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Reliable equipment restoration incorporated

FACT SITUATION:  Reliable Equipment Restoration Incorporated (hereafter RER) is a generalpartnership engaged in the business of buying, selling and restoring used heavy equipment. RER’s originalpartners were Roger Martin and Claus Kent.  They formed the partnership on January 12, 1997, under anoral partnership agreement that provided that the partners would share profits equally.  There was noagreement as to how the partners would share losses.  At the time the partnership was formed, Martincontributed $320,000 and Kent contributed $80,000.

On December 12, 1998, RER hired Karen Baker to be a salesperson and to assist in purchasing used equipment for RER’s inventory.  On December 15, 1998, Martin instructed Baker to negotiate the purchase of a used airplane from Jackson without disclosing that Baker was acting on RER’s behalf.  Martin thought that Baker could negotiate a better price if Jackson was not aware that the airplane was being acquired for RER.  Baker contracted with Jackson without disclosing that the airplane was being purchased for RER.  The agreement provided that Jackson would deliver the airplane to Baker on January 2, 1999, at which time the purchase price was to be paid.  On January 2, 1999, Jackson attempted to deliver the used airplane purchased for RER by Baker.  Baker, acting on Martin’s instructions, refused to accept delivery or to pay the purchase price.

On December 20, 1998, Kent assigned Kent’s partnership interest in RER to George Grey.  On December 31, 1998, Kent advised Martin of the assignment to Grey.  On January 11, 1999, Grey contacted Martin and demanded to inspect the partnership books and to participate in the management of partnership affairs, including voting on partnership decisions.

On January 13, 1999, it was determined that RER had incurred an operating loss of $160,000 in 1998.  Martin demanded that Kent contribute $80,000 to the partnership to account for Kent’s share of the loss.  Kent refused to contribute.

On January 28, 1999, Fine Equipment Parts Corp., a creditor of RER, sued RER and Martin for unpaid bills totaling $92,000. RER had not paid the bills because of a cash shortfall caused by the 1998 operating loss.

      Jackson has taken the following position:

  • Baker is responsible for any damages incurred by Jackson as a result of RER’s refusal to accept delivery or pay the purchase price.

Martin has taken the following position:

  • Grey is not entitled to inspect the partnership books or to participate in the management of the partnership.

  • Only the partnership is liable for the amounts owed to Fine Equipment Parts Corp., or, in the alternative, Martin’s personal liability is limited to 50% of the total of the unpaid bills.

Kent has taken the following position:

  • Only Martin is liable for the 1998 operating loss because of the assignment to Grey of Kent’s partnership interest.

  • Kent’s assignment of his partnership interest caused automatic dissolution of the partnership.

  • Any personal liability of the partners for the 1998 operating loss should be allocated between them on the basis of their original capital contributions

Question: Determine whether each of the above positions is correct and state the reasons for your conclusions.



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