Cheesecake Factory, Inc. v. Baines
964 P.2d 183, 125 N.M. 622, 1998 NMCA 120 (1998)
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Rule of Law:
A person who consents to being represented as a partner in an enterprise is liable for that enterprise's debts to a creditor who extends credit in reasonable reliance upon the representation, establishing a partnership by estoppel.
Facts:
- Triples American Grill was a sports bar owned by a corporation named Triple Threat, Inc.
- The manager of the bar, Frank Kolk, represented to Steve Mager, president of Cheesecake Factory, Inc., that the bar was a partnership owned by three people, including John R. Baines.
- Relying on this representation and the perceived security of a partnership structure, Cheesecake Factory extended credit and delivered goods to Triples American Grill.
- Baines was frequently present at the bar, entered the business office, and told others he was a partner.
- Baines and Kolk opened a bank account for the business under the name "Baines: Bob DBA Triples American Grill."
- The signature card for the bank account listed both "Bob Baines, owner" and "Frank Kolk, owner."
- Triples American Grill incurred a debt to Cheesecake Factory for the goods delivered on credit, which it failed to pay.
Procedural Posture:
- Cheesecake Factory, Inc. filed a claim against John R. Baines in a New Mexico district court (trial court).
- The district court, applying the state statute on partnership by estoppel, entered a judgment in favor of Cheesecake Factory.
- Baines paid the judgment in full.
- Baines (appellant) then appealed the judgment to the New Mexico Court of Appeals (intermediate appellate court), and Cheesecake Factory (appellee) moved to dismiss the appeal, arguing Baines had waived his right to appeal by paying the judgment.
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Issue:
Is a person liable for a business's debts under the doctrine of partnership by estoppel when they consent to being represented as a partner, and a creditor extends credit in reasonable reliance on that representation, even if the creditor did not conduct a thorough financial inquiry into the purported partner?
Opinions:
Majority - Hartz, Chief Judge
Yes. A person is liable for a business's debts under the doctrine of partnership by estoppel if they consent to being held out as a partner and a creditor reasonably relies on that representation. The court found sufficient evidence for both elements. Baines's conduct, including opening a bank account as an 'owner,' being frequently present at the business, and telling others he was a partner, was enough to infer his consent to being represented as a partner by Kolk. Furthermore, Cheesecake Factory's reliance was reasonable; its president testified that credit was extended specifically because he believed the business was a partnership, which offers greater security to creditors than a corporation due to the personal liability of partners. The court held that a creditor's reliance on the existence of a partnership and the status of an individual as a partner can be reasonable even without a formal credit check, as a partner's personal investment provides a rational basis for extending credit.
Analysis:
This decision clarifies the 'reliance' element of partnership by estoppel, establishing that a creditor does not need to conduct a formal credit check or exhaustive financial inquiry for its reliance to be deemed reasonable. The court emphasizes that reliance on the business structure itself—a partnership versus a corporation—and the general financial security implied by a partner's involvement can be sufficient. The opinion suggests a presumption of reliance when a creditor is aware of the holding out, which can be rebutted only by showing the creditor's 'complete indifference.' This lowers the evidentiary burden for creditors and serves as a strong warning that individuals who allow themselves to be perceived as partners risk incurring personal liability for the business's debts.
