Fairway Development Co. v. Title Insurance
621 F. Supp. 120, 1985 U.S. Dist. LEXIS 16515 (1985)
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Rule of Law:
Under Ohio's Uniform Partnership Law, which adheres to the common law aggregate theory of partnership, any change in the membership of a general partnership results in the dissolution of the original partnership and the formation of a new, distinct partnership that lacks standing to sue on contracts made with the original entity.
Facts:
- A general partnership named Fairway Development Company was formed by three partners: Thomas M. Bernabei, James V. Serra, Jr., and Howard J. Wenger (referred to as Fairway I).
- Title Insurance Company of Minnesota issued a title guarantee insurance policy to Fairway Development Company (Fairway I) for a parcel of real property.
- Two of the original partners, Bernabei and Serra, sold and transferred their entire rights, title, and interests in the partnership to the remaining partner, Wenger, and a new individual, James E. Valentine.
- Wenger and Valentine entered into a new partnership agreement to continue the business under the same name, Fairway Development Company (referred to as Fairway II).
- The new partnership, Fairway II, later discovered an undisclosed easement for a gas line on the property, which it considered a defect in the title that should have been covered by the insurance policy.
Procedural Posture:
- Fairway Development Company (the plaintiff) filed a breach of contract action against Title Insurance Company of Minnesota (the defendant) in the U.S. District Court.
- The plaintiff and the defendant both filed cross-motions for summary judgment.
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Issue:
Does a change in the members of a general partnership dissolve the original partnership, thereby preventing the newly formed partnership from having standing to sue on a title insurance policy issued to the original partnership?
Opinions:
Majority - Dowd, District Judge
Yes, a change in the members of a general partnership dissolves the original partnership, preventing the new partnership from suing on a contract made with the original. Ohio law follows the common law aggregate theory, which treats a partnership as the sum of its members rather than a separate legal entity. The court reasoned that under Ohio's Uniform Partnership Law, the withdrawal of two partners and the admission of a new one was a 'change in the relation of the partners,' which legally constitutes a dissolution of the original partnership (Fairway I) and the creation of a new one (Fairway II). The statute allowing a partner to convey an 'interest' without dissolution (Ohio Rev. Code § 1775.26) applies only to the transfer of economic rights (profits), not the entire bundle of partnership rights including management, as occurred here. Since the insurance policy was a contract with Fairway I, the new entity, Fairway II, was not a party to that contract and thus lacked privity and standing to sue for its breach.
Analysis:
This decision reinforces the traditional aggregate theory of partnership, highlighting that a general partnership's legal identity is intrinsically linked to its specific members. It clarifies that statutes allowing a partner to convey an 'interest' without dissolution refer only to the economic interest in profits, not the full rights of partnership including management. The ruling serves as a significant caution for businesses operating as general partnerships, as it establishes that contracts, such as insurance policies, do not automatically transfer to a successor partnership. This creates a potential pitfall for businesses undergoing ownership changes that fail to secure new agreements or formal assignment consents from their contractual partners.
