Jack and Mari decided to open a new bakery and pastry shop in Encino. On 10 Janu
ID: 348262 • Letter: J
Question
Jack and Mari decided to open a new bakery and pastry shop in Encino. On 10 January 2000 they entered into a written agreement providing that each of them would contribute $50,000 to the capital of the business. Jack and Mari agreed to work full-time for the partnership. It was agreed that both Jack and Mari would have authority to buy and sell property on behalf of the business; they would also have the authority to borrow money for the partnership. They agreed that profits would be shared equally. The business was to be called “Romulus Bakery and Pastry Partnership”.
On 11 January 2000 Jack and Mari made an arrangement with Rob for Rob to become the pastry chef of Romulus. Rob did not sign the partnership agreement; however Jack, Mari and Rob agreed in writing that Rob would work at least 40 hours per week at Romulus. The agreement also provided that Rob was to be paid the minimum hourly wage plus an additional $15 per hour; in addition to this he was to receive 10% of any profits which Romulus might make.
On 12 January 2000 Jack and Mari made an arrangement with Lulu to use a building which Lulu owned as a location for the bakery and pastry shop. The written agreement between Jack, Mari and Lulu provided that Romulus would be allowed to occupy the building for at least one year. Jack and Mari also agreed that Lulu would be paid $500 per month and also 10% of any profits that Romulus might make.
Jack and Mari needed more capital to establish the business. Ned, a friend of Jack’s, said: “I will invest $50,000 in your business, but I don’t want to be a partner.” Jack said: “That’s fine – you will not be a partner but you will get 10% of all profits of the business”. On 2 February 2000 Ned gave Jack and Mari a check for $50,000. At the same time they each signed a document that stated: “Jack and Mari hereby acknowledge that Ned has invested $50,000 in Romulus Bakery and Pastry Partnership. Ned shall be entitled to 10% of the profits of Romulus Partnership. It is hereby agreed that Ned shall not be a partner in Romulus Bakery and Pastry Partnership.”
On 1 March 2000 Jack negotiated a written agreement with Santa Rita Bank; the bank loaned $50,000 to Romulus Bakery and Pastry Partnership.
Jack and Mari needed still more capital for the operation of the business. Mari discussed the situation with her old friend Mr. Moneybags (a multi-billionaire). On 20 May 2000 Mr. Moneybags said: “If you have trouble borrowing money, you can always tell people that I am your partner”. On 21 May 2000 Jack and Mari approached Morris, an officer at the Bank of Money, about the possibility of borrowing money from the Bank. Mari said: “Mr. Moneybags is our new partner”. Morris replied: “We will lend you $100,000”.
Romulus was not successful. About 18 months after it began doing business, the bakery and pastry shop closed. Romulus still owed $49,000 to the Santa Rita Bank and $99,000 to the Bank of Money. The Santa Rita Bank and the Bank of Money each brought lawsuits against Romulus, Jack, Mari, Rob, Lulu, Ned and Mr. Moneybags in an attempt to recover payment for the loans that they had made to Romulus Partnership.
What would the result of those suits be? Explain.
Explanation / Answer
This is a very clear case where the debts are not being paid back to the creditors and is a very common case but in this case there is generally no mortgage or security that has been kept in the bank, hence both the loans are examples of unsecured loan and in these cases it becomes tough for the bank to collect the debt that is pending and here there are two banks involved, the Santa Rita Bank and the Bank of Money which makes the situation more complex. In this case Lulu, Ned, Rob and Mr. Moneybags won't be liable because none of them were partners in the organization rather they worked for the organization and provided wealth at some point. Mr. Moneybags name was used to get loan from the Bank of Money but there was no written formal document in this case, hence he is also not liable.
Romulus as an organization is liable along with Jack and Mari, the sole partners in the organization. As the loan is unsecured, the banks need to justify the transaction through bank account transfers and once that is done there are various ways through which the debt can be collected. The bank can put a lien on the business and the property owned by the business, the bank can aske for compensation along with penalty if there is delay in the payment for long. In this case the amount recovered needs to be divided by both the banks depending upon the investment that they have made. The business will be sued in this case and even the personal assets of Jack and Mari can be taken in in order to repay the loan.
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