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

Chapter 21
Partnerships

McGraw-Hill/Irwin

Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.


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?
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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
be dismissed personally from the lawsuit.
Will Ratcliff succeed in his motion for dismissal?
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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?
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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.

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Partnership
Uniform Partnership Act Definition:
“Association of two or more persons to
carry on as co-owners a business for
profit”

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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
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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
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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

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Partnership Duties
• Duty of Loyalty
• Duty of Obedience
• Duty of Care

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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
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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”
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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
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The Revised Uniform Partnership Act
(RUPA)
Revised version of Uniform Partnership
Act (UPA); use of RUPA varies from state
to state

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Partnership Termination
• Begins when partnership dissolves
• Once partnership dissolved and assets
liquidated and distributed (“winding up”),
partnership terminated

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Partnership Dissolution
• Definition: Partnership cessation
• Partnership dissolution can result from:
-Partner actions
-Operation of law
-Court action
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Events Resulting in Partnership
Dissolution
• Expiration of term (time period) stated in partnership
agreement
• Fulfillment of established (agreed-upon) partnership
objective
• Partner withdraws from “partnership at will”
(partnership that does not specify objective/duration
of partnership)
• Partner withdraws in accordance with partnership
agreement
• Partner expelled from partnership in accordance
with partnership agreement
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Examples of Partnership Dissolution By
“Operation of Law”
• Partner dies
• Partner adjudicated bankrupt
• Partnership engages in illegal activity

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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
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“Winding Up” of Partnership
Definition: Activity of completing
unfinished partnership business,
collecting and paying debts, collecting
partnership assets, and taking inventory

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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
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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

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Requirements for Limited Liability (of
Limited Partner)
• Limited partner has complied in good faith with
certificate of limited partnership filing
requirement
• Limited partner does not participate in control of
business
• Limited partner’s surname is not part of
partnership name

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Comparison of General Partners and
Limited Partners
General Partner

Limited Partner

– Has all rights associated
with controlling business

– Has no right to
participate in
management and control
of business

– Has unlimited personal
liability for all partnership
debts
– Acts as agent of
partnership

– Liability limited to
amount of capital partner
has contributed to
business
– Is not an agent of the
partnership
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Reasons For Dissolution of Limited
Partnership
• Expiration of term established in certificate of
limited partnership
• Completion of objective established in certificate
of limited partnership
• 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)
• Court action
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