Chapter 32

PARTNERSHIPS
Suggested Additional Assignments
Research: Partnership Registrations
The Uniform Partnership Act (UPA) permits partnerships to file a statement with the local Secretary of
State containing basic information about the partnership. Assign each student a different state and ask
him or her to log on to the Web site of the Secretary of State (or call the office) to find out if any
partnerships have registered. What kinds of partnerships are most likely to register? Why?
Drafting Exercise: Partnership Terms
Ask students to break into small groups (three or four students) and prepare a list of the main terms that
they would want to have in a partnership agreement. A complete agreement will cover the important
issues, such as sharing profits and losses, management, voting rights, and term.

Chapter Overview
Chapter Theme
In the United States, at least 1.4 million partnerships involving 9 million partners file partnership returns
with the IRS. (Although a partnership is not a taxable entity, it must file an “informational return” with
the IRS.) There are undoubtedly millions of other businesses that the law would recognize as
partnerships who either do not realize that they are partnerships or do not know that they have to file with
the IRS. In short, despite their drawbacks, partnerships are common. Students need to know how to form
a partnership, how to avoid forming one, and how to exit without legal or financial penalty.
Quote of the Day
“He who has a partner has a master.” Italian proverb quoted in The Count of Monte Cristo by Alexandre
Dumas (1802-1870), French novelist and playwright.

Creating a Partnership
Is There a Partnership or isn't There?
In many ways, this is the most important issue in partnership law. People generally understand that to
form a corporation they must take certain prescribed steps, but there are no clear-cut guidelines for
forming a partnership. The participants may have a partnership when they think they do not or,
conversely, they may not have one when they think they do. Impress upon students that in determining
whether parties are in a partnership, substance trumps form.
Factors that Matter
The association of two or more persons to carry on as co-owners a business for profit forms a
partnership, whether or not the persons intend to form a partnership.

Courts consider: Sharing profits? (Charitable businesses cannot be partnerships.) Sharing losses?
Management of the business? Oral or written agreement? (but actions speak louder than words!)
Have you said you are partners? (may sway a court’s decision)
Example: Determining Partnership Status
Facts: Nancy Green borrowed money from Joseph DiFebo to make a down payment on four houses. She
bought all four properties in her name alone. The two parties signed this document:

1
2 Unit 6 Business Organizations

Nancy R. Green and Joseph A. DiFebo are equal partners in the following Wilmington, Delaware
properties: 807 Pine Street, 427 East 3rd St., 611 East 7th Street, 613 East 7th Street.
On the death of Nancy R. Green, her half interest is left to her daughters, Kelly R. Green and Stacy R.
Green. On the death of Joseph A. DiFebo, his half interest is left to his daughters, Amy DiFebo and Beth
Durham. If Nancy R. Green survives Joseph A. DiFebo she makes all decisions on the above properties

DiFebo never asked Green for a share of the rentals from any of these buildings. He did perform some
repair work on them. When the city condemned one of the properties, Green refused to give DiFebo half
the proceeds. DiFebo testified that, in his mind, the money he transferred to Green established a
partnership between them. Green testified that at no time did she consider their arrangement to be a
partnership.
Issue: Were Green and DiFebo partners?
Holding: Green and DiFebo were not partners. Although they called themselves “equal partners,” they
did not share profits.
Question: What could DiFebo and Green have done to make this a partnership?
Answer: The court suggests that calling the document a partnership agreement and signing it as partners
would have helped. They also needed to share profits, which is a requirement for a partnership.
Question: The court indicated that DiFebo and Green had used this document in lieu of a will.
According to the court's interpretation, DiFebo was leaving half the value of the buildings to his daughters
if Green still owned the buildings when he died. Other than that, he got nothing. Does that make sense?
If he is not a part owner and partner, why are his daughters entitled to anything?
Answer: He had loaned money to Green to buy the buildings. With the agreement, he could be sure that
the loan would be repaid, if not during his lifetime, then afterward.
Question: Why did DiFebo think he and Green were partners if they did not divide profits?
Answer: It is possible that DiFebo did not take his share of the profits because he did not want his wife
to know about the buildings (and possibly his relationship with Green).
Question: What did Green and DiFebo really intend?
Answer: It is simply not clear whether they were debtor/creditor, lovers, or partners. In the case where it
is not clear, the court decided against a partnership. DiFebo had the burden of proof, which he did not
carry.
Question: What is the moral of this story?
Answer: There are three possibilities–they intended to be a partnership, they intended not to be a
partnership, or they made no decision and passively agreed to worry about that problem later. When a
case ends up in court, both parties are losers. The moral of the story is that they should have decided
what their legal relationship (if not their personal relationship) was before DiFebo loaned the money. If
they did not want to pay for a lawyer, they should at least have drafted an agreement that more clearly
spelled out what would happen to the buildings under a variety of circumstances.

You Be the Judge: Nadel v. Starkman1

Facts: Morris Starkman hired Raymond Nadel just after he graduated from law school. At the beginning,
Nadel was clearly an associate, not a partner, but after some years working together, the two men signed
an agreement that changed their relationship.—although to what is not clear. The agreement clarified
many important issues (such as Nadel’s vacation time), but it failed to resolve the most crucial question:
was Nadel now a partner?
The agreement offered some hints to answering this question, but unfortunately the clues pointed in
different directions. It stated that:
The practice had "heretofore" been owned solely by Starkman
Nadel had an “interest in the firm”
1
2010 N.J. Super. Unpub. LEXIS 2542 SUPERIOR COURT OF NEW JERSEY, APPELLATE DIVISION, 2010.
Chapter 32 Partnerships 3

The firm would continue to be owned solely by Starkman who had the right to make all management
decisions
Starkman was the sole owner and Nadel was an independent contractor
Nadel would receive a percentage of the firm’s net income and he was guaranteed a minimum income
each year
The firm would pay for Nadel's benefits, but not Starkman’s
Other relevant facts:
The firm never filed a partnership tax return
Its checking accounts remained solely in Starkman's name and were entitled "Morris Starkman, Attorney
at Law"
Nadel never had authority to sign checks, and none of the checks bore his name
The firm's signage, letterhead, and advertisements all used the name Starkman & Nadel.
Later,, Starkman decided that the firm should become an LLC. The agreement he prepared stated that he
would own ninety-nine percent to Nadel’s one percent. It also stated that Nadel was an employee. Nadel
refused to sign the agreement. At trial, Starkman testified that Nadel had refused to sign because he
wanted a pension plan and a severance package. Nadel maintained that he had not been willing to give up
his partnership interest.
The agreement had referred to the two men’s “excellent relationship,” but that did not last long.
Starkman soon began looking for Nadel’s replacement. (He waited to send the termination letter until
Nadel was on vacation, which probably did not help their relationship.) Starkman formed a partnership
with David Rochman while Nadel filed suit, asking the court to determine the reasonable value of his
ownership interest in the firm.
At trial, Rochman (who had since parted ways with Starkman) and others testified that Starkman had told
them that Nadel was his partner and he owed the man a substantial buyout. The trial judge believed Nadel
while finding Starkman evasive and dishonest. She ruled that the two men had intended to form a
partnership and had indeed done so. Starkman appealed.
You Be the Judge: Were Starkman and Nadel partners?
Argument for Nadel: There was substantial evidence of a partnership both in the agreement itself and in
the two men’s behavior. The agreement provided for the sharing of net profits, which is an important
indicator of a partnership. Also, it implied Nadel was a partner when it referred to his “interest in the
firm” and stated that the practice was "heretofore" owned solely by Starkman. As for the provision in the
agreement that referred to Starkman as the sole owner, that simply meant that he was the managing
partner. In any event, if the agreement was unclear, any ambiguity should be interpreted against Starkman
because he is the one who drafted it.
As for behavior, the trial judge found that the parties intended to create a partnership and that Nadel
refused to convert the business to an LLC because he would not give up his partnership interest. Starkman
repeatedly referred to the business as a partnership and admitted to other people that he owed Nadel a
substantial buy-out.
Argument for Starkman: Both the agreement and the two men’s behavior provide overwhelming
evidence that there was no partnership. The agreement does not refer to itself as a partnership agreement.
It clearly stated that Nadel was an independent contractor, rather than a partner. The agreement did not
grant Nadel the right to make management decisions. It did make provision for his benefits and vacation
time, but not Starkman’s. These provisions indicated he was an employee, not a partner.
As for behavior, Nadel did not share in the firm’s losses and the firm did not file a partnership tax return.
(Presumably two lawyers would have known enough to file the appropriate tax return.).
4 Unit 6 Business Organizations

Additional Case: Love v. The Mail on Sunday2

Facts: Mike Love and Brian Wilson were members of The Beach Boys. In the 1960’s, they wrote songs
together. The copyrights for these songs were later sold to Rondor, which paid the two men royalties
when the songs were played. In 2004, Wilson re-recorded some of these songs on a CD. This CD was
distributed in the United Kingdom by the newspaper The Mail on Sunday.
Love sued Wilson, claiming the two men had a partnership and Wilson violated the partnership
agreement by re-recording the songs without Love’s permission. Wilson filed a motion for summary
judgment.
Issue: Did Mike Love and Brian Wilson have a partnership?
Holding: No, Wilson’s motion for summary judgment is granted. According to the court, a partnership
is an “association of two or more persons to carry on as coowners of a business for profit…whether or not
the persons intend to form a partnership.” Here, the collaboration and co-ownership of songs does not
show that they were engaged as co-owners of a business.
The assets that Love characterizes as partnership assets, the copyrights to their co-authored songs, are
not owned by Love or Wilson; they have been owned by Rondor since 1969. There is no evidence that
the entitlement to royalties runs through any partnership. Rondor pays royalties to both men individually.
Moreover, there is no evidence that the parties entered into an oral partnership agreement. In fact,
Love and Wilson never signed any written partnership agreement, they never discussed what would be
done with the songs that they wrote together, Love cannot recall any conversation with Wilson about the
need to inform each other about the use of the songs, Love never filed partnership tax returns in
connection with the royalties he received from the songs, and there is no partnership entity that exists to
collect the royalties. Most damaging, when asked directly whether he and Wilson entered into an oral
partnership, Love stated that they sat down and co-wrote songs together and that they never entered into a
formal agreement. Love characterized their partnership as a “songwriting partnership” and as
“collaborating.”
Love also claims that the copyright applications filed by Wilson list Love and Wilson as co-authors,
and this proves that a partnership existed. From the late 1960’s to 1994 Wilson’s mental problems
prevented him from actively participating in the creation of new music, yet Love’s only evidence that any
partnership continued past the 1960s is that he and Wilson “discussed collaborating on other songs on
several occasions.” None of these states shows that their relationship was anything other than song
collaboration. According to the court, Love’s mere “belief” that they had a legal partnership and his
repeated use of the term “partnership” cannot substitute for evidence that a legal partnership in fact
existed.
Question: The court said that a partnership is an association of two or more persons to carry on as
co-owners of a business for profit. Didn’t Love and Wilson write songs together for a profit?
Answer: Yes, Love and Wilson did write songs together, and those songs generated royalties.
However, Love and Wilson were no co-owners of a business for profit. According to the court, they
were co-writers of or collaborators on songs. In addition, another entity, Rondor, owned the rights to
the songs, and Rondor passed the royalties on to Love and Wilson individually.
Question: What would it take for them to be partners?
Answer: Among other things, they would have to agree to co-own a business for profit. In this case,
Rondor owned the rights to their songs. If Love and Wilson wanted their business to own the rights
to their songs, their business would have to buy those rights from Rondor.
Question: What is the moral of this story?
Answer: Many of the problems that arise in lawsuits involve situations where no one clearly spells
out the nature of the relationship. (You might remember, there were many such cases in the contracts

2
489 F.Supp. 2d 1100; 2007 U.S. Dist. LEXIS 41678, United States District Court for the Central District of
California, 2007.
Chapter 32 Partnerships 5

chapters.) It is easier, at least at the beginning, not to talk about difficult subjects. Unfortunately, this
failure to talk means that both parties can get deep into the relationship while harboring very different
expectations. Then, neither party is protected if the relationship falls apart. In this case, it seems that
Love thought that he and Wilson were partners and Wilson needed Love’s permission to re-record
their songs. Although Wilson’s motivations are not clear from the case, it seems he did not believe he
needed Love’s permission.
Partnership by Estoppel
Partnership by estoppel is the other side of the Green example. That case involved people who wanted to
be partners so that they could share in the profits. Partnership by estoppel involves people who do not
want to be partners because they want to avoid liability. One other important difference: the Green
example revolved around the (alleged) partners' relationship between themselves. Partnership by estoppel
cases focus on the (alleged) partners' relationships with outsiders.
Example: Partnership by Estoppel
Four lawyers shared a suite of offices. They used stationery that listed all four names. One lawyer
referred to another as his “partner.” A newspaper article said that one of the lawyers was a “senior
partner” in the firm. On the other hand, they did not have a partnership agreement, they did not share
profits, nor did they file a partnership income tax return. One of the lawyers stole money from a client.
The client sued the firm, asking a court to hold all four “partners” liable.3
Question: Were these four lawyers, in fact, partners?
Answer: Probably not. After all, they did not share profits.
Question: Why would the three other lawyers be liable for the misdeeds of a non-partner?
Answer: The issue was not what their relationship really was. The issue was what their relationship
appeared to be. By putting their names together on the letterhead and by referring to each other as
partners, they were telling outsiders that they were partners, even though they were not. The court
held all of them liable for the theft.
Question: So what is the moral of this story?
Answer: These lawyers could not have it both ways. They could not have the advantages of a
partnership without the resulting liability.

Relationship between Partners and Outsiders

Example: Agency law and the issue of authority
When the law firm of Plante & Moran passed over John Dorsey for partnership, he threatened to quit.
Five partners told him he would make it next year if he avoided any major mistakes. The partnership
agreement required a two-thirds majority to admit new partners. The partnership then had 60
partners. The next year, the partnership did not vote Dorsey in. He sued–and lost.4
Question: Is a partnership liable for the promises that its partners make?
Answer: Only if they are acting within their authority.
Question: In this case, five partners promised the associate that, as long as he committed no major
blunders, he would make partner the next year. Did the partners have authority to make this promise?
Answer: Let's look at the different types of authority.
• They did not have express authority because the partnership had not authorized them to make the
promise.
• A partner has implied authority for conduct reasonably necessary to carry out authorized
transactions. In this case, the partners were carrying out unauthorized acts; therefore, there was
no implied authority.

3
In re Estate of Pinckard, 94 Ill. App. 3d 34 Court of Appeals of Illinois, 1980
4
“Contract–No Breach,” Michigan Lawyers Weekly, Jan. 25, 1993, p. 10.
6 Unit 6 Business Organizations

• Do the partners have apparent authority? Only if the partnership does something that causes a
third party reasonably to believe that the partners were authorized. In this case, the associate
knew that the partners were not authorized–he knew that a partnership decision required a
favorable vote of two-thirds of the partners. Five partners did not equal two-thirds of 60 partners.
Question: What if these five partners had promised an outsider that the firm would hire him as a
partner?
Answer: The issue again would be whether the partners had apparent authority. If the group met
with the outside candidate at the firm's offices and corresponded on firm stationery, it would probably
have apparent authority, as long as the candidate did not know that a two-thirds vote of the partners
was required.
Information
As agent, a partner has a duty to pass on all relevant information to the partnership. Whether or not a
partner actually fulfills this obligation, the law treats the partnership as if it had received notice.

Additional Case: Pettiette v. New York Life5

Tom Pettiette and his law partner, Martin Akins, received a contingency fee of $1.5 million. They could
not agree on how to split the fee, so they each purchased a $750,000 annuity contract from New York
Life Insurance Company. They figured that, during the term of the annuity, the money would be safe and
each would receive an income. They had agreed that, on a certain date, they would both redeem the
annuities. By that point, they figured, they would have decided how to divide the $1.5 million fee.
Unfortunately, when they went to redeem the annuities, they discovered that they had to pay a surrender
charge and tax penalty that greatly reduced the proceeds. Pettiette sued New York Life for failing to tell
him about these charges and penalties. New York Life had disclosed these facts in a prospectus that it
had mailed to the law firm. Akins admitted he had received a prospectus. Evidently, he had failed to give
it to Pettiette. Result? The trial court dismissed the case on a motion for summary judgment from New
York Life. The appeals court upheld the trial court's decision. When Akins received the information, he
had a duty to pass it on to the partnership. Although he failed to do so, the partnership was treated as if it
had been notified.
Tort Liability
A partnership is responsible for the intentional and negligent torts of a partner that occur in the ordinary
course of the partnership's business or with the actual authority of the partners.

Additional Case: Phillips v. Carson

The Phillips and the Carsons had been friends for several years before Mr. Phillips died. Mrs. Phillips
hired Mr. Carson, a partner in a law firm, to handle her husband's estate. She paid his firm $80,000. For
no extra charge, the firm handled a number of other legal matters for her.
One evening at a party, Carson told Phillips that he was having financial problems. Fearful that he
might be suicidal, she loaned him and his wife $270,000. To secure the loan, Carson gave her a mortgage
on property in Arizona. Later, Carson asked Phillips to release her mortgage so that he could sell the land.
He offered her a mortgage on land in Kansas and told her that this would put her in a better position.
Carson prepared a mortgage on the Kansas property but failed to file it with the Register of Deeds. All of
Carson's correspondence with Phillips, whether relating to her husband's estate or the loans, was typed on
firm letterhead by his secretary at the firm. Phillips knew that the secretary did both firm and personal
work for Carson.

5
1993 Tex. App. LEXIS Court of Appeals of Texas, 1993
Chapter 32 Partnerships 7

Carson filed for bankruptcy protection. Because Phillips's mortgage had never been filed, she became
an unsecured creditor with little chance of receiving repayment on her loan. She filed suit against Carson
and his law firm. The lower court found that Carson had been negligent for not filing the mortgage.
The trial court dismissed the claim against the law firm on a motion for summary judgment. The
appeals court reversed on the grounds that there was substantial evidence from which a trier of fact could
find the firm liable.
Question for Phillips: On what theory would the law firm be liable for Carson's misdeeds?
Answer: There are two possibilities. A partnership is responsible for the intentional and negligent
torts of a partner that occurs either:
• In the ordinary course of the partnership's business, or
• With the actual authority of the partners.
Question: Did Carson's misdeeds occur in the ordinary course of the partnership's business?
Phillip's Answer: Absolutely.
• All correspondence with Phillips was on firm stationery.
• Phillips paid the firm $80,000 for legal advice.
• Even if borrowing money was not in the ordinary course of firm business, Phillips relied on
Carson's legal advice about the mortgages. Giving legal advice is certainly firm business.
Law Firm's Answer: Yes, the firm was representing her, but only for probating her husband's will.
• The loan grew out of their social relationship. They were at a party together when she agreed to
loan money to Carson and his wife.
• She could not possibly have thought that loaning money to a suicidal man was in the ordinary
course of the firm's business.
• Phillips knew that Carson's secretary did both personal and firm work for him.
Question: Did Carson act with the actual authority of his partners?
Answer: Both sides would probably concede that he did not borrow money with actual authority.
Question: What can partners do to prevent this type of liability?
Answer:
• Choose their partners carefully.
• Perhaps they should have been more alert to possible signs of trouble with Carson. If he was
acting suicidal at parties, perhaps his partners should have picked up these signals earlier and
encouraged him to seek counseling, financial advice, etc.
• The firm should encourage its partners to keep personal and firm business separate. If Carson had
discussed these issues with Phillips only in the evenings or weekends and only from home, and if
he had typed all the correspondence himself, perhaps it would have been clearer to Phillips that
Carson was not acting within the scope of partnership business.
Paying the Debts of the Partnership
The basic rule of partnership liability is simply stated: all partners are personally liable for all debts of
the partnership.

Financial Rights
Sharing Profits
Partners share profits equally, unless they agree otherwise.
Payment for Work Done
Even if partners do work for the partnership, they are not entitled to any payment beyond their share of
profits, unless the partnership agrees otherwise.
8 Unit 6 Business Organizations

Case: Banker v. Estate of Banker6

Facts: Father Banker owned Peaceful Valley Campground (PV) but, if the name had been accurate, it
would have been Angry Family Battleground. Peaceful Valley operated as both a campground, with
cabins and RV sites. When Father Banker died without a will, each of his four sons inherited roughly ten
percent, while his widow got the rest. One son, Arnold, bought out his mother’s share, so he owned
roughly two-thirds.
Because the four brothers had made no other arrangement, PV operated as a partnership. Arnold was the
only brother who worked in the business. He lived year round in a house on the campground where he
was on call 24 hours a day during the seven-month camping season. He dealt with routine camp business
(including reservations and maintenance) as well as emergencies. Off season, he made repairs and did
office work.
The partnership paid Arnold a salary of about $25,000 a year. It also paid his live-in girlfriend, Linda
Romeo, about $10,000 a year for office work and cleaning. In addition, PV paid some of Arnold’s
personal expenses. The other brothers had not agreed to these payments.
The brothers objected to payments from PV to Arnold, alleging that, as a partner, Arnold had no right to
payment for the work he performed.
Issue: Was Arnold entitled to any payment in addition to his share of partnership profits?
Excerpts from Justice Peckham’s Decision: The personal expenses of Arnold alleged to have been paid
from the partnership include meals and lodging, a truck, furniture and fixtures, and sunglasses. The meals
and lodging were trips related to campground business. The furniture and fixtures were actually two
additional cabins for the campground. The truck was purchased for use at the campground hauling
materials and supplies and canoes the camp rents out. The sunglasses were for Arnold's use working
around the camp. [T]he objection to these expenses is denied.
There is no written partnership agreement and no proof was introduced that the partners ever agreed to
Arnold's salary. [W]hen there is no written partnership agreement, the New York Partnership Law
effectively becomes the partnership agreement. Under the Partnership Law of New York, consent by all
the partners was needed [for a partner to receive] compensation for services rendered to the partnership.
No such consent was given by the three minority partners in the Peaceful Valley partnership. No consent
having been given, the payment of a salary violated the partnership agreement and the law and must be
refunded.
The work Ms. Romeo performed is the same type of work done by Arnold and could have been done by
him. The other partners did not agree to hire Ms. Romeo, nor to the payments made to her. [Arnold must
repay these amounts.]

Additional Case: Hooper v. Hooper

Facts: Charles Hooper owned Lako, a scrap metal business, and invited his brother William to join him
as partner. They were each entitled to 50 percent of the profits of the partnership, but they agreed that
they would take out only what was necessary to live, and the remainder would stay in the business. The
two brothers also agreed that Lako would hold and manage real estate and stocks they had inherited from
their grandfather. These inherited holdings generated most of most of the partnership’s income.
Ten years after forming the partnership, William was injured in a car accident. Although William
never returned to the office, he did do some partnership work at home. William and Charles had a major
disagreement over a settlement offer from an insurance company on a Lako building that had been
destroyed by fire. William wanted to take the settlement but Charles wanted to hold out for more.

6
911 N.Y.S.2d 691; 2010 N.Y. Misc. LEXIS 1145, SUPREME COURT OF NEW YORK, DELAWARE COUNTY, 2010
Chapter 32 Partnerships 9

Charles became so angry that he communicated with William only through his girlfriend, and refused to
give William any information about the partnership.
William filed suit, asking the court to order an accounting and to dissolve the partnership. Charles
alleged that he was entitled to payment for the services he performed for the partnership after William’s
accident. The lower court found for William and Charles appealed.
Issue: Is a partner entitled to compensation for the services he provides the partnership?
Holding: In the absence of an express or implied agreement, a partner is not entitled to any
compensation for his services to the partnership other than his share of the profits. Therefore, Charles is
not entitled to payment for the services he performed.
Question: Who started Lako?
Answer: Charles did.
Question: Over the life of the partnership, who did the most work for Lako?
Answer: Charles did.
Question: In fairness, should Charles be entitled to payment for his extra work?
Answer: Maybe in fairness he should be, but not in law. In the absence of an explicit agreement, a
partner is not entitled to any compensation for his services to the partnership other than his share of
the profits.
Question: Was there an agreement that the partnership would pay more to Charles?
Answer: Charles may have felt that he was entitled to more, but there is no evidence of any
agreement as to what Charles should have been paid or how his compensation should have been
determined.
Partnership Property
All partnership property belongs to the partnership as a whole, not to the individual partners.
Right to Transfer a Partnership Interest
Without the approval of the other partners, a partner cannot sell her partnership share. She can only
transfer her economic interest in the partnership, that is, her right to receive partnership profits and losses.
A new partner can only be admitted to a partnership by unanimous consent of the other partners.

Additional Case: Warren v. Warren 7

Jon Warren was an equal partner with his father and brother in J-W Foods, a grocery store in Huntsville,
Arkansas. When Jon and his wife divorced, the trial court held that Sue should become the owner of a
one-sixth interest in the grocery store (one-half of Jon's one-third interest).
Question: Is there a problem with this decision?
Answer: All partnership property belongs to the partnership as a whole, not to the individual partners.
A new partner cannot be admitted without the permission of the other partners. Therefore, the trial
court could not award her specific partnership property or an ownership share of the partnership. She
was entitled only to some portion of the “provable fair net present value” of Jon's share.
Question: How could Sue enforce this award if she is not actually a partner?
Answer: By obtaining a charging order on the partnership.
Comment: This case illustrates the concepts underlying partnership law. Imagine the horror of Jon,
his father, and his brother if they had to be partners with Jon's ex-wife. This potentially antagonistic
relationship runs counter to the whole theory of partnerships as a mutually supportive, fiduciary
relationship.

7
675 S.W.2d 371 (Ark. Ct. App. 1984).
10 Unit 6 Business Organizations

Management Rights
Right to Manage
Each and every partner has equal rights in the management and conduct of the business, unless the
partners agree otherwise.
Management Duties—Duties of Care
Partners are liable to the partnership for gross negligence, reckless conduct, intentional misconduct, or a
knowing violation of the law. Partners are not liable for negligence.

Case: Moren v. Jax Restaurant8

Facts: Jax is a pizza restaurant in Foley, Minnesota owned by two sisters—Nicole Moren and Amy
Benedetti. They operated it as a partnership. One afternoon, Moren ended her regular shift at 4:00 p.m.
and left to pick up her two-year-old son Remington from day care. When her sister called her to say that
one of the cooks had not come to work, Moren returned to the restaurant with Remington. Moren’s
husband said he would pick the child up in about 20 minutes.
Because Moren did not want Remington running around the restaurant, she brought him into the
kitchen with her, set him on top of the counter, and began rolling out pizza dough using the dough-
pressing machine. As she was making pizzas, Remington reached his hand into the dough press. His
hand was crushed, causing permanent injuries. His father brought suit on Remington’s behalf against the
partnership for negligence. The partnership, in its turn, sued Moren, arguing that she had to reimburse the
partnership for any payments to Remington. The district court granted summary judgment to Moren. The
restaurant appealed.
Issue: Is Moren liable to the partnership for her own negligence?
Holding: Judgment for Moren affirmed. Her conduct was in the ordinary course of the partnership’s
business, which means that the partnership is liable to Remington. However, her conduct was ordinary
negligence, not gross negligence or intentional misconduct, which means that she is not required to
indemnify the partnership
Question: Why did the father sue his wife’s partnership?
Answer: He sued the partnership because it carried liability insurance. He was not trying to reach
the assets of his son’s mother and her sister, but their partnership’s insurance policy.
Question: What would happen if the partnership did not have liability insurance?
Answer: The partnership would be liable, which might mean that Moren’s sister would have to pay
half of the judgment.
Question: Why would the partnership be liable to Remington? Wasn’t it his mother’s fault he was
injured, not the partnership’s?
Answer: When Remington was injured, his mother, who was a partner in the business, was in the
restaurant’s kitchen making pizzas. She was doing partnership business.
Question: Why doesn’t Moren have to indemnify the partnership? After all, she was the careless one.
Answer: Because, under partnership law, a partner only has to indemnify the partnership if she
commits an intentional wrong or gross negligence, which is almost as bad as an intentional wrong.
Question: Does this rule make sense? What policy considerations are behind it?
Answer: Partnerships are a relationship built on trust. All for one and one for all. As we have seen
before, it is important to choose one’s partners very carefully.
Conflict of Interest
A partner has a conflict of interest whenever the partnership does business with him, a member of his
family, or a business partly or fully owned by him. Unless the other partners consent to the business
relationship in advance, the partner must turn over all of its profits to the partnership.
8
679 N.W.2d 165; 2004 Minn. App. LEXIS 459 Court of Appeals of Minnesota, 2004
Chapter 32 Partnerships 11

Case: Marsh v. Gentry9

Facts: Tom Gentry and John Marsh were partners in a business that bought and sold racehorses. The
partnership paid $155,000 for Champagne Woman, who subsequently had a foal called Excitable Lady.
The partners decided to sell Champagne Woman at the annual Keeneland auction. Gentry purchased the
horse personally for $135,000, without telling Marsh. Later, he told Marsh that someone from California
had approached him about buying Excitable Lady. Marsh agreed to the sale. Although he repeatedly
asked Gentry the name of the purchaser, Gentry refused to tell him. Not until 11 months later, when
Excitable Lady won a race at Churchill Downs, did Marsh learn that Gentry had been the purchaser.
Issue: Did Gentry violate his fiduciary duty when he bought partnership property without telling his
partner?
Holding: Yes, Gentry did violate his fiduciary duty. A partner has an absolute right to know if his
partner purchases partnership property.
Question: Why didn't Gentry tell Marsh he wanted to purchase the two horses?
Answer: Presumably, he thought Marsh either would not sell to him or would demand a higher price.
Question: Marsh agreed to the price for the private sale of Excitable Lady. Why would Marsh care
whether he sold to a partner or to a stranger?
Answer: In a sale to a stranger, Marsh would assume that he knew at least as much, if not more,
about the horses than the stranger did. In a sale to a partner, he has to wonder what the partner knows
that he does not.
Question: What damages would Gentry be required to pay?
Answer: Gentry would have to turn over any profits he earned from the secret transactions.
Question: How would you measure profits in this case?
Answer: It would be complicated. If Gentry subsequently sold the horses, then the difference
between what he had paid for them and what he sold them for would be a start. Of course, he
incurred expenses as well, which would have to be subtracted. In the case of Excitable Lady, which
he has not sold, perhaps the difference between her value after winning the race and the price he paid
for her would be a fair measure of his profits.

Terminating a Partnership
If the partners have not agreed how long their partnership will last, they have a partnership at will, and
any of them can leave at any time, for any reason.
With a term partnership, the partners have agreed in advance how long it will last. At the end of the
specified term, the partnership automatically ends.
Winding Up
Any partner who has not wrongfully dissociated has the right to take part in the winding up. During this
process, partners may complete unfinished business, but they do not have the right to take on new work.

Case: Jefferson Insurance. Co. v. Curle10

Facts: Steven Shelley and Michael Curle were partners in a roofing business. During the process of
winding up, Shelley canceled the partnership's general liability insurance policy without telling Curle.
While finishing a project, Curle left a hole in a roof, covering it only with tar paper. A painter, Dennis
Whitsett, fell through the hole. When he sought to recover from the partnership for his serious injuries,
Curle and Shelley asked the insurance company to pay the claim. The trial court found that the policy did
not cover Shelley, but did cover Curle and the partnership. Jefferson Insurance appealed.

9
642 S.W.2d 574, 1982 Ky. LEXIS 315 Supreme Court of Kentucky, 1982
10
771 S.W.2d 424, 1989 Tenn. App. LEXIS 30 Tennessee Court of Appeals, 1989
12 Unit 6 Business Organizations

Issue: Were the partnership and Curle bound by Shelley's decision, during the winding up process, to
cancel the policy, even though he had not told Curle?
Holding: Judgment for Curle and the partnership reversed. The decision was binding on the partnership
and Curle. The cancellation was within Shelley's authority in winding up the partnership's affairs.
Question: Why did the trial court decide that the insurance policy protected Curle and the
partnership, but not Shelley?
Answer: T he decision was based on a prior version of Tennessee law, but, in essence, the trial court
felt that it was not fair to penalize Curle for something Shelley had done without telling Curle.
Question: Is it fair to hold Curle liable when he did not know the policy had been canceled?
Answer: The trial court clearly did not think so. The drafters of the UPA believed it was fair.
Question: Curle clearly would have been liable if Shelley had canceled the policy before the
partnership was in the winding up process. Why should winding up make any difference?
Answer: During the winding up process, partners tend to have less contact with each other and less
knowledge about what their partners are doing. In this case, they seem to have divided
responsibilities–Curle would finish their one remaining project and Shelley would do the winding up.
Question: Why is the liability of the partners the same?
Answer: Someone will be harmed by Shelley's action. Either the insurance company will have to
pay on a policy for which it received no premiums, or Shelley and Curle will have to pay the debt
from their personal assets. Curle chose Shelley as a partner; therefore, he is more to blame for
Shelley's irresponsibility than is the insurance company.
Question: Whose negligence harmed Whitsett, the painter?
Answer: Curle’s, by leaving a hole covered only by tar paper.
Question: Is it fair to hold Shelley liable when he did not know Curle had left the hole uncovered?
Answer: This case illustrates the risk of a partnership. On the one hand, Curle was liable because he
was bound by Shelley's cancellation of the policy. On the other hand, Shelley was liable for Curle's
tort.

Multiple Choice Questions

1. CPA QUESTION Which of the following is not necessary to create a partnership?
(a) Execution of a written partnership agreement
(b) Agreement to share ownership of the partnership
(c) Intention of conducting a business for profit
(d) Intention of creating a relationship recognized as a partnership
Answer: A. CPA Examination, November 1990, #11.

2. If a partner dissociates, he is entitled to:

(a) Force the termination of the partnership
(b) Receive indemnification from liability for present partnership debt
(c) Receive indemnification from damages he caused the partnership
(d) Receive only his share of the value of the partnership assets when it ultimately liquidates
Answer: B.

3. CPA QUESTION Cobb, Inc., a partner in TLC Partnership, assigns its partnership interest to Bean,
who is not made a partner. After the assignment, Bean asserts the right to (1) participate in the
Chapter 32 Partnerships 13

management of TLC and (2) Cobb’s share of TLC’s partnership profits. Bean is correct as to which of
these rights?
(a) 1 only
(b) 2 only
(c) 1 and 2
(d) Neither 1 nor 2
Answer: B. CPA Examination, May 1993, #15.

4. CPA QUESTION Ted Fein, a partner in the ABC Partnership, wishes to withdraw from the
partnership and sell his interest to Gold. All of the other partners in ABC have agreed to admit Gold
as a partner and to hold Fein harmless for the past, present, and future liabilities of ABC. A provision
in the original partnership agreement states that the partnership will continue upon the death or
withdrawal of one or more of the partners. As a result of Fein’s withdrawal and Gold’s admission to
the partnership, Gold:
(a) Is personally liable for partnership liabilities arising before and after his admission as a partner
(b) Has the right to participate in the management of ABC
(c) Acquired only the right to receive Fein’s share of the profits of ABC
(d) Must contribute cash or property to ABC in order to be admitted with the same rights as the other
partners
Answer: B. CPA Examination, May 1986, #55.

5. Blackriver Partnership is in the process of winding up. It has three partners: Jason, Keira and
Lancelot. The partnership has assets of $90,000, but debts of $60,000, including $30,000 it owes to
Jason. Who gets what?
(a) Each partner receives $10,000.
(b) Each partner receives $30,000.
(c) Jason receives $30,000 and the other two get $10,000 each.
(d) Jason receives $40,000 and the other two get $10,000 each.
Answer: D.

Essay Questions
1. ETHICS Arthur, John, and George formed a partnership to drill and maintain cesspools for two years.
After less than two months, John and George sent a letter to Arthur informing him that they were
dissolving the partnership. Arthur sued the two other men, asking the court to declare that the
partnership still existed and he had the right to continue in the business. Do John and George have the
power to dissolve a term partnership before the end of the term? Aside from the legal issue, is it fair
to Arthur to allow his two partners to walk away from their partnership? He had counted on a two-
year commitment; they gave only two months.
Answer: The court refused to re-create the partnership. It held that the defendants could terminate
the partnership any time they wanted, even in violation of the partnership agreement, but they would
14 Unit 6 Business Organizations

be ordered to pay damages for breaching the agreement. Engelbrecht v. McCullough, 80 Ariz. 77,
292 P.2d 845 (1956).

2. You Be the Judge: WRITING PROBLEM Hubert, an artist, entered into an agreement with
Randy for the reproduction and distribution of his paintings. Herbert was to receive 50 percent of the
gross sales revenues. Randy was responsible for all losses and for management of the business.
Before leaving on a trip to Israel, where he feared he might be in some danger, Randy signed a
partnership agreement with Herbert stating that they jointly owned the business. Shortly after Randy
returned from the trip, the two men terminated their business relationship, and Herbert revoked his
authorization for the sale of prints. When Randy continued selling the prints, Herbert filed suit. Randy
argued that the two had formed a partnership and that he was authorized to sell assets of the
partnership. Were Herbert and Randy partners? Argument for Herbert: A partnership agreement
does not create a partnership. Randy alone managed the business. Herbert shared only revenues, not
profits. Argument for Randy: Herbert and Randy both provided services to the business: Randy paid
for the printing, and Herbert did the artwork. These two men signed a partnership agreement, and they
obviously intended to be partners.
Answer: The court found that no partnership existed. Their signed agreement was similar to the one
in Green–more a will than a real partnership agreement. The court concluded that, “neither the
parties’ acts nor their intent point to the existence of a partnership.” Shuptrine v. Brown 709 F.2d
3. Seventy-Three Land, Inc., sued Maxlar Partners for the balance due on a note made by the
partnership. Max, a partner, asked the court to dismiss the claim against him personally because the
plaintiff had not first tried to collect against the partnership. Does Max have a valid claim?
Answer: Creditors with contract claims against a partnership must first exhaust partnership assets
before proceeding directly against individual partners. Seventy-Three Land v. Maxlar Partners, 270
N.J. Super 332, 637 A.2d. 202, 1994 N.J. Super. LEXIS 51 (N.J. Super. Ct. App. Div. 1994).

4. Pedro and Juan have a business selling ties with fraternity insignia. Pedro finds out that an online shirt
business is for sale. It sounds like a great idea -- customers send in their measurements and get back a
custom-made shirt at a price no higher than off-the-rack shirts at the local department store. Does
Pedro have to let Juan in on the great opportunity?
Answer: Yes, if it relates to the partnership business, which this does.

5. Brothers Sydney and Ashley were partners in a real estate partnership in Pennsylvania. They received
identical salaries. Sydney moved to Florida to establish residency so that he could obtain a divorce
there. His lawyer told him not to return to Pennsylvania until he had resolved his marital problems.
After Sydney had been gone almost a year, Ashley decided to increase his own salary to compensate
for the additional work he was doing. Does Ashley have the right to pay himself more if he is doing
more work?
Answer: Ashley was not entitled to additional compensation in return for his additional work
because, in the absence of an agreement to the contrary, a partner is not entitled to compensation
beyond his share of the profits for services rendered by him in performing partnership matters.
Altman v. Altman, 653, F.2d 755 (3rd Cir. 1981).

Discussion Questions
Chapter 32 Partnerships 15

1. Mike Love and Brian Wilson were members of the Beach Boys. In the 1960s, they wrote songs
together. The copyrights for these songs were later sold to Rondor, which paid the two men royalties
when the songs were played. In 2004, Wilson re-recorded some of these songs on a CD called Good
Vibrations. This CD was distributed in the United Kingdom by the newspaper The Mail on Sunday.
Love sued Wilson, arguing that the two men had a partnership and Wilson had violated the
partnership agreement by re-recording the songs without Love’s permission. Did Mike Love and
Brian Wilson have a partnership?
Answer: In Love v. The Mail on Sunday, 2007 U.S. Dist. LEXIS 41678, the court ruled that there
was no partnership. The songs were owned by Rondor not the partnership. The two men did not have
an explicit partnership agreement, either written or oral. They never filed a partnership tax return.
They may have had a partnership in the colloquial sense of the word, but not in the legal sense. They
were simply songwriting collaborators.

2. Dutch, Bill, and Heidi were equal partners in a lawn care business. Bill and Heidi wanted to borrow
money from the bank to buy more trucks and expand the business. Dutch was dead set against the
idea. When the matter came to a vote, Bill and Heidi voted in favor, Dutch against. Dutch was so
annoyed that he told the bank not to lend the money and, further, that he would not be responsible for
repaying the loan. The bank loaned the money, the business failed, and the bank sued all three
partners. Is Dutch liable on the loan?
Answer: Yes. Bill and Heidi's vote was binding on the partnership and on all of the partners. Dutch
would not have been liable if he had dissolved the partnership by withdrawing before the loan was
made.

3. Carrie and Laura started a business together to sell bridesmaids dresses online. Carrie spent months
preparing the financials and meeting with potential investors while Laura designed dresses and found
suppliers. Once Carrie was finished with the financials and had identified some potential investors,
Laura announced that she preferred to work with Scott and Carrie was out of the business. What
rights does Carrie have?
Answer: A partner can only be expelled if the partnership agreement permits. Here, there is no
agreement, hence Laura has no right to expel Carrie. However, Carrie probably does not want to
litigate. This is a true case. The moral of the story is that Carrie should have had a partnership
agreement before she invested so much time. Or she should have chosen her partner more carefully.

4. Is it fair that partners are not entitled to be paid for work they do for the partnership? What about poor
Arnold in the Peaceful Valley case – he was on call 24/7, his girlfriend was cleaning the latrines, but
they were not entitled to be paid.
Answer: Maybe not, in which case they should ask the partners to approve a salary or refuse to do the
work. But they cannot just pay themselves whatever they want without the approval of the other
partners.

5. Is there any good reason to be in a partnership? If so, for what sort of business would it make sense?
Answer: It is an easy and cheap form of organization, but the liability is an important issues. Perhaps
a short-term project with someone whom you trust and without much money or potential liability at
stake. However, if there are any significant assets at stake, it is a good idea to have a written
agreement.
16 Unit 6 Business Organizations

ROLE REVERSAL Write an essay question that illustrates the dissociation process.