Story Case

James Brown and Clarence Coe were in the jewelry business, working together as Brown & Coe, partners. During the second year of their business together, they became financially embarrassed and entered into the following arrangement with Lewis Meyer: Meyer agreed to advance money to the firm, to the maximum amount of $10,000, at the rate of $500 per month. Brown & Coe agreed to give Meyer one-third of the net profits of the business, and to allow him to personally aid in it management and to have a voice in its policy and control, particularly with reference to sales on credit; also, they gave him a chattel mortgage on the property in stock, for the money he put into the business. While they were operating under this contract, Brown and Coe made a large purchase of jewelry which, it developed later, was not paid for. The vendor of the jewelry, thereupon, brought suit against Brown, Coe and Meyer, as partners. To sustain the evidence of Meyer's partnership, his contract with Brown & Coe was submitted. Does this contract make them partners?

Ruling Court Case. Cox And Wheatcroft Vs. Hickman, Volume 8 House Of Lord Cases, Page 268

Messrs. Smith were partners, engaged in the business of iron masters and corn merchants. Being unable to meet their outstanding obligations, they made an assignment of all their property to creditors, as trustees, upon trust, to carry on the business, and, after paying the current expenses, to divide the net income ratably among the creditors of Messrs. Smith, as often as there should be funds in hand sufficient to pay one shilling in the pound. After all the creditors were paid in full, the property was to be reconveyed to Messrs. Smith.

In the assignment, the creditors, named as trustees, were given power to make such rules and regulations as the majority saw fit for the proper management of the business, and even to discontinue the business, in case it did not promise success under those circumstances.

Cox and Wheatcroft, among others, were named as trustees; Cox never accepted, and Wheatcroft, after acting for six months, resigned. After the resignation of Wheatcroft, the other trustees, who continued to act in the conduct of the business, incurred certain indebtedness to Hickman; he brought the present action against the defendants, Cox and Wheatcroft included, seeking to charge them as partners in the business, and, therefore, liable for the debts of the business, incurred by the trustees after the assignment.

The following quotation from Lord Cranworth contains the decision of the Court "It was argued that as they - the creditors, including Cox and Wheatcroft - would be interested in the profits, therefore, they would be partners. It is often said that the test, or one of the tests, whether a person, not ostensibly a partner, is, nevertheless, in contemplation of law, a partner, is whether he is entitled to participate in the profits. This, no doubt, is in general a sufficiently accurate test; for a right to participate in profits affords cogent, often conclusive, evidence that the trade in which the profits have been made was carried on in part for, or on behalf of the person setting up such a claim. But the real ground of the liability is that the trade had been carried on by persons acting on his behalf. When that is the case, he is liable to the trade obligations, and entitled to its profits, or to a share of them. It is not strictly correct to say that his right to share in the profits makes him liable to the debts of the trade. The correct mode of stating the proposition is to say that the same thing which entitles him to the one makes him liable to the other, namely, the fact that the trade has been carried on on his behalf, i. e., that he stood in the relation of principal towards the persons acting ostensibly as the traders, by whom the liabilities have been incurred, and under whose management, the profits have been made."

"Taking this to be the ground of liability as a partner", continued Lord Cranworth, "It seems to me to follow that the mere concurrence of creditors in an arrangement under which they permit their debtor, or trustee for their debtor, to continue his trade, applying the profits in discharge of their demands, does not make them partners with their debtors or the trustees. The debtor is still the person solely interested in the profits, save only that he has mortgaged them to his creditors. He receives the benefit of the profits as they accrue, though he has precluded himself from applying them to any other purpose than the discharge of his debts. The trade is not carried on by or on account of the creditors, though their consent is necessary in such a case, for without it all the property might be seized by them in execution. But the trade still remains the trade of the debtor or his trustee. The debtor or the trustees are the persons by or on behalf of whom it is carried on."

It was accordingly held, that Cox and Wheatcroft were not partners in the business, and were not liable for the debts in question.

Ruling Law. Story Case Answer

What then shall we say is the true test in determining when and under what circumstances the relation of partnership exists? Negatively, it may be said that no arbitrary rule can be formulated which will solve all cases. The best that can be done is to select and emphasize some of the more prominent features and elements of a true partnership relation.

It is said by some, that the intention of the parties will govern in determining this question. This may be a good general test, provided the meaning of "intention" is properly understood. Thus, it is said, that the legal intention, and not the actual intention, is the important thing. By legal intention is meant, that if persons enter into an enterprise, which has all the characteristics and attributes of a partnership, they will be treated as partners, regardless of what they actually intended.

In former times, it was held by the English courts that the mere fact that a person shared in the profits of an enterprise made him a partner in the business, regardless of the basis upon which he received the profits. But it seems now, that the real test is that persons are held to be partners when they are engaged in a business as joint principals, and have a community of interest in the subject matter of the partnership, and jointly share in the profits of the business, and have equal or similar control in the management of the affairs. This excludes a servant who receives a part of the profits by way of compensation; a landlord who receives a part of the profits by way of rent; a lender who receives a part by way of return of his money and interest; and all others who may share in the profits upon any other basis than as joint principals..

In the Story Case, the contract showed that Meyer has a control in the business, that he is to share in the profits, but, because a chattel mortgage was given to Meyer, it is difficult to say that they are in the business as joint principals, and have a community of interest in the property. If it can be proven that the chattel mortgage covered a real interest as a principal owner, then a partnership exists. The Court might say that this was the effect of the mortgage and, therefore, was a partnership. Under the case of Cox vs. Hickman, however, merely a debtor and creditor relation exists, since a community of interest as joint owners can not be shown.

The elements of a complete partnership are (1) control in the business; (2) share in the profits and losses; and (3) likeness or community of interest in the property. If these characteristics are present, no matter what the parties call themselves, they are partners. Of course, partnership is often expressly and intentionally entered into, and by contract, one or more of the parties agrees not to exercise the first element, or perhaps part of his right under the second.