Reference no: EM133450996

Case Study: One of the vexing problems in partnership law involves management rights in partnerships with only two partners. In the event of an internal dispute about a matter of partnership business, William Draper Lewis suggested that the UPA as written made the result clear: "A contract made by one of two partners against the protest of the other is not made by a majority. The implication from the section as worded, therefore, is that such a contract, the third person knowing of the protest, would not be a partnership contract." William Draper Lewis, The Uniform Partnership Act-A Reply to Mr. Crane's Criticism, 29 Harv. L. Rev. 291, 302 (1911). This view has not always prevailed in the courts. In the well-known case of National Biscuit Company, Inc. v. Stroud, 106 S.E.2d 692 (N.C. 1959), the Supreme Court of North Carolina faced this issue in the context of a partnership that operated a grocery store. One of the two partners (Stroud) decided that he no longer wanted to purchase bread from Nabisco, and he told Nabisco that he would not be personally liable for any future orders. When the other partner (Freeman) subsequently ordered bread, Nabisco delivered. Upon the failure of the partnership to pay for the bread, Nabisco sued Stroud for payment. The court held Stroud personally liable, reasoning:

Freeman as a general partner with Stroud, with no restrictions on his authority to act within the scope of the partnership business so far as the agreed statement of facts shows, had under the Uniform Partnership Act "equal rights in the management and conduct of the partnership business." Under [UPA §18(h)], Stroud, his co-partner, could not restrict the power and authority of Freeman to buy bread for the partnership as a going concern, for such a purchase was an "ordinary matter connected with the partnership business," for the purpose of its business and within its scope, because in the very nature of things Stroud was not, and could not be, a majority of the partners. Therefore, Freeman's purchases of bread from plaintiff for Stroud's Food Center as a going concern bound the partnership and his co-partner Stroud. . . .

While this case neatly displays the tension between the rules governing management rights and the rules governing authority, cases involving third-party claims against divided two-person partnerships are fairly rare.*1 A more common problem arises when a rogue partner acts in a manner that exposes other partners to liability. As you evaluate that problem, consider the possible justifications for holding partners responsible for fraudulent behavior that they did not condone.

For the sake of discussing the remaining problems in this chapter, assume that Lloyd Park and John Blaylock formed a general partnership, later adding a third partner named Kenneth Wheeler, who had expertise in real estate development. Wheeler was not licensed to practice in California, but he was licensed to practice in Arizona. In December 2018, Wheeler engaged in the unauthorized practice of law in several real estate transactions and began misappropriating client funds in connection with those transactions.

Questions Presented:

(1) If parties to the foregoing real estate transactions sued the law firm partnership because of Wheeler's actions, under what circumstances would the law firm or its partners incur liability for Wheeler's actions?

(2) If the law firm instructed Wheeler not to practice law until he obtained his license, would that influence your answer? Would it matter to your answer that the misappropriations would have been difficult for the other partners to detect?

(3) What preventative decisions, documents, policies and so forth, been valuable to prevent liability to the other partners.