CHAPTER 37
ALL FORMS OF PARTNERSHIPS
ANSWER TO CRITICAL THINKING QUESTION
IN THE FEATURE
CASE 37.1—CRITICAL THINKING
WHAT IF THE FACTS WERE DIFFERENT?
Suppose that Salmon had disclosed Gerry’s proposal to Meinhard, who had said that he
1. Why would a partnership agreement contain one provision for a buy-out on a partner’s
2 UNIT EIGHT: BUSINESS ORGANIZATIONS
CHAPTER 37: ALL FORMS OF PARTNERSHIPS 3
3. The lower court awarded attorney’s fees to the defendants, who prevailed on their
motion for summary judgment. By reversing the summary judgment, does the appellate
CASE 37.3—CRITICAL THINKING
LEGAL ENVIRONMENT
How are the penalties likely to be apportioned among the three defendants? Explain.
Whichever penalties the trial court determines to impose on remand, Valley View Enterprises,
Inc., is likely to be held liable for violations of the Phase I permit, and Valley View Properties,
Ltd., and Joseph Ferrara are likely to be held liable for violations of the Phase II permit.
The state charged three defendants with pollution control violations—Valley View
Enterprises (a corporation), Valley View Properties (a limited partnership), and Ferrara (the
owner and president of Valley View Enterprises and the sole general partner of Valley View
Properties). Valley View Enterprises held the Phase I permit, which stated that any
noncompliance was a violation of state law. Valley View Properties owned the property on which
the development was built and held the Phase II permit. Ferrara was in charge all activities
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performed at the construction site. He failed to obtain the proper wetlands-fill permits and to
comply with their requirements for each phase of the development.
As a corporate officer, Ferrara will likely avoid personal liability for the actions of Valley View
Enterprises. But as a general partner, Ferrara is likely to be personally liable for the actions of
Valley View Properties. Of course, with respect to any fine levied on the partnership, the assets
of the firm may have to be exhausted before payment can be sought from Ferrara.
ANSWERS TO QUESTIONS IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
1A. Duration of a partnership
This is a general partnership, and the facts in the problem indicate that it is a partnership at will.
A partnership agreement can limit the duration of a partnership to a certain date or a particular
project, in which case it would be considered to be a partnership for a term. If no fixed duration
is specified, as in this problem, a partnership is a partnership at will.
2A. Authority of a partner
In a general partnership, all partners have equal rights in managing the partnership. Often, in a
large partnership, partners will delegate daily responsibilities to a management committee made
up of one or more of the partners. The partnership in this problem is not large, although the
management did appear to be split among the partners. In that division of labor, it was Manny’s
responsibility to handle the livestock. After his injury, the responsibility was apparently still his,
and he acted on it. Unanimous consent of all of the partners is required in some circumstances,
but none of those circumstances appear to exist here.
3A. Liability of an existing partner
Al’s Feed Barn can bring action against Jason or Cowboy Palace. A partner is jointly and
severally (separately, or individually) liable for all partnership obligations, including such debts
as the one in this question, even if the partner did not participate in, ratify, or know about
whatever it was that gave rise to the obligation. Nevertheless, Al’s Feed Barn would have to
take several steps before succeeding in a suit against Jason individually. Generally, a creditor
cannot collect a partnership debt from a partner of a non-bankrupt partnership without first
attempting to collect from the partnership, or convincing a court that the attempt would not
succeed.
4A. Liability of a dissociated partner
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 liability of the firm for transactions
entered into by dissociated partners within two years after their withdrawal. To avoid this
CHAPTER 37: ALL FORMS OF PARTNERSHIPS 5
possible liability, a partnership can notify its creditors, customers, and clients of a partner’s
dissociation. The partnership or former partner can also file a statement of dissociation in the
appropriate state office, limiting the dissociated partner’s authority to ninety days after the filing.
ANSWER TO DEBATE THIS QUESTION IN THE REVIEWING FEATURE
AT THE END OF THE CHAPTER
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 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.
It was an inefficient legal requirement before when the departure of a partner required the
dissolution of the partnership. If we returned to the former law, we would again see partners
wasting partnership assets, including the remaining partners’ time, to dissolve the partnership
and create a new one every time a partner left the firm. In any event, partnerships now survive
for decades after one or more partners leave the firm, which shows that they are viable with a
different set of partners.
ANSWERS TO ISSUE SPOTTERS
AT THE END OF THE CHAPTER
1A. Darnell and Eliana are partners in D&E Designs, an architectural firm. When Darnell
dies, his widow claims that as Darnell’s heir, she is entitled to take his place as Eliana’s
partner or to receive a share of the firm’s assets. Is she right? Why or why not? No. A
widow (or widower) has no right to take a dead partner’s place. A partner’s death causes
dissociation, after which the partnership must purchase the dissociated partner’s partnership
interest. Therefore, the surviving partners must pay the decedent’s estate (for his widow) the
value of the deceased partner’s interest in the partnership.
2A. Finian and Gloria are partners in F&G Delivery Service. When business is slow,
with out Gloria’s knowledge, Finian leases the delivery vehicles as moving vans.
Because the vehicles would otherwise be sitting idle in a parking lot, can Finian keep the
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37-1A. Partnership formation
Classen cannot hold Daniel liable as a partner, because a true partnership never existed; nor is
Daniel liable under a theory of partnership by estoppel. A partnership is defined as an
association of two or more persons to conduct, as co-owners, a business for profit [UPA 101(6)].
To determine that a partnership was created, the court must look for a sharing of profits and a
joint ownership of the business, with each party having an equal right to manage the business.
37-2A. Dissolution of a limited partnership
(a) A limited partner’s interest is assignable. In fact, assignment allows the assignee
to become a substituted limited partner with the consent of the remaining partners. The
assignment, however, does not dissolve the limited partnership.
37–3A . Fiduciary duties of partners
Yes, Rüsen and Thomas breached their fiduciary duty to HRT and Horvath. The fiduciary duties
that a partner owes to the partnership include the duty of loyalty. The duty of loyalty requires a
partner to account to the partnership for any property, profit, or benefit derived by the partner in
the conduct of the partnership’s business or from the use of its property. The duty of loyalty can
be breached by dealing with the firm as an adverse party. Each partner must act in good faith
CHAPTER 37: ALL FORMS OF PARTNERSHIPS 7
for the benefit of the partnership. Of course, a partner may pursue his or her own interests
without automatically violating these duties.
37-4A. Partnership formation
37–5A. Winding up
Yes, Dan can be held liable for the amount of the debt owed to Flying Cat. Even after a
partnership has been dissolved, a partner may still bind the firm by engaging in a transaction
that would have bound the partnership if it had not been dissolved, provided the other party to
the transaction had known of the partnership before dissolution and had no knowledge or notice
of the dissolution.
In this problem, the Coles operated their business as a partnership during their marriage.
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37–6A. BUSINESS CASE PROBLEM WITH SAMPLE ANSWER—Partnerships
Yes, Sacco is entitled to 50 percent of the profits of Pierce Paxton Collections. The
requirements for establishing a partnership are (1) a sharing of profits and losses, (2) a joint
ownership of the business, and (3) an equal right to be involved in the management of the
business.
37–7A. Formation
Yes, Leisa was a partner in L&R. In the circumstances of this problem, she is entitled to half of
the value of the partnership’s assets. Under the UPA, a partnership is “an association of two or
more persons to carry on as co-owners a business for profit.” When there is no formal, written
partnership agreement, an agreement to form a partnership can be implied by conduct. If an
agreement does not apportion profits and losses, the UPA provides that they will be shared
equally. On a partner’s dissociation, he or she is entitled to have his or her interest in the
partnership bought by the firm.
37–8A. Formation and operation
Yes, the notice published by the York County Tax Bureau, mailed to FS’s address of record, and
posted on the partnership’s land, declaring that it would be sold at a sale for unpaid taxes, was
sufficient. Property acquired by a partnership is the property of the partnership and not of the
partners individually. This includes property that was acquired by the partnership or in the
CHAPTER 37: ALL FORMS OF PARTNERSHIPS 9
partnership’s name after its formation. A partner is not a co-owner of partnership property and
has no right to sell, mortgage, or transfer it to another.
Here, FS Partners is a general partnership. The partners are Stahlman and Fitz & Smith,
37-9A. A QUESTION OF ETHICS—Wrongful dissociation
(a) Willensky’s dissociation occurred when he left for Florida and did not return.
According to the partnership agreement, he was to supply the labor and oversee the
construction and renovation. By effectively abandoning the project and failing to keep his side
of the bargain, he breached the partnership agreement. Whenever a partner’s dissociation
constitutes a breach of the partnership agreement, it is deemed wrongful.
(b) Many of Willensky’s actions represented poor management of the project, and
some acts were clearly unethical, if not illegal. Willensky failed to pay bills on time; did not keep
Moran informed of his expenditures and the status of the partnership accounts; incurred
excessive and unnecessary costs (at one point, he allegedly paid $320 for an ironing board);
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ANSWERS TO LEGAL REASONING GROUP ACTIVITY QUESTIONS
AT THE END OF THE CHAPTER
(3) an equal right to be involved in the management of the business. Several months before the
Olympics, Fontenot and his friends agreed to sell Cajun food in Atlanta and on May 19 applied
for a license as a group. Although the partnership agreement was not signed until July 31,
Fontenot and his friends had an oral agreement to form an association and to work together
toward a common goal before they purchased the mobile kitchen on June 12. At that point, a