SCENARIO:

Tom, Linda, and Zach are casual acquaintances. Each of them has a different set of business skills that they believed would be complimentary in forming a new business. Tom excels at creating visions, business development, marketing, and leadership. Linda is a shrewd investor and has access to capital through her own investment company. Zach is a technological wizard and can readily develop software solutions.

Tom had an idea for a new social media app, which he presented to Linda and Zach one day during a lunch meeting. Zach felt that he would be able to create the software and agreed to do so for a percentage of the profits. Linda stated that she would be willing to finance the project, also for a percentage of the profits. Before the end of the meal, the three toast "to new adventures" and agree to meet up again soon to work out the details.

Excited about the project, Tom immediately returned home and started to develop a business plan. Over the course of the following week, he contacted several public relations firms to get pricing for their help marketing the app and, after meeting with each one, decided that he would go with the firm which he felt would provide the best service at a reasonable cost. He executed a contract with the firm in the amount of $20,000 and then notified Linda that he would need the capital to cover the contract.

Linda wrote a check for the full amount from her investment company's checking account.

During this time, Zach started developing his ideas and, within two months, had an app that was operational and ready to launch. In an email to Linda and Tom, Zach said, "Hey guys, just wanted to let you know that the app is ready to go. I can have it uploaded this evening. Tom, are we ready with the PR?"

Tom responded, "Yes, I have spoken with them, and they have prepared the press releases. I just need to let them know when to send them out. I'll email the firm right now and tell them that we are launching tonight."

Within the next three months, profits from the app totaled over $150,000, which was sitting in an online account held by the app distributor. Eager for a paycheck, Zach emails Linda and Tom and states, "Hey guys, I see that our online account has reached over $150k! This should be a great payday for all of us. I would like to go ahead and have my share of $50,000 transferred out so I can pay some bills. Do each of you want your share now? Should we open a business checking account and dump the money into that before distributing it?"

Linda responds, "I don't mind holding off on my share of the profits, but I would like to have my initial loan to the company back because I have some other investment opportunities for which I would like to have that money. And Zach, I don't see how you would be entitled to $50,000.... After I get paid back my $20,000, then we all should get $43,333. Besides that, I think we need to reinvest some of that money in the business."

Zach became angry and sent a response back. "Linda, I did all of the development, and it's not like we even agreed that everyone should share equally. You paying the $20,000 to the PR firm was your contribution to the business, which you can have back out of your share of the profits just like my contribution of time and skill. Besides, I don't see how you should be entitled to anything above the $20k plus 4%. I mean, that would be a reasonable rate of interest on a loan anyone makes to the company and that's really all you did."

QUESTIONS:

1. Assume that when Tom made the agreement with the PR Firm, he failed to read the agreement closely. Instead of agreeing to a one-time payment of $20,000, Tom actually agreed to monthly payments for $20,000 over the course of the next year. If a court upholds the contract as being valid, could Zach and Linda's personal assets be at risk if it is determined they are partners?

a. No, because partners can never be held personally liable for the debts of the partnership.

b. No, they can only be held personally liable for the torts committed by a partner. They are not bound to contracts.

c. No, only Tom can be held personally liable for a contract he signed on behalf of the partnership.

d. Yes, they can be held personally liable if the partnerships assets are insufficient to cover the debt.

2. Did Tom exceed his authority when he signed the contract for PR services on behalf of the business if he did not disclose it to Zach and Linda prior to signing?

a. Not if a partnership exists because all partners are agents of the partnership for the acts occurring within the course of ordinary partnership business and neither Zach nor Linda repudiated the transaction.

b. Yes, Tom needed the permission of both Linda and Zach before signing the contract in order to have authority.

c. Tom had the authority to sign based on the language of the operating documents.

d. Since only Tom signed the contract, only Tom will be liable for it; therefore, obtaining Zach and Linda's permission was not necessary.

3. Assume Zach is presented with an opportunity from another tech company to develop software for a music sharing platform. By coincidence, a portion of the code he developed for the social media app could be used in the music sharing platform. Zach doesn't feel the need to disclose it to the group because he believes the opportunity doesn't involve anything that impacts Tom or Linda and they would never know that he reused the code. What is the best argument Tom and Linda have against Zach for violating their financial rights?

a. Zach has taken a financial opportunity away from their partnership by failing to ask Tom and Linda if they would like to develop a music app before agreeing to develop the app with another company.

b. Zach has reduced their share of the overall profits of their partnership by working for another company rather than exclusively for the partnership.

c. The code is protected as intellectual property of their partnership, and he has therefore appropriated property of the partnership.

d. Zach's actions amount to an inappropriate sale of his share in a profit-making element of the business, which reduces the value of Tom and Linda's remaining share.

4. Assume a partnership exists between Zach, Linda, and Tom and the state in which the business exists has the following statute: "177.1 (a) No partner shall have the right to withdraw any portion of partner's capital contribution until the dissolution of the partnership or rightful disassociation of the partner; (b) A payment or advance made by a partner to cover the obligation of a partnership constitutes a loan to the partnership which accrues reasonable interest from the date of the payment or advance." What is Linda's strongest argument for why she is entitled to a payment of $63,333 as opposed to $50,000?

a. She is entitled to her initial capital contribution of $20,000 plus a share of the remaining profits as a partner because the business is winding up due to the anticipatory disassociation by Zach.

b. Her contribution of $20,000 represented a loan to the business for which she is entitled to repayment in addition to a 1/3 share of the remaining profits ($43,333) as a partner.

c. $63,333 represents a fair distribution of her initial loan ($20,000) plus accrued interest on the loan ($43,333) over the lifetime of the business thus far.

d. Her contribution of $20,000 represented a capital contribution to the business for which she is entitled to repayment in addition to a 1/3 share of the remaining profits ($43,333) as a partner.

5. What is Zach's best argument for why Linda should not be considered a partner?

a. There was never an agreement to how much of the profit Linda was entitled.

b. There is no written agreement that Linda is a partner.

c. Linda did not participate in the management of the business. She merely made what amounts to a loan to the company.

d. Linda would not share in the losses of the business.