Partners in Name Only?

• Posted on: May 10 2021

Business relationships come in all forms. People can be shareholders of a corporation, joint venturers and partners. 

Sometimes, as in Capizzi v. Brown Chiari LLP, 2021 N.Y. Slip Op. 02956 (4th Dept. May 7, 2021) (here), a dispute arises among the parties to a business relationship concerning the existence of the relationship itself. When that happens, courts will, as an initial matter, examine the writings between the parties to determine the existence of the relationship. If there are no such writings, they will consider the conduct of the parties, their intent, and their financial relationship to determine the type of association, if any, between the parties.

As discussed below, Capizzi involved a partnership.

A partnership is considered to be a voluntary, contractual association among the parties to the relationship. Congel v. Malfitano, 31 N.Y.3d 272, 278 (2018). Typically, the rights and obligations of the parties are governed by an agreement and any disputes concerning those rights and obligations will be determined by reference to the principles of contract law. Id. at 278.

When the writing is silent on a matter, New York’s Partnership Law will fill in the gaps left by the parties. Id. Similarly, if there is no writing or the agreement contains provisions contrary to law, the provisions of the Partnership Law will control the relationship. Id. (citation omitted). 

Where the very existence of the association is at issue, the Partnership Law instructs that the sharing of business profits constitutes prima facie evidence of the existence of a partnership. See Partnership Law § 11(4). Notwithstanding, the courts have held that the sharing of profits “is not dispositive” of the issue. Fasolo v. Scarafile, 120 A.D.3d 929, 931 (4th Dept. 2014), lv. dismissed, 24 N.Y.3d 992 (2014). Instead, they look to the parties’ conduct, intent, and relationship to determine whether a partnership existed in fact. Hammond v. Smith, 151 A.D.3d 1896, 1897 (4th Dept. 2017). In this regard, they examine: (1) the parties’ intent, whether express or implied; (2) whether there was joint control and management of the business; (3) whether the parties shared both profits and losses; and (4) whether the parties combined their property, skill, or knowledge. Id.  Importantly, “[n]o single factor is determinative” as the “court [must] consider[] the parties’ relationship as a whole.” Id. (id.).

The court in Capizzi v. Brown Chiari LLP applied the foregoing multi-factor test to hold that the parties were partners notwithstanding the absence of a partnership agreement.

Capizzi involved the resignation from, and dissolution of, the defendant law firm Brown Chiari LLP (the “firm” or “defendant”). Plaintiff was an attorney of the firm. Plaintiff commenced the action seeking, among other things, a declaration that the firm was dissolved and money damages, including profits, had been wrongfully withheld from him. Defendants James E. Brown (“Brown”) and Donald P. Chiari (“Chiari”), also former attorneys of the firm, argued that they were the only partners in the firm and that plaintiff was not entitled to the relief requested because he was not a partner.

Prior to the commencement of the action, Capizzi, Brown, and Chiari had been named as defendants in an action brought by a fourth attorney upon that attorney’s resignation from a prior incarnation of the firm (the “prior firm”). After a nonjury trial in the prior litigation, the court determined that all four attorneys were partners in the prior firm, despite the testimony of plaintiff and Chiari that they did not consider themselves to be partners in the prior firm (the “prior decision”). Among the facts noted by the court were that each of the four attorneys received a percentage of the prior firm’s income; the prior firm’s tax returns identified each as a partner; each received a Schedule K-1 with a capital account; each personally guaranteed a line of credit; and banking resolutions were signed by each, giving them broad authority to transact business on behalf of the prior firm. The court highlighted those facts as supporting the existence of a four-person partnership. Following the dissolution of the prior firm, the defendant firm was formed.

After a nonjury trial, Supreme Court (Timothy J. Walker, A.J.) issued two judgments (denominated decisions and orders). The judgment on appeal in appeal No. 1 declared that plaintiff was an equity partner in the firm when he resigned from it. The judgment on appeal in appeal No. 2 declared that the firm had been dissolved upon plaintiff’s resignation. The Appellate Division, Fourth Department affirmed each judgment.

With respect to the first factor of the analysis, the Court found that the “parties’ intent to establish a three-person partnership [was] evident from the manner in which they structured [the] firm in the wake of the [prior] decision.” Slip Op. at *1. The Court explained that:

[i]f Brown and Chiari—two highly experienced and capable attorneys—intended at that time to form a partnership that excluded plaintiff, they had the benefit of [the prior] decision to serve as a guide. Brown and Chiari could have executed a written partnership agreement detailing the terms of partnership, or they could have structured [the] firm differently from the prior firm by eliminating or substantially limiting the business practices that were identified by the [prior] decision as indicia of partnership. They did neither. Indeed, the evidence presented at trial established that plaintiff’s position in [the] firm was much the same as it had been in the prior firm. For example, plaintiff received 20% of profits from 2007 to 2013. The firm’s 2007-2015 tax returns identified plaintiff, Brown, and Chiari as the firm’s partners and indicated that none owned an interest of 50% or more. Plaintiff received a Schedule K-1 with a capital account every year, and he personally guaranteed the firm’s line of credit. Further, plaintiff signed banking resolutions giving him authority to borrow money on the firm’s behalf. In other words, the parties recreated pre-[prior firm] conditions at their newly formed firm.…

Id.

Based upon the foregoing facts, the Court “conclude[d] that the parties’ conduct in doing so constitute[d] strong evidence of their intent to establish a three-person partnership that included plaintiff.…” Id.

The Court found the other factors to be present and supportive of its holding. For example, “[w]ith respect to the third factor,” the Court found that the parties agreed to share profits and losses, a fact that was “undisputed”. Id. “With respect to the fourth factor, combined property, skill, and knowledge”, the Court found that plaintiff satisfied it as well, as those factors are “inherent in any legal practice”. Id. 

The Court noted that “[a]lthough joint control and management arguably [was] not present,” it did not change the result. Id. 

Accordingly, the Court held that plaintiff was partners with Brown and Chiari in the defendant law firm. Id.

Takeaway

As discussed, in Capizzi, plaintiff satisfied his burden of proving that he was a partner of the defendant law firm. He successfully demonstrated that, following the dissolution of the prior firm and the formation of the defendant law firm, (1) the parties intended to conduct themselves as partners of the firm by (a) sharing profits and losses, which, under the Partnership Law, is prima facie evidence of a partnership (see Partnership Law § 11 [4]), (b) receiving a Schedule K-1 with a capital account, (c) guaranteeing the firm’s line of credit, and (d) signing banking resolutions giving them authority to borrow money on the firm’s behalf; (2) the parties shared supervision of the firm’s business operations and shared responsibility for handling the firm’s financial affairs; and (3) the parties combined their property, skill, and knowledge in furtherance of the firm. In light of the foregoing facts, the Court concluded that there was no reason to disturb the judgments entered by Supreme Court.