Court Decides When A Contractual Relationship is the Equivalent of a Partnership

• Posted on: Nov 20 2019

A partnership is an association of two or more persons to carry on as co-owners of a business for profit. Partnership Law § 10(1). Typically, a partnership is memorialized in some type of writing, such as a partnership agreement. When, as in Giffuni v. Towler, 2019 N.Y. Slip Op. 51824(U) (Sup. Ct., Suffolk County Nov. 15, 2019) (here), there is no written partnership agreement between the parties, the court must determine whether a partnership-in-fact existed from the conduct, intention, and relationship between the parties. Brodsky v. Stadlen, 138 A.D.2d 662, 663 (2d Dept. 1988).

In analyzing whether a partnership-in-fact exists, courts consider a number of factors, including, but not limited to: the sharing of profits and losses, the ownership of partnership assets, joint management and control, joint liability to creditors, the intention of the parties, compensation, the contribution of capital, and loans to the organization. Id. Significantly, no one characteristic of a business relationship is determinative in finding the existence of a partnership-in-fact. Id.

Giffuni v. Towler

Giffuni involved an alleged agreement to pursue the acquisition of two related companies – Avery Biomedical Devices, Inc. (“Avery”) and Pinnacle Bionics, Inc. (“Pinnacle”) – as equal partners. Plaintiff maintained that the arrangement constituted a partnership, while defendants contended that none of the factors discussed above support the formation of a partnership-in-fact.

Background

Plaintiff, Christopher Giffuni (“Giffuni”), is a certified public accountant. Avery, which designed and manufactured medical devices, was one of his clients. Avery was owned by Claire Dobelle until her death in 2015. After Claire Dobelle died, ownership of Avery passed to her children, the defendants Martin, Miriam, and Molly Dobelle (the “Dobelle Defendants”). Martin Dobelle also owned a controlling interest in Pinnacle. Defendant Anthony Martins (“Martins”) was a long-time employee of Avery and a minority shareholder of Pinnacle.. Defendant Dilys Marion Gore (“Gore”) was another long-time employee of Avery.

In 2014, Martin Dobelle approached Plaintiff about selling Avery and Pinnacle. Plaintiff then approached defendant Linda Towler (“Towler”), Avery’s Chief Financial Officer, about buying Avery and Pinnacle together. To that end, they drafted a non-binding letter of intent, dated April 29, 2014, which they sent to Claire and Martin Dobelle. In it, Plaintiff and Towler (or an entity formed by them) proposed to acquire substantially all of the stock of Avery and Pinnacle “for $5 to $8 million dollars in total to be further determined, negotiated, and allocated[.]” The letter of intent indicated that, except for certain specified provisions, it did not constitute a legally binding or enforceable agreement and that a binding commitment would only result if and when the parties entered into a definitive agreement.

The Dobelles made a counterproposal that was unacceptable to Towler, who no longer wished to proceed. However, in a subsequent letter of intent dated May 8, 2014, Plaintiff and Towler proposed an alternative arrangement in which they would become partners with Claire Dobelle and “raise the necessary working capital for the continuation and success of Avery[.]” Under this arrangement, Plaintiff, Towler, and Claire Dobelle would become full partners, with Claire Dobelle contributing Avery’s assets and Plaintiff and Towler contributing their expertise, know-how, and financing. Like the previous letter of intent, it was not legally binding, except for certain specified provisions, and it contemplated the preparation of a formal, definitive agreement once the due diligence was completed. On or about May 22, 2014, Towler again decided that she did not wish to proceed.

The Dobelles subsequently tried to sell Avery and Pinnacle to a third party. Those negotiations continued into early 2015 and were discontinued when Claire Dobelle died in March of that year. Afterwards, Plaintiff and Towler renewed their proposal to purchase Avery and Pinnacle together. To that end, they retained an attorney to represent them.

Counsel drafted a letter of intent dated April 24, 2015, that was sent to Martin Dobelle. In it, he outlined the preliminary terms and conditions under which Plaintiff and Towler, or an entity to be formed by them, proposed to acquire all of the assets of Avery and 51% of the capital stock of Pinnacle. The letter of intent, like the previous ones, was not binding, except for certain specified provisions, unless and until the execution and delivery of “a purchase agreement in form and substance mutually acceptable to each party and their counsel” and completion of the buyers’ due diligence. The purchase price was $3 million ($2.5 million for the Avery assets and $500,000 for the Pinnacle stock), $500,000 of which was to be paid in cash at the closing. The balance was to be paid pursuant to two promissory notes that would be personally guaranteed by Plaintiff and Towler, jointly and severally. The letter of intent was signed by Plaintiff and Towler individually and by Martin Dobelle in both his individual and corporate capacities.

By the end of May 2015, Towler had changed her mind about working with Plaintiff. She no longer wished to move forward with the deal because she did not think they could work together anymore. She so advised Plaintiff on May 26, 2015.

Thereafter, Plaintiff and Towler agreed that Plaintiff would pursue the transaction alone (assuming he could obtain financing), Towler would serve as CFO of the company, and Plaintiff would give Towler a 5% interest in the company.

On June 1, 2015, Plaintiff and Towler sent an email to Martin Dobelle in which they advised him of the arrangement.

On June 11, 2015, counsel prepared and emailed a draft employment agreement to Plaintiff and Towler. Towler refused to sign it because it contained too many onerous restrictions. In addition to not allowing her to write checks or enter into contracts over $10,000, the agreement did not provide for raises; it limited her authority; it did not provide for standard perqs, such as a cell phone; it took away her benefits after a year, and it contained a 5-year restrictive covenant, among other things. In an email to Towler the next day, Plaintiff claimed that counsel had accidentally removed the 5% ownership interest from the draft, and he sent Towler the language that purportedly had been left out. Towler responded that Plaintiff had failed to address the agreement’s other deficiencies. She concluded, “There is absolutely no upside to me signing this contract.” The closing, which was scheduled for June 15, 2015, did not take place.

In an email dated June 17, 2015, Martin Dobelle advised Plaintiff that Gore had approached Towler about an employee takeover “some time ago.” He also advised Plaintiff that, when he and Towler came to the conclusion that they could not work together, Towler spoke to Gore and Defendant Anthony Martins about an employee takeover. Dobelle went on to say that he worked out a deal with Gore, Towler and Martins, which he was going to pursue instead of the one he had with Plaintiff.

Towler, Gore, and Martins ultimately formed GMT Holdings, Inc., to purchase Avery and Pinnacle as 100% shareholders. The sale closed on July 1, 2015. The action ensued.

Plaintiff sued Towler for breach of fiduciary duty and fraud, and the other defendants for aiding and abetting Towler’s breach of fiduciary duty and fraud, and all defendants for an accounting, unjust enrichment, a declaratory judgment and a constructive trust.

Following discovery, Towler, Gore, and Martins moved for summary judgment. The Court granted the motion.

The Court’s Decision

Since most of the causes of action were predicated on the existence of a partnership (i.e., a fiduciary relationship), the Court addressed that issue first. Looking at the factors identified above, the Court held that there was no partnership between Giffuni and Towler.

Profits and Losses

The Court found that contrary to Plaintiff’s contention, Giffuni and Towler were not 50/50 partners in any acquisition of Avery and Pinnacle and did not agree to share the profits and losses of the businesses equally. In this regard, the Court noted that the proposed employment agreement given to Towler provided that she would “receive only 5% of the profits”; it did not contain any “provision for the sharing of losses.” Slip Op. at *3.  This was significant because “[a]n employer-employee relationship providing for the division of profits [does] not give rise to a fiduciary relationship (in this case, a partnership) absent an agreement to also share losses.” Id., citing Vitale v. Steinberg, 307 A.D.2d 107, 108 (1st Dept. 2003). The Court noted that “[a]n agreement that an employee shall share in the profits of the business as entire or partial compensation for her services is a contract of mere hiring, providing for compensation in a particular manner in order to induce greater energy and faithfulness on the part of the employee.” Id., citing Vitale at 109-110. “When an employee is not required to make good on negative amounts,” explained the Court, “losses are shared in only the broadest sense. Such an expansive interpretation of losses renders meaningless the distinction between ‘sharing profits’ and ‘sharing losses,’ and no trust or fiduciary relation is created.” Id., citing Vitale at 109-110. “Accordingly,” held the Court, “this factor weigh[ed] in favor of the defendants.” Id.

Ownership of Partnership Assets

The Court noted that the record “reflect[ed] that the purported partnership never acquired any assets. While the plaintiff and Towler sought to acquire Avery’s assets and Pinnacle’s stock, … the acquisition was never completed.” Slip Op. at *3. In fact, said the Court, relying on the nonbinding letters of intent, Plaintiff and Towler “never even had a contractual right to acquire Avery’s assets and Pinnacle’s stock.” Id. “Accordingly,” concluded the Court, “this factor weigh[ed] in favor of the defendants.”

Joint Management and Control

The Court found that the record supported joint efforts by Plaintiff and Towler with respect to the acquisition, noting that Plaintiff and Towler “worked on various aspects of the proposed acquisition together and that the plaintiff even participated in the management of Avery and Pinnacle, including hiring personnel and taking charge of research and development, among other things.” Id. “Accordingly,” held the Court, “this factor weigh[ed] in favor of the plaintiff.” Id.

Joint Liability to Creditors and Loans to the Organization

The Court found that, under the circumstances, there were no loans made to the alleged partnership, nor was there any joint liability to creditors. Slip Op. at *4. Only Plaintiff secured a loan to finance the acquisition of Avery. The loan was not made to any partnership with Towler. In any event, no loan agreement or promissory note was ever executed, and there was no evidence in the record that Towler agreed to be jointly liable with Plaintiff on the loan. Slip Op. at **3-4. “Accordingly,” held the Court, “these factors weigh[ed] in favor of the defendants.” Slip Op. at *4.

Contribution of Capital

Since the record did not reflect any contributions of capital to the alleged partnership by either Giffuni or Towler, the Court found the factor to weigh “in favor of the defendants.”

Compensation

While the parties disputed the reasons why Avery compensated Giffuni, they did not dispute that it was paid by Avery and not by the purported partnership.

The Court noted that “[t]he purpose of the purported partnership between the plaintiff and Towler was not to carry on a business for profit, but to acquire a profit-making business. It, therefore, did not generate any profits from which to pay either the plaintiff or Towler. Both were paid by Avery, the business that the plaintiff and Towler sought to acquire.” Slip Op. at *4. Thus, “[i]n the absence of any compensation from the alleged partnership itself, the court [held that] that this factor weigh[ed] in favor of the defendants.” Id.

Intention of the Parties

The Court observed that “[w]hile the plaintiff and Towler expressed an intent to form an entity to acquire Avery and Pinnacle at some time in the future, they never came to a meeting of the minds on the issue.” Id. All three letters of intent, said the Court, clearly indicated that, except for certain specified provisions, they were not legally binding and contemplated the preparation and execution of a more definitive agreement. Nothing in the letters “indicated that the plaintiff and Towler were already partners.” Id. In fact, noted the Court, “[t]wo of the three letters referred to an entity to be formed by them, indicating that no such entity had yet been formed” and “no certificate of doing business as partners was filed in connection with the purported partnership, as required” by General Business Law § 130(1)(a). Id.

The Court rejected Giffuni’s argument that he and Towler held themselves out as partners – in effect, making a partnership-by-estoppel argument. Id. Accordingly, the Court found “this factor weigh[ed] in favor of the defendant.”

“In sum,” concluded the Court, “the record reflects that, although the plaintiff and Towler jointly sought to acquire Avery and Pinnacle, their efforts did not rise to the level of a partnership. That the parties worked together on the proposed acquisition and participated in the management of Avery and Pinnacle, without more, is insufficient to create a partnership.” Id.

Takeaway

As noted by the Court, “[t]he ultimate inquiry is whether the parties have so joined their property, interests, skills, and risks that, for the purpose of the particular adventure, their respective contributions have become as one and the commingled property and interests of the parties have thereby been made subject to each of the associates on the trust and inducement that each would act for their joint benefit.” Id. (citation omitted). In Giffuni, the Court found that the case did “not reveal such an amalgam of property interests.” Id. Instead, the record showed that Giffuni and Towler merely had a community of interest and a common economic objective, both of which created nothing more than a contractual obligation. Slip Op. at **4-5. The Court held that such attributes alone were insufficient to create the existence of a partnership-in-fact.

Tagged with: Breach of Fiduciary Duty, Business Disputes, Business Litigation, Partnership, Partnership Law