Fred is a limited partner in the Bolton and Jost, Limited Partnership (Bolton & Jost). Bolton and Jost have developed several large apartment buildings in Iowa. In July of 2024, one of the general partners, Jost, became ill. Fred stepped in, took over Jost’s duties, and has been actively involved on a daily basis in running the Limited Partnership ever since. Jon and Ross have approached Fred and asked him to join them in forming a new partnership that would own apartment buildings in direct competition with Bolton and Jost.

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First, let's outline the scenario in plain terms: Fred is a limited partner in Bolton & Jost, but he has actively taken over day-to-day duties when a general partner fell ill, and now he is involved in running the partnership. Separately, Fred is considering forming a new partnership with Jon and Ross that would compete with Bolton & Jost.
Option A says: 'Since Fred is a limited partner in Bolton and Jost, he owes a fiduciary duty to the Bolton and Jost partnership.' While limited partners do owe limited fiduciary duties to the partnership and other partners, this statement is incomplete because it does not address the issue of competition and the effect of Fred’s active involvement on his status. Moreover, the duty to the partnership does not automatically bar competitive ventures; the conflict analysis is more nuanced as the partnership agreement and applicable statutes may impose restrictions.
Option B says: 'Since Fred is a limited partner in Bolton and Jost, he is free to enter into the new partnership with Jon and Ross.' This is overly broad and incorrect. A limited partner is generally restricted from participating in management beyond a passive role, and active management could cause loss of limited liability status or create fiduciary concerns. The mere fact of being a limited partner does not automatically grant freedom to compete; there are duties and potential conflicts of interest that must be considered.
Option C says: 'Fred is free to enter into a partnership with Jon and Ross, since the fiduciary duty of general partners has little effect upon the business interests of their limited partners.' This is inaccurate because facts show Fred has assumed day-to-day management duties, which can intensify fiduciary concerns and potentially eliminate his limited partner status or at least create substantial conflicts of interest. The notion that general partner fiduciary duties have little effect on limited partners’ interests misstates how independence of roles operates and ignores the risk of losing limited liability protection.
Option D says: 'Fred’s business activities with Bolton and Jost have compromised his limited partner status, and his fiduciary obligations to Bolton and Jost now preclude him from competing against Bolton and Jost in another partnership.' This option accurately captures the core legal principle: by actively managing the partnership, Fred may be treated as a de facto general partner for purposes of fiduciary duties, which implicates conflicts of interest and could affect his status as a limited partner. Those fiduciary duties to the existing partnership can restrict competition and create the risk of liability if he engages in competing ventures, especially while still involved in Bolton & Jost.
In summary, the reasoning shows that A and B oversimplify or misstate the duties and consequences for a limited partner who becomes involved in management. C misstates the impact of general partner duties on a limited partner’s situation. D correctly reflects the risk to Fred’s limited partner status and the fiduciary constraints that would preclude him from competing with Bolton & Jost in a new venture. The nuanced understanding of fiduciary duties and status changes under partnership law is the key distinction here.

ACCT:4300:0001 Fall25 Examination #3 (final exam) - Accounting Ethics and Law- Requires Respondus LockDown Browser

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ACCT:4300:0001 Fall25 Examination #3 (final exam) - Accounting Ethics and Law- Requires Respondus LockDown Browser

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Log in for full answers

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