The New Jersey Appellate Division recently analyzed the kind of proof needed to establish an oral partnership agreement. In Louis and Marion Trombetta v. Anthony Trombetta & Richard Basciano, plaintiffs filed a Chancery Division action claiming that they owned one-third of defendants’ business, which involved “peep shows and dancing girls,” and was operated out of the rear of plaintiffs’ adult bookstore, based on an alleged oral partnership agreement. Plaintiffs asked the trial court to dissolve the partnership pursuant to the New Jersey Uniform Partnership Act, N.J.S.A. 42:1A-1, et seq. (UPA), order an equitable distribution of the partnership assets and award other damages. Defendant Anthony Trombetta alleged that plaintiffs’ business, Crescendo Books Inc., was a franchisee of his company, that Crescendo had agreed to pay one-third of his company’s operating expenses and had breached that agreement.

At trial, plaintiffs testified that in the 1970s they formed Crescendo, paid off defendants’ debts, took over the front of the premises, continuing its ongoing operation as an adult bookstore, and kept all of the proceeds. They also testified that they had agreed orally with Anthony Trombetta that the “peep shows and dancing girls” operation in the rear of the store was a partnership among the parties, with the proceeds to be divided three ways, one-third to plaintiffs and one-third to each of the two defendants

The Chancery judge found, and the Appellate Division affirmed, that plaintiffs had failed to prove the existence of a partnership. The judge reasoned that plaintiffs had “not produced nor presented any evidence or any document whatsoever . . . [o]ver the period of thirty-some years they claim the partnership existed . . . which would indicate the business to be a partnership.” The lower court focused on the fact that none of the parties had filed tax returns indicating income from a partnership, nor had the alleged partnership filed a separate partnership tax return. The Chancery judge also noted that while “there can be an oral partnership . . . there needs to be some indicia of the fact that there is a partnership to prove the oral partnership.”

On appeal, plaintiffs argued that the lower court had mistakenly applied the UPA retroactively, when it should have applied the predecessor statute, the Uniform Partnership Law (UPL), which had been in effect until December 17, 2000. The Appellate Division responded that, even if the UPL applied, the plaintiffs still had failed to prove a partnership.

The court reviewed several factors to determine whether a business relationship constituted a partnership, including: 1) the intention of the parties; 2) control of the business and partnership property; 3) how profits and losses are shared; and 4) the conduct of the parties toward third parties. In affirming the lower court’s decision, the Appellate Division noted that the trial judge credited the defendants’ testimony that they were not in need of plaintiffs’ financial assistance and had not intended to form a partnership, particularly since the defendants maintained all decision-making power. The Appellate Division also recognized that owners may delegate management responsibility without ceding their claim of sole ownership. In addition, while profit sharing would tend to suggest a partnership, not every business arrangement that provides for the sharing of profits is a partnership. The plaintiffs’ evidence proved nothing more than that they received compensation for their management services. The payments to the plaintiffs were always based on gross profits in the form of commissions, which the court also found did not prove a partnership relationship, because true partners are co-owners and would not typically receive commissions. Plaintiffs had failed to meet their burden of proving any of the factors relevant to formation of a partnership and the Appellate Division affirmed the lower court’s finding that no partnership existed.