Illinois Appeals Court Provides Partnership Primer

DeSouza v. Tradelink, LLC, 2014 IL App (1st) 131456-U provides an excellent – though unpublished – primer on Illinois partnership law and contract interpretation rules. The case also illustrates the confusion that can result when parties to a business deal have several conflicting and parallel documents that govern a single transaction.

Plaintiff entered into a four-way business arrangement with a software developer, another individual and a trading firm to share profits from a unique software trading module invented by the developer.  Three documents governed the parties’ relationship.   A Term Sheet, a Trader Agreement , a Side Letter (which contained a separate rider) codified the parties venture and assigned each participant’s profits split. The plaintiff, who introduced the software developer to the trading firm, was to receive 5% of all trading profits realized by the developer (who was to be paid 55%) from the software. The payments to the plaintiff were to flow through the developer who would pay plaintiff his share after he (the developer) was paid by the trading company.

When the trading firm severed ties with the developer, the plaintiff sued to recover several million dollars in profits that the company earned over several years based on its use of the trading software. The trial court granted summary judgment for the trading firm on plaintiff’s claims on the basis that no partnership was formed between the parties.  Plaintiff appealed.

Held: Reversed. Questions of fact exist as to whether the parties intended to form a partnership.

Rules/Reasoning:

The Uniform Partnership Act (810 ILCS 206/100, 202(a))(the UPA) defines a partnership as the association of two or more persons to carry on as co-owners a business for profit – regardless of whether that was the persons’ intent. The sharing of gross revenues by 2 or more people doesn’t establish a partnership by itself but where a person receives a share of business profits, he is presumed to be a partner unless he was paid (a) wages as an employee or (b) compensated as an independent contractor. UPA Section 206/202(c); (¶21).

Illinois courts describe a partnership as a contractual relationship and a partnership is controlled by the parties’ oral or written agreement. The caselaw echoes the UPA and finds a partnership where parties join together to carry on a business venture for their common benefit and each party contributes property or services to the enterprise and has a community interest in the business profits.

Other indices of a partnership include the manner in which the parties deal with one another, the mode in which each alleged partner dealt with third parties with the other partners’ knowledge and whether the two (or more) persons advertised their business using a firm name. (¶ 21).  The Court also looks at whether the business has filed a partnership certificate with the county clerk, whether the business has a checking account and files partnership tax returns as part of its partnership inquiry.  And while the parties’ intent isn’t the decisive factor (in deciding whether there is a partnership), it’s still something the court considers when determining whether a partnership exists. (¶¶33, 42).

The Court reversed summary judgment for the trading company because there were disputed fact questions as to whether the parties formed a legal partnership.  The various documents and the parties’ conduct was both consistent and inconsistent with the existence of a partnership.  The pro-partnership factors included multiple references to the terms “partner” and “partnership” and the fact that plaintiff was assigned a specific percentage of the business arrangement’s profits.

Factors that ran counter to a partnership finding included the plaintiff not contributing property or funding for the business and not having any role in the day-to-day business of the trading firm. that plaintiff didn’t contribute any money to the enterprise, didn’t run the trading business or share in business losses.  Because there were so many factual and textual incongruities in the various documents, it wasn’t clear whether the parties meant to form a partnership.   (¶¶ 22-28)

The other key fact dispute that led to the court’s summary judgment reversal involved plaintiff’s role in the enterprise.  The trial court found that plaintiff was merely a “finder” who connected to developer with the trading company and was entitled to a “finder’s fee.”  But there was evidence in the record that plaintiff expended time , energy and money in consummating the developer-trading firm connection.  Because of this, it was conceivable that the plaintiff contributed property or services to the business venture.  If plaintiff’s time and money efforts were considered contributions of property or services, this would indicate the existence of a partnership.  More facts needed to be developed for the court to rule definitively on the partnership question.  (¶¶ 31-32). 

Take-aways: Confusion results where multiple documents govern the same transaction.  Where multiple agreements control a single transaction, the agreements should incorporate each other by reference and specifically state what document trumps the other(s) if there is a dispute or conflict among the different terms.  The case’s real value, though, lies in its excellent summary of Illinois partnership law under the UPA and the construing caselaw.  De Souza provides a fairly exhaustive summary of the key elements a court considers when deciding whether the parties’ conduct evidences a formal partnership.

 

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PaulP

Litigation attorney at Fisher Kanaris, P.C. representing businesses and individuals in all types of commercial disputes.