Tag: partnership

Illinois Joint Ventures – Features and Effects

Primo v. Pierini, 2012 IL App (1st) 103553-U discusses the key elements of a joint venture and how it differs from other common business arrangements.

The plaintiff contractor sued a construction manager to recover about $300k in building improvements it made in building a Chicago restaurant.  The construction manager was hired by the restaurant owner and was actively involved in funding the construction.

The construction manager in turn filed a third party suit against the restaurant owner for contribution.  It (the construction manager) claimed that it merely lent money to the restaurant owner and that there was no formal business relationship between them.

After a bench trial, the court found a joint venture existed between the construction manager and the restaurant owner based on their oral agreement to share restaurant profits among other reasons.

The court entered judgment for the plaintiff for nearly $300k and awarded defendant about $150K (one-half of the judgment) in its third-party claim  against the restaurant operator.  The court later reduced the judgment to about $140k after excising over $150k in extras and prejudgment interest from the judgment amount.  Each side appealed.

Result: Reduced judgment (minus extras and interest) affirmed.

Reasons:

The appeals court agreed with the trial court that there was a joint venture between the construction manager and restaurant owner.

– A joint venture is an association of two or more persons or entities to carry out a single, specific enterprise;

-Whether a joint venture exists is a factual inquiry and no formulaic rules ultimately determine whether a joint venture exists;

– Where the parties’ conduct evinces an intent to share profits from a common enterprise, the court will find a joint venture exists;

– The key joint venture elements are: (1) an express or implied agreement to carry on an enterprise; (2) a manifestation of intent by the parties to be associated as joint venturers; (3) joint interest as shown by the contribution of property, money or knowledge by each joint venturer; (4) joint control or ownership over the enterprise; and (5) the joint sharing of profits and losses;

– Like a partnership, each joint venture participant is an agent of the other one and is liable to third parties for another participant’s acts taken in the regular course of the venture’s business;

– Unlike an LLC or corporation, a joint venture is not a separate legal entity (i.e. like a corporation, LLC or limited partnership is): instead, a joint venture is a contractual relationship formed between the constituent venturers;

– Joint ventures can be made up of individuals, corporations, or a combination of the two.

(¶ 56-58).

The court rejected the defendant construction manager’s claim that it was only a lender (and not a partner or joint venturer) to the restaurant business.  The construction manager relied on section 202 of the Illinois Partnership Act (805 ILCS 206/202(a), (c)), which provides that receiving debt repayments from a business venture signals a lender-borrower relationship instead of a profit sharing/partnership one. (¶ 59-60)

Here, the court credited trial testimony that the parties planned to split profits well after the restaurant owner repaid the defendant’s loan.  In addition, the construction manager’s principal’s self-serving written statement that “I am not a partner” wasn’t sufficient to cast doubt on the trial testimony that defendants and the restaurant owner agreed to share profits indefinitely. (¶ 62)

In sum, the defendants’ active and direct involvement in funding the restaurant’s construction coupled with the agreement with the owner/operator to share in the profits manifested the intent to form a joint venture.

Afterwords

– A hallmark of a joint venture is the sharing of profits and losses in a common, one-time enterprise;

– Where one party lends money to another, this generally denotes a lender-borrower arrangement; not a joint venture or partnership one;

– Each enterprise participant’s active involvement in day-to-day functioning of a business, coupled with profit and loss sharing, is strong evidence of joint venture relationship.

 

 

 

 

 

 

 

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.

 

Partnership Dissolution: Illinois Basics

Cross v. O’Heir, 2013 IL App (3d) 120760 spotlights a dispute over the division of partnership property.

The plaintiff’s husband (who died before lawsuit was filed) entered a written partnership with the defendant to develop property.

A few years later, and unbeknownst to plaintiff’s husband, the defendant signed a cross-easement agreement with some adjacent owners to provide vehicle and pedestrian access over three parcels that were allotted to the defendant after he and plaintiff’s husband began dividing up the partnership real estate.

The plaintiff, as executor of her husband’s estate, filed suit for a declaration that the cross-easement agreement benefitted her property (adjacent to the defendant’s three parcels) and defendant counter-sued to dissolve the partnership and for an accounting.

The court entered summary judgment for the defendant and on defendant’s dissolution action.  After a bench trial on damages, the court entered a money judgment of about $40K for the defendant and the plaintiff appealed.

(¶¶ 17-19).

The Court affirmed summary judgment on the defendant’s partnership dissolution counterclaim.

The dissolution of a partnership means a change in the relation of the partners caused by any party ceasing to be associated in the carrying on of the partnership’s business.

 A partnership can be dissolved by judicial order or by operation of law.  Death of a partner normally dissolves a partnership unless the partnership agreement says otherwise. 

Judicial dissolution can be granted upon a partner’s application if the court finds that the partnership business can’t be carried out in accordance with the partnership agreement.  (¶¶ 32-33); 805 ILCS 206/801(5). 

After dissolution, each partner is entitled to a settlement of partnership accounts and a partner’s right to an accounting accrues on the date of dissolution.  A dissolution action can be brought in tandem with an accounting suit.  (¶ 34), 805 ILCS 206/807(b). 

Following dissolution, each partner must contribute to the partnership, amounts equal to any surplus funds (over credits) in the partnership’s account to pay creditors.  In addition, the estate of a deceased partner is liable for the partner’s obligation to contribute to the partnership.  805 ILCS 206/807(b), (e).

The plaintiff argued that the defendant’s dissolution action was untimely since the partnership “constructively dissolved” when it stopped doing business twelve years before the lawsuit was filed.  The Court disagreed, noting that at the time defendant filed its dissolution action, the partnership still owned property.  It wasn’t until 2011 when the last of the partnership property – the two outlots – was finally transferred.  Until those two lots were disposed of, a dissolution and accounting suit was still timely.  (¶¶ 36-37).

Afterwords:

–  A partnership agreement can provide that the partnership continues after the death of a partner;

– If a partnership has ceased doing business, a partner can still bring a dissolution action so long as there is partnership property at the time the dissolution suit is filed;

– A deceased partner’s estate is liable to the partnership for the deceased partner’s contribution to the partnership after dissolution.