Business Associations, Pages 148–155

Cheesecake Factory, Inc. v. Baines

Court of Appeals of New Mexico, 1998
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Facts:

Plaintiff extended credit to Triples American Grill because it thought it thought that it was owned by a partnership with defendant as a member, but it was instead owned by a corporation. Plaintiff then sued defendant as a partner by estoppel

Procedural History:

Trial court entered a judgment against defendant.

Issue:

Was defendant a partner by estoppel?

Rule:

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[A] person can be treated as a partner, and consequently exposed to personal liability for the corporation's debts, when representations are made that the enterprise is a partnership and the person is a partner. The representations must be made by the purported partner or with the purported partner's consent. . . . "If the representation is privately made, it may be taken advantage of only by persons to whom it was made; if it was publicly made, anyone (roughly speaking) can make use of it."

. . . . When a representation is private, the statute explicitly requires the claimant to establish that it "has on the faith of such representation, given credit to the actual partnership."

Plaintiff's Argument:

No such reliance is necessary if the representations are made "in a public manner."

Reasoning:

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    [R]ecognizing estoppel without reliance would be a sharp departure from firmly grounded common-law principles. The foundation of estoppel is that one is bound by saying or doing something upon which another relies to his or her detriment.

  • The statute's language also suggests that reliance is still required when made in a public manner. This also makes the most sense, as there is no reason for public representations to be different, and one who consents to a public announcement that he is a partner can expect others to hear and rely upon this.

  • Defendant must have also consented to being represented as a partner. While no evidence directly shows this, it is implied. A bank account was opened in defendant's name as "owner" of Triples American Grill, and a payroll account was opened similarly. Defendant was often in the business office of the bar, making employees believe that he was a partner. Testimony stated that defendant had told people that "he had a sports bar" and "was a partner" in it. In light of this evidence, it was reasonable to infer that defendant consented to being represented as a partner to plaintiff.

  • Finally, plaintiff relied on the purported partnership. Its president testified that it was only willing to extend credit because it was a partnership, specifically because liability runs to the individual partners. Even if he did not do a credit check on defendant, merely having a second person provides some comfort to creditors. People personally liable are usually more careful with their businesses, and the business only owed $20,000—an amount which could be expected to be paid off mostly by a business owner. The test for reliance does not require the decision to have been good business practice. Many factors can go into such a decision, and having defendant as a partner was reasonably included among these. Thus, plaintiff relied on this purported fact.

Holding:

Yes, defendant was a partner from estoppel and is thus estopped from asserting otherwise to plaintiff. Affirmed.