Peck, Darrell L.

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Partnerships: The Nature of the Partnership Before the Law

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Marquette Law ReviewVolume 37Issue 1 Summer 1953 Article 6Partnerships: The Nature of the Partnership Beforethe LawDarrell L. PeckFollow this and additional works at: http://scholarship.law.marquette.edu/mulrPart of the Law CommonsThis Article is brought to you for free and open access by the Journals at Marquette Law Scholarly Commons. It has been accepted for inclusion inMarquette Law Review by an authorized administrator of Marquette Law Scholarly Commons. For more information, please contactmegan.obrien@marquette.edu.Repository CitationDarrell L. Peck, Partnerships: The Nature of the Partnership Before the Law, 37 Marq. L. Rev. 66 (1953).Available at: http://scholarship.law.marquette.edu/mulr/vol37/iss1/6MARQUETTE LAW REVIEWstatutes of limitation, policy considerations would seem to warrantallowing the federal courts in bankruptcy proceedings to impose federalequitable interpretations upon state statutes of limitations.The Supreme Court's recent denial of certiorari seems unfortunateinasmuch as the Austrian decision cannot be justified on the groundsthat the interpretation of 11 e which formed the basis of the decisionwas that intended by Congress. In addition thereto, the general policyof the Bankruptcy Act aimed at extending the period in which to bringsuit would seem to warrant a contrary interpretation of 11 e.GERALD A. FLANAGANPartnerships-The Nature of the Partnership before the Law-In 1946 two persons formed a partnership to operate a Ford salesand service agency. Two years later the same persons formed a secondpartnership to sell and service tractors. Each partnership had its ownbuilding, books, employees and bank account. All they had in commonwere the two owners, the partners. The Ford agency employed enoughmen to make it subject to the Michigan employment security act, butthe tractor agency did not. However, acting under advice from ap-pellant, the partners included the employment of both firms on the samereport. By 1949, because of the good employment record of the twofirms, the partners' contribution rate for employment insurance wasonly one per cent of the wages paid. At that time appellee purchased theFord agency from the partners, retaining the same employees. Appellantraised the contribution rate of the Ford agency to three per cent on theground that the two partnerships had legally been but a single firmbecause they were composed of the identical partners; that appelleetherefore was not a successor to the firm that had the one per centcontribution rate, but to a distinct firm. Appellee won on an appealto a referee. This decision was affirmed by the appeal board and bythe circuit court, but the commission appealed. Held: Affirmed. Apartnership is a legal entity distinct from the individuals composing it.Consequently, two partnerships with the same members are not a singleemploying unit but must be considered separately. Michigan Employ-ment Security Commission v. Crane et al. 334 Mich. 411, 54 N.W. 2d616 (1952).The decision of the principal case, that a partnership has a legalexistence distinct from its members, follows what is generally knownas the entity theory of partnerships. The contention of the appellant-a partnership is not a distinct legal entity but an association of indi-viduals-is known as the aggregate theory.' Whether a partnership is]-Crane, The Uniform Partnership Act-A Criticism, 28 HARV. L. REv. 762at 763 (1915).[Vol. 37RECENT DECISIONSor is not a legal being, though a most fundamental concept, has longbeen one of the most confused questions of partnership law because ofthe conflict between these theories.2The aggregate theory may be traced back to the early common lawwhere there were no artificial legal entities recognized by the courts.3The entity theory, on the other hand, was embodied in the old LawMerchant.4 When the Law Merchant was incorporated into Englishcommon law, the entity concept of partnerships was inadvertently leftbehind.5 Consequently, the aggregate theory was the prevailing commonlaw theory when this country inherited its common law from England.Among the civil law jurisdictions, however, the entity theory hasreceived almost universal recognition.0Although there has been considerable legislation in this countryconcerning partnerships, statutes defining their specific nature have beenconspicuously lacking.7 Statutes dealing primarily with other phases ofthe law, and with partnerships only incidentally, generally treat the firmas an entity." For example, a partnership is an entity under thebankruptcy act 9 or for purposes of workmen's compensation."0 Thepartnership is usually included in the statutory definition of a "person."'"The Uniform Partnership Act is the most important and mostgenerally adopted legislation dealing directly with partnerships.2 x Im-mediately prior to the drafting of the act, begun in 1902, the entitytheory was rapidly growing in popularity, so much so that it was evenreferred to as the "generally accepted theory."' 3 This theory was so2 The two theories are discussed in almost every treatise concerning partnershiplaw. See especially: Cowles, The Firm as a Legal Person, 57 CENT. L. J. 343(1903); Burdick, Some Judicial Myths, 22 HARV. L. REv. 393 (1909) ; Lewis,The Uniform Partnership Act, 24 YALE L. J. 617 (1915) ; Crane, The UniformPartnership Act-A Criticism, 28 HARV. L. REv. 762 (1915); Lewis, TheUniform Partnership Act-A Reply to Mr. Crane's Criticism, 29 HARv. L. REv.158, 291 (1915); Crane, The Uniform Partnership Act and Legal Persons,29 HARV. L. REv. 838 (1916); Drake, Partnership Entity and Tenancy inPartnership: The Struggle for a Definition, 15 MicH. L. REv. 609 (1917);Mathews and Folkerth, Ohio Partnership Law and the Uniformn PartnershipAct, 9 OHIo ST. L. J. 616 (1948); Kaesh, Partnership Law and the UniformPartnership Act in South Carolina, 3 S.C.L.Q. 193 (1951).3 GILmoRE ON PARTNERSHIPS §40 (1st ed. 1911).4For a complete history of the entity theory, see Drake, Partnership Entityand Tenancy in Partnership: The Struggle for a Definition, supra, note 2.5 Ibid. at 620.6 Supra, note I at 764.7 Nebraska has adopted the entity theory by statute. NEB. R v. STATS. §67-306(1943).8 Supra, note 1 at 768.9 TELLER. PARTNERSHIPS §113A (Ist ed. 1949).10 Wis. STATS. (1951), sec. 102.04 (2); Kalson v. Industrial Commission, 248Wis. 393, 21 N.W. 2d 644 (1946).1WIs. STATS. (1951), sec. 108.02 (4), 189.02 (2), 120.53 (1), 121.76 (1),122.01 (6).12 7 UNIFORM LAWS ANNOTATED.13 Supra, note 3 at 609. It was even claimed that the entity theory had replacedthe aggregate theory as the legal concept See Prof. Beale's Preface toPARSONS, PARTNERSHIP (4th ed.).1953]MARQUETTE LAW REVIEWpopular with the Commissioners on Uniform State Laws that when theyundertook to codify partnership law the aggregate theory was originallynot even considered. Later two distinct partnership acts were drawn up,one on each theory; and finally the draft based on the aggregate theorywas approved. 14 This choice dealt a serious blow to the progress of theentity theory, but contrary to the expectations of some,15 did notdestroy it.Neither the aggregate nor the entity theory is applied in absoluteform in this country. For convenience, the various states may be dividedinto four groups: 1) the entity theory states, 2) the liberal aggregatetheory states, 3) the borderline states, and 4) the strict aggregate theorystates.'6In the entity theory states, the partnership is a distinct entity beforethe law for all purposes. The rule is usually applied with admirableconsistency in such jurisdictions.' 7 In exceptional cases the partnershipentity is sometimes ignored, but such departures are rare.'8The majority of the states follow a very liberal modification of theaggregate theory. Although it is recognized that the partnership is nottechnically a legal entity, nevertheless it is often treated as one. 19Whether or not the courts of such jurisdictions will recognize thepartnership as an entity depends entirely on the facts of each case.A few states are borderline states. Actually these could probablybe included among the liberal aggregate theory states; but, instead ofdeclaring that a partnership is not technically a legal person but is onlytreated as such, they sometimes hold that a partnership is a legal entityand sometimes that it is not.20 What a partnership actually is in suchstates is hard to determine.'1 For a detailed history of the attempt to draft a Uniform Partnership Act, see7 Uniform Laws Annotated, Prefatory Note; Lewis, The Uniform Partner-ship Act, supra, note 2 at 639; Richards, The Uniform Partnership Act, 1Wis. L. REv. 5, 90 (1920).'1 Lewis, The Uniform Partnership Act, supra, note 2.16This classification must, of course, be rather arbitrary. Aside from theconfirmed entity theory states [Iowa, Louisiana (civil law), Nebraska(statute), Oklahoma, South Carolina, and Vermont], it is almost impossibleto make any positive classification.'7Thurston v. Detroit Asphalt & Paving Co., 226 Mich. 505, 198 N.W. 345(1924); Chisholm v. Chisholm Construction Co., 298 Mich. 25, 298 N.W. 390(1941); Lobato v. Paulino, 304 Mich. 668, 8 N.W. 2d 873 (1943); Walker v.Wait, 50 Vt. 668 (1878) ; Dunbar v. Farnum, 109 Vt. 313, 196 At. 237 (1938) ;Glass v. Newport Clothing Co., 110 Vt. 368, 8 A.2d 651 (1939) ; Brooks v.Ulanet, 116 Vt. 49, 68 A.2d 701 (1949).18 Chisholm v. Chisholm Construction Co., supra, note 17 [to avoid fraud];Calhoun v. Bank of Greenwood, 42 S.C. 357, 20 S.E. 153 (1894) [where therewas only one partner].'9 Note, 41 CoT. L. REv. 698 (1941) discusses a number of New York decisionsemploying the entity theory in certain situations although New York generallyfollows the aggregate theory.20 Fenner & Beane v. Nelson, 64 Ga.App. 600, 13 S.E.2d 694 (1941) states thata partnership is a legal entity. Huiet v. Brown, 70 Ga.App. 638, 29 S.E.2d 326(1944) 'declares that a partnership is not a being distinct from its members.Each cites several cases in support of the decision.[Vol. 37RECENT DECISIONSThe strict aggregate theory states deny that the nature of a partner-ship is ever such as to make it a legal person. The firm may be anentity only for procedural or conveyancing purposes or other purposesestablished by statute.21 Even then, the essential nature of the partner-ship is not affected.2 2Wisconsin, in Westby v. Bekkeda, 23 its first decision on the legalnature of the partnership, affirmed the aggregate theory as the commonlaw on the subject. The language of the court in the Thomas case2"definitely placed this state in support of the strict aggregate theory.25The latest Wisconsin case on the nature of the firm, however, theKalsoncase, 2 6 declared that a partnership is recognized as an entity for somepurposes.27 At first glance, this would seem to make Wisconsin a liberalaggregate theory state, but a closer examination raises some doubt.In the Thomas case, the court refused to recognize the firm as anentity even though the workmen's compensation act included a "firm"in the definition of an employer .2  An employee was said to beemployed by the partners as individuals and not by the firm as anentity.29 This position was reversed in the Kalson case which held thatthe firm entity and not the individual partner was the employer.30However, the court may not have been departing from its aggregateposition but merely recognizing that statute makes the firm an entity incertain instances. Even a court following the strict aggregate theorycannot ignore legislation recognizing the partnership as an entity.312lThomas v. Industrial Commission, 243 Wis. 231, 10 N.W.2d 206 (1943).22Supra, note 3.23 172 Wis. 114, 178 N.W. 451 (1920).24 Supra, note 21.25-. . it is -well established that the Uniform Partnership Act is founded onthe aggregate, and not on the entity theory so far as all substantive right,liabilities, and duties are concerned. Whatever recognition is given to theentity theory in the partnership act is solely for procedural or conveyancingpurposes .. Ibid. at 239.26Kalson v. Industrial Commission, supra, note 10.27 "But we cannot sustain the plaintiff's contention that use of the word 'firm' inthat phrase [WIs. STATS. (1951), sec. 102.04 (2)] it was not intended to treat,under the compensation act, a firm as a separate entity, as distinguished froman aggregation of individuals who composed these partnerships." Ibid. at 396.28 WIs. STATS. (1951), sec. 102.04 (2).29Supra, note 24 at 239. A husband and wife had formed a partnership whichemployed their minor son. The son was killed at work and his parents suedfor $2000 under the compensation act. The court held the parents, and notthe firm as an entity, were actually the employer. Consequently, the parentswere both claimant and employer, both a plaintiff and defendant in the action,and could not recover.In its next session, the state legislature reversed this result by abolishingthe defense that the claimant was also the employer, enacting Wis. STATS.(1951), see. 102.51 (7). Possibly this action by the legislature influenced thecourts decision in the Kalson case.30 Supra, note 26 at 396.31 The New Jersey-court reached the same result in a case very similar to theKALSON case. Finston v. Unemployment Compensation Commission, 132N.J.L. 276, 39 A.2d 697 (1944).19531MARQUETTE LAW REVIEWBy the same token, how can the courts of any state which hasadopted the Uniform Partnership Act ignore this legislative confirmationof the aggregate theory by declaring that the partnership is a legalentity? The draftsman of the act has stated that this is impossible.3 2Yet it is almost impossible to find a court, even in states having theUniform Partnership Act, which have never treated the firm as anentity. 3 Apparently then, the uniform act is not a codification of theaggregate theory. Claim has been made that the act is closer to the entitytheory 34 but this conclusion is not generally accepted.3 5 The answermust be that the act is not based entirely on either theory.3 6 Since theact is in effect in entity as well as aggregate theory states,3 7 apparentlyit does not settle the question one way or the other.3 8 Consequently, itis left to each state to decide the question for itself.The question has been decided with the greatest certainty in theentity theory states.3 9 The strict aggregate theory states are also veryconsistent in their decisions on the subject, but, because of statutesemploying the entity theory even in these states, the same degree ofcertainty is not possible.40 There is utter confusion as to whether thefirm will be treated as an entity or as a group of individuals in a givencase in the liberal aggregate theory or borderline states.41 Very muchdiscretion is left to the courts in the states and, as a result, "hard" casesare avoided at the expense of a definite rule of law.In addition to being the most certain theory, the entity theory is also32 "It is submitted that there is no warrant for this conclusion [that the UniformPartnership Act adopts neither the aggregate nor the entity theory] ; but that,on the contrary, the adoption of the Act makes it impossible for a court tohold a partnership a legal person. . . " Lewis, The Uniform Partnership Act-A Reply to Mr. Crane's Criticism, supra, note 2 at 298.33The Wisconsin Supreme Court is a good example. See Kalson v. IndustrialCommission, supra, note 10.34 "The language and the effect of provisions of the proposed Uniform [Partner-ship] Act are more nearly consistent with the legal-person theory of partner-ship than with any other theory." Crane, The Uniform Partnership Act andLegal Persons, supra, note 2 at 843.s Supra, note 25; supra, note 32.36 "The language of the Act reminds us of the language of some politicalplatforms. There is some language which will please those who approve theaggregate theory. There is other language which will please those whoapprove the entity theory..."Drafting the Uniform Partnership Act afforded a wonderful opportunityto give a clear and unambiguous answer to-that question. We think that nosuch answer is given by the act, and that this is a matter for profoundregret." WAPuuN, CoRPoRATE ADVANTAGES WITHOUT INCORPORATION 300.(1929).37 Michigan, Nebraska, South Carolina, and Vermont are entity theory stateswhich also have the Uniform Partnership Act.asSupra, note 1 at 770. Mr. Crane analyzes the Uniform Partnership Act andpoints out where the entity theory shows its influence.39Supra, note 17.4OIn the Thomas case the Wisconsin Supreme Court enunciated the strictaggregate theory but in the Kalson case a statute necessitated recognizing theentity theory.41 Supra, note 19.[Vol 37RECENT DECISIONSclosest to the layman's and businessman's view of the partnership. 42Business is conducted with the firm, not with several individuals. Theaggregate theory is a carry over from the old common law prior to itsmerger with the mercantile law which governed the business world.Under the Law Merchant the partnership was an entity and theUniform Partnership Act expressly provides that in any case notprovided for in that act "the rules of law and equity, including the lawmerchant, shall govern." 43 It has already been seen that the act does notsettle the nature of a partnership. The entity theory should not beavoided merely because it is a departure from the old common law. Themodern trend is toward the entity theory.44 The question is of increasingimportance because in recent years the partnership form of doingbusiness has increased in popularity due to income tax benefits it hasover the corporation. 45The entity theory is closest to the true nature of partnerships and itsadoption in Wisconsin would be desirable to avoid recurrences of theconfusion and apparent conflict of the Thomas and Kalson cases.46However, if the Wisconsin Supreme Court should decide to take sucha step, the aggregate theory should be destroyed with a single blow toavoid the confusion of wavering between theories which is so prevalenttoday. It is probably better to be certain of the old law than to waverbetween the old and the new.4 7 But it is better still to be certain ofthe new.DARuELL L. PEcK42 "In common parlance a partnership is referred to as though it had a separateexistence like that of a corporation; this is doubtless the mercantile con-ception, and there seems to be a growing tendency on the part of the courtsto adopt this view of the business world which regards a partnership as alegal entity distinct from and independent of the persons composing it."40 AM. Jug. PARTNERSHIPS §18.43 UNIFORM PARTNERSHIP Acr §5.44"While a co-partnership at common law was not considered a distinct entityfrom the partners composing it, the modern tendency is the other way, i.e.,to treat a partnership as an entity distinct and independent of the individualscomposing it." Gleason v. Sing, 210 Minn. 253, 297 N.W. 720 (1941).45Note, 97 U. oF PA. L. REv. 52 (1948).46As Justice Learned Hand said, "The whole subject of partnership has un-doubtedly been exceedingly confused, simply because our law has failed torecognize that partners are not merely joint debtors. It could be straightenedinto great simplicity, and in accordance with business usages and businessunderstanding, if the entity of the firm, though a fiction, were consistentlyrecognized and enforced. Like the concept of a corporation, it is for manypurposes a device of the utmost value in clarifying ideas and in making easythe solution of legal relations." In re Samuals & Lesser, 207 Fed. 195, 198(S.D. N.Y. 1913).47 Since the decision of the Kalson case, even the old law is none too certainin Wisconsin.1953]

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Partnerships: The Nature of the Partnership Before the Law

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