Question

Argue both sides to this case

Bill runs a dry cleaning store called Bill’s Dry Cleaning. He is in deep financial trouble. His bank will no longer give him any credit and is threatening to demand immediate repayment of all money it has loaned to his business. Bill also owes money to other creditors and vendors.

Bill is desperate, so he approaches Christine, a very rich lady, and asks her to refinance his business. Christine reviews the business and its operations and says to Bill, “Listen, you’re a great dry cleaner but a lousy businessman. I’ll bail you out, but we have to divide up responsibilities a bit. If we’re going to make this business work, we have to be stricter about it. First, no more credit to professors. They’re lousy at paying their bills on time. Second, I want to determine who gets paid when. One of the arts of staying in business is stretching out your accounts payable. So, before you pay anyone, you check with me. Also, I want some upside potential. So long as you owe me money, I want 12% interest on whatever you owe me or 12% of the profits, whichever is higher. You pay me the 12% monthly, and quarterly I’ll decide whether to keep the past three month’s interest or take my share of the past three month’s profits.”

​Bill accepts Christine’s terms, with one condition: “We have to pay the employees on time. If we have the money, we pay them.” Christine accepts Bill’s condition, pays off the loan from the bank, and provides additional working capital to the business.

​The business continues to operate under the same name, and no one except Bill knows about Christine’s involvement. Bill stops extending credit to professors. Each month Christine reviews Bill’s accounts payable and sets the priorities for payment as follows: (1) pay Christine the money owed her; (2) pay overdue bills from people Bill intends to buy from again; (3) pay overdue bills from other people who are threatening to sue; and (4) pay others. Christine never does take a percentage of the profit because the 12% interest figure is always higher.

​Bill makes all decisions about which vendors to use. He also makes all personnel decisions (hiring, firing, salaries, etc.). Despite Christine’s help, the business fails in less than a year. Bill owes Christine $350,000; he owes creditors a total of $150,000 and $25,000 in unpaid wages to three employees. Bill has no money left.

Question: Are Bill and Christine partners, and if so, what kind of partners are they, and how (if at all) can the creditors and the employees collect from Christine? Explain.

Answer 1

Answer

Let us understand the concept one by one.

LET US FIRST UNDERSTAND THE ESSENTIALS OF THE PARTNERSHIP

1. CONTRACT FOR PARTNERSHIP - There must be a contract between both the person to form the partnership. If there is no contract between the person then there will be no partnership as general.

2. CARRYING ON OF THE BUSINESS IN THE PARTNERSHIP - They must have agreed to carry on any business in the partnership. Point to be noted that only sharing of profit of the property will cont constitute the partnership.

3. SHARING OF PROFIT- Both person must have agreed to share the profit in some ratio.Sharing of profit include the term sharing of loss.

4. MUTUAL AGENCY- Its mean that the business must be carried on by all the partner or by any of them on the behalf of all the partner.

TYPE OF PARTNERS FOR OUR UNDERSTANDING

1. ACTIVE PARTNER- Active partners means a person who invest money in the partnership, takes day to day decision in the partnership and share the profit and loss.

2. SLEEPING AND DORMANT PARTNER- Sleeping Partner is the partner the name of whom doesn't appear in the partnership. He just invest the money and share the profit and loss in the Partnership.He also doesn't participate in the day to day decision making in the partnership.

In the question, Mr. Bill and  Christine’s are not the partners for the following reasons:

1. There is no partnership agreement between them and it is one of the essential feature of the partnership to have the agreement

2. Christine’s just invested money in the business and as a matter of facts, taking decision.

3. In the question Christine’s said that Mr Bill need to pay interest or the share of the profit to Christine’s as long as Bill owes money to the lady.

4. The employees can sue Mr Bill for the overdue.

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