An introduction to the fundamentals of dynamic business law and business ethics chap021

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 fo

Chapter 21Partnerships

Chapter 21 Case Hypothetical

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 (3) partners (Andrew Cooper,

Thomas Anderson, and Marvin Young), and six (6) employees (four associate accountants, an office

manager, and a secretary/receptionist)

Meeting payroll was especially challenging for the partnership this month In order to compensate

the firm’s employees, Marvin Young went to The Bank of the Americas and obtained a $23,000

business loan, signing his name to the loan agreement as well as the name of the partnership

Marvin used the proceeds of the loan to compensate the employees their full monthly salaries

Upon discovering what Marvin had done, Andrew and Thomas 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 (Andrew, Thomas, and Marvin had not 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) Further, Andrew and Thomas were concerned about partnership liability for the $23,000 loan, as well as their own personal liabilities for the loan

Is the general partnership Cooper, Anderson and Young responsible for the $23,000 loan? Are

Andrew Cooper and Thomas Anderson personally liable for the loan?

Chapter 21 Case Hypothetical

The year 2002 was a nightmare for James Littleton In January 2002, Littleton was diagnosed with “Type 2” (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, James 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 is taken to a local

Pinecrest law firm, Stephenson, Gordon, and Ratcliff, 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.

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 remaining “life energy”

on bringing Stephenson, Gordon, and Ratcliff to justice He sues the general partnership, as well as 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

Chapter 21 Case Hypothetical

Morrison, Manzarek and Huxley is a general partnership law firm located in Los Angeles, California The partnership was formed in 1967, the year Robbie Morrison, John Manzarek and Raymond

Huxley graduated from the University of California at Los Angeles (UCLA) School of Law

Robbie Morrison’s desk had sat empty for the past two (2) weeks John and Raymond had no idea

where he was The day before he left, Robbie had told his fellow partners he was tired of the practice

of law, and wanted to do something else with his life Concerned about their partner, especially since

he had never “disappeared” like this before, John and Raymond drove to Robbie’s house on Love

Street, where he lived with his common-law wife, Pamela Kennealy

Pamela answered the door When asked of Robbie’s whereabouts, Pamela responded that she did

not know where he was She did say that he had said something about going to the desert, and had left in his 1967 Shelby GT500 Mustang He had not returned home in the past two (2) weeks, nor

had she seen him since he left

John and Raymond consider Robbie’s disappearance strange, and given the fact that he had, by

Pamela’s account, chosen to leave, they considered his absence inexcusable They are considering partnership dissolution

Do John Manzarek and Raymond Huxley have the legal right to dissolve the Morrison, Manzarek and Huxley general partnership?

Chapter 21 Case Hypothetical and Ethical Dilemma

Harris, Pendleton, and McRae, certified public accountants, have operated their general partnership

accounting firm since the “disco ball and polyester” years of the 1970s Harris is 68 years old, Pendleton is 66, and McRae is 65 They have operated their partnership by way of an “old-school” approach, a “handshake”

agreement, since their professional association was first formed (in spite of strong advice from legal counsel

to the contrary.)

Harris has been acting rather strange in recent months Clients and support staff have been asking questions Six weeks ago, Harris was discovered standing on top of his desk singing the 1970s Rick Dees tune, “Disco

Duck,” interspersing quacking sounds throughout his rendition of the disco classic Harris no longer wears

conservative business attire; instead, he has opted for a light blue leisure suit with white patent leather shoes Currently, he can be found again standing on his desk, this time offering up his version of the 1979 Sister

Sledge anthem, “We Are Family.”

Pendleton and McRae are in the conference room, considering their options and the future of their accounting business They would like to terminate Harris’ partnership, but they are unsure whether they have the legal

right to do so They are also struggling with the notion of an ethical obligation to “try to work things out” with

Harris; after all, he has been their partner for over thirty years Finally, they wonder whether they could end

their professional relationship with Harris, without being required to dissolve the existing partnership and “wind up” the financial affairs of the business.

Advise Pendleton and McRae of their legal rights, as well as their ethical responsibilities.

Uniform Partnership Act Definition:

“Association of two or more persons to

carry on as co-owners a business for

profit”

Characteristics of Partnership

• 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

Situations Where No Partnership:

• 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

Formation of Partnership

Partnership agreement (“articles of

partnership”) should include:

• Name of each partner

• Name of partnership

• Duration of partnership

• How profits/losses divided

• Division of management responsibilities

• Contributions from each partner

Partnership Duties

• Duty of Loyalty

• Duty of Obedience

• Duty of Care

Partnership Rights

• Right to Share in Management

• Right to Share in Profits

• Right to Compensation

• Rights to Partnership Property

• Right to Inspect Books

• Right to an Accounting

Circumstances “Triggering” Partner’s

Right to an Accounting

• Whenever partnership agreement provides for an

accounting

• Whenever co-partners 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”

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

The Revised Uniform Partnership Act

(RUPA)

Revised version of Uniform Partnership

Act (UPA); use of RUPA varies from state

to state

Partnership Termination

• Begins when partnership dissolves

• Once partnership dissolved and assets

liquidated and distributed (“winding up”),

partnership terminated

Partnership Dissolution

• Definition: Partnership cessation

• Partnership dissolution can result from:

-Partner actions

-Operation of law

-Court action

Events Resulting in Partnership

• Partner withdraws from “partnership at will”

(partnership that does not specify objective/duration

Examples of Partnership Dissolution By

“Operation of Law”

• Partner dies

• Partner adjudicated bankrupt

• Partnership engages in illegal activity

Examples of Partnership Dissolution By

“Court Action”

• Partner adjudicated insane

• Impractical to continue partnership business

• Partner incapable of fulfilling his/her duties

established by partnership agreement

• Partner disagreement as to how to conduct

partnership business

“Winding Up” of Partnership

Definition: Activity of completing

unfinished partnership business,

collecting and paying debts, collecting

partnership assets, and taking inventory

Order of Distribution of Partnership

Assets (Upon “Winding Up”)

• Payment to partnership creditors

• Payment of refunds/loans to partners for loans

made to partnership

• Payment of partners for invested capital

• Payment of profits distributed to partners per

terms of partnership agreement

Limited Partnership

• Definition: Agreement between at least one

general partner and at least one limited partner

• Allows investor (limited partner) to share in

profits of partnership

• Limited partner’s liability limited to amount

he/she invests in business

Requirements for Limited Liability (of

Limited Partner)

• Limited partner has complied in good faith with

certificate of limited partnership filing

Comparison of General Partners and

Limited Partners

General Partner

– Has all rights associated

with controlling business

– Has unlimited personal

liability for all partnership

of business

– Liability limited to amount of capital partner has contributed to

business – Is not an agent of the partnership

Reasons For Dissolution of Limited

• Unanimous written consent of all partners

(limited and general)

• Withdrawal of general partner (unless certificate

establishes that other general partners will

continue operation of business)