Commonwealth v. Roche (In re Roche)

• Citation: 582 B.R. 632
• Decision Date: 21 March 2018
• Docket Number: Adv. Proc. No. 16–2015–GLT,Case No. 15–23639–GLT
• Parties: IN RE: Edward J. ROCHE and Kathleen J. Roche, Debtors. Commonwealth of Pennsylvania Office of Attorney General, Plaintiff, v. Edward J. Roche and Kathleen J. Roche, Defendants.
• Court: United States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Western District of Pennsylvania

582 B.R. 632

IN RE: Edward J. ROCHE and Kathleen J. Roche, Debtors.Commonwealth of Pennsylvania Office of Attorney General, Plaintiff,

v.Edward J. Roche and Kathleen J. Roche, Defendants.

Case No. 15–23639–GLT

Adv. Proc. No. 16–2015–GLT

United States Bankruptcy Court, W.D. Pennsylvania.

Signed March 21, 2018

Jesse F. Harvey, Esq., for Plaintiff, Commonwealth of Pennsylvania Office of Attorney General, Bureau of Consumer Protection.

Donald R. Calaiaro, Esq., for Defendants, Edward and Kathleen Roche.

MEMORANDUM OPINION

GREGORY L. TADDONIO, UNITED STATES BANKRUTPCY JUDGE

The Commonwealth of Pennsylvania seeks a determination that certain debts owed by Consignments on Centre, a now-defunct consignment shop in Pittsburgh's East End, are non-dischargeable. As an initial matter, the Court must determine whether Consignments on Centre was operated as a sole proprietorship by Kathleen J. Roche or was instead a partnership between her and her husband, Edward J. Roche. After conducting an evidentiary hearing on this limited issue and reviewing the evidence presented, the Court finds insufficient proof within the record to establish the existence of a partnership between the spouses.

I.

Consignments on Centre (the "Store") was a consignment store specializing in quality used women's fashions.¹ Prior to 2001, the Store was operated by Women's American Art, a nonprofit organization, with Debtor, Kathleen J. Roche ("Kathleen"),² serving as the Store's manager.³ Kathleen purchased the Store in 2001. It is undisputed that Kathleen operated the Store as its sole owner from 2001 to 2013. During that time span, Kathleen ran the business as a full-time onsite owner-manager and was assisted by several unpaid volunteers.

Debtor Edward J. Roche ("Edward"), her husband, was employed in the construction industry until he was permanently disabled in 2004. Since that time, Edward's personal income is solely derived from social security and disability insurance from MetLife. After he became disabled, Edward drove Kathleen to and from the Store each day, but he usually did not stay there during working hours.⁴

In 2013, Kathleen suffered a debilitating illness that caused her to be intermittently absent from the Store until it was finally closed in June 2015. When Kathleen could not be present and the Store was not otherwise closed, Edward would open and close the store and remain on the premises. The extent of Edward's other duties and responsibilities at the Store between 2013 and 2015 is the focus of the current dispute as to whether he was a partner in the Store.

Kathleen and Edward filed a voluntary joint petition under chapter 13 of the Bankruptcy Code on October 2, 2015. The case was converted to chapter 7 on March 18, 2016.⁵

The Commonwealth of Pennsylvania, Bureau of Consumer Protection, initiated this adversary proceeding as parens patriae⁶ on behalf of consumers who have been damaged by the allegedly fraudulent practices of the Debtors in operating the Store, including Pennsylvania residents who filed 245 claims in this bankruptcy case. Through its Amended Complaint , the Commonwealth seeks an exception to discharge under § 523(a)(2)(A) and (a)(4) for each of those claims.⁷

The parties agreed to bifurcate the issues for trial, first setting an evidentiary hearing on the question of whether Kathleen and Edward operated the Store as a partnership, and deferring the resolution of the remaining issues of dischargeability to a later date. The evidentiary hearing on the partnership issue was held on September 1, 2017.⁸ The Commonwealth called both Debtors as witnesses, but the defendants did not call any witnesses. After the close of evidence, the Court took the matter under advisement.

The Court has jurisdiction over this matter under 28 U.S.C. §§ 1334 and 157(b)(2)(I). Venue is proper in this district under 28 U.S.C. § 1408.

II.

A. Pennsylvania Partnership Law

Whether a partnership has been formed under Pennsylvania law is governed by the Uniform Partnership Act of 2016, 15 PA. CONS. STAT. § 8422.⁹ This statute provides, in relevant part:

§ 8422. Formation of partnership .

(a) General rule. —Except as provided in subsection (b), the association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership.¹⁰

* * *

(c) Rules for determining formation of partnership. —In determining whether a partnership is formed, the following rules apply:

(1) Joint tenancy, tenancy in common, tenancy by the entireties, joint property, common property or part ownership does not by itself establish a partnership, even if the co-owners share profits made by the use of the property.¹¹

(2) The sharing of gross returns does not by itself establish a partnership, even if the persons sharing them have a joint or common right or interest in property from which the returns are derived.

(3) A person who receives a share of the profits of a business is presumed to be a partner in the business, unless the profits were received [in payment of expenses not relevant in this dispute].

(d) Cross reference. —See section 8416(c) (relating to application of partnership agreement).¹²

The burden of pleading, producing evidence, and of persuasion to establish the existence of a partnership is on the party asserting that existence.¹³ The existence of a partnership under Pennsylvania law is a question of fact.¹⁴ In Pennsylvania, partnership agreements may be proven by a writing, oral agreement, or by implication.¹⁵ The Commonwealth concedes that there is no written partnership agreement, nor has it provided evidence to dispute the testimony of both Debtors that they did not consider themselves partners. The Commonwealth's position is that the Debtors' partnership may be inferred from the circumstances.

It is a fundamental axiom of judicial interpretation and construction that the opinions of other sister jurisdictions are not binding precedent, but may be persuasive based on the facts and circumstances of the individual cases.¹⁶ However, in the case of Uniform Laws, such as the UPA and RUPA, both the Pennsylvania legislature and the courts of the Commonwealth have recognized the importance of the opinions of all signatory states in promoting a comprehensive statutory scheme for issues of common interest among the states.¹⁷

Pennsylvania enacted the Statutory Construction Act, which provides, in pertinent part, that "[t]he object of all interpretation and construction of statutes is to ascertain and effectuate the intention of the General Assembly."¹⁸ The Legislature clearly expressed its intent that the courts of the state (and, by extension, this Court) are to give "great deference" to the decisions of other states when interpreting uniform laws.¹⁹

The courts have followed the statutory command and give the opinions of sister states on questions of uniform law great deference.²⁰ Pennsylvania courts, for example, have looked to the opinions of other states that have adopted the Uniform Partnership Act in interpreting its provisions.²¹ Throughout this Memorandum Opinion , the Court will only cite to those other state jurisdictions that have enacted the UPA and RUPA in forms substantially similar to the Commonwealth.

Proof of the existence of a partnership is ordinarily by a preponderance of the evidence.²² However, the Court observes that several states have held that partnerships between husband and wife require a heightened burden of proof of the existence of the partnership.²³ As discussed below, husbands and wives are by law marital partners, with obligations to each other that in many ways mirror (and often exceed) the obligations of nonmarital partners to each other.

B. Intent to Form a Husband–Wife Partnership

Pennsylvania holds that the intent to form the partnership (i.e. , the intent to carry on a business for profit as co-owners) is the essential element in partnership formation,²⁴ especially in the context of husband-wife partnerships.²⁵ This principle is consistent across the sister states' interpretation of the Revised Uniform Partnership Act.²⁶

Under 15 Pa. C.S. § 8422(c)(3), intent to form a partnership may be presumed (a rebuttable presumption) where there is a sharing of profit. However, both the academic research and case law cautions that profit-sharing in a husband-wife partnership is problematic. As a leading treatise on partnership law observes:

Often a small business is operated with various types of partner-like participation by spouses or other members of a household. They may help out, or they may help themselves to the proceeds of the business through a joint bank account or otherwise. ... The problem in determining household partnerships is that aspects of the relationship that would otherwise resemble partnership take on a different coloration in the family setting. The exercise of control by a spouse may be simply that of a helpmate in marriage rather than that of a partner[.]

Where the purported partners draw out of a joint account into which revenues of the business are deposited and from which expenses are paid, this has been regarded as profit sharing, the theory apparently being that the account consists of what is left after expenses are subtracted from revenues. On the other hand, the inference of partnership is weaker where family members draw household expenses from the account because the family members may be sharing as such and not as partners whose share is subject to the risks of the business.

Since there is often a close question in the family setting as to whether the sharing in the joint account involves profit sharing, the partnership question frequently must be resolved in these cases with reference to the other indicia of co-ownership.²⁷

Bromberg and Ribstein are consistent with the only two circuit decisions on this issue.²⁸ The states are equally skeptical of sharing income/profits in a husband-wife partnership.²⁹ And this skepticism appears rooted in a...