Deck 37: All Forms of Partnerships

Question 1

Partnership Dissolution Nine minority partners each owned one-half of 1 percent of J J Celcom, a partnership with AT T, which owned the rest. AT T, using its majority power, voted to buy out the minority partners. It offered each partner a price that was slightly higher than the price provided by a third party's appraisal. Some of the partners accepted the offer, but others did not. AT T then voted to dissolve the partnership, forcing the remaining minority partners to accept the appraisal price. Those partners sued. The trial court held for AT T, and the minority partners appealed. The appeals court held that the price offered was the fair market price, but certified the following question to Washington State's highest court: "Does a controlling partner violate the duty of loyalty to the partnership or to dissenting minority partners where the controlling partner causes the partnership to sell all its assets" to another party? How should the Washington Supreme Court answer this question? Why? [ J J Celcom v. AT T Wireless Services, Inc., 162 Wash.2d 102, 169 P.3d 823 (Sup.Ct. 2007)]

Answer 1

The majority partner does not violate the duty of loyalty by merely buying out the minority partners. As long as the majority partner engages in good faith and fair dealing, then the court will not find a violation of the duty of loyalty.
In this case, the majority partner offered the minority members above the fair market price of their assets for those partners who voluntary left and a fair market price for those who stayed on. Based on those facts, the company has not violated a duty of loyalty.

Question 2

Limited Partnership James Carpenter contracted with Austin Estates, LP, to buy property in Texas. Carpenter asked Sandra McBeth to invest in the deal. He admitted that a dispute had arisen with the city of Austin over water for the property, but he assured her that it would not be a significant obstacle. McBeth agreed to invest $800,000 to hold open the option to buy the property. She became a limited partner in StoneLake Ranch, LP. Carpenter acted as the firm's general partner. Despite his assurances to McBeth, the purchase was delayed due to the water dispute. Unable to complete the purchase in a timely manner, Carpenter paid the $800,000 to Austin Estates without notifying McBeth. Later, Carpenter and others- excluding McBeth-bought the property and sold it at a profit. McBeth filed a suit in a Texas state court against Carpenter. What is the nature of the fiduciary duty that a general partner owes a limited partner? Did Carpenter breach that duty in this case? Explain. [ McBeth v. Carpenter ; 565 E3d 171 (5th Cir. 2009)]

Answer 2

The general partner owes the highest fiduciary duty to a limited partner. It is the same level of trust and confidence as in a traditional partnership. C did have the management control of the funds by virtue of being a general partner. However, C misrepresented the issues with the water company. If C knew the situation was dire and could not follow through with the terms of M's contribution, but told her he could, then this would be a breach of duty.

Question 3

Partnership Dissolution George Chaney and William Dickerson were partners in Bowen's Mill Landing, which purchased a large piece of land in the 1980s. The partners had planned to develop the property, but nothing was ever done. Chaney died in 1990, and his wife inherited his interest. When she died in 2004, her two sons, John and Dewey Lynch, inherited the half-interest in the partnership. Dickerson died in 1995, and his daughter, Billie Thompson, inherited his half-interest. In 2006, the Lynches filed a petition for partition, asking that a commission be appointed to make a fair division of the land, giving the Lynches half and Thompson half. In 2007, the commission reported on how to divide the land into two parts. Thompson objected that the land belonged to Bowen's Mill Landing and could not be divided. The trial court ordered Thompson to "effectuate the dissolution of any partnership entity and … to wind up the business and affairs of any partnership" so that the land could be divided. Thompson appealed. Can the court order the partnership to dissolve? Why or why not? [ Thompson v. Lynch , 990 A.2d 432 (Sup.Ct.Del. 2010)]

Answer 3

Yes, the court may order a dissolution of a partnership in cases where it would be impractical for the partnership to continue.
In this case, the two partners who planned to develop the land had both died and none of their heirs had indicated any interest in developing the property. Arguably, since neither party planned to develop the land in accordance with the original partners' intent, the court could order the dissolution of the partnership.

Question 4

Duties and Liabilities of Partners Karl Horvath, Hein Rüsen, and Carl Thomas formed a partnership, HRT Enterprises, to buy a vacant manufacturing plant and an annex building on eleven acres in Detroit, Michigan. HRT leased the plant to companies owned by the partners, including Horvath's Canadian-American Steel. When Horvath's firm missed three payments under its lease, HRT evicted it from the plant. Horvath objected but remained an HRT partner. Later, Rüsen and Thomas leased the entire plant to their company, Merkur Steel. Merkur then sublet the premises to City Steel and Merkur Technical Services- both of which were owned (or substantially owned) by Rüsen and Thomas. The rent these companies paid to Merkur was higher than the rent Merkur paid to HRT, which meant that Merkur profited from the arrangement. Rüsen and Thomas did not tell Horvath about the subleases. When Horvath learned of the deals, he fi led a suit in a Michigan state court against HRT and the other partners for an accounting of their actions. Did Rüsen and Thomas breach their fi duciary duty to HRT and Horvath? Discuss. [Horvath v. HRT Enterprises, __ N.W.2d __ (2011)]

Question 5

A QUESTION OF ETHICS: Wrongful Dissociation.
Elliot Willensky and Beverly Moran formed a part nership to renovate and "flip" (resell) some property. According to their agreement, Moran would finance the purchase and renovation of the property , and Willensky would provide labor and oversight of the renovation work. Moran would be reimbursed from the profits of the sale and the remainder of the profits would be divided evenly. Any losses would also be divided evenly. Moran paid $240,000 for a house and planned to spend $60,000 for its renovation. The parties agreed that the renovation would be completed in six months. Willensky lived in the house during the renovation. More than a year later, the project still was not completed, and the cost was much more than the $60,000 originally planned. Willensky often failed to communicate with Moran, and when she learned that her funds were nearly exhausted and the house nowhere near completion, she became worried. She told Willensky that he would have to pay rent and utility bills if he wished to continue to live in the house. Shortly thereafter. Willensky left for Florida due to a family emergency, saying that he would return as soon as he could. He never returned, however, and Moran lost touch with him. Moran took over the project and discovered that Willensky had left numerous bills unpaid, spent money on excessive or unnecessary items, and misappropriated funds for his personal use. After completing the project, paying all expenses relating to the renovation (in all, the renovation costs came to $311,222), and selling the property, Moran brought an action in a Tennessee state court to dissolve the partnership and to recover damages fi?m Willensky for breach of contract and wrongful dissociation from the partnership. [ Moran v. Willensky, ___ S.W.3d ___ (Tenn.Ct.App. 2010)]
(a) Moran alleged that Willensky had wrongfully dissociated from the partnership. When did this dissociation occur? Why was his dissociation wrongful?
(b) Which of Willensky's actions simply represent unethical behavior or bad management, and which constitute a breach of the agreement?

Question 6

Partnership Formation Daniel is the owner of a chain of shoe stores. He hires Rubya to be the manager of a new store, which is to open in Grand Rapids, Michigan. Daniel, by written contract, agrees to pay Rubya a monthly salary and 20 percent of the profits. Without Daniel's knowledge, Rubya represents himself to Classen as Daniel's partner and shows Classen the agreement to share profits. Classen extends credit to Rubya. Rubya defaults. Discuss whether Classen can hold Daniel liable as a partner.

Question 7

Grace Tarnavsky and her sons, Manny and Jason, bought a ranch known as the Cowboy Palace in March 2007, and the three verbally agreed to share the business for five years. Grace contributed 50 percent of the investment, and each son contributed 25 percent. Manny agreed to handle the livestock, and Jason agreed to handle the bookkeeping. The Tarnavskys took out joint loans and opened a joint bank account into which they deposited the ranch's proceeds and from which they made payments toward property, cattle, equipment, and supplies. In September 2011, Manny severely injured his back while baling hay and became permanently unable to handle livestock. Manny therefore hired additional laborers to tend the livestock, causing the Cowboy Palace to incur significant debt. In September 2012, Al's Feed Barn filed a lawsuit against Jason to collect $32,400 in unpaid debts. Using the information presented in the chapter, answer the following questions.
Was this relationship a partnership for a term or a partnership at will?
DEBATE THIS: A partnership should automatically end when one partner dissociates from the fi rm.

Question 8

QUESTION WITH SAMPLE ANSWER: Partnership Dissolution.
Dorinda, Luis, and Elizabeth form a limited partnership. Dorinda is a general partner, and Luis and Elizabeth are limited partners. Consider the separate events below, and discuss fully whether each event constitutes a dissolution of the limited partnership.
(a) Luis assigns his partnership interest to Ashley.
(b) Elizabeth is petitioned into involuntary bankruptcy.
(c) Dorinda dies.

Question 9

Grace Tarnavsky and her sons, Manny and Jason, bought a ranch known as the Cowboy Palace in March 2007, and the three verbally agreed to share the business for five years. Grace contributed 50 percent of the investment, and each son contributed 25 percent. Manny agreed to handle the livestock, and Jason agreed to handle the bookkeeping. The Tarnavskys took out joint loans and opened a joint bank account into which they deposited the ranch's proceeds and from which they made payments toward property, cattle, equipment, and supplies. In September 2011, Manny severely injured his back while baling hay and became permanently unable to handle livestock. Manny therefore hired additional laborers to tend the livestock, causing the Cowboy Palace to incur significant debt. In September 2012, Al's Feed Barn filed a lawsuit against Jason to collect $32,400 in unpaid debts. Using the information presented in the chapter, answer the following questions.
Did Manny have the authority to hire additional laborers to work at the ranch after his injury? Why or why not?
DEBATE THIS: A partnership should automatically end when one partner dissociates from the fi rm.

Question 10

Distribution of Partnership Assets Meyer, Knapp, and Cavanna establish a partnership to operate a window-washing service. Meyer contributes $10,000 to the partnership, and Knapp and Cavanna contribute $1,000 each. The partnership agreement is silent as to how profits and losses will be shared. One month after the partnership begins operation, Knapp and Cavanna vote, over Meyer's objection, to purchase another truck for the firm. Meyer believes that because he contributed $10,000, the partnership cannot make any major commitment to purchase over his objection. In addition, Meyer claims that in the absence of any provision in the agreement, profits must be divided in the same ratio as capital contributions. Discuss Meyer's contentions.

Question 11

Grace Tarnavsky and her sons, Manny and Jason, bought a ranch known as the Cowboy Palace in March 2007, and the three verbally agreed to share the business for five years. Grace contributed 50 percent of the investment, and each son contributed 25 percent. Manny agreed to handle the livestock, and Jason agreed to handle the bookkeeping. The Tarnavskys took out joint loans and opened a joint bank account into which they deposited the ranch's proceeds and from which they made payments toward property, cattle, equipment, and supplies. In September 2011, Manny severely injured his back while baling hay and became permanently unable to handle livestock. Manny therefore hired additional laborers to tend the livestock, causing the Cowboy Palace to incur significant debt. In September 2012, Al's Feed Barn filed a lawsuit against Jason to collect $32,400 in unpaid debts. Using the information presented in the chapter, answer the following questions.
Under the current UPA, can Al's Feed Barn bring an action against Jason individually for the Cowboy Palace's debt? Why or why not?
DEBATE THIS: A partnership should automatically end when one partner dissociates from the fi rm.

Question 12

Partnership Status Charlie Waugh owned and operated an auto parts junkyard in Georgia. Charlie's son, Mack, started working in the business part-time as a child and full-time when he left school at the age of sixteen. Mack oversaw the business's finances, depositing the profits in a bank. Charlie gave Mack a one-half interest in the business, telling him that if "something happened" to Charlie, the entire business would be his. In 1994, Charlie and his wife, Alene, transferred to Mack the land on which the junkyard was located. Two years later, however, Alene and her daughters, Gail and Jewel, falsely convinced Charlie, whose mental competence had deteriorated, that Mack had cheated him. Mack was ordered off the land. Shortly thereafter, Charlie died. Mack filed a suit in a Georgia state court against the rest of the family, asserting, in part, that he and Charlie had been partners and that he was entitled to Charlie's share of the business. Was the relationship between Charlie and Mack a partnership? Is Mack entitled to Charlie's "share"? Explain. [ Waugh v. Waugh , 265 Ga.App. 799, 595 S.E.2d 647 (2004)]

Question 13

Grace Tarnavsky and her sons, Manny and Jason, bought a ranch known as the Cowboy Palace in March 2007, and the three verbally agreed to share the business for five years. Grace contributed 50 percent of the investment, and each son contributed 25 percent. Manny agreed to handle the livestock, and Jason agreed to handle the bookkeeping. The Tarnavskys took out joint loans and opened a joint bank account into which they deposited the ranch's proceeds and from which they made payments toward property, cattle, equipment, and supplies. In September 2011, Manny severely injured his back while baling hay and became permanently unable to handle livestock. Manny therefore hired additional laborers to tend the livestock, causing the Cowboy Palace to incur significant debt. In September 2012, Al's Feed Barn filed a lawsuit against Jason to collect $32,400 in unpaid debts. Using the information presented in the chapter, answer the following questions.
Suppose that after his back injury in 2011, Manny sent his mother and brother a notice indicating his intent to withdraw from the partnership. Can he still be held liable for the debt to Al's Feed Barn? Why or why not?
DEBATE THIS: A partnership should automatically end when one partner dissociates from the fi rm.

Question 14

CASE PROBLEM WITH SAMPLE ANSWER: Indications of Partnership.
In August 2003, Tammy Duncan began working as a waitress at Bynum's Diner, which was owned by her mother, Hazel Bynum, and her stepfather, Eddie Bynum, in Valdosta, Georgia. Less than a month later, the three signed an agreement under which Eddie was to relinquish his management responsibilities, allowing Tammy to be co-manager. At the end of this six-month period, Eddie would revisit this agreement and could then extend it for another six-month period. The diner's bank account was to remain in Eddie's name. There was no provision with regard to the diner's profit, if any, and the parties did not change the business's tax information. Tammy began doing the bookkeeping, as well as waiting tables and performing other duties. On October 30, she slipped off a ladder and injured her knees. At the end of the six-month term, Tammy quit working at the diner. The Georgia State Board of Workers' Compensation determined that she had been the diner's employee and awarded her benefits under the diner's workers' compensation policy with Cypress Insurance Co. Cypress filed a suit in a Georgia state court against Tammy, arguing that she was not an employee, but a co-owner. What are the essential elements of a partnership? Was Tammy a partner in the business of the diner? Explain. [ Cypress Insurance Co. v. Duncan, 281 Ga.App. 469, 636 S.E.2d 159 (2006)]