[In 1999 King was doing business under the name of Washco as a sole proprietorship engaged in

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[In 1999 King was doing business under the name of ‘‘Washco’’ as a sole proprietorship engaged in selling, installing, and servicing carwash systems and accessories. King offered to his customers the ‘‘QuikPay’’ system, a cashless vending system for carwashes that used a memory chip key that interacted with a controller at the carwash. Either a cash value can be placed on the key or the carwash usage recorded on the key is billed monthly. Washco purchased QuikPay systems for resale from Datakey Electronics Inc. (Datakey) but it was becoming unprofitable for Datakey, partly because the keys for QuikPay could only be obtained from an attendant. According to Glen Jennings, president of Datakey, since most carwashes are unattended, this reliance on the presence of the carwash owner or employee was limiting the product’s market. 

   As QuikPay’s largest distributor, King was aware that QuikPay’s limitations made the product unattractive to many of his customers. King contacted Willson, an electronics technician and computer programmer, to see if Willson could develop a combined ‘‘key dispenser’’ and ‘‘revalue station’’ for the QuikPay system that would make the system self-service. King also asked Willson if he would design and install an interface between the QuikPay system and the carwash of one of King’s customers. Designing such an interface was beyond King’s technical expertise. Willson individually designed and installed at least four specific customer interfaces that allowed King to sell the QuikPay system to those customers, but Willson was never paid for his work. 

   According to King there was an oral agreement among himself, Willson, and Scott Gardeen (an employee of Datakey who was an original designer of QuikPay) to form a corporation whenever Willson developed the key dispenser-revalue station. The three parties met in the spring of 2002 to discuss the venture in which they would design and build the key dispenser-revalue station and sell it to Datakey. It was agreed that Willson would write the software and do the firmware, hardware, and any other electrical or software work; Gardeen would contribute his knowledge of the system and his contact with Datakey; and King would contribute financial resources and his experience and contacts as QuikPay’s largest distributor. Together, Willson, King, and Gardeen came up with the name ‘‘Secure Data Systems’’ for their business. They discussed the fact that the entity’s initials, ‘‘SDS,’’ were also the initials of their first names, Scott, Don, and Scott. By the summer, Willson had built a handheld revalue station for a meeting with Jennings. Jennings indicated that if a final, marketable key dispenser-revalue station were developed, Datakey would be interested in a business relationship with Secure Data Systems.

   Around October 2002, Datakey decided to discontinue its QuikPay line and referred all of its customers to King for continued support of the system. By the beginning of 2003, King had deliberately separated his QuikPay sales, maintenance, and its future development from his Washco carwash business and had moved all QuikPay business to Secure Data Systems. Around the same time, Willson developed a Web site for Secure Data Systems with e-mail accounts for King and Willson.

   By the spring of 2003, Willson’s work for Secure Data Systems consisted primarily of dealing with QuikPay maintenance and repair issues, although he continued to try to finish the key dispenser-revalue station whenever he had time. Willson made changes in the QuikPay software to fix problems that customers wanted fixed.

   In May 2003, King and Willson went together to an international carwash convention in Las Vegas, Nevada. King suggested to Willson that he make up Secure Data Systems business cards for King and Willson. The cards presented Willson as ‘‘System Designer & Engineer’’ and King as ‘‘Sales.’’ The cards described Secure Data Systems as carrying the ‘‘QuikPay Product Line.’’

   In correspondence with clients, King often referred to Willson as the person doing technical work for QuikPay. Willson also sent e-mails communicating directly with QuikPay clients on various issues. In an e-mail dated August 12, 2003, Willson described himself as the software and hardware designer with Secure Data Systems and he referred to King as his ‘‘partner.’’ In October 2003, King sent an e-mail to a potential customer in which King referred to Willson as ‘‘the other half of Secure Data Systems.’’

   Willson estimated that he had put at least 2,000 hours into QuikPay sales and maintenance and in developing the key dispenser-revalue station. When Willson was asked why he invested his time and expertise into QuikPay without any remuneration, he explained, ‘‘That was my contribution to the company. I mean that was my piece.’’ Willson contacted a law firm to draw up papers to formalize the partnership. These papers were never drafted. According to Willson, when he told King he was looking into creating a written agreement for their relationship, King ‘‘assured [him] that he was having his attorneys look at it.’’ King and Willson had another meeting around the end of December and agreed to end their relationship and any joint QuikPay or key dispenser-revalue station activities. Approximately two weeks after this meeting, King called Willson and offered to compensate him for the time he had spent in maintaining or repairing QuikPay. Willson refused.

   Willson brought an action for winding up and an accounting, alleging formation of a partnership. King denied they had formed a partnership. The trial court found that King and Willson had ‘‘pooled resources, money and labor,’’ but found no partnership existed because there was no ‘‘specific agreement.’’ Alternatively, the trial court found that because King did not commit his preexisting business to any specifically formed partnership, the scope of the partnership did not encompass any activity garnering profits. Willson appealed the trial court’s order.]

   This case is governed by the * * * revised Uniform Partnership Act. Section [202(a)] of the Act defines that a partnership is formed by ‘‘the association of two or more persons to carry on as co-owners a business for profit’’ and explains that this is true ‘‘whether or not the persons intend to form a partnership.’’ [Citation.]

   Obviously, the relationship between King and Willson is ‘‘of two or more persons.’’ In addition, whether the business of QuikPay maintenance, or even the development of the never-produced key dispenser-revalue station, qualifies as a business ‘‘for profit’’ is not in issue. It is not essential that the business for which the association was formed ever actually be carried on, let alone that it earn a profit. Rather, a business qualifies under the ‘‘business for profit’’ element of [Section 202(a)] so long as the parties intended to carry on a business with the expectation of profits. [Citations.]

***

   We first consider whether King and Willson formed an association. King correctly points out that inherent to the term ‘‘association’’ is the idea that the relationship between the ‘‘two or more persons’’ be intentional. [Citation.] King argues that no partnership was formed because he never intended to form a partnership relationship with Willson. * * *

   But, as [Section 202(a)] explicitly states, the intent necessary to form an association does not refer to the intent to form a partnership per se. There is no requirement that the parties have a ‘‘specific agreement’’ in order to form a partnership. People do not become partners when they attain co-ownership of a business for profit through an involuntary act. [Citation.] But, if the parties’ voluntary actions form a relationship in which they carry on as co-owners of a business for profit, then ‘‘they may inadvertently create a partnership despite their expressed subjective intention not to do so.’’ [Citation.] Intent, in such cases, is still of prime concern, but it will be ascertained objectively, rather than subjectively, from all the evidence and circumstances. [Citation.]

   Because of this, King’s focus on his intent to form a corporation, as opposed to a partnership, does more to prove an intent to form the requisite association than to disprove it. It is, in fact, not unusual for courts to find a partnership relationship between parties that were operating with the intent to form a corporation and to specifically avoid a partnership relationship. [Citation.] * * *

   In considering the parties’ intent to form an association, it is generally considered relevant how the parties characterize their relationship or how they have previously referred to one another. [Citation.] The joint use of a business name is evidence of an association. [Citations.] This is especially true when the business name is composed of the parties’ names or initials. [Citations.]

   It is undisputed that King and Willson discussed the fact that Secure Data Systems had the initials of Scott, Don, and Scott. Granted, at its inception, Secure Data Systems was an association among three parties focused on the limited task of creating a key dispenser-revalue station. * * * King removed any QuikPay operations from his Washco business. He instead began to conduct all QuikPay business exclusively through Secure Data Systems. Willson was clearly associated with King in that venture.

   * * * Business cards were created for King and Willson describing their respective positions in Secure Data Systems. King and Willson went as joint representatives of Secure Data Systems to a Las Vegas carwash convention. King and Willson worked together both in servicing the QuikPay line, assembling and repairing Datakey’s old inventory, and developing the key dispenser-revalue station. Various e-mails to customers and to Datakey evidence their joint efforts in this regard. To King and to others, Willson referred to himself and King as partners. Specifically in regard to ventures involving the regular QuikPay system, King referred to Willson as ‘‘the other half of Secure Data Systems.’’ We believe the evidence is clear that King and Willson formally associated to develop a key dispenser-revalue station and that further, this association expanded in scope to encompass all QuikPay operations.

   * * * King claims that he started selling and maintaining QuikPay by himself and asserts that he maintained full control of that business line. According to King, Willson simply did what King asked him to—apparently for free.

   Being ‘‘co-owners’’ of a business for profit does not refer to the co-ownership of property, [RUPA Section 202(c)(3)] but to the co-ownership of the business intended to garner profits. It is co-ownership that distinguishes partnerships from other commercial relationships such as creditor and debtor, employer and employee, franchisor and franchisee, and landlord and tenant. [Citation.] Co-ownership generally addresses whether the parties share the benefits, risks, and management of the enterprise such that (1) they subjectively view themselves as members of the business rather than as outsiders contracting with it and (2) they are in a better position than others dealing with the firm to monitor and obtain information about the business. [Citation.]

   The objective indicia of co-ownership are commonly considered to be: (1) profit sharing, (2) control sharing, (3) loss sharing, (4) contribution, and (5) co-ownership of property. [Citation.] The five indicia of co-ownership are only that; they are not all necessary to establish a partnership relationship, and no single indicium of co-ownership is either necessary or sufficient to prove co-ownership. [Citation.]

   * * * The record demonstrates that Willson contributed his time and expertise not only to the business of developing the key dispenser-revalue station, but also to the continued operations of the regular QuikPay product line. * * * 

   The continuing investment of one’s labor without pay is generally considered a strong indicator of co-ownership. [Citations.] * * * Valid consideration for an ownership interest in a partnership may take the form of either property, capital, labor, or skill, and the law does not exalt one type of contribution over another. [Citations.]

   In this case, Willson contributed his time and expertise without any compensation for approximately 1 year. Conservatively, Willson estimated his contribution as totaling over 2,000 hours. * * * that without Willson’s technical assistance, King would have been unable to continue QuikPay’s viability after Datakey abandoned the product. That King could have dealt with certain issues by hiring contractors or employees is irrelevant. He chose not to do so—presumably because the promise of the key dispenser-revalue station made a partnership relationship more worthwhile—and saved himself the expense of paying for this labor.

   We also find that despite King’s protestations to the contrary, the evidence shows that King and Willson shared control over QuikPay business. * * *

***

   Willson also testified that he had an agreement with King to share profits, although King denies this. Of the five indicia of co-ownership, profit sharing is possibly the most important, and the presence of profit sharing is singled out in [Section 202(c)(3)] as creating a rebuttable presumption of a partnership. [Citations.] However, what is essential to a partnership is not that profits actually be distributed, but, instead, that there be an interest in the profits. [Citations.] Willson’s testimony that they agreed to share in the profits of the business is, in light of all the evidence, simply more credible than King’s statement that compensation ‘‘was never discussed.’’ And even King vaguely admits that they had an understanding to share profits of the key dispenser-revalue station, if that were developed. * * *

   We do not find any evidence that King and Willson had an agreement for loss sharing. But we find this of little import, since purported partners, expecting profits, often do not have any explicit understanding regarding loss sharing. [Citation.] Likewise, although King and Willson admittedly do not own any joint property, in an informal relationship, the parties may intend co-ownership of property but fail to attend to the formalities of title. [Citation.] Moreover, in this case, it is unclear that there is much QuikPay ‘‘property’’ at all. * * *

   We conclude that the objective, as well as subjective, indicia are sufficient to prove co-ownership of the business of selling, maintaining, and developing QuikPay. Having already concluded that there was an association for the same, we conclude that Willson proved that he and King had formed a partnership for the business of selling, maintaining, and developing QuikPay.

   Reversed and remanded for further proceedings.

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Smith and Roberson Business Law

ISBN: 978-0538473637

15th Edition

Authors: Richard A. Mann, Barry S. Roberts

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