Question

Compare and contrast these three scenarios. Which ones are partnerships? Explain. Which are not partnerships? Explain.

Daniel is the owner of a chain of shoe stores. He hires Rubya to be the manager of a new store, which is to open in Grand Rapids, Michigan. Daniel, by written contract, agrees to pay Rubya a monthly salary and 20 percent of the profits. Without Daniel’s knowledge, Rubya represents himself to Classen as Daniel’s partner and shows Classen the agreement to share profits. Classen extends credit to Rubya. Rubya defaults.

Patricia Garcia and Bernardo Lucero were in a romantic relationship. While they were seeing each other, Garcia and Lucero acquired an electronics service center, paying $30,000 apiece. Two years later, they purchased an apartment complex. The property was deeded to Lucero, but neither Garcia nor Lucero made a down payment. The couple considered both properties to be owned “50/50,” and they agreed to share profits, losses, and management rights. When the couple’s romantic relationship ended, Garcia asked a court to declare that she had a partnership with Lucero. In court, Lucero argued that the couple did not have a written partnership agreement.

Karyl Paxton asked Christopher Sacco to work with her interior design business, Pierce Paxton Collections, in New Orleans. At the time, they were in a romantic relationship. Sacco was involved in every aspect of the business—bookkeeping, marketing, and design—but was not paid a salary. He was reimbursed, however, for expenses charged to his personal credit card, which Paxton also used. Sacco took no profits from the firm, saying that he wanted to “grow the business” and “build sweat equity.” When Paxton and Sacco’s personal relationship soured, she fired him. Sacco objected, claiming that they were partners.

Answer 1

Answer:

1. Classen cannot hold Daniel liable as a partner, because a true partnership never existed; nor is Daniel liable under a theory of partnership by estoppel. A partnership is defined as an association of two or more persons to conduct, as co-owners, a business for profit [UPA 101(6)]. To determine that a partnership was created, the court must look for a sharing of profits and a joint ownership of the business, with each party having an equal right to manage the business. When specific evidence that this situation existed is lacking, some guidelines are applied. First, the sharing of profits from a business is prima facie evidence of the existence of a partnership, unless such sharing is by means of one party receiving wages as an employee [UPA 202(c)(3)]. Rubya is not a co-owner of the business and his share of profits is partially the means of paying his salary. Therefore, a partnership is not created, and Daniel is not liable as a partner.

To be liable as a partner by estoppel, Daniel must either have represented himself to Classen as Rubya’s partner or have impliedly (or expressly) consented to Rubya’s representing himself as a partner. Because Daniel did not even know of Rubya’s assertions and did nothing to lead Classen to believe he was Rubya’s partner, Classen can look only to Rubya for payment of the debt. No partnership by estoppel was created.

2. Partnership in business is an agreement where more than two parties corporate with each other in order to make their mutual interest sounder. Because partnerships are usually happen for profits so in many case it becomes problematic. Garcia and Lucero probably satisfied all three requirements for forming a partnership. They owned the two properties equally, agreed to share both profits and losses, and enjoyed equal management rights. Moreover, it is immaterial that they lacked a written partnership agreement. The Statute of Frauds does not apply to these facts, and a partnership agreement can be oral or implied by the parties’ conduct.

3. Yes, Sacco is entitled to 50 percent of the profits of Pierce Paxton Collections. The requirements for establishing a partnership are

(1) A sharing of profits and losses,

(2) A joint ownership of the business, and

(3) An equal right to be involved in the management of the business.

The effort and time that Sacco expended in the business constituted a sharing of losses, and his proprietary interest in the assets of the partnership consisted of his share of the profits, which he had expressly left in the business to “grow the company” and “build sweat equity” for the future. He was involved in every aspect of the business. Although he was not paid a salary, he was reimbursed for business expenses charged to his personal credit card, which Paxton also used. These facts arguably meet the requirements for establishing a partnership.

In the actual case on which this problem is based, Sacco filed a suit in a Louisiana state court against Paxton, and the court awarded Sacco 50 percent of the profits. A state intermediate appellate court affirmed, based generally on the reasoning stated above.