Business 8th Edition by Marianne Jennings

Exercise 24

Byker v Mannes
641 N.W.2d 210 (Mich. 2002)*
Dumb and Dumbfounded
FACTS
In 1985, David Byker (plaintiff) was doing accounting work for Tom Mannes (defendant). The two talked about going into business together because they had complementary business skills. Mr. Mannes could locate certain properties because of his real estate background, and Mr. Byker could raise money for their property purchases. Indeed, the parties stipulated the following as part of the litigation process in this case:
[T]he Plaintiff… and Defendant… agreed to engage in an ongoing business enterprise, to furnish capital, labor and\or skill to such enterprise, to raise investment funds and to share equally in the profits, losses and expenses of such enterprise.… In order to facilitate investment of limited partners, Byker and Mannes created separate entities wherein they were general partners or shareholders for the purposes of operating each separate entity.
They also stipulated that they had investment interests in five real estate limited partnerships. With regard to these partnerships in which they invested over a nine-year period, they shared equally in the commissions, financing fees, and termination costs. The two also personally guaranteed loans for these investments from several financial institutions.
The business relationship between the parties began to deteriorate after they created Pier 1000 Ltd. in order to own and manage a marina. Shortly after the creation of Pier 1000 Ltd., the marina encountered serious financial difficulties. To address these difficulties, the parties placed their profits from another partnership, the M B Limited Partnership II, into Pier 1000 Ltd. and borrowed money from several financial institutions.
When Mr. Mannes refused to make any additional monetary contributions, Mr. Byker continued to make loan payments and incurred accounting fees on behalf of Pier 1000 Ltd., as well as on behalf of other business entities. Mr. Byker also entered into several individual loans for the benefit of Pier 1000 Ltd. These business transactions were performed without Mr. Mannes's knowledge.
The marina was returned to its previous owners in exchange for their assumption of Mr. Byker and Mr. Mannes's business obligations. At this point, the business ventures between Mr. Byker and Mr. Mannes ceased.
Mr. Byker then approached Mr. Mannes to obtain his share of the payments required as a result of the losses from the various businesses. Mr. Mannes testified that he was "absolutely dumbfounded" by the request for money.
Mr. Byker then filed suit for the payments, saying that the two had entered into a partnership. Following a bench trial, the court determined that the parties had created a general partnership that included all of the business entities. The Court of Appeals reversed that decision. Mr. Byker appealed.
JUDICIAL OPINION
MARKMAN, Justice
"[T]here is no necessity that the parties attach the label 'partnership' to their relationship as long as they in fact both mutually agree to assume a relationship that falls within the definition of a partnership."
In determining whether a partnership exists, the focus is not on whether individuals subjectively intended to form a partnership, that is, it is unimportant whether the parties would have labeled themselves "partners." Instead, the focus is on whether individuals intended to jointly carry on a business for profit regardless of whether they subjectively intended to form a partnership.
Whether Michigan partnership law, M.C.L. § 449.6(1), requires a subjective intent to form a partnership or merely an intent to carry on as co-owners a business for profit is a question of law.
... At present, partnership is defined as "an association of 2 or more persons, which may consist of husband and wife, to carry on as co-owners a business for profit.… "
In 1994, however, the UPA definition of partnership was amended by the National Conference of Commissioners. The amended definition stated that "the association of two or more persons to carry on as coowners a business for profit forms a partnership, whether or not the persons intend to form a partnership."...
Although Michigan has not adopted the amended definition of partnership as set forth in § 202 of the Uniform Partnership Act of 1994, we believe nonetheless that M.C.L. § 449.6 is consistent with that amendment. †
... [I]f the parties associate themselves to "carry on" as co-owners a business for profit, they will be deemed to have formed a partnership relationship regardless of their subjective intent to form such a legal relationship. The statutory language is devoid of any requirement that the individuals have the subjective intent to create a partnership. Stated more plainly, the statute does not require partners to be aware of their status as "partners" in order to have a legal partnership.
Pursuant to this common law, individuals would be found to have formed a partnership if they acted as partners, regardless of their subjective intent to form a partnership.
If parties intend no partnership the courts should give effect to their intent, unless somebody has been deceived by their acting or assuming to act as partners; and any such case must stand upon its peculiar facts, and upon special equities.
It is nevertheless possible for parties to intend no partnership and yet to form one. If they agree upon an arrangement which is a partnership in fact, it is of no importance that they call it something else, or that they even expressly declare that they are not to be partners. The law must declare what is the legal import of their agreements, and names go for nothing when the substance of the arrangement shows them to be inapplicable.
Thus, one analyzes whether the parties acted as partners, not whether they subjectively intended to create, or not to create, a partnership.…
Accordingly, we believe that our prior case law has, consistent with M.C.L. § 449.6(1), properly examined the requirements of a legal partnership by focusing on whether the parties intentionally acted as co-owners of a business for profit, and not on whether they consciously intended to create the legal relationship of "partnership."
With the language of the statute as our focal point, we conclude that the intent to create a partnership is not required if the acts and conduct of the parties otherwise evidence that the parties carried on as co-owners a business for profit. Thus, we believe that, to the extent that the Court of Appeals regarded the absence of subjective intent to create a partnership as dispositive regarding whether the parties carried on as co-owners a business for profit, it incorrectly interpreted the statutory (and the common) law of partnership in Michigan.
Accordingly, we remand this matter to the Court of Appeals for analysis under the proper test for determining the existence of a partnership under the Michigan Uniform Partnership Act.
What type of relationship did Mr. Byker and Mr. Mannes have?
*This case created a bit of a tussle between the Michigan Court of Appeals and its Supreme Court. Following this decision and remand, the Court of Appeals found that there was no partnership because the parties had to be aware of it to be liable, thus defying the Michigan Supreme Court. On appeal, the Michigan Supreme Court reversed the Court of Appeals, 668 N.W.2d 909 (Mich. 2003), not offering an opinion but explaining it was reversing for the reasons stated in the dissenting opinion at the Court of Appeals on the second round.
† Note how the court traces the history of the law of partnership. Instructors should refer to the Instructor's Manual for more information on the history of business organizations.