Story Case

The firm of Young & Brown, engaged in a wholesale clothing business, became pressed for cash money, although it had adequate assets in promissory notes from its customers. For this reason, Young and Brown entered into an agreement with Henry Hyde, by virtue of which Hyde advanced cash on the notes to the extent of their par value, for which he was to receive one-third of the profits of the business. Hyde held the right to determine what notes should be accepted from customers or prospective customers. He did not, however, possess the power to dictate in any other way in the business or its policy. Three months after this agreement was made, Young & Brown became more financially embarrassed, and finally became insolvent. The creditors now attempt to hold Hyde, alleging that, by virtue of his contract with Young & Brown, he became a partner with them. Hyde contends that he was only a creditor advancing money on security. Which contention is correct?

Ruling Court Case. Harvey Vs. Childs, Volume 28 Ohio State Reports, Page 319; Same Case, Volume 22 American Reports, Page 387

A certain person, Potter, was engaged in the business of buying hogs for shipment. He was a man of little capital and he offered one Childs a share in the business with a view of increasing its capital.

Childs was unwilling to take any such interest, but he was willing to advance money sufficient to pay for the hogs as they came. By way of security, Potter agreed that Childs should have the right to the possession of the hogs, that he might sell them, reimburse himself, and retain one-half the proceeds; but that in any case, whether they made or lost, he was to be repaid the money which he advanced.

With the knowledge and consent of Childs, Potter purchased a lot of hogs from Harvey, the plaintiff. In pursuance of their agreement, when the hogs arrived, Childs assumed possession and sold them; they lost on the shipment; Potter repaid the money which had been advanced by Childs, but did not pay Harvey for the hogs. This was an action brought by Harvey against Childs, seeking to hold him for the hogs in question, as a partner of Potter.

Decision

No relation of partnership existed between Childs and Potter in regard to the business of dealing in hogs; there was merely the relation of borrower and lender. There was never an intention that there should be a community of interest between them, in regard to a business in which they were engaged as joint principals. The fact that he was to receive a part of the profits and had the right to sell, is entirely consistent with his desire to be adequately protected as a creditor of Potter.

The Court said in part: "What shall be deemed sufficient evidence of that relation, or to raise the implication of authority to incur the liability in question? To this end numerous tests have been supposed to exist; but the best considered and the least objectionable is that of a community of interests in the profits of a business or transaction as a principal or proprietor * * * Therefore, on these principles, the true test of a partnership, at last, is left to be that of the relation of the parties as principal and agent, to be proved by any competent evidence; for where they sustained that relation, a joint liability may be said to have been incurred by the authority or on behalf of each of the parties so related." It was, therefore, held that the plaintiff could not recover from the defendant for the shipment of hogs.

Ruling Court Case. Burnett Vs. Snyder, Volume 76 New York Reports, Page 344

On a certain day, a partnership was organized by and between the following parties: Strang, Piatt, Lock-wood, Clark, and A. Platt. On the same day, Strang and Platt, individually, entered into an agreement with Snyder in which it was stated that it was for the best interest of the partnership, of that day formed, that Snyder should become a member thereof; it was agreed that Snyder was entitled to receive one third of the profits earned and received by Strang and Piatt from the partnership; and Snyder agreed that he would pay to Strang and Platt an amount equal to one third of any losses which they, or either of them, might sustain, by reason of their connection with the partnership. During the continuance of the partnership, certain obligations were assumed which the partnership, as a firm, was unable to meet; the plaintiff, a creditor of the firm, brought this action against the defendant. He contended that Snyder was a partner in the firm, by virtue of the agreement referred to above.

Decision

The agreement, by which it was agreed that Snyder should become a partner, did not make him one, because it was the agreement of two members only; in order to receive a new member into a firm, all members of the firm must concur in including such new member. Snyder's liability for losses and right to profits did not arise from any connection with the partnership, but from his personal agreement with two members of the firm; he was not liable to the firm for any losses, but to Strang and Platt; he had no right against the firm for any profits, but only against Strang and Piatt; consequently, he was held not to be a partner, and not liable to the plaintiff for any of the debts of the partnership.

Accordingly, judgment was given for the defendant.

Ruling Law. Story Case Answer

It frequently happens that the relation of borrower and lender resembles very much the relation of partnership. As for example, one person may advance money to another, and stipulate that the money and interest thereon shall be returned by his sharing a part of the profits, as they are made. In order to give the lender more adequate assurance that his money will be returned, the borrower may agree that the lender shall have a certain limited control over the property in question, as the right to sell and reimburse himself from the proceeds. Such a transaction appears very much like a partnership transaction. But two elements are lacking to make a partnership out of the relation. In the first place, there is not community of interests between the parties. The property in question belongs solely to the borrower; the lender has only an interest to have his money repaid. In the second place, they are not joint principals engaged in business, where each has the implied right to act for the other. The existence and continuance of the business depends entirely upon the will of the borrower; it is his, and he need not even carry it on; but if he does not, the lender has no right to attempt to continue it as their joint business. Thus, even though it may appear that one person is to receive a part of the profits of the business, and to have some control over it, it may be shown that they were intended only as creating the relation of borrower and lender.

This is the condition in the Story Case. Hyde made a bona fide loan to Young and Brown, taking as security a share in profits of the business, but he had no further interest or power as a principal.