors, partner loan, followed by returning partner B’s capital contributions. The remaining $100,000 will be distributed equally among A and B ($50,000 each.)
A and B dissolve their partnership. In winding up, they liquidate the partnership assets and have a total of $1 million to distribute. How should that amount be distributed, if (1) the partnership owes $600,000 to trade creditors; (2) Partner A loaned the partnership $100,000; and (3) Partner B made capital contributions of $200,000? What if A and B’s partnership has only 700,000 to distribute?d
Issue: What happens if a partnership dissolves but does not have sufficient assets to return funds to all interested parties?
Rule: In general, there are three levels of priority for repayment and each level must be satisfied before moving to the next. First, partnerships must repay their creditors starting with outside creditors and ending with inside creditors. Next, capital contributions of partner’s must be repaid. Finally, partners will share any remaining profits.
Analysis: Here, we know that the first party to receive payment should be outside creditors. Thus, the trade creditors shall be paid first. Next, partners who have loaned money to the partnership should be repaid. In this case that would mean partner B’s inside loan will be repaid next. This, however, leaves no money remaining for the partnership’s other outstanding debts and thus the partner will not receive funds to repay their capital contribution to the partnership.
Conclusion: Therefore, the creditor and the partner who made the loan will be re-paid and A will still be liable to B for one half of the outstanding liability being $100,000.
A and B form a partnership that has the purpose of buying and developing properties and selling such properties for profit. The AB partnership has assets of $90k. D, a contractor holds the AB partnership liable on a recent contract with the AB partnership for $100k. When D realizes she can only recover $90k from the AB partnership, D holds A liable for the remaining $10k.
Who is liable and for what amounts?
Issue: Who is liable and in what amount when a third party is unable to recover their full fee from a partnership?
Rule: In general, a partnership is an association of (1) two or more persons (2) carrying on as co-owners (3) for profit. Partners are jointly and severally liable for the debts of the partnership. Partnership creditors must exhaust partnership resources before recovering from partners individually. A partner who is held individually liable has a right to indemnification from the partnership and contribution from the other party.
Analysis: Here, we can conclude that AB is a partnership because (1) there are two people (2) working as co-owners and (3) doing so for profit. General partners are jointly and severally liable for the debts of the partnership and as such must pay D the total amount owed to him. First, D is required to collect as much of his debt as possible from the partnership entity. Once that has been exhausted, D may go after an individual partner for the remaining funds. Although D is suing A, B is also responsible for half of the debt owed to D. In this case, if A is held personally liable for the entire remaining sum of $10,000, then A has a claim against B for one half of that amount, $5,000.
Conclusion: If a third party is unable to collect debt owed to them by a partnership, they may hold individual partners personally liable for the remaining debt.
A and B are sharing profits in the AB partnership as co-owners. The AB partnership has outstanding debt of $200k. Despite the precarious financial situation, C sees a long-term benefit in joining the partnership and decides to join the AB partnership in January. A and B demand that C contribute capital of $100k to satisfy existing creditors and C agrees to do so. In March of the same year, D, one of the AB partnership creditors, holds C personally liable for outstanding AB partnership debt of $100k.
Is C liable?
Issue: Is a new partner entering a partnership personally liable for pre-existing debt?
Rule: In general, a partnership is an association of (1) two or more persons (2) carrying on as co-owners (3) for profit. Partners are jointly and severally liable for the debts of the partnership. Partnership creditors must exhaust partnership resources before recovering from partners individually. A partner who is held individually liable has a right to indemnification from the partnership and contribution from the other party. General rule is that incoming partners have no liability for preexisting debt. There is an exception to this rule in that any capital contributions from an incoming partner may be used to pay preexisting debt.
Analysis: Here, we know that AB is a valid partnership in which there were at least two people, carrying on as co-owners, and working for profit. C knew that AB Partnership had an outstanding debt of $200,000 at the time they joined. When C joined the partnership, AB was within its right to use the capital contributed by C to pay off existing debt and satisfy creditors. However, when D, an existing creditor, went after C for personal liability on existing debt, this outstanding debt could not be taken from C personally as they were not a partner at the time the debt was incurred. C’s partnership contributions are the only funds available to creditors. D must hold A or B personally liable for the $100,000 of outstanding debt they are owed.
Conclusion: Therefore, C is not personally liable for the preexisting debt of AB partnership.
A, B and C are sharing profits in the ABC partnership as co-owners. C decides to dissociate from the partnership in January without filing a statement of dissociation with the department of state. In March of the same year, A and B sign a contract with a new creditor D. In May of the same year, D holds C liable on the contract.
Is C liable?
Issue: Is C liable for subsequent debts of a partnership following their dissociation?
Rule: In general, a partnership is an association of (1) two or more persons (2) carrying on as co-owners (3) for profit. Partners are jointly and severally liable for the debts of the partnership. Partnership creditors must exhaust partnership resources before recovering from partners individually. A partner who is held individually liable has a right to indemnification from the partnership and contribution from the other party. If a partner has dissociated or otherwise left the partnership, they will remain personally liable to all future creditors. There are two exceptions to this rule. First, if the outgoing partner files a notice of withdrawal and if that notice is given to all known and future potential creditors, then the outgoing partners cannot be liable for future debts. Second, the outgoing partner can protect themselves by filing a notice of dissociation with the Department of State which is effective 90 days after file.
Analysis: Here, we can assume by the facts given that ABC is/was a valid partnership in which it was comprised of at least two people, carrying on as co-owners, for profit. In general, C is liable for all subsequent debts to future creditors of the partnership even after they have left the partnership. C is able to counteract that by one of two measures; either filing a notice of withdrawal that is given to all current and potential creditors or by filing a notice of dissociation with the department of state. Here, C did not take either of those measures that would terminate his liability to the partnership’s future creditors. On the other hand, had C filed that notice of dissociation with the Department of State, it would still not be effective against the new creditor because that notice is not effective for 90 days. Here, it had only been 60 days. Thus, at the time the partnership assumed debt from D, C remained personally liable to the partnership for that debt.
Conclusion: C is liable for subsequent debts of a partnership following their dissociation.
A and B agree to start a ski school. A agreed to lend B money to purchase a snowmobile for the school. Later, A told C, a snowmobile vendor: “B, my partner, and I are starting a ski school and we would like to buy a snowmobile.” C offered to sell A and B a snowmobile. C agreed to allow B to take it for a test ride. Before B’s test drive, however, A and B decide to abandon their idea for setting up the ski school. Nevertheless, B takes the snowmobile out for a test-ride and totally destroys it.
Can C recover damages from A?
Issue: Is A liable to C when A told C of an alleged partnership between A and B, when C acted in reliance of the alleged entity?
Rule: In general, Partnership is an association of (1) two or more persons (2) carrying on as co-owners (3) for profit. Further, no formalities are required for partnership entity formation. Partnerships are jointly and severally liable for the debts of the partnership. The exception to this rule lies within Partnership by Estoppel in which anyone representing themselves as a partnership to a third party will be liable as if a partnership does exist.
Analysis: Here, we know that AB partnership had not formed a partnership but rather only agreed to a lending relationship. Although there were two or more persons carrying on as co-owners, they were not working together for profit. On the other hand, because A held B out as their partner to C, they became a partnership by means of estoppel. Thus, it does not matter that a valid partnership did not exist because A and B had partnership by estoppel. When A and B represented themselves to C, they became bound to C as if a partnership really had existed. Per partnership rules, general partners are personally liable to creditors for debts assumed/torts committed by another partner.
Conclusion: Therefore, A is liable to C for damages caused by A’s partner B.
A, B, and C are in the business of buying and selling diamonds as co-owners for profit. On a recent business trip for the ABC partnership to Johannesburg’s diamond markets, A spots choice diamonds, and secretly buys them for herself for $1 million. A then resells the diamonds for $2 million.
What duties, if any, has A breached? What remedies, if any, does the ABC partnership have against A?
Issue: Did A breach a duty to ABC partnerships when A participates in activities resulting in secret profits and usurping? If so, does ABC have a claim against A?
Rule: In general, Partnership is an association of (1) two or more persons (2) carrying on as co-owners (3) for profit. Further, no formalities are required for partnership entity formation. Partnerships are jointly and severally liable for the debts of the partnership. Partners are fiduciaries of each other and of the partnership and the partnership cannot eliminate these duties. Fiduciary Duties include a (1) duty of loyalty, (2) duty of good faith and fair dealing, and a (3) duty of care. Each partner has a (1) duty of loyalty to the partnership and to the other partner/s including no usurping of partnership opportunities, no self-dealing, and no secret profits at the partnership’s expense. If this is violated, the enforcement is an Action for an Accounting. The partnership may recover losses caused by the breach of loyalty and may disgorge profits made by the breaching partner. This is the only form of an action that can be brought by a partnership against its own partners for breach of loyalty. Partners have a (2) duty of good faith and fair dealing to one another and to the partnership as a whole. Partners also have a (3) duty of care to one another in which the partner must refrain from grossly negligent or reckless conduct or intentional misconduct. Ordinary negligence does not result in liability to other partners.
Analysis: Here, we know that there are three individuals involved, working as co-owners, and operating as a for profit entity. Therefore, a valid partnership did exist at the time of the potential breach. To determine if a breach occurred, we must look to all three duties owed to partners/the partnership. First, there is a duty of loyalty. A had a duty to act with loyalty to the partnership which includes not usurping partnership opportunities, not self-dealing, as well as not participating in secret profits at the expense of the partnership. There is no evidence that A was usurping business from the partnership nor self-dealing. However, A’s actions to secretly purchase and subsequently sell for profit the diamond is a clear violation of a partner’s duty to not participate in secret profits at the expense of the partnership.
Next there is a duty of good faith and fair dealing. There is no evidence that A violated this duty.
Finally, there is the duty of care owed to the partnership. This means that A owed the partnership the duty of care to refrain from grossly negligence or reckless conduct or intentional misconduct. A’s actions do not constitute grossly negligent or reckless behavior. However, there could be an argument that A did violate the duty of care by intentional misconduct. However, this may be more difficult to prove. Therefore, A did breach their duty of loyalty to ABC partnership.
Conclusion: Therefore, A is liable to ABC partnerships for breaching their duty of loyalty and as such ABC partnership is entitled to an Action for an Accounting claim.
A, B, and C are in the business of buying and selling diamonds as co-owners for profit. On a recent business trip for the ABC partnership to Johannesburg’s diamond markets, A spots choice diamonds, and buys them for the ABC partnership for $1 million. On her return trip to the United States, A recklessly lost the diamonds. What duties, if any, has A violated?
Issue: Did A violate a duty to the partnership when A negligently lost the diamonds?
Rule: In general, Partnership is an association of (1) two or more persons (2) carrying on as co-owners (3) for profit. Further, no formalities are required for partnership entity formation. Partnerships are jointly and severally liable for the debts of the partnership. Partners are fiduciaries of each other and of the partnership and the partnership cannot eliminate these duties. Fiduciary Duties include a (1) duty of loyalty, (2) duty of good faith and fair dealing, and a (3) duty of care. Each partner has a (1) duty of loyalty to the partnership and to the other partner/s including no usurping of partnership opportunities, no self-dealing, and no secret profits at the partnership’s expense. If this is violated, the enforcement is an Action for an Accounting. The partnership may recover losses caused by the breach of loyalty and may disgorge profits made by the breaching partner. This is the only form of an action that can be brought by a partnership against its own partners for breach of loyalty. Partners have a (2) duty of good faith and fair dealing to one another and to the partnership as a whole. Partners also have a (3) duty of care to one another in which the partner must refrain from grossly negligent or reckless conduct or intentional misconduct. Ordinary negligence does not result in liability to other partners.
Analysis: Here, we know that there are three individuals involved, working as co-owners, and operating as a for profit entity. Therefore, a valid partnership did exist at the time of the potential breach. To determine if a breach occurred, we must look to all three duties owed to partners/the partnership. First, there is a duty of loyalty. A had a duty to act with loyalty to the partnership which includes not usurping partnership opportunities, not self-dealing, as well as not participating in secret profits at the expense of the partnership. There is no evidence that A participated in any of those activities. Next there is a duty of good faith and fair dealing. There is no evidence that A violated this duty. Finally, there is the duty of care owed to the partnership. This means that A owed the partnership the duty to refrain from grossly negligence or reckless conduct or intentional misconduct. When A recklessly lost the diamonds, they violated this duty of care. On the other hand, if the conduct could be proven as not reckless but rather ordinary negligence, A could be relieved from potential liability. Knowing what we know here, it is safe to conclude that their actions were reckless in nature and thus violated a duty.
Conclusion: Therefore, A violated the duty of care owed to the partnership when they recklessly lost the diamonds.
