Any Ship But a Partnership

Posted by William J. Piercy on

Yun v. Um, 277 Ga. App. 477 (2006).  In this business divorce case, Mr. Yun and Mr. Yi began their business relationship as employer-employee.  Yun, the owner of several businesses, employed Yi to manage a (largely unprofitable) grocery store that Yun owned for approximately ten years.  In 2000, Yun and Yi discussed the possibility of acquiring and operating a liquor store.  Central to the dispute that eventually arose between them was whether Yun and Yi would acquire and operate the business as partners, or whether Yun would acquire the business and employ Yi to manage it.  Ultimately, a suitable acquisition target was located:  a liquor store doing business as Beverage City.  After a few offers and counteroffers with the seller, a purchase price of just under $1,200,000 was agreed upon.

A few months before the eventual closing, Yun and Yi opened a commercial account at Wachovia in the name of “Beverage City.” Yun signed the signature card as CEO and Yi did so as President.  Both Yun and Yi had check writing privileges on the account.  Although they opened this account under the trade name Beverage City, neither Yun nor Yi ever incorporated a business entity bearing that name.

The approximately $1,200,000 purchase price was funded with a combination of cash and seller financing.  Yun paid $150,000 at closing and invested an additional $50,000 as “starter money” for the business.  For his part, Yi borrowed $100,000 from his sister-in-law, Um, and paid those funds to the seller at closing.

At closing, Yun received the business and its inventory as well as a warranty deed for the real property.  All of the purchase-related documents, including the promissory notes, personal guarantees, and the security deed listed Yun as the sole purchaser and obligor.   Although Yun held all of the licenses, accounts with liquor distributors, and other accounts associated with the business solely in his name, Yun left the management and operation of Beverage City to Yi.

Ultimately, the business was not profitable.  Perhaps unsurprisingly, Yun became dissatisfied with Yi’s management and decided to sell the business.

In 2003, Yun sold Beverage City to a third party for $951,000, substantially less than he paid for the business less than three years earlier.  While some of the 23 documents executed pursuant to the sale of the business listed an entity, Momo Enterprise, Inc., as having some affiliation with Yun as the seller, none of the documents referenced Yi in any way.  After an offset of $80,000 to the new owner to adjust an inventory shortfall and the payment of $13,200 to a liquor distributor, the net proceeds from the sale were approximately $317,000, which Yun deposited into the Beverage World operating account.

Believing himself to be an equal partner in the business and entitled to share in the sale proceeds, Yi withdrew $150,000 from the operating account and wired it to his sister-in-law, Um.  Upon discovering this transaction, Yun confronted both Yi and Um.  Yun also attempted swear out a warrant for Yi’s arrest for the theft of $150,000, but was not permitted to do so because Yi was a signatory on the Beverage City account.

Mutual friends intervened and set up a meeting between Yun and Yi.  The parties dispute what was said at the meeting, but it is undisputed that Yi delivered Yun a check for $50,000 which Yun accepted and deposited.  Yun understood that this constituted partial repayment of the $150,000.  For his part, Yi believed this to be a true-up of their business relationship and a settlement of their dispute.

Thereafter, Yun sued both Yi and Um (Yi’s sister-in-law) for breach of contract, conversion, and money had and received in an effort to recover the remaining $100,000 of the sale proceeds as well as an additional $116,000 constituting 29 months of $4,000 payments that Yi was obligated, but failed, to make to Yun.

At trial, Yi testified that he and Yun were equal partners and that both were entitled to share equally in the proceeds from the sale of Beverage City.  Alternatively, Yun testified that due to Yi’s poor management of Yun’s grocery store before the Beverage City acquisition that he was unwilling to go into business with or to be Yi’s partner.  Instead, Yun testified that Yi was an employee and tasked with managing Beverage City.  Further, in exchange for Yi’s initial investment of $100,000, Yun would allow Yi to manage Beverage City and to retain all profits above $4,000 per month.

The trial court found that (A) a co-equal partnership existed between Yun and Yi, entitling Yi to share in the proceeds of the Beverage City sale; and (B) the $50,000 payment from Yi to Yun constituted an accord and satisfaction or settlement which resolved all outstanding issues between them.  Apparently important to the trial court’s determination was “the fact that the end result left both Mr. and Mr. Yi with an amount approximately equal to the initial investments they had made toward the purchase of the store.”

Yun appealed and the Court of Appeals reversed the trial court’s holding.  In so doing, the Court found very important the fact that all of the documents memorializing the transaction indicate that Beverage City was acquired and held in Yun’s name individually and not jointly with Yi or in the name of a partnership.  Also important was the fact that the business was not acquired with partnership assets, but with the individual assets of Yun and Yi.  Had the two created a partnership, transferred assets to it and then used those assets to acquire Beverage City, the outcome could be very different.  The Court also noted that the mere fact that Yun and Yi agreed to share profits was not sufficient to establish the existence of a partnership.  Finally, the Court found compelling that all of the contracts and all of the potential liability rested on Yun’s shoulders, rather than being shared with Yi.  The Court cited to Yun’s trial testimony in this regard that the new owner of Beverage City was suing him (Yun) as a result of Yi’s shorting of inventory and failure to pay employees just prior to the sale transaction.

Summarizing its findings that no partnership existed, Court stated that

[blockquote]Given the absence of documentary evidence that Yi had an ownership interest in the liquor store, the absence of any written or recorded partnership agreement, and the absence of evidence that Yun and Yi operated the business as a partnership within the meaning of Georgia’s Uniform Partnership Act, the trial court’s dual findings that the liquor store was ‘acquired and operated as a partnership’ and that Yi as a ‘partner’ of Yun was ‘entitled to receive a share of the proceeds from the sale of the business are lacking in evidentiary support.[/blockquote]

The Court of Appeals also reversed the trial court’s finding that the $50,000 payment from Yi to Yun constituted a settlement of all issues between them.  Under Georgia law, an “[a]ccord and satisfaction occurs where the parties to an agreement, by a subsequent agreement, have satisfied the former agreement, and the latter agreement has been executed.”  The Court noted that, “Like any other contract, an accord and satisfaction requires a meeting of the minds” and further that “an accord and satisfaction may settle one or more claims, or a portion of a claim, without prejudicing the remaining claims”.  Finally, it held that “[a]n accord and satisfaction must be of some advantage, legal or equitable, to the creditor or it shall not have the effect of barring him from his legal rights under the original agreement.”

The Court noted that although Yun accepted the $50,000 payment from Yi, that there was no evidence that this payment was meant to constitute a new, binding enforceable settlement of all issues or that there was a meeting of the minds.  In the absence of such evidence, the Court determined that the $50,000 payment was nothing more than a partial repayment of the $150,000 that Yi took from the Beverage City account.

Finally, the Court sent the case back to the trial court for further inquiry as to whether Yun was limited to seeking repayment of the $100,000 in sale proceeds from Yi in addition to the $116,000, or whether Yun could pursue recovery of the $100,000 in sale proceeds against Um as well.