Brief Fact Summary. A brokerage business borrowed money from Peyton (D) and others (D).
Synopsis of Rule of Law. If a transaction bears all of the aspects of a loan, and words are not determinative, a partnership arrangement will not be found.
Knauth (D), Nachod (D), and Kuhne’s (D) partnership was in financial trouble. One of the partners, Hall (D), secured a loan from other friends, including Peyton (D). In exchange for a $2,500,000 loan in liquid securities, Peyton (D) and the other loaners (D) were entitled to a percentage of the profits until the loan was paid off. The provisions and the conditions in the loan were; Peyton was to have a veto over speculative investments; Hall was to have an insurance policy taken out on his life; the securities could be pledged as a loan; and the loaners (D) were to receive dividends from the securities. Peyton (D) couldn’t bind the partnership nor initiate any action either on his own. The agreement directly stated a loan, and not a partnership arrangement. Peyton (D) and the others (D) were to accrue no liability for partnership debts under the agreement. A creditor of the partnership, Martin (P), filed suit against it, and the loaners to it, Peyton (D) and the others (D). Martin (P) alleged that the agreement formed a partnership interest for the loaners (D). The court found for Peyton (D).
Issue. Will a partnership arrangement be found if the only control exerted (and sharing of profits) was to protect and pay off a loan?
Held. (Andrews J.) No. Words alone do not determine a relationship. Declaring that no partnership is intended will not dispose of this issue. The parties will be liable as partners if the words, acts , and agreements create the existence of a partnership arrangement. Neither Peyton’s (D) words nor actions establishes a partnership. The contract also indicates that there was nothing other than necessary precautions in it to protect the loan. Any control was negative in nature, and was emplaced to prevent misuse of funds. Peyton (D) held no power to bind the contract nor steer or initiate policy. Peyton (D) and the other loaners (D) are not liable because it was only a loan. Judgement affirmed.Discussion.
Partnerships result from express or implied contracts. The sharing of profits is an important factor in determining the existence of a partnership. Equally important to this issue is the power to share the decision making function and/or bind contractual obligations to the partnerships.