Chapter 36 Partnerships: Nature, Formation, and Operation Copyright © 2017 McGraw-Hill Education All rights reserved No reproduction or distribution without the prior written consent of McGrawHill Education Overview • LO36-1: What is a partnership? • LO36-2: What are the different ways in which a partnership can be formed? • LO36-3: What are the rights of partners as they interact with each other? • LO36-4: Are all members of a partnership liable for interactions with third parties? 36-2 Chapter 36 Hypothetical Case • Fresh out of law school and with dim traditional employment prospects due to a tight job market for attorneys, best friends Scott Griswold and John Turman decide to join forces, hang a shingle, and start a new law practice Griswold and Turman have decided to operate their firm as a general partnership The two legal eagles are currently discussing the terms of their partnership, including the name of the partnership, the division of partnership profits and losses, the division of management duties, and each partner's respective capital contributions • From an evidentiary standpoint, are Scott Griswold and John Turman legally required to enter into a written partnership agreement? If written documentation of their partnership agreement is not legally required, should Griswold and Turman nevertheless put their agreement in writing? 36-3 Chapter 36 Hypothetical Case • The accounting firm of Cooper, Anderson, and Young had fallen on hard times in recent months Several clients had left the firm, and in a slow economy, it was difficult to generate new clients Cooper, Anderson, and Young was a general partnership with three partners (Anna Cooper, Thomas Anderson, and Miranda Young) and six employees (four associate accountants, an office manager, and an administrative assistant/receptionist) Meeting payroll was especially challenging for the partnership this month In order to compensate the firm's employees, Young went to The Bank of the Americas and obtained a $23,000 business loan and signed her name, as well as the name of the partnership, to the loan agreement Young used the proceeds of the loan to compensate the employees their full monthly salaries 36-4 Chapter 36 Hypothetical Case (cont'd) • Upon discovering what Young had done, Cooper and Anderson were furious Both felt that since the firm had experienced a financial downturn, the employees should have to take a substantial reduction in their salaries for the month, or forego their salaries for the month altogether (none of the three partners had received any profit distribution for the current month; their partnership agreement did not provide for partner salaries, and even if it had, there were no other monies to distribute) Furthermore, Cooper and Anderson were concerned about partnership liability for the $23,000 loan, as well as their own personal liabilities for the loan • Is the general partnership of Cooper, Anderson, and Young responsible for the $23,000 loan? Are Cooper and Anderson personally liable for the loan? 36-5 Characteristics of Partnership • Uniform Partnership Act definition: "Association of two or more persons to carry on as co-owners a business for profit" • Voluntary and consensual relationship • Between two or more individuals, partnerships, corporations, or other forms of business organization • Engaged in numerous business transactions over period of time • Partners share profits and management of business 36-6 Business Arrangements Where No Partnership Exists • Employer shares profits with employee as payment for work • Landlord accepts share of profits for payment of rent • Party receives share of profits for payment of debt • Party receives share of profits for payment of annuity to widow/representative of deceased partner • Party receives share of profits for payment from sale of goodwill of business/other property • Party receives share of profits for payment of interest on a loan 36-7 Formation of Partnership • Partnership agreement (articles of partnership) should include: • • • • • • Name of each partner Name of partnership Duration of partnership How profits divided Division of management responsibilities Contributions from each partner 36-8 Partnership Duties and Rights • Duties • Loyalty • Obedience • Due care • Rights • • • • • • Share in management Share in profits Compensation Partnership property Inspect books Conduct an accounting 36-9 Circumstances Triggering Partner's Right to an Accounting • Whenever partnership agreement provides for an accounting • Whenever copartners wrongfully exclude partner from partnership/from access to partnership books • Whenever partner fails to disclose profit/benefit from partnership (breach of fiduciary duty) • Whenever circumstances render accounting just and reasonable 3610 Interactions Between Partners and Third Parties • If partnership has liability, each partner has unlimited personal liability (joint and several liability) • Joint and several liability: Third party can choose to sue partners separately, or all partners jointly in one action; partners are collectively, as well as individually, liable for partnership debts • All partners jointly and severally liable for commission of tort by any partner • Implied liability of partners when purchases made to perpetuate partnership's business 3611 Chapter 36 Hypothetical Case • The year 2014 was a nightmare for James Littleton In January 2014, Littleton was diagnosed with Type (adult onset) diabetes In June, Littleton's physician expressed concern with the lack of circulation in his left leg, and in October, a circulatory specialist recommended that the left leg be amputated to the knee; reluctantly, but resigned to his fate, Littleton agreed On November 1, Littleton was admitted to Pinecrest General Hospital for surgery In what can only be described as a horrible and catastrophic mistake, the surgeon misreads the diagnosis and surgical instructions and amputates Littleton's right leg by mistake Littleton's left leg is amputated the next day Confined to a wheelchair, but supported by the love, care and concern of his family, Littleton visits the offices of a local Pinecrest law firm, Stephenson, Gordon, and Ratcliff, which is a general partnership Stephenson and Gordon agree to represent Littleton in the medical malpractice lawsuit and sign a contract of representation with Littleton, agreeing to represent him for the standard one-third contingency fee, plus associated expenses 3612 Chapter 36 Hypothetical Case (cont'd) • The statute of limitations for medical malpractice actions in the state is three years Due to oversight and neglect (rumor has it that both Stephenson and Gordon have substance abuse problems), the firm fails to file a complaint against the attending surgeon and Pinecrest General Hospital within the three-year period Even though he lacks legal training, Littleton knows he will be forever barred from bringing a lawsuit against the doctor and the hospital Having experienced catastrophic neglect from two professions he once respected, Littleton focuses his energy on bringing Stephenson, Gordon, and Ratcliff to justice He sues the general partnership, as well as the individual attorneys Stephenson, Gordon, and Ratcliff, for legal malpractice Ratcliff's attorney moves for dismissal of the claim against his client individually, arguing that Ratcliff was not an attorney of record for Littleton, and as a result, should be dismissed personally from the lawsuit • Will Ratcliff succeed in his motion for dismissal? 3613 Chapter 36 Hypothetical Case • Recall the Chapter 35 Hypothetical Case involving tailoring experts Frieda Oglesby, Rena Fitts, and Will Bertrand, who decided to go into business together Their business, FitzWellby, is a business that provides in-home measuring and fittings, and even on-site stitching, for busy executives who don't have time to take their clothing to tailor shops The business was formed as a general partnership Recently, Oglesby, Fitts, and Bertrand agreed to welcome a fourth partner, Bob Strahan, to the business The partnership agreement was signed on October 10, and Strahan invested $60,000 to become a partner Unbeknownst to any of the partners, trouble was brewing as the ink was drying On the evening of October 9, Bertrand dropped off a freshly tailored gown at the lavish residence of client Veronica Treadwell, who was out of town at the time Per Treadwell's instructions, Bertrand used a code to open Treadwell's garage The interior door to the home had been left unlocked for him, so he left the garment in the laundry room Bertrand was to lock the door leading to the garage behind him and close the garage upon leaving 3614 Chapter 36 Hypothetical Case (cont'd) However, Bertrand received a panicked phone call from his daughter in the midst of dropping off the gown She was stranded and needed to be picked up Bertrand hastily up the gown and dashed out of Treadwell's laundry room, forgetting to lock the door behind him or even close the garage door When Treadwell returned from her vacation on October 12, she found her garage door open, the door unlocked, and her home stripped of all her valuables Somewhere between Bertrand's errand on the evening of October and 4:00 p.m on October 12, Treadwell had been robbed Treadwell files suit against FitzWellby and each of the four partners individually for Bertrand's negligence • Is Bob Strahan, the new partner, personally liable? Can Strahan's $60,000 be used to settle the lawsuit? Explain your response 3615 ... a business for profit" • Voluntary and consensual relationship • Between two or more individuals, partnerships, corporations, or other forms of business organization • Engaged in numerous business. .. Frieda Oglesby, Rena Fitts, and Will Bertrand, who decided to go into business together Their business, FitzWellby, is a business that provides in-home measuring and fittings, and even on-site... of a local Pinecrest law firm, Stephenson, Gordon, and Ratcliff, which is a general partnership Stephenson and Gordon agree to represent Littleton in the medical malpractice lawsuit and sign a