Court of Appeals Addresses Partnership by Estoppel

Court of Appeals Addresses Partnership by Estoppel

      A recent decision by the Court of Appeals has considered the application of partnership by estoppel principles to hold an actor personally liable on a third-party debt.  Gibson v. Ready Mix Concrete, No. 2012-CA-000962-MR, 2013 WL 1385012 (Ky. App. April 5, 2013) (Not to be Published).

      Lanham was the owner of Somerset Motor Sports, Inc.  As the corporation was not succeeding, Lanham entered into negotiations with Gibson.  They agreed to form a new venture, intending to expand Somerset Motor Sports physical facility and hopefully its product mix.  Organizational documents for an LLC were prepared (the opinion does not detail whether those documents were the articles and an operating agreement or only one but not the other), and states that articles of organization were ever filed with the Secretary of State (later the opinion contradicts itself on that point).  The agreement between Lanham and Gibson was that Lanham would contribute to the new venture the existing business of Somerset Motor Sports while Gibson would bear the cost of the improvements to the physical plant.  At part of the expansion, Gibson contacted Ready Mix Concrete, explaining what was needed for the expansion and explaining further that he and Lanham were working in partnership with Gibson being the 51% partner.  While Ready Mix would be paid $12,558.53 for the work done, the remaining outstanding balance of $59,279.45 for work performed through October, 2008 was never satisfied.  In December, 2008, both Somerset Motor Sports, Inc. and Lanham filed for bankruptcy protection.  Ready Mix then brought suit against Gibson for the outstanding balance.

      Gibson’s initial argument was that no partnership ever came into existence because he and Lanham never entered into a formal partnership agreement and no filings with respect to that partnership were ever made with the Kentucky Secretary of State.  The trial court, however, determined that in fact a partnership came into existence.  In addition, the trial court, citing KRS § 362.1-308(1), determined that Gibson was as well a partner by estoppel and therefore liable on the partnership’s obligations.

      On appeal, Gibson argued that a determination that he was a partner by estoppel was erroneous and further that certain statements that he purported to have made to Ready Mix put it on notice that he would not be responsible on the partnership’s debt.

      The opinion is confusing with respect to the status of the venture to be formed between Gibson and Lanham.  While the opinion states at one point that “The new entity was to be called Somerset Motor Sports Complex, LLC, but was never incorporated,” the opinion later states “that Gibson’s name appears as an ‘organizer’ on the articles of organization filed with the Kentucky Secretary of State.”  In fact, articles of organization for an LLC under that name were filed with the Kentucky of State on November 7, 2008.  As such it was organized subsequent to the partnership incurring the debt to Ready Mix.  The LLC was administratively dissolved on November 3, 2009 for failure to file its annual report.

      The Court of Appeals, acknowledging that the trial court seemed to have treated interchangeably the principles of partnership and partnership by estoppel, determined that it had correctly concluded that Gibson was liable on the open account to Ready Mix.  Not drawing many distinctions to correct that blurring, the Court of Appeals found that Gibson was liable both as an actual partner and as well as a partner by estoppel. 

      That said, we don’t know much more about the principal after this case than we did before.  Also, the court’s apparent confusion with respect to the organization of an LLC is curious.