Smith v. Kelley
465 S.W.2d 39, 1971 Ky. LEXIS 422 (1971)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
Holding an individual out to the public as a partner does not, by itself, create a partnership between the parties if their internal agreement and course of conduct demonstrate a contrary intent, particularly regarding the sharing of profits, losses, and management control.
Facts:
- In 1964, Smith began working for an accounting firm owned by partners Kelley and Galloway.
- For three and a half years, Smith received a fixed monthly salary, an expense allowance, and a small annual bonus from the firm's profits.
- During his employment, the firm held Smith out to the public as a partner on tax returns, professional board filings, and in contracts with third parties.
- Smith made no capital contribution to the firm, took no part in its management, had no authority to hire or fire employees, and was not obligated to share in the firm's losses.
- Upon leaving the firm in 1968, Smith claimed for the first time that he was a partner and entitled to a twenty-percent share of the profits.
Procedural Posture:
- Smith filed a suit for a partnership accounting against Kelley and Galloway in the trial court (referred to as the Chancellor).
- The Chancellor found that no partnership existed and dismissed Smith's claim.
- Smith, as the appellant, appealed the Chancellor's judgment to the state's highest court, with Kelley and Galloway as appellees.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does holding an employee out to the public as a partner create a partnership between the parties themselves, entitling the employee to a share of the profits, when there was no agreement to share profits or losses and the employee had no management control or capital investment in the firm?
Opinions:
Majority - Clay, Commissioner
No. Holding an employee out as a partner does not create a partnership between the parties themselves without the requisite intent to form one. A partnership is a contractual relationship requiring an intention to create it, which is distinct from a partnership by estoppel that may arise with respect to third parties. The court found that the Chancellor's determination was not clearly erroneous, as the evidence showed no agreement for Smith to share in a percentage of the profits. The conduct of the parties over three and a half years—including Smith's lack of capital contribution, management authority, or obligation for losses—confirmed that a partnership relationship was never intended or created between them, despite Smith being held out as a partner to the public.
Analysis:
This case clarifies the critical distinction between a 'partnership by estoppel,' which protects third parties who rely on the public representation of a partnership, and a 'partnership in fact' ('inter se'), which governs the rights and obligations among the parties themselves. It establishes that for a partnership to exist between the parties, their intent to form such a relationship is paramount. The decision emphasizes that courts will look beyond titles and public representations to the substantive reality of the business arrangement, including agreements on profit/loss sharing and management control, to determine if a true partnership was formed.
