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May 12, 2017

District Court Addresses New Jersey’s Little-Used “Partnership-by-Reliance” Statute

By John P. Mitchell

Noting that the New Jersey state courts have not previously addressed the issue, a federal court has construed New Jersey’s partnership-by-reliance statute, N.J.S.A. 42:1A-20. Messler v. Cotz, No. 14-6043 (D.N.J., Apr. 24, 2017). Partnership-by-reliance, also known as partnership-by-representation or partnership-by-estoppel, is recognized in many jurisdictions and permits vicarious liability to be imposed on those who are not actual partners.

Ms. Messler brought a malpractice claim against her former attorney, George Cotz, who practiced law with his wife under the firm name Cotz & Cotz. Because Mr. Cotz did not have malpractice insurance, the plaintiff also sought to impose vicarious liability on Mrs. Cotz even though she did not participate in the representation. Following discovery Mrs. Cotz moved for summary judgment arguing that (i) Cotz & Cotz was not an actual partnership and (ii) there was no basis for a partnership-by-reliance claim under N.J.S.A. 42:1A-20.

Judge Freda H. Wolfson, United States District Judge for the District of New Jersey, granted summary judgment to Mrs. Cotz, finding that the plaintiff did not present any evidence as to the seven indicia for determining that a partnership existed: (1) the parties’ intention to form a partnership; (2) the obligation to share in profits and losses; (3) ownership and control of the partnership’s property and business; (4) community of power and administration; (5) the language used in the partnership agreement; (6) the conduct of the parties toward third persons; and (7) the rights of the parties upon dissolution.

On the partnership-by-representation issue, Judge Wolfson found the evidence insufficient to support that claim. Under the New Jersey Uniform Partnership Act (and identical provisions adopted by many other states), a partnership-by-representation will exist where:

[A] person, by words or conduct, purports to be a partner, or consents to being represented by another as a partner, in a partnership or with one or more persons not partners, the purported partner is liable to a person to whom the representation is made, if that person, relying on the representation, enters into a transaction with the actual or purported partnership.

N.J.S.A. 42:1A-20a. According to the court, such a claim requires the plaintiff to establish that (i) she was “presented with sufficient indicia of partnership” (i.e., a representation) and (ii) she “rel[ied] on that representation in entering into a transaction with the actual or purported partnership.”

In Messler the court found that plaintiff could establish the first element but could not establish the reliance element. The plaintiff presented three pieces of evidence: (1) deposition testimony by Ms. Cotz in an unrelated case in which she described practicing law with Mr. Cotz as a partner, (2) a letter from Mr. Cotz forwarding a “draft of a complaint that we have put together for you”; and (3) the signed retainer agreement on letterhead titled “Cotz & Cotz.”

The court held that the plaintiff could not have relied on the first two items because they each occurred after the plaintiff had already engaged Mr. Cotz. Moreover, the use of “we” in the letter did not refer specifically to Mrs. Cotz. As to the “Cotz & Cotz” letterhead, even if Ms. Messler could have reasonably interpreted it as a representation that the two attorneys were practicing as a law partnership, there was nothing to show that Ms. Messler actually relied on the letterhead or believed she was going to be represented by the two attorneys as partners.

The court’s ruling in Messler was case-specific and based on the complete lack of any evidence of reliance. The court may have denied summary judgment had the facts been only slightly different—had Ms. Messler testified that she had relied on the Cotz & Cotz letterhead in choosing to engage Mr. Cotz, believing he had a more substantial practice.

Whether that kind of self-serving testimony would be enough to change the calculus is itself an interesting question. Messler should cause professionals to re-think what representations are conveyed in their correspondence and communications. Those non-partners who are associated with a partnership should take precautions to forestall potential partnership-by-representation liability. For example, a partnership-by-reliance claim might be avoided by including in the retainer agreement an express statement that the professional is not a partner or by clearly identifying the status and roles of others within the firm.

The material contained in this communication is informational, general in nature and does not constitute legal advice. The material contained in this communication should not be relied upon or used without consulting a lawyer to consider your specific circumstances. This communication was published on the date specified and may not include any changes in the topics, laws, rules or regulations covered. Receipt of this communication does not establish an attorney-client relationship. In some jurisdictions, this communication may be considered attorney advertising.

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