A Partnership Does Not Automatically Create Joint and Several Liability

From the Desk of Mike Staskiews: 

Generally, all persons in a partnership can be found liable for the wrongful acts of one. But what if the wrongdoer’s conduct was done in the course of business of another entity that is not part of the partnership? The Oregon Court of Appeals breaks down this exact situation.

Claims Pointer:

This recent opinion by the Oregon Court of Appeals examines a situation where the defendant (Parsons) was not liable for the actions of their partner (Gorman). The Court found that the wrongful actions of Branch 9, a business created by Gorman who was in a partnership with defendant, were not done in the course of business of the partnership. Thus, the defendant could not be held liable for Branch 9’s actions just because he was in a partnership with Gorman.

Little v. Branch 9 Design and Contracting, LLC, 317 Or App 639 (2022).

Facts:  

Defendant formed a general partnership with Gorman in 2010. They shared defendant’s Oregon Construction Contractors Board (“CCB”) license to perform construction services. The license listed defendant as the Responsible Managing Individual (“RMI”). Gorman then started to take projects with another person, Raymond, under the entity Branch 9 Design and Contracting, LLC. Defendant knew of and approved of the arrangement but was not an owner or employee of Branch 9.

In 2017, Gorman, Raymond, and Branch 9 (“codefendants”) entered a contract with plaintiffs to do renovations on plaintiffs’ property. The contract included the use of the partnership’s license, but defendant did not participate in contract negotiations, nor did he make any representations to plaintiffs. Defendant did work on the project for about a week during the demolition phase but did not receive compensation. A month later, plaintiffs terminated the contract due to codefendants’ failure to complete the work in a timely manner and codefendants’ misrepresentations about paying subcontractors. At the time of termination, plaintiffs had paid codefendants $53,639.52 that codefendants did not refund.

Plaintiffs filed a lawsuit against codefendants and defendant for several claims, including breach of contract. The trial court entered a default judgment against codefendants, who failed to appear and did not participate at the trial. However, the trial court ruled that defendant, as the general partner of Gorman, was jointly and severally liable for Gorman’s breach of contract and all damages flowing therefrom. Defendant appealed asserting that he was not liable for the debts and obligations of Gorman’s separate business.

Law:  

Under ORS 67.105(1), “all partners are liable jointly and severally for all obligation of the partnership unless otherwise agreed by the claimant or provided by law.” Additionally, ORS 67.100(1) states a “partnership is liable for loss or injury caused to a person…or for a penalty incurred as a result of a wrongful act or omission or other actionable conduct of a partner acting in the ordinary course of business of the partnership or with authority of the partnership.” (Emphasis added). However, the Supreme Court has found that a partner is not limited to working only with or for the partnership. Liggett v. Lester, 237 Or 52 (1964).  

Analysis:  

The Oregon Court of Appeals determined that the fact that Gorman was in a partnership with defendant did not mean that all of Gorman’s business activities were connected to the partnership. Further, the Court pointed out that the trial court’s own factual findings supported defendant’s argument on appeal. Specifically, the trial court had found that Branch 9 was a separate business from the partnership that defendant was not associated with. Additionally, defendant had not participated in the formation of the contract for plaintiffs’ project, nor had he received compensation in connection with the contract. Further, the trial court had not found that the business of Branch 9 was the “ordinary course of business of the partnership” or that Branch 9’s actions were authorized by the partnership. ORS 67.100(1).

The Oregon Court of Appeals then addressed defendant’s argument that Gorman’s use of the partnership’s CCB license also did not create liability for defendant. First, the Court pointed out that the trial court did not find that the defendant knew that Gorman used the CCB license, therefore there was no proof that Gorman used the license “with authority of the partnership.” ORS 67.100(1). Further, the Court looked at the Oregon Administrative Rules which state that a license can only be issued to one entity, and no entity may perform work through the use of another entity’s license. OAR 812-003-0100(1). Thus, under the Oregon Administrative Rules, Gorman was required to have a separate license for Branch 9 and was prohibited from using the license of the partnership. The Court held that Gorman’s violation of the OAR did not create liability for defendant.

The Big Picture: 

When dealing with a case that involves partnerships and other business entities it is important to understand the laws regarding partnerships. While a plaintiff might think it would be easy to assign fault to a defendant because of their partnership with the wrongdoer, it may be the case that your defendant cannot be held liable because the wrongful or actionable conduct was not in the ordinary course of business of the partnership or authorized by the partnership.