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Eagan v. Gory

2010 WL 1220961 (U.S. Ct. App. 3rd Cir. 2010) (Unpublished)

PARTNERSHIPS — Although a person who shares in the profits of a business is presumed to be a partner unless the profits are received in payment of specific obligations of the partnership, there are seven other elements that must be considered.

A broker entered into a business relationship with his father-in-law. The two worked together to purchase, rehabilitate, and sell properties. The broker located and investigated the properties and orchestrated the rehabilitation and remodeling of the properties. His father-in-law decided whether or not to purchase certain properties, funded the purchases, reimbursed the broker’s out-of-pocket expenses, and gave the broker fifty-percent of the net profits. After the broker and his wife separated (and later divorced), the father-in-law sold two properties he had acquired with the broker’s help, but did not share the profits. The broker sued his former father-in-law for his share of the profits for the sale of the properties he had located and helped rehabilitate. The broker argued that he entered into an oral partnership agreement with his former father-in-law to divide the profits equally. His former father-in-law claimed that the two did not have a partnership, but had a business relationship designed to help his daughter since the broker was not in a good financial position.

The lower court found that the broker and his former father-in-law were not partners because: (1) the father-in-law only intended to associate with the broker as long as the broker was married to his daughter; (2) there was no obligation to share losses because the broker did not have the financial resources to share in any losses; (3) the parties did not share mutual control over any property, as the father-in-law had full decision making authority; and (4) they never referred to themselves as “partners” either to each other or in dealings with third-parties. The lower court viewed any payments made by the father-in-law to the broker as a payment of wages for services performed, but not as payment of a partnership share. The broker appealed and the Court of Appeals affirmed.

The Appellate Division noted that under the New Jersey Uniform Partnership Act, a person who shares in the profits is presumed to be a partner unless the profits are received in payment of specific obligations of the partnership. However, there are other elements that must be considered, including: (1) the intention of the parties; (2) the obligation to share in the losses; (3) ownership and control of partnership property; (4) community of power and administration; (5) language used in the partnership agreement; (6) conduct of the parties toward third parties; and (7) rights upon dissolution. In this case, the Court affirmed the lower court’s finding that no partnership existed.

The Court agreed with the lower court’s finding that the broker was not obligated to share in any losses. The Court found that the broker’s financial position precluded him from sharing in any losses and that his father-in-law was involved only to help his daughter (who would have been harmed if the broker had to share in any losses). The Court also found that the broker had no ownership or control. The father-in-law had sole decision making authority to purchase or sell properties, and any properties that were purchased were acquired in the father-in-law’s name alone. In addition, the Court agreed with the lower court’s finding that the father-in-law never intended to form a partnership agreement and never represented to the public that he and the broker were partners. The Court rejected the broker’s argument that a partnership was presumed because he had shared in the profits from the sale of one of the properties. The Court noted that sharing in profits is a rebuttable presumption that a partnership existed, but the other factors demonstrated that the broker and his former father-in-law were not partners.

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