Jack for (a) one-half of the $500,000 he had paid to partnership creditors and (b) one-half of $80,000, the reasonable value of Charles’s services during the operation of the partnership. Who will prevail and why?

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Jack for (a) one-half of the $500,000 he had paid to partnership creditors and (b) one-half of $80,000, the reasonable value of Charles’s services during the operation of the partnership. Who will prevail and why?

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Charles and Jack orally agreed to become partners in a tool and die business. Charles, who had experience in tool and die work, was to operate the business. Jack was to take no active part but was to contribute the entire $500,000 capitalization. Charles worked ten hours a day at the plant, for which he was paid nothing. Nevertheless, despite Charles’s best efforts, the business failed. The $500,000 capital was depleted, and the partnership owed $500,000 in debts. Prior to the failure of the partnership business, Jack became personally insolvent; consequently, the creditors of the partnership collected the entire $500,000 indebtedness from Charles, who was forced to sell his home and farm to satisfy the indebtedness. Jack later regained his financial responsibility, and Charles brought an appropriate action against Jack for (a) one-half of the $500,000 he had paid to partnership creditors and (b) one-half of $80,000, the reasonable value of Charles’s services during the operation of the partnership. Who will prevail and why?

Charles and Jack orally agreed to become partners in a tool and die business. Charles, who had experience in tool and die work, was to operate the business. Jack was to take no active part but was to contribute the entire $500,000 capitalization. Charles worked ten hours a day at the plant, for which he was paid nothing. Nevertheless, despite Charles’s best efforts, the business failed. The $500,000 capital was depleted, and the partnership owed $500,000 in debts. Prior to the failure of the partnership business, Jack became personally insolvent; consequently, the creditors of the partnership collected the entire $500,000 indebtedness from Charles, who was forced to sell his home and farm to satisfy the indebtedness. Jack later regained his financial responsibility, and Charles brought an appropriate action against Jack for (a) one-half of the $500,000 he had paid to partnership creditors and (b) one-half of $80,000, the reasonable value of Charles’s services during the operation of the partnership. Who will prevail and why?

Explanation & AnswerSolution by a verified expert

Explanation

In this case, the total loss was of $1,000,000, including $500,000 each of the capital and debts. Individual J had already contributed to the inception of the partnership, out of which Individual J's share of loss can be settled. On the other side, Individual C has to pay the share of debt out of pocket because Individual C does not have any capital to adjust.

Sample Response

Individual C cannot recover the amount, based on Section 401 of Revised UPA and Comment 3 under Section 18(a) of UPA. As per the acts, the profits and losses shall be distributed equally amongst the partners in the absence of any such clause in the partnership agreement.

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