Partnership Joint and Several Liability PDF

Preview

Summary

Notes...

Description

PARTNERSHIP JOINT & SEVERAL LIABILITY 



All partners have joint liability for partnership debts and obligations o Joint liability means that all partners are sued together, and the resulting court order makes them all liable for the whole amount of the debt. o Example: You and I are partners in a building firm. The partnership borrowed $500,000 from the bank to develop houses on land the partnership owns. The property market has collapsed and the houses can old be sold at a loss. The partnership defaults on the loan. The bank sues you and I jointly as partners. The court will award a judgment against both of us, and if we fail to pay the judgment, the bank will sell the houses and land the partnership owns first. Let’s say they are able to recover $300,000 from the sale of partnership assets. The balance owed to the bank is $200,000. The bank would next seek the remaining balance out of the partners’ personal assets. Assuming I have more assets, the logical step for the bank to take is to seek the whole $200,000 from me. The law does not require the bank to seek $100,000 from me and $100,000 from you. This is because each partner is jointly liable for the partnership debts. I would be required to pay the enter $200,000 from my assets, and if you do not pay anything, then I can sue you for $100,000 assuming that the partnership agreement requires losses to be shared equally. All partners are jointly and severally liable for wrongful acts or omissions committed by a partner in the ordinary course of the partnership business. All partners are jointly and severally liable for misapplication of money or property. o Wrongful acts include torts (fraud, negligence, defamation and assault. Negligent driving by one partner resulting in an accident is a wrongful act for which the other partners might be held liable if it occurred in the ordinary course of the partnership business. o Ordinary course of the partnership business – court will look at what kind of activities the partnership might undertake as a normal part of its business. o Joint liable – all partners can be sued together and resulting court order makes each of them liable for the whole amount of the judgment o Severally liable – each partner can be sued individually for the whole amount of the claim o Liability for misapplication of money or property – Example: March 1998, partners in a small Melbourne law firm discovered that their taxation partner, Max Green, had been found dead in a Cambodian hotel room, having been severely beaten with a brick then strangled with a tie. As a result, the law firm’s trust accounts were investigated. Over $30 million in client money was missing. Instead of investing the client money in a tax minimisation scheme as he was supposed to, Green stole the money, used it for his own purposes in a series of shady schemes involving gems in Cambodia and Laos. The money was never recovered and Green’s killers never found. The partners knew nothing about Green’s theft of the money or scams. Regardless, the remaining partners were fully liable for Green’s misuse of the money belonging to the firm’s clients. Green’s activities led to a huge number of court cases involving not only the clients and the law firm but also banks, accountants and auditors. Choose partners carefully. Also note that the quickest way to lose your license to practice law – steal client money....