1. What form of entity have Demuth, Warren, and Oakley formed? What law governs the operation of the partnership and the rights of the partners? 

2. If the venture becomes insolvent (runs out of money to pay its regular monthly bills), will Demuth, Warren, and/or Oakley be liable for any, some, or all of the debt owed to Strand? If, just after the venture becomes insolvent, Demuth files for personal bankruptcy, will Warren and Oakley now be liable 100 percent for the debt owed to Strand? 

3. Assume that when Oakley finds out about the loan to Strand, she is so angered that she gives notice to Demuth that she is withdrawing from the partner-ship before the agreed-upon five-year period. What is the legal impact of Oakley’s dissociation on the partnership? Is the partnership automatically dissolved? Is Oakley still liable for the Strand debt and to any creditors to which the partnership owes money?

4. In Question 3 above, suppose that Demuth and Warren decide they cannot continue without Oak-ley’s expertise and they dissolve the partnership. In the process, they are forced to breach several
contracts with their vendors. What is Oakley’s postdissociation liability to Demuth and Warren for any damages suffered by breaching the vendor contracts?

5. Suppose that, instead of the conflict that developed, the parties end up being profitable on the venture and are eager to continue the business. What are the factors that the parties should consider in choosing a business entity that will suit the company’s needs now and in the future?

Demuth is a sole proprietor of a business that specializes in designing and manufacturing custom-made medical instruments for health care professionals. Several hospitals and physician practice groups have approached Demuth and asked him to design and produce a highly specialized surgical instrument that is currently unavailable in the market from larger manufacturers. Demuth, unable to finance the research and development costs, has convinced Warren, a private investor, to fund the project. Demuth also has recruited Oakley, a physician, to lend her medical expertise. Demuth has drafted a letter to Warren and Oakley thanking them for their confidence in the project and setting out certain terms for the venture. The letter is very brief and states that the parties will be equal participants in the business ven-ture intended to develop and manufacture a certain surgical instrument. Demuth will contribute his expertise, laboratory workspace, and manufacturing facilities to the project.  Warren will contribute $100,000 as a capital contribution, and Oakley will contribute medical expertise, research knowledge, and $10,000 in capital. The letter ends with a statement that the business venture will last for five years unless the parties mutually agree on extending the term. Profits or losses will be calculated annually, and each party will be paid in equal shares for any profits or bear equal losses. Warren and Oakley each write “Agreed” and sign and date the letter on the bottom. Demuth then goes on to hire a top engineer and purchases equipment to work on the Demuth-Warren-Oakley project. 

After a year of slow progress on the project, Demuth is concerned that the initial capital contribution is not going to be sufficient to carry the venture into its second year. Demuth approaches Warren for an additional $100,000. Warren, who is disgruntled about the slow progress, refuses. Demuth, anxious about keeping the venture afloat, negotiates a loanon behalf of the business with Strand, another private investor. With-out the knowledge of the other principals, Demuth signs the promissory note “ Demuth-Oakley-Warren Partnership, by Demuth, Partner.”