Ellen Doran is an accounting analyst. She made a name for herself in the Florida panhandle with several small businesses. Growing tired of working seven days per week, Doran formed a partnership with a local software saleswoman, Penelope Bitz. They agreed verbally as to how expenses and such would be handled-each department would be its own profit center, and each partner would be allocated 100% of the profit from her individual department. Although they agreed to this via e-mail, the partners failed to draft a formal written partnership agreement. Due to Dorans business contacts in the area, her department was very profitable. Bitz's department, on the other hand, was not profitable, and she grew resentful of Dorans growing profits. Seven weeks into the partnership, Doran realized that Bitz had cleaned out the partnership bank account and closed it. Three years of litigation ensued over the $5,000 profits: The results were dismal. Hundreds of thousands of dollars were spent in legal and accounting fees, not to mention the time each former partner spent on the case. The judge ruled that in absence of a written partnership agreement, Doran had mutual agency liability for the actions of Bitz. Doran filed for bankruptcy, and Bitz lost most of her clients in the aftermath.
Requirements
1. Did either of the partners commit a fraud?
2. Should a verbal agreement be as binding as a formal, written partnership agreement?
3. What could the partners have done to protect themselves from the situation?