Business Associations, Pages 155–161

Fairway Development Co. v. Title Insurance Co.

United States District Court for the Northern District of Ohio, 1985

Facts:

Plaintiff allegedly bought title insurance from defendant and later found an easement not excepted. It notified defendant, which refused to pay to plaintiff.

Issue:

Did plaintiff dissolve its partnership?

Defendant's Argument:

Defendant sold the insurance to Fairway Development, but it was a different Fairway Development. When defendant sold it, Fairway Development was a partnership between three people, which is the only entity defendant is liable to. That Fairway Development terminated however when two of the partners sold their interests to the remaining member and another party. Plaintiff is this new partnership of these two partners, not the partnership defendant is liable to.

Plaintiff's Argument:

The partners transferring their interests was not sufficient to dissolve the partnership. There was clearly an intent to not do so, as both of the allegedly separate partnerships used the exact same name and carried on the previous one's business.

Note:

This is called the entity theory of partnership, which is followed by the RUPA.

Rule:

A partnership is an association of partners, so any change in the personnel of a partnership will result in its dissolution.

Exception:

A mere assignment of one's "interest" without transferring management rights, such as as collateral for a loan, will not dissolve the partnership.

Note:

This is called the aggregate theory of partnership, which is followed by the UPA.

Reasoning:

When the first Fairway Development's partners assigned their interests, the partnership dissolved. Plaintiff was a different partnership formed afterwards. Interpretations otherwise would require interpreting the relevant statute in contradiction to rest of Ohio's law. This is also evidenced by how the partners reformed the company. Both even had a 50% interest, when they would have been split 2:1 if they retained their purchased interests from the initial partnership. As plaintiff is a separate entity from the one the title guaranty extended to, plaintiff has no standing to sue defendant for breach of the contract in question.

Holding:

Yes, the original Fairway Development was dissolved, and plaintiff was formed as a separate partnership with the same name. Plaintiff's motion for summary judgment denied.

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