February 2021 Second Example Ten-point Answers to Virginia Essay Questions
February 2021 - QUESTION 9 – VIRGINIA BAR EXAMINATION
Arnold, Burton and Clyde practiced law in Poquoson, Virginia, under the firm name of Arnold, Burton & Clyde, Attorneys at Law. Each had contributed the sum of $20,000 as operating capital when the firm was first established, and they rented their office space. They had no agreement covering their relationship but often referred to themselves as "equal partners." On June 30, 2020, Burton was killed in an automobile accident. On July 24, 2020, the firm paid Burton's widow the sum of $10,000 representing the unpaid balance of Burton's share of the net earnings of the firm for the first six months of 2020, which included his share of work in progress.
Arnold and Clyde carried on the practice after Burton's death, using the same stationery and without changing the firm's name. As of December 31, 2020, the firm showed a net profit of $600,000 for the year, there having been several substantial cases that were initiated in August of 2020 and settled in the last few months of the year. The firm records also showed two obligations payable in March of 2021; one for $15,000 incurred by purchasing a computer in March of 2020, and the other for $5,000 related to computer software purchased after Burton's death. All other expenses of the firm had been paid during 2020.
Burton's widow, who was also his Executrix, called on Arnold and Clyde in January of 2021 and asked for Burton's share of the earnings of the firm during the latter half of 2020 for fees collected after his death, and for his share of firm assets and for his cash contribution. She also asked that she be given a statement of the financial relationship between the law firm and herself as Burton's Executrix.
|(a)||What was the legal effect of Burton’s death on the partnership? Explain fully.|
|(b)||Assuming the absence of any agreement among the partners as to the rights of the personal representative of a deceased partner against the partnership, what, if any, claim did Burton's Executrix have against the firm for: (1) firm assets, (2) fees collected after Burton’s death, and (3) Burton’s cash contribution to capital? Explain fully.|
|(c)||Does Burton's estate have an obligation to pay any part of the charge for the computer, or the charge for the software? Explain fully.|
|(d)||Can Arnold and Clyde continue to use the name “Arnold, Burton & Clyde, Attorneys at Law” and, if so, for how long? Explain fully with reference to the Virginia Rules of Professional Conduct.|
February 2021 - QUESTION 9 – EXAMPLE ANSWER #1
a. Burton’s death reflected a dissociation of the partnership.
Here, Arnold, Burton and Clyde were members of a general partnership. It lacked formalities and we are not told they filed any forms with the SCC indicating anything to the contrary.
In a general partnership, each partner is presumed to profit in proportion to their capital contribution. For example, because each of the three partners contributed equal amounts to form the relationship and referred to themselves as “equal partners” and in the absence of articles of incorporation or bylaws stating otherwise, the partners are presumed to share in the profits in the same proportions.
Burton’s death indicated a dissociation of Burton from the partnership. It is up to the remaining general partners (Arnold and Cylde) whether they choose to wind up and dissolve the partnership or carry on without Burton. We are told they carried on without Burton.
b. Assuming the absence of an agreement regarding a deceased partners rights in the partnership, the deceased partner’s personal representative has rights to the deceased’s share of the firm assets and capital contribution, as well as any profits for which he earned while a living, participating partner.
In a member’s dissociation from a general partnership, and in the absence of any agreement otherwise, they are entitled to their share of the capital contributions made to the partnership and their share of the firm’s assets. Here, Burton’s personal representative is entitled to $20,000 for Burton’s capital contribution. His estate is entitled to one-third of the firm assets, which can be provided in cash should the remaining partners decide to carry on with the business. Here, we are told that Arnold and Clyde carry on so they should provide Burton’s personal representative with the cash value of one-third of the firm’s assets.
In a general partnership, each partner is not guaranteed a salary amount, but they are entitled to their share of profits earned. Burton’s estate is not entitled to fees collected after his death for the cases assumed after Burton’s dissociation. However, Burton is entitled to the $10,000 for his share of the work prior to his passing.
c. Burton’s estate has an obligation to pay for one-third of the computer purchased in March 2020, prior to Burton’s death, and does not have an obligation for the computer software purchased subsequent to his death which functioned as a disssociation.
In the absence of an agreement otherwise, the partnership appears to be one where each of the three partners provides an equal share of the capital contributions. Here, the $15,000 computer was purchased in March 2020, when Burton was still alive, prior to his death on June 30, 2020. Therefore, Burton owed $5,000 to the partnership for the computer that should be settled by his estate.
Burton’s estate does not have liablity for the software acquisition following Burton’s death. Burton’s death acted as a dissociation which keeps the dissociated partner liable for debts incurred prior to the dissociation, here death, but does not create liability for future debts after the dissociation.
d. According to the VA Rules for Professional Conduct, the firm name including Burton’s name can continue to be used indefinitely.
VA requires that lawfirm names not be misleading or include names of lawyers not longer associated with the firm. However, in the case of dissociation as a result of death, the VA Rules of Professional Conduct do not require the deceased partner’s name be removed as long as the partner was living and a participating member of the firm at the the time of its naming.
February 2021 - QUESTION 9 – EXAMPLE ANSWER #2
(a) Legal effect of Burton's death
A partnership is an agreement between two or more people to carry on a for-profit business together as co-owners. A formal written agreement is not required. In the absence of an agreement to the contrary, partners will share losses and income of the partnership equally. During the life of the partnership a partner may not demand a distribution, but he may have his share of income credited to his partnership account, which is established based on his contributions to the partnership. A partnership can either be for a specific time or purpose, or it may be for an indefinite length of time. A partner has the ability to withdraw from a partnership at any time, though not necessarily the right to do so. If a partner withdraws from a partnership for a limited time or purpose, the withdrawal is wrongful and will trigger the termination of the partnership. However, a partner may withdraw at will from a partnership of indefinite duration.
Here, Arnold, Burton & Clyde, Attorneys at Law (ABC) appears to have been a partnership of unlimited duration, since there is no indication of a time frame or a specific single purpose limiting the partnership's existence. Thus, any partner had the power and right to withdraw from the partnership with appropriate notice, so long as it was not in violation of the partnership agreement. When Burton died, he was automatically dissociated from the partnership; however, under these circumstances, the partnership may continue operating as before.
(b) Claims of Burton's Executrix
Upon withdrawal, a partner has the right to have his partnership interest bought-out by the partnership. This includes a payment of any amount in his partnership account and a payment of his share of the partnership's value. The value of the partnership is calculated as if the partnership were wound up at the date of the withdrawal, and will be the greater of the value of it's liquidated assets or it's value as a going concern. The partnership must pay it's estimate of the dissociated partner's share within 120 days of dissociation. The partner may seek an accounting in court if he disagrees with the partnership's estimate. When a partner dies, his partnership interest becomes part of his estate. His executor, heir, or assignee is not entitled to a voting power, but is entitled to receive his share of partnership income and his partnership account payment.
(b)(1) Firm assets
Burton's estate is entitled to receive a buy-out payment as described above. With regard to the firm assets, this means Burton's estate is entitled to a payment of his share of the partnership's value calculated as if the partnership were wound up on the date of his death, either as the amount of its liquidated assets or its value as a going concern, whichever is greater.
(b)(2) Fees collected after Burton's death
Once a partner withdraws from a partnership, he no longer has a right to receive a share of any income acquired after his withdrawal. Here, Burton's estate has no entitlement to the fees collected after his death because he is treated as having withdrawn as of his death. The facts indicate that a substantial portion of the $600,000 net profit of 2020 was derived from a substantial number of cases initiated in August and settled in the last few months of the year. Since this income was earned after Burton's death, his estate is not entitled to a share of those fees.
(b)(3) Cash contribution to capital
As described above, a withdrawing partner is entitled to receive a payment of any amount in his partnership account upon withdrawal. The partner's partnership account is initially funded by that partner's capital contributions to the partnership. Any share of income or losses that are not distributed are thereafter credited to the partner's partnership account.
Here, Burton's cash contribution to the partnership's capital should be reflected in Burton's partnership account. His estate is entitled to receive the full value of that partnership account.
(c) Burton's estate is obligated to pay the charge for the computer, but not the software.
Absent an agreement to the contrary, partners will share income and losses of the partnership equally. Further, a partner can be held personally liable for any partnership obligation or debt. However, a partner is not liable for losses or expenses incurred after his withdrawal, except for reasonable costs and expenses incurred in winding up a terminated partnership.
Here, the $15,000 computer was purchased by the partnership in March 2020, prior to Burton's death in June 2020. Since he was a partner at the time that this expense was incurred, he must share in the expense equally with the other two partners. Thus, a $5,000 expense should be credited against his partnership account. Regarding the software, since it was purchased after Burton's death and is not a cost related to winding up the partnership, Burton would not share in that expense. Accordingly, Burton's estate should only have to pay a portion of the cost of the computer. Assuming the value of Burton's partnership account and partnership interest payment is greater than $5,000, his payment will simply be reduced by that amount.
(d) The Partnership may continue to use the name Arnold, Burton, & Clyde, Attorneys at Law, but only as long as it does so continually without interruption.
The Virginia Rules of Professional Conduct restrict the kind of names and titles a law firm may use to prevent the law firm's name from being misleading. A law firm may not continue to use the name of a partner who has left the partnership. However, a partnership may continue to use the name of a deceased partner if that partner was still a partner at the time of his death. This remains true so long as the partnership continues to operate under that name; once the partnership changes it's name, however, it cannot change back later to include the deceased partner's name again.
Here, Arnold, Burton, & Clyde, Attorneys at Law, may continue to use Burton's name so long as they do so continuously. Once they change the name, they cannot later return to use it.