Tag: UPA

Illinois Partnership Law, Exclusive Remedy Provisions and Federal Judgment on the Pleadings Standards (IL ND)

Allied Waste Transportation v. Bellemead Development Corp., 2014 WL 4414510 (ND.Ill. 2014), examines the reach of liability under a decades-old partnership agreement for millions of dollars in environmental clean-up costs.

The plaintiff and defendant were partners in an entity that ran a landfill in suburban Chicago. The partnership agreement gave each party 50-50 responsibility for paying litigation costs and any fines levied against the  partnership.  If either party failed to pay under this cost-sharing section, the paying party would have his partnership share increased while the non-payer’s share would correspondingly lessen.

After plaintiff paid about $125M to end several years of environmental litigation filed by State and local governments related to the landfill, it sued for damages under CERCLA (the Federal environmental statute) and for breach of the  partnership contract.  The defendants counter-sued for breach of the partnership agreement’s indemnification provision – the section that required either partner to indemnify the other for litigation costs incurred in defending a lawsuit.

Defendants moved for judgment on the pleadings on all claims on the dual grounds that the partnership agreement’s share adjustment section was the exclusive remedy for a partnership violation and that plaintiff’s suit was premature since it failed to first seek a formal accounting.

Held: Defendants’ motion for judgment on the pleadings denied.

Reasons:

The Court held that the defendants failed to meet their burden of establishing that the plaintiff could never state a valid breach of partnership or a statutory CERCLA Claim.

A party can move for judgment on the pleadings after pleadings are closed. FRCP 12(c). The same standards that govern a Rule 12(b)(6) motion govern judgment on the pleadings motions.  A Court views allegations in the light most favorable to the non-moving party and the motion will be granted where it appears beyond a doubt that the non-movant cannot prove any set of facts sufficient to support his claim for relief.  On a judgment on the pleadings motion, the Court considers only the complaint, answer and any exhibits.

Applying these standards, the Court held that the plaintiff made out both a CERCLA claim and a cause of action for breach of the partnership agreement.  

On the breach of partnership agreement count, the Court found that the agreement’s profit and loss adjustment section was not an exclusive remedy. In Illinois, limitation of remedy provisions are enforceable but they aren’t favored. Contracting parties are not required to put all potential remedies in a document in order to make those remedies available, and providing for one specific remedy won’t always preclude another remedy.  Also, a contract doesn’t have to use the word “exclusive” for a remedy to be deemed exclusive. Instead, the remedy will be found exclusive where the contract text warrants such a finding. (*4-5).

Here, the interest adjustment section that the plaintiff argued was the exclusive remedy only applied to situations where the partnership needed an infusion of extra capital and one partner didn’t timely contribute his share. There was no language, in either the adjustment section or in the partnership agreement as a whole, to justify a finding that an increase or reduction in partnership interest was the sole remedy for a breach. (*6).

The Court also rejected defendant argument that a formal accounting was a required precursor to a partnership suit by the plaintiff. In Illinois, the general rule is that one partner can’t sue another until there has been a settlement of partnership affairs via an accounting.  An exception to this rule is where a partner’s claim can be decided without a full review of the partnership accounts.  Also, see 805 ILCS 206/405 (partner can sue partnership or a co-partner with or without an accounting) (**6-7).

Here, since the amount plaintiff paid for the environmental clean-up costs was easily calculable (as was the defendants’ share of the costs), no accounting was necessary as a precondition to plaintiff’s suit.

Afterwords: If contracting parties intend for there to be an exclusive remedy for a breach – they should say as much.  This case also makes clear that a formal accounting isn’t always required first before a partner can sue another partner or the partnership entity; especially if the suing partner can easily compute his damages.  

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.