A partnership can be created under Tennessee law without the partners ever having a written partnership agreement. Even where parties have not expressly agreed, verbally, to operate a partnership, an implied partnership can be formed under Tennessee law where the parties involved intended the acts that give rise to a partnership. The consequences, good and bad, of being in an implied partnership can be financially significant.
If you are in an implied partnership, that may be a good thing to establish in a Tennessee court as it may allow you successfully to recover money, property or profits another partner owes you or is withholding. Being a partner in an implied partnership, however, can also result in your personal liability, not just to other partners, but to third parties. To boot, it can result in your being liable to a third party based on an act or omission of the person or persons with whom you are determined to be in an implied partnership.
This blog discusses two general topics about implied partnerships in Tennessee: (1) How Tennessee courts determine whether an implied partnership exists; and (2) the resulting advantages and disadvantages to partners in implied partnerships.
DOES AN IMPLIED PARTNERSHIP EXIST?
Under the Tennessee Revised Uniform Partnership Act (“TRUPA”), a partnership is formed “by the association of two or more persons to carry on as co-owners of a business for profit … whether or not the persons intend to form a partnership.” Under TRUPA, a “person” includes business entities such as limited liability companies and corporations. Significantly, TRUPA provides that owning property together, in and of itself, even where profits from it are shared, does not establish a partnership.
Also, very significantly, TRUPA provides that a person who shares in the profits of a business is presumed to be a partner in a partnership, unless the profits were received on account of one of the specific reasons set forth in the statute, e.g., compensation paid to an employee or independent contractor.
The Supreme Court of Tennessee has stated, in Bass v. Bass (1991), that there is no one fact or circumstance that establishes an implied partnership, but that, like so many other legal decisions, whether an implied partnership exists will depend on the unique facts of each case. One factor that must always be present in order for an implied partnership to exist is an understanding between the parties that the profits of the business will be shared. Without that, there can never be an implied partnership. Beyond an understanding that they will share profits, for there to be an implied partnership, the parties must have entered into a relationship to operate a business whereby they would combine their skill, labor, experience or money.
Here are two cases that are informative on the issue of whether an implied partnership exists:
Moran v. Willensky (Tenn. Ct. App. 2010): In this case, the implied partnership was so obvious that neither party disputed it. The implied partnership in this case is worth discussing because it is pretty typical of many implied partnerships. The parties had agreed that the plaintiff would supply the funds to buy and to renovate a house for resale at a profit. The plaintiff and defendant agreed that the defendant, who allegedly had experience in renovation, would manage the renovation. The defendant was not to receive compensation for overseeing the renovation. The parties agreed that, once the property was renovated and sold, after the plaintiff was repaid the money which she had advanced for the purchase of the home and the expense of renovation, the profits would be split.
Webster v. Estate of Dorris (Tenn. Ct. App. 2015): In this case, the purchasers of a home, which allegedly had defects, attempted to obtain their judgment against, not only the husband who had built the home, but also, against his wife who had made a commission selling it. The plaintiffs alleged that the husband and wife were involved in an implied partnership from which the wife, in addition to the husband, profited. Here are the basic facts:
- Husband and Wife bought a lot on which the home the plaintiffs bought was built
- Husband and Wife both guaranteed the loan for the purchase of the lot
- Husband operated a residential construction company in which Wife had no ownership or participation
- Wife had no input into the design of the structure of the house or into the actual construction of the house, but did assist with the design of certain elements like brick color and roof color
- The funds from the sale of the house to the plaintiffs went into the Husband’s construction company’s account to which the Wife had no access
- Wife acted as listed agent on the sale of the home to the plaintiffs, and she received a 3% commission which she deposited into her own personal account
On the above facts, the court held that there was not an implied partnership between Husband and Wife.
ADVANTAGES AND DISADVANTAGES TO PARTNERS
There is no doubt that bringing a cause of action to establish an implied partnership can be advantageous in many cases because a partner is entitled to share in the profits of the implied partnership. As well, a partner in an implied partnership co-owns assets of the partnership, even property that is titled in the name of another partner, but which is, in fact, partnership property. Under TRUPA, property which is purchased with partnership funds is presumed to be property of the implied partnership even if held in the name of a partner.
As far as profits, TRUPA provides that partners are entitled to share equally in partnership profits. As well, since partners in an implied partnership have duties of care and loyalty, a partner may have a claim for substantial monetary damages against another partner where that partner has engaged in grossly negligent or reckless conduct, competed against the partnership or usurped a business opportunity.
Probably the biggest disadvantage of being a partner in an implied partnership is that, with some exceptions, a partner is jointly and severally liable for all debts of the partnership. Moreover, such a debt can arise by an act or omission of another partner, done in the course of the business of the partnership, even where one of the partners was not directly culpable. As well, partners in implied partnerships, just like partners in other general partnerships, have duties of care and of loyalty to other partners. Finally, partners can be held liable to other partners for breaching the terms of a partnership agreement even where that agreement is not reduced to writing. The defendant partner in the Moran case referred to above was held liable to the plaintiff partner for breaching his obligation to manage the renovations by abandoning the project.
Implied joint ventures, are, for most practical purposes, treated just like implied partnerships under Tennessee law. The Supreme Court of Tennessee has described implied joint ventures as being similar to implied partnerships, but “for a more limited period of time, and a more limited purpose.”
If you believe that you have rights or obligations, whether as a partner in an implied partnership, or because you have dealt with someone who might be a partner in an implied partnership, you should consult an experienced Nashville commercial litigation attorney.