Forming an Inadvertent Partnership – Part 2

A few weeks ago, I wrote a post entitled "Forming an Inadvertent Partnership".  You can find it here.   That post discussed the Texas Supreme Court's 2009 decision in Ingram v. Deere.

Since the Texas Supreme Court issued its opinion in Ingram v. Deere in 2009 establishing a new standard for courts to use in determining whether a general partnership has been formed among two or more persons, courts across the state have wrestled with applying Ingram’s “totality-of-the-circumstances test” to various factual situations.

The necessarily somewhat subjective nature of the test has sometimes led courts to opposite conclusions on fact patterns which do not appear to be readily distinguishable. Often the only way to reconcile those cases is by considering whether the fact-finding at the trial court was performed by a jury and the consequent standard of review engaged in by the appellate court.

For example, in Rojas v. Duarte, 393 SW 837 (8th Court of Appeals, El Paso, 2012), the court used a “legal sufficiency standard” to review a jury’s finding that the two men had formed a general partnership. The court explained that under this standard of review:

[We] review the evidence in the light most favorable to the jury’s verdict…. If more than a ‘scintilla of evidence’ exists to support the jury’s findings, it is legally sufficient…. More than a ‘scintilla of evidence’ exists when the evidence supporting the finding, as a whole, would enable reasonable and fair-minded people to differ in their conclusions…. [The] jury is entitled to resolve any conflicts in the evidence and to choose which testimony to believe…. Accordingly, we do not substitute our judgment for that of the jurors if the evidence falls within this zone of reasonable disagreement.

The court then measured the evidence produced at trial relevant to each prong of the partnership test identified in, and weighted as described in, Ingram:

1. Sharing profits: Rojas claimed Duarte was paid as an independent contractor for his efforts and the court agreed there was no evidence Duarte received a share of the profits. But Duarte testified the men had an oral agreement (all of the agreements Duarte alleged were merely verbal) to split profits and (unfortunately for him) Rojas had prepared written “split sheets” allocating net profits between them or, in Rojas’s testimony, showing what allocations would have been had the men been co-owners. The court concluded Duarte’s testimony and the “split sheets” of Rojas “constitute more than a scintilla of evidence of an agreement to share profits.”

2. Expression of intent to be partners: Despite Rojas testifying that he did not want Duarte to be his partner, three friends of Duarte testified that the two men presented themselves as partners at meetings. Scintilla of evidence established.

3. Control of business: The court looked for evidence that each partner possessed or lacked the right to make “executive decisions” including exercising authority over the business’s operations, writing checks on the business bank account, access to records and management of assets and money. Again, Duarte prevailed, not because he possessed equal authority with Rojas to make all executive decisions but because Duarte testified that he had power to make some executive decisions either alone or together with Rojas. Sharing or agreeing to share profits and participating in or having the right to participate in control of the business are the two most important factors in determining whether a partnership has been formed.

4. Sharing losses or liability: Sharing or having an agreement to share losses or liabilities to third parties “is not necessary to create a partnership” but “the existence of such an agreement supports the existence of a partnership” according to Ingram. The business here had no losses, but Duarte prevailed again because he testified (and the split sheets arguably reflected) that the two men agreed to share third party liabilities.

5. Contributions: Although Rojas denied that Duarte contributed any money or property to the business, Duarte testified that he agreed to leave his profits in the business (as well as contributed some tangible property).

The appellate court concluded that the trial court record contained:

more than a scintilla of evidence in support of each of the five factors …. Though the evidence as to each and every factor may not be conclusive, it is nonetheless sufficient to enable reasonable and fair-minded people to differ in their conclusions…. [There] is ample evidence in the record that Duarte shared profits and control over some aspects of the business, the two factors … that will probably continue to be the most important factors in determining whether a partnership exists.

Then, because Rojas lost his argument that there was no partnership between him and Duarte, he lost his argument that he had not breached a fiduciary duty to Duarte.

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