Business Organizations
Dennis – 2018 Spring
1. Partnerships
A. Formation
Fenwick v. Unemployment Compensation Commission
Partnership Formation; Partners vs. Employees – (pg. 79)
Rule: The sharing of profits does not alone create a partnership.
Facts: Appellant, the Unemployment Compensation Commission, sought a review of the Supreme Court of New Jersey’s decision to designate Respondent and Chesire as partners. Chesire, a receptionist for Respondent’s beauty salon, repeatedly asked for a raise from her fifteen dollars per week. Respondent was not certain if the amount of business would generate enough revenue to pay Chesire a higher salary. Respondent wanted to retain Chesire, so they entered an agreement wherein Respondent would pay Chesire her salary plus twenty percent of the profits. In the agreement, the parties are designated “partners”, but Chesire’s duties never changed post-agreement. [Note: The UCC is suing the employer because if the lady were an employee, the employer would have to pay employment taxes (which have to be paid if you have 8 employees)].
Issue: Whether Ms. Chesire was a partner or an employee of Mr. Fenwick?
Holding/Rationale: Despite the language in the agreement, Ms. Chesire was an employee; a partnership has not been established under the 8-factor test. Courts consider several elements when determining whether a partnership exists. Weighing all of these factors, the scale tips in favor of an employee-employer relationship.
8 Factor Test for Establishing a Partnership:
Intent of the parties
Right to share profits
Prima facie evidence of partnership, BUT no inference shall be drawn if such profits were received in payment as wages of an employee
Obligation to share in losses
Ownership and control of the partnership property and business; right to share in capital upon dissolution
Community of power in administration / management of the business
Language in the agreement
Conduct of the parties towards third persons (ex: on tax forms)
Rights of the parties upon dissolution
Notes: Five factors from UPA:
The agreement is evidential of intent, but not conclusive
2 or more persons
Business
Anticipation of profit
Profit sharing and joint control
Martin v. Peyton
Partners vs. Lenders – (pg. 84)
Rule: An agreement that offers a degree of control by a first party to protect first party’s assets should not be considered a partnership if factors as a whole indicate that the other party still maintains day-to-day control of the business.
Facts: Hall was a friend of Peyton’s, and Hall’s brokerage business was suffering. Peyton discussed helping Hall and his business, but needed to ensure that Hall’s business would discontinue their speculative, unwise investments. Peyton agreed to loan Hall $2.5 million in securities for Hall to secure $2 million in loans. In return, Peyton received Hall’s more speculative collateral and would receive a percentage of Hall’s profits. Peyton acquired the ability to review Hall’s books and veto certain investments. Plaintiff (Martin) is a creditor of the firm that has gone bankrupt, and Peyton is trying to claim that they’re not partners so they won’t be personally liable. Peyton argue there is no “voluntary association” –offered an option to become partners and turned it down; instead, characterize themselves as “lenders” so they would fall into category of creditors. Martin argues they are partners because they had the right to inspect books, had veto power, resignation of each member of the firm
Issue: Whether the conditions of the agreements between Peyton and Hall constituted a partnership between the two parties.
Holding/Rationale: The agreements did not establish a partnership. Although Respondents ensured that they had some control over the operations of Hall’s business, the controls they bargained for were to ensure that their investment was secure. Immediately prior to Respondent’s investment, Hall’s business was doing poorly due to bad decision-making and Respondents needed to prevent further bad decisions. Hall still was able to control the day-to-day affairs, and Respondents never had control to initiate their own ideas
Notes: General partnerships have unlimited personal liability for partners.
Policy Rationale: Protection of investors à encourages business lending à good for business
B. Fiduciary Duties
Meinhard v. Salmon
Fiduciary Obligations of Partners (Duty of Loyalty) – (pg. 97)
Rule: Members of a partnership owed duty of loyalty to each other and so must disclose opportunities that arise in order for both to have an equal chance to take advantage of it.
Facts: Walter J. Salmon (Defendant) entered into a lease for a hotel. Defendant, while in course of treaty with the lessor as to the execution of the lease, was in course of treaty with Meinhard (Plaintiff), for the necessary funds. Plaintiff and Defendant were involved in a joint venture in regards to the property, for better or worse. Defendant was the manager of the property. Near the end of the lease, Elbridge Gerry became the owner of the reversion, and he approached Defendant. The two entered into a new lease, which is owned and controlled by Defendant. Defendant did not tell Plaintiff about it. When Plaintiff found out about the new lease, he demanded that the lease be held in trust as an asset of the venture between Defendant and Plaintiff, which Defendant refused.
Issue: When a partner appropriates the benefit of the partnership without making any disclosure to the other partner, will that act be a breach of loyalty?
Holding/Rationale: Yes. Joint adventurers owe to one another the duty of the finest loyalty, while the enterprise continues. Partners in a venture have a fiduciary duty to each other. So, when an opportunity arises that can benefit both partners, but one partner takes advantage of it without informing the other, the fiduciary duty is deemed to have been breached. The opportunity belonged to the partnership, not to the individual partners, so one partner is considered to have stolen the opportunity from the partnership. Defendant held the lease as a fiduciary, for himself and another, sharers in a common venture. If he had revealed this fact to Gerry, Gerry would have laid before both of them his plans of a new lease. Defendant appropriated the preemptive opportunity that was
rest in the partnership is in a share of the profits/surplus, not in the pieces of property. A conveyance of partnership property by one partner held in the name of the partnership is made in the name of the partnership and not as a conveyance of the individual interests of the partners.
Facts: Putnam and her husband owned one half of a business, Frog Jump Gin, with another couple (Charltons). After Putnam’s husband died the business became unprofitable, and the Shoafs (appellees) offered to take Putnam’s share of the business. Putnam and the other partners would put $21,000 into the partnership and then Putnam would convey her share of the business. After Putnam conveyed her interest, Shoafs discovered that the former bookkeeper was stealing money from the business. The business collected $68,000, but Putnam asserts that the Shoaf’s share is rightfully hers because the misconduct happened while she was a partner.
Issue: Whether Putnam’s conveyance of her rights in the business to Appellees included the rights to the money collected by Appellees.
Holding/Rationale: The Appellant (Putnam) is not entitled to the money collected by the business. Although the dishonest bookkeeping occurred while Putnam was still a partner, Putnam signed over her undivided interest in the partnership to the Shoafs. A partner does not personally own any specific property of the partnership and therefore she cannot retain any rights to the partnership after she conveyed it to Shoafs. If she had an interest in the money, then she had an interest in the partnership – She wouldn’t be suing to take part in any additional losses, would she? Putnam never had a right to transfer interest in the specific items or claims – could only convey her right to partnership profits → cannot turn around and say she wants to come back and get other profits related to property she didn’t convey
Notes: 2 ways to think of a partnership: (1) Entity in which individuals may own shares, or (2) aggregation of assets, each of which is owned pro rata by the partners. Interest in a partnership = right to share in the profits and/or losses
Under UPA, property rights consisted of: (1) Rights in specific partnership property, (2) Interest in the partnership (surplus), and (3) Right to participate in management (Page 125). Partnership property does not mean that because you have 10% of the partnership you get 10% of the assets – it means you can use the property as much as everyone else and you have a right to 10% of the profits. There is no right to specific claims / items
