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Liability when a firm becomes insolvent

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Paula, Fred, and Stephanie agree that Paula and Fred will form and conduct a partnership business and that Stephanie will become a partner in two years. Stephanie agrees to lend the firm $5,000 and take 10 percent of the profits in lieu of interest. Without Stephanie's knowledge, Paula and Fred tell Harold that Stephanie is a partner, and Harold, relying on Stephanie's sound financial status, gives the firm credit. The firm later becomes insolvent, and Harold seeks to hold Stephanie liable as a partner.

Should Harold succeed?

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Solution Summary

This solution discusses the case of Paula, Fred, and Stephanie. The facts regarding the succession of Harold are thoroughly analyzed and discussed.

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There are a few different issues in this case. Paula, Fred, and Stephanie all agree to the terms of the partnership. Stephanie will be a partner in two years, but all three parties now enter into the agreement to conduct a partnership. Additionally, Stephanie provides $5,000 for a 10% claim on the profits. We must make certain assumptions in this case, and we are assuming that Stephanie will begin receiving 10% of the profits now, and not in two years, because the $5,000 was invested now. Also, we have to note the wording. ...

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