Chapter One: Non-Corporate Entities
4. (B) If a division of profits is specified in a partnership agreement, but not a division of losses, losses will be divided in the same manner as profits. This partnership agreement specified that profits were to be split based on capital contributions. Anchor contributed $5,000 (1/6), Chain contributed $10,000 (1/3) and Hook contributed $15,000 (1/2).
Thus, any losses would be allocated 1/6 to Anchor, 1/3 to Chain and 1/2 to Hook. Only answer (B) reflects this allocation.
5. (B) Partners are agents of the partnership and each other. Thus, agency rules apply. If a partnership dissolves, partners must give actual notice to old customers and published notice to new ones. Failure of a partner to give proper notice would give a partner apparent authority to act on behalf of the partnership with customers who were unaware of the dissolution. Although dissolution would discharge a partner’s actual authority, it does not discharge a partner’s apparent authority. Ace was an old customer, having previously sold cars to Hook for the partnership.
Ace did not receive any notice of the dissolution. Thus Hook had apparent authority to bind the partnership to a contract with Ace even though dissolution had previously occurred, making (B) correct and (A) incorrect.
6. (B) Each partner is personally liable for all partnership debts. Thus, Anchor, Chain and Hook are jointly and severally liable to pay any judgment recovered by Ace. Answer (A) is incorrect because Anchor and Chain individually would also be liable for the judgment.
ANSWER 3
a. Martin's first position that Green is not entitled to inspect the partnership books or participate in partnership management is correct. Green, as an assignee of Kent's partnership interest, is entitled to receive Kent's share of partnership profits only. Green is not entitled, as an assignee of Kent's partnership interest, to inspect the partnership records or to participate in the management of the partnership.
Martin's second position that only the partnership is responsible for the debt owed Laco is incorrect. Although the partnership is primarily liable for the unpaid bills, both Martin and Kent, as Best's partners, are personally liable for the unpaid amount of the debt. Laco will be entitled to seek recovery against Martin or Kent for the full amount owed.
b. Kent's first position that only Martin is liable for the 1993 operating loss because of the assignment of Kent's partnership interest to Green is incorrect. A partner's assignment of a partnership interest does not terminate that partner's liability for the partnership's losses and debts.
Kent's second position that any personal liability of the partners for the 1993 operating loss should be allocated on the basis of their original capital contributions is incorrect. The 1993 loss will be allocated in the same way that profits were to be allocated between the parties, that is, equally, because Martin and Kent had not agreed on the method for allocating losses between themselves.
ANSWER 4
a. Weil is entitled to inspect and copy Sterling's books and records. A limited partner such as Weil has the right to have the partnership books kept at the principal place of business of the partnership and to inspect and copy them at all times.
b. Generally, limited partners are not liable to partnership creditors except to the extent of their capital contribution. In Weil's case, however, he will probably be liable to Anchor Bank in the same manner as Sterling's general partners because he has taken part in the control of the business of the partnership and, therefore, has lost his limited liability. Smith, as a general partner, would also be personally liable to Anchor because liability was incurred prior to withdrawal.
c. Edwards will likely prevail in his lawsuit against Smith for withdrawing because the partnership agreement specifically prohibits a withdrawal by a general partner without the consent of the other partners. Therefore, Smith has breached the partnership agreement and will be liable to Edwards for any damages resulting from Smith's withdrawal.
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d. The withdrawal (retirement) of a general partner disables the partnership unless the remaining general partners continue the business of the partnership under a right to do so provided in the limited partnership certificate, or unless all partners consent.
e. Weil is free to assign his limited partnership interests to Alberts in the absence of any prohibitions in the Sterling partnership agreement or certificate.
f. Alberts, however, cannot be a substitute limited partner without the consent of the remaining general partner, Edwards.
g. Therefore, Alberts, as an assignee of Weil's limited partnership interest, may not exercise any rights of a partner. Alberts is entitled only to any distributions from Sterling to which Weil would have been entitled.
h. Finally, the assignment by Weil of his partnership interest does not cause a dissolution of the partnership.
ANSWER 5
a. 1. Mathews' first position is incorrect. A partner is considered an agent of the partnership in carrying out its usual business. In this case, Baker lacked actual authority to bind Prime to the Jaco contract; however, Baker did have, from Jaco's perspective, apparent authority to do so because of the general character of Prime's business and , more important, because Baker had previously purchased cars from Jaco on Prime's behalf. Jaco was not bound by the limitation on Baker's authority unless Jaco was aware of it.
2. Mathews' second position is also incorrect. As a general rule, a partner is liable for the debts of the partnership, and a third party is not bound by the profit and loss sharing agreements between partners because the third party is not a party to the partnership agreement. Therefore, Jaco can look to Prime's assets and Mathews' personal assets to satisfy the obligation.
3. Mathews' third position is correct. A partner is liable to other partners for any liability associated with contracts entered into ostensibly on behalf of the partnership but outside the partner's actual authority. In this case, because Baker violated the agreement with Mathews concerning the $15,000 limitation on used car purchases, Baker will be liable to Mathews for any liability that Mathews may have to Jaco.
4. Mathews' fourth position is also correct. A partner owes a fiduciary duty (that is, a duty of loyalty) to the partnership and every other partner. A partner may not benefit directly or indirectly at the expense of the partnership. A partner must account to the partnership for any benefits derived from the partnership's business without the consent or knowledge of the other partners. In this case, Baker was not entitled to accept and retain the incentive payments made by Top. Doing so violated Baker's fiduciary duty to Prime and Mathews. Baker must account to Prime for all the incentive payments received.
b. KYA's contention that its $25,000 capital contribution cannot be used to satisfy Prime's obligation to Jaco is incorrect. A new partner is liable for partnership liabilities that arose prior to the new partner's admission, but the liability is limited to the partner's capital contribution and interest in partnership property. Therefore, KYA's liability is limited to its capital contribution and its interest as a partner in Prime's assets.