Was This A Case Of A Partnership That Never Was Or A Superseded Partnership?

Three men got together to buy and operate a restaurant.  They formed a corporation, issued shares and made a "Subchapter S" election.  Later, disagreements arose and one of the three sued the other two.  Each side struggled to explain what happened.  The plaintiff alleged the they had formed a partnership and that the partnership survived the incorporation.  The defendants countered that there never had been a partnership, but also that the corporation had superseded the partnership.  

In Eng v. Brown, 2018 Cal. App. LEXIS 232, the plaintiff carried the burden of showing that the parties had formed a partnership.  The defendants then raised, and carried, the affirmative defense of supersession - the general principal that incorporation automatically terminates a partnership.  The burden then shifted back to the plaintiff to prove that the parties entered into a preincorporation agreement or otherwise intended for their partnership to survive incorporation.  This, the plaintiff failed to do and hence lost his case.

Note that had the plaintiff failed to prove the formation of a partnership in the first instance, the defendants never would have had to shoulder the affirmative defense of supersession.   


Tags: Partnerships