And a Simple Solution Yesterday, the a new internet company, , and its interesting, new-economy business model (which, for the time being, operates only in Seattle): New York Times trumpeted Loftium , as long as they are willing to continuously list an extra bedroom on Airbnb for one to three years and share most of the income with Loftium over that time. Loftium will provide prospective homebuyers with up to $50,000 for a down payment At first glance, the arrangement between and participating homebuyers might like a loan. (Indeed, the Times even describes it as such .) But upon a closer look, the arrangement that Loftium contemplates with homebuyers is not a loan. First of all, Loftium ; rather, according to Loftium, the down payment assistance it provides to homebuyers is lasting . Second, and more important, the arrangement between Loftium and homebuyers has none of the . There is no “principal” amount that the homebuyer is required to repay in a set period of time, and Loftium does not charge the homeowner any “interest.” In fact, the homebuyer is required to make _any_payments to Loftium in return for the company’s cash (unless the homeowner and stops renting on Airbnb before the term expires). Loftium sound in an infographic clearly says it is not a loan “a part of a services agreement” 12–36 months characteristics of a traditional (term) loan not breaches the parties’ agreement All the homebuyer must do in exchange for Loftium’s money is (i.e., ) and ( .) If, at the end of the term, Loftium has not been repaid its initial investment, . Hence, if renting out the homeowner’s spare room is not profitable during the term of the parties’ agreement, (1) list her spare room on Airbnb continuously through the term of her agreement with Loftium, (2) be a decent host “not be[] rude to guests” (3) split her Airbnb rental revenue with Loftium with two-thirds going to the company the homeowner is not required to repay Loftium’s initial contribution “Loftium takes full responsibility for that loss.” Of course, Loftium expects that the total income from renting out a homeowner’s spare room will greatly exceed the amount that it originally provided to the homebuyer, so that both will profit. If Loftium makes more in rental income than it pays towards the homeowner’s down payment, Loftium will make a profit. Further, by all appearances, there is on Loftium’s potential profit is its business arrangement with homebuyers. In fact, Loftium makes clear that it wants to maximize the income that it splits with homebuyers: Loftium promises that it will work with them “ To that end, Loftium provides homebuyers with for their spare bedroom (and a keyless entry lock), access to , and . no cap to increase monthly bookings as much as possible, so can benefit from the additional income.” both sides some start-up supplies advice and know-how regarding how to rent an Airbnb room online tools to help maximize their rental income So, if the business arrangement between Loftium and homeowners is a loan, what it? It is almost certainly a (i.e., a “joint venture”). not is general partnership for a term What is a Partnership? Both the original Uniform Partnership Act (UPA) (adopted uniformly by almost every state, but now in effect in only around 13 states) and its successor, (variations of which have been adopted by perhaps 37 states) define a partnership as an “association of two or more persons to carry on as co-owners a business for profit.” UPA § 6(a); RUPA § 202. the revised Uniform Partnership Act (RUPA) Hence, creation of a partnership has four elements: (1) an association of two or more (2) persons; (3) who carry on as co-owners; a (4) for-profit business. The Easy Elements There can be no doubt that Loftium and the homebuyer are legal persons under the statute. UPA § 2 (defining “person” to include corporations like Loftium). Further, it is clear that leasing an Airbnb apartment year-round is a for-profit business. (Indeed, Loftium from the city of .) See advises homebuyers that they must obtain a business license Seattle As a result, the only elements in question are (1) whether the parties have voluntarily “associated” and (2) whether they are “co-owners” of the for-profit business of renting out the homeowner’s spare room on Airbnb. The Element of “Co-Ownership” It might seem, since the homebuyer owns the spare room and Loftium does not, that the two are not “ -owners.” However, the relevant question is not whether the two are co-owners of used to operate the business, but rather, whether the two are co-owners of It is quite common for a partnership to operate a business using the real property of only one partner. Lupien v. Malsbenden, 477 A.2d 746 (Me. 1984); Peed v. Peed, 325 S.E.2d 275 (N.C. Ct. App. 1985). Indeed, absent express contrary intention, RUPA presumes that personal property of a partner which she allows the partnership to use for the business remains property, and is contributed to the partnership. RUPA § 204(d). co the property the Airbnb business. See, e.g., her own not See UPA and RUPA also provide some guidance for courts in assessing whether persons who operate a business are “owners” of that business. First, both statutes effectively that anyone who of a business is an owner of — and thus, a partner in — the business. UPA § 7(4) & RUPA § 202(c). However, that presumption has an important caveat: Receiving a share of the profits of a business is presumed to make one a partner in that business if “the profits were received in payment … of a debt by installments or otherwise … or of interest … on a loan, even if the amount of payment varies with the profits of the business.” RUPA § 202(c)(1)(i) & (v); UPA § 7(4)(a) & (d). Hence, if Loftium shared the profits of each homeowner’s Airbnb rental business as repayment of a loan to the homeowner, the law would presume that Loftium was a co-owner of (and partner in) the homeowner’s business. presume shares the profits See not accord not Yet here, not only has Loftium that it is lending money to homebuyers, its arrangement with homebuyers looks a traditional loan. Accordingly, if Loftium were to argue that it was not a homebuyer’s partner because it simply loaned the homebuyer money for the homebuyer’s business, a court would probably reject that argument. Lupien, (holding that an alleged “banker” who took over the business of his “borrower,” and whose “loan” to the business “carried no interest and no fixed payments, but was to be repaid only” out of revenues from the business, was in fact a partner). explicitly denied nothing like See, e.g., supra Admittedly, Loftium and a homeowner do not exactly split “profits” of their Airbnb rental business; rather, they each contribute different things to the partnership and then split the revenues. The homeowner contributes some labor, plus the use of her spare room, furnishings and bathroom; Loftium puts in cash, some supplies, its know-how about renting on Airbnb, and other online resources. Yet, it is not uncommon for one partner to contribute property (or the use thereof) to the partnership while another partner contributes something else to the partnership — and both partners split the partnership’s revenues. For example, it is common for one partner to provide capital (and sometimes, agree to accept all capital losses) and the other partner to provide labor and/or expertise. Accordingly, Loftium and each homebuyer are undoubtedly sharing “profits” of the partnership, not the “gross” (which _does not_lead to a presumption of partnership, UPA §7(3)). Although they do not share the profits (or the losses) from the business , that is not required of partners (although it is the default rule in the absence of a contrary agreement). RUPA § 401 cmt. 3. (the “money partner”) (the “service partner”) see equally See In addition, if one stops to consider the statutes deem sharing profits as a critical gauge of co-ownership, one realizes that sharing profits — i.e., revenues net expenses — means sharing in the of the business. Unlike a lender, who is paid “off the top,” an equity owner who is paid from the “net” shares the risk that the business’s expenses will exceed its revenues. However, also unlike a lender, an equity owner shares in any profit that occurs if revenues exceed expenses. why fully risks and rewards Hence, in assessing whether one co-owns a business and therefore is a partner in it, courts often consider whether she shares fully or only superficially in the risks of the business. In re KeyTronics, 274 Neb. 936 (2008) (describing co-ownership as whether the parties “share the benefits, risks…of the enterprise” such that they “subjectively view themselves as members of the business rather than as outsiders contracting with it”). Here, there can be no doubt that Loftium is a co-owner of each homeowner’s Airbnb rental business because — as Loftium freely admits — . If, upon expiration of the term, the Airbnb rental has made no money, the owner owes nothing to Loftium and gets her spare room back; Loftium, by contrast, loses its entire investment. Further, Loftium’s marketing materials make clear that the company This stands in stark contrast to a lender who only cares whether the business makes enough money to repay its principal with interest (which come “off the top”). See it takes on of the risks all intends to maximize the Airbnb revenues that it shares with the homeowner Finally, in assessing whether one is co-owner a business — and as such, is a partner in that business — courts also consider whether the person in question has a right to the business. UPA § 6 cmt. (“To state that partners are co-owners of a business is to state that they each have the power of ultimate control.”). Loftium satisfies this requirement in spades. While the owner furnishes and takes care of the premises (and can, if she decides, ), Loftium plays a critical role in managing the business by for the homeowner’s spare room on Airbnb. Further, as described above, Loftium provides some supplies (like the keyless entry lock) and advice for hosting on Airbnb; Loftium also . Moreover, while the homeowner sets rules for the apartment on Airbnb, manage Cf. clean it herself setting (and constantly adjusting, to suit market conditions) the price requires homeowners to provide its guests with certain amenities Loftium can veto the rules if it considers them “overly restrictive.” Yet, even if Loftium had in managing the Airbnb business, that would not prevent it from being a partner. The history of “silent” partners in a real estate ventures who merely provide funds (and share profits), but allow another partner to manage the business is a venerable one. , Meinhard v. Salmon, 249 N.Y. 458 (1928) (Cardozo, J.) (perhaps the most famous case in partnership law) (silent partner in New York’s Hotel Bristol provided cash; managing partner operated the business and functioned as its sole public “face”). Back when he actually built buildings, but after he nearly went bankrupt, he sold 70% of his interest in Riverside South to partners from Hong Kong; while The Donald built, operated and was the public face of these buildings, his partners put in the money. (Ironically, while he oversaw development, he left himself with no control over key important aspects of the business, including its sale. But I digress.) no role See, e.g. Donald Trump himself has been involved in similar partnerships (albeit a limited partnership): real In sum, since Loftium and the homebuyers to whom it provides down payment cash are co-owners of a for-profit business, they undoubtedly are partners. The Element of “Association” Yet, what of the final element, “association”? It means that the parties must partner . Gangl v. Gangl, 281 N.W.2d 574 (N.D., 1979) (explaining that “association” element “connotes…voluntariness.”). voluntarily See At first glance, this element seems easily satisfied, because on its website, Loftium to rent out their spare room on Airbnb. This is a red herring, though. Business people often use the term “partner” colloquially, so labeling oneself a partner in a business does not automatically make one a partner in that business. , Gangl, . Or, as one Texas court famously put it when holding that two people were not partners simply because they described themselves as such: “a duck which is called a horse does not become a horse; a duck is a duck.” City of Corpus Christi v. Bayfront Assocs., Ltd., 814 S.W.2d 98 (Tex. App. — Corpus Christi 1991). repeatedly describes itself as “partnering” with homebuyers See, e.g. supra Digging deeper, one discovers that, contrary to Loftium’s careless use of the word “partner” on its website, the company actually has attempted from being deemed a partner with homebuyers by contract. According to the : to protect itself “terms of service” that governs the arrangement between Loftium and homebuyers No agency, partnership, joint venture, or employment relationship is created…, and neither party has any authority of any kind to bind the other in any respect. In short, Loftium and homebuyers will by contract that their arrangement is a partnership. Although judges often write that the parties’ “intent” is critical to the formation of a partnership, this language is misleading because it does not specify the precise subject of the parties’ intent. That is to say, this language fails to state in order to be partners. agree not exactly what the parties must intend Disclaimers of Partnership According to the settled law, the relevant question is whether the parties intended , not whether they intended Byker v. Mannes, 641 N.W.2d 210 (Mich. 2002) (explaining that, if the parties “associated to ‘carry on’ as co-owners a business for profit, they will be deemed to have formed a partnership relationship regardless of their subjective intent to form such a legal relationship”; and that “the statute does not require partners to be aware of their status as ‘partners’ in order to have a legal partnership …. [In ascertaining the existence of a partnership, the proper focus is on whether the parties intended to…’carry on as co-owners a business for profit’ and not on whether the parties subjectively intended to form a partnership.”); Heck & Paetow Claim Service, Inc. v. Heck, 93 Wis.2d 349 (1980)(“The ultimate and controlling test as to the existence of a partnership is the parties’ intention of carrying on a definite businessas co–owners.”); Bass v. Bass, 814 S.W.2d 38, 41 (Tenn. 1991) (“It is the intent to do the things which constitute a partnership that determines whether individuals are partners, regardless if it is their purpose to create or avoid the relationship.“) to be co–owners of a for-profit business to form a relationship known as a “partnership.” See In short, not only is it possible for two people to form a partnership to do so, it is possible for two people to form a partnership despite that they to do so. RUPA § 202, cmt. 1 (“[A] partnership is created by the association of persons whose intent is to carry on as co-owners a business for profit, regardless of their subjective intention to be “partners.” Indeed, they may inadvertently create a partnership despite their expressed subjective intention not to do so.”). without any intent intend not See For this reason, courts have long held — particularly in cases involving claims by third parties against one or more partners (but, as I intend to argue in a subsequent article, also in claims between partners) — disclaimers of partnership if contrary to the facts. As the New York Court of Appeals explained, in a celebrated case: are not dispositive Mere words will not blind us to realities. Statements that no partnership is intended are not conclusive. If as a whole a contract contemplates as association of two or more persons to carry on as co-owners a business for profit, a partnership there is. Martin v. Peyton, 246 N.Y. 213, 217–18 (1927) (Andrews, J.) Although some cases hold (wrongly, I believe) that parties may define their own relationship by contract, there is little doubt that (which involved a claim made by a creditor against alleged partners) is the rule in lawsuits by third parties. Martin In sum, even if a court were to decide, in a lawsuit , that the disclaimer of partnership in Loftium’s terms of service precludes formation of a partnership between Loftium and the homeowner, a court would nonetheless be likely to deem the disclaimer ineffective . So, for example, if an Airbnb renter who slips and falls in a homebuyer’s spare room (and whose claim exceeds ) could probably obtain damages from Loftium. UPA § 13(a) & 15(a) (partners are liable for the negligence of another). by the homeowner in a lawsuit by a third party Airbnb’s $1 million liability insurance policy for its subscribers See A Simple Solution Although this possibility of liability to third parties (and, if my interpretation of partnership law is correct, to homebuyers) may come as a shock to Loftium, the problem actually has an easy solution. With respect to third parties, Loftium could substantially limit its potential liability by forming a limited liability company (LLC) with each homebuyer. A member of (i.e., one with an ownership interest in) an LLC is liable to third parties for debts of the LLC. , Tex. Bus. Orgs. Code § 101.114. While this would not allow Loftium to escape liability for misconduct (or, if its disclaimers of partnership are ineffective as to homeowners, for lawsuits by homeowners), it would substantially reduce Loftium’s risk of being held liable to a third party for a homeowner’s torts or contractual debts. not See, e.g. its own Note: This post is solely for educational purposes and does not constitute legal advice. It was originally published on Unincorporated Business Entites Law blog .

Loftium Unwittingly Forms General Partnerships with Homebuyers

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Joe Leahy

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