Peter, Paul, and Mary operate a pottery studio in Seaside, California called "Puff's Pottery Shoppe & Studio" (Puff's). Peter contributed $5,000.00 while Mary and Paul contributed $30,000.00 each to the partnership five years ago and despite a rough start, Puff's became wildly popular and profitable two years ago. Artists from California to Maine and places between regularly come to Puff's to practice their art amidst the stunning beauty of the central coast.

Recently, Peter has upon difficult times in his personal financial life. For the past year, he has been on the verge of bankruptcy. In an act of desperation, Peter caused Puff's to obtain business loans in the amount of $420,000 through a contractual relationship with Krystle Twinkles Art Gallery and secretly diverted the money to his personal account. Paul and Mary regularly review the books and records of the business, but Peter successfully hid the existence of the loans by not recording them in the business ledger.

Meanwhile, Mary decided that she wanted more time to focus on her family. After discussing it at great length with a close friend and fellow potter, Mary decided to transfer her management and financial interests in the partnership to Yolanda. Yolanda took to her new roles and responsibilities with great enthusiasm. While reviewing Puffs books and records last week, Yolanda discovered a discrepancy and ultimately uncovered Peter's secret loans. By Yolanda's estimation, Puff's assets arc worth $90,000, Paul has assets of $25,000.00 and Mary has personal assets valued at $15, 000.00.

Upon learning about the secret loans, Paul fell betrayed and needed some time to calm down and refocus on the partnership. He left on a trip to Europe and was expected to return last week but he has not been seen at Puff's since.

1. Based on the scenario briefly discuss whether:

• the transfer of Mary's interests to Yolanda is valid in whole or in part.
• Puffs is liable for the loans diverted by Peter in whole or in part.
• Peter, Paul, or Mary is liable for the loans diverted by Peter in whole or part.
• Paul's absence has terminated the partnership and any possible liability that he may owe. (15 marks)

1. Looking at the facts of the scenario, suggest to Mary the most suitable type of entity that should have been chosen. (20 marks)