Chapter 34 Partnership Scenario

The real estate partnership you and your friend started has been a great success. You and your friend are working well together and agree it is time to bring on a new partner. The real estate manager you hired, David, has been very successful and you want to convince him to spend all of his efforts on the partnership.

You and your friend have decided to offer David a 20% interest in the partnerships future profits and losses if he agrees to work full-time for the partnership. David is not required to make a capital contribution to the partnership in exchange for receiving his partnership interest.

David readily accepted on November 1, 2022. At that time the partnership had $500,000 in outstanding bank debt. The partnership was also under threat of a potential lawsuit being filed by a tenant against the partnership, you, and your friend for the personal injuries caused by the former maintenance manager.

1. Threshold question: Does David have to make a contribution of property to the partnership in order to become a partner?

2. Incoming Partner Liability Issues

a. Shortly after David becomes partner, a lawsuit is filed and judgment in favor of the tenant for $150,000 is subsequently entered. Besides the partnership, which partners are potentially liable for this liability?

b. Is David liable for the debt owed to the bank?

c. Your friend is able to work out a release of the liability to the tenant for herself/himself. Does that release also apply to you?

d. David is very excited about being a partner and enters into a contract with a company to help develop a new piece of property. It becomes clear very quickly that the partnership is not going to be able to perform on its end and it breaches the contract.

i. The company only sues David for the breach of contract and is seeking $400,000 in damages for lost profits. Who is potentially liable for the breach of contract?

ii. The company elects to modify its complaint and sues all of the partners and the partnership. Who is potentially liable for the breach of contract?

iii. The company subsequently receives a judgment of $400,000 for the breach of contract. Of the three partners, you are the only one that has enough liquid assets to pay the judgment. What rights do you have with respect to the partnership and the other partners if you pay the judgment in full out of your own funds?