BLAW 308 PRACTICE TEST
FALL 2020
PROFESSOR PARDAU
Ari, Ben and Cat opened up a new pizzeria shop in Northridge on the corner of Reseda and
Nordhoff. Ari had no experience in the restaurant business but contributed all the money
($100,000) to back the venture. Ben had no money but had experience working at and
managing restaurants. Cat had no money and had no experience with restaurants, but was a
very experienced marketer and was also an accounting and business law major at CSUN. Based
on their respective skills (Ari’s money to get the business off the ground, Ben’s managing the
day-to-day operations and Cat’s promotion and marketing of the business and her keeping also
of all the books and accounting and reviewing any legal agreements).
There was no written or other oral agreement between Ari, Ben and Cat.
The pizzeria opened with great fanfare despite the pandemic. Cat spent $20,000 on marketing
and promotion to help launch the business. Sales were only average at the beginning and that
was mostly because of heavy discounting that was part of the promotional efforts. Within a
matter of five or six weeks, business pretty much slowed to near nothing. By week eight after
the date of opening, Ari, Ben and Cat had a ZOOM call. It went like this:
“So, Cat, you keep the books and accounts, how much money do we have left in this venture?”,
asked Ben.
“I am not at liberty to say”, said Cat
“Not at liberty say??”, said Ari rather incredulously. “It’s my effing money!! My $100K!!”
“Not so fast, buffalo breath”, said Ben. “It’s the money of the business. I put in hundreds of
hours of my time working my butt off and haven’t been paid a dime. I need to be
compensated!!”
“Well, I took this class BLAW at CSUN from Pardau and I believe we have what is known as a
“partnership”. That means we have to split the profits of the business. Since the business has
no profits, there is nothing to split.”
Unknown to Ari and Ben, Cat had spent $40,000 in total marketing expenses, all of which was
paid to a company that she (Cat) owned and operated. Also not known to Ari and Ben, there
was only $19.23 left over from the original $100,000 which was maintained in a separate bank
account that Cat opened with Wells Fargo when the business venture started.
Using the IRAC formula, describe the rights and obligations of Ari, Ben and Cat.
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MODEL ANSWER. STOP READING. DO NOT READ THIS UNTIL YOU TRY TO DRAFT YOUR OWN
ANSWER.
Issue(s): Was there a partnership established between Ari, Ben and Cat? If so, what rights and
obligations to Ari, Ben and Cat have to each other?
Rule(s): In the absence of a partnership agreement (whether written or oral), a partnership may
be established based on the conduct and statement of the parties, such as referring to each
other as partners and/or in the splitting profits and losses. If there is no partnership agreement
but a partnership is established, the default rules under RUPA kick in and profits and losses are
split equally among the partners and other applicable obligations such as Agency and joint
several liability will be triggered.
Partners are fiduciaries of the other which means that they must place the interests of the
other partners and the partnership overall above their own interests. A fiduciary duty is the
highest duty in the law, above ordinary standards of care. Under the umbrella of fiduciary duty,
there are a series of other duties including duties to account duties not to compete or to have
interests adverse to the partnership.
By law, partners are not employees of the partnership. However, an employer-employee
relationship may be established based on a separate written employment relationship between
the parties that is separate and apart from the partnership. The establishment of an
employment relationship is significant insofar as it gives the employee various rights, including
to bring discrimination suits or to receive unemployment benefits.
Application: While there is no evidence of a written or oral partnership agreement, based on
the conduct of the parties it does appear very likely that a partnership was established based
on the conduct of the parties. First, Ari, Ben and Cat each made their own initial contributions
to the partnership. Ari made cash contributions, Ben his management and operational skills of
the business and time, and Cat her marketing, accounting and legal skills and services. The
parties could have pre-agreed to a split on the percentage of the profits and losses of the
partnership, but given that they did not they would revert back to the default rules were it will
be split evenly, 1/3, 1/3 and 1/3. Cat erroneously stated that only profits are split among
partners, not noting that losses are as well.
As partners, Ari, Ben and Cat have fiduciary duties to the other, whereby they must place the
interests of the partnership above their own. Here, it seems that Cat fell well below that
standard by failing in her duty to account (she did not want to disclose the financial records of
the business) and also by her obvious “self-dealing” by directing funds of the partnership to her
side marketing business which she owned and operated and did not disclose to the other
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partners. With regard to Ari and Ben, there is no evidence from these facts that they violated
any fiduciary duties.
With regard to Ben’s claim that he is an employee, that would be a stretch. As noted above, by
a partnership relationship by and among the partners does not create a separate employeremployee relationship between a given partner and the partnership. To do that, a separate
written employment agreement between Ben and the partnership would have been required
as evidence that the partnership wished to establish an employment relationship with Ben. No
such evidence exists so Ben has no claim for “compensation” or wages for the time he has
spent so far.
As it stands now, each of the partners would have to forego their respective initial
contributions to the partnership. If they want the partnership to continue, each will have to
make additional contributions (in whatever format that may take – money, their services, etc.).
Both Ari and Ben would definitely have a claim against Cat for breach of fiduciary duties, failure
to account, conflicts of interest, failure to adhere to prohibition on duties to have interests that
are adverse to the partnership, etc. for her self-dealings on the payment of $40K of partnership
funds to her side business.
It is possible that Cat could claim there was never a partnership and no fiduciary duties are
owed, but that will be difficult for her to make given that she herself referred to the business as
a partnership.
CONCLUSIONS: For the reasons noted above, a partnership will be found to exist and Cat will
have been determined to violated her fiduciary and other related duties to the parternship.
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