Saturday, September 19, 2015
I just completed the unit on partnerships in my Business class, and we covered Page v. Page, 55 Cal. 2d 192 (Cal. 1961), the case of the warring brothers who ran a linen supply partnership. This is a semi-famous case - not as fundamental as Meinhard v. Salmon, but included in several business casebooks and discussed in many law review articles.
The opinion itself is maddeningly short on details of the relationship between the brothers, and how it is that this family dispute came to end up in a courtroom.
What we know from the California Supreme Court is this:
George Page was the sole owner of a corporation that supplies linen and machinery for the operation of industrial linen businesses.
George entered into an oral partnership agreement with his brother, H.B., in 1949. That partnership was to operate a linen supply business serving Santa Maria. Each brother contributed $43,000 of capital to the business that apparently went to purchase a few basic assets. Day to day operations, however, depended on services and materials supplied by George’s corporation. The partnership was unprofitable for its 10 years of existence, and ultimately came to owe George’s corporation $47,000 for the materials it supplied.
When the Vandenberg Air Force base was established in Santa Maria, the partnership finally began to turn a profit. Only a few months later, however, George proclaimed that he wanted to dissolve the partnership, and sought declaratory judgment that the partnership was at-will, giving him free rights of withdrawal. H.B. opposed, arguing that the partnership was intended to last until all obligations were paid, and that George was only trying to dissolve now so that he could take sole advantage of the opportunities afforded by the air force base. Among other things, H.B. pointed out that a previous partnership between him and George explicitly provided it was to terminate only when obligations were paid off, and therefore this partnership should be interpreted similarly.
Ultimately, the court concluded that the partnership was at-will, but allowed that H.B. might be able to demonstrate a breach of fiduciary duty if George intended to appropriate for himself benefits properly allocated to the partnership.
The opinion offers no further insight into the George/H.B. arrangement, which leaves it to teacher’s manuals to speculate – and two in particular offer wildly divergent interpretations.
[More under the cut]
The Eisenberg/Cox teacher’s manual argues that because George owned a linen supply corporation, it can be inferred that he was a new entrepreneur in need of start-up capital, and so he solicited the passive investment of his brother, H.B. H.B. was perhaps something of a naïf, in need of protections similar to those offered to Meinhard in Meinhard v. Salmon. Or perhaps he was akin to a venture capitalist, providing initial money to get the business off the ground, but entitled to share in at least some of the upside.
The Allen/Kraakman/Subramanian teacher’s manual, by contrast, is all in for George Page.
In their view, because George Page is really the guy who knows the linen business, he wouldn’t have agreed to even let his brother have a stake unless he knew for sure it was at-will.
According to them, George Page has been carrying his deadbeat brother for 10 years, even going so far as to extend a failing partnership a $47,000 loan. And he’s entitled to say enough is enough, even if there’s a new profitable opportunity just around the corner.
Now, teacher’s manuals don't necessarily reflect the actual views of the casebook authors – they may easily be recommending that the professor take particular positions in order to challenge students. Nonetheless, the diametrically opposed factual assumptions about l’affaire du Page are fascinating, especially since for me, the red flag is in the original set-up.
George Page owned a linen supply corporation. If he wanted to go into business with his brother, he could have sold his brother an interest in the corporation. Instead, the two ended up in this weird partnership with no written agreement in which his brother invests $43,000 for a business that has virtually no assets and depends upon George’s corporation for its daily operations. That to me suggests that, per Eisenberg/Cox, George was the one who wanted capital to expand, but he didn’t want to actually turn over any control to his brother. Instead, he arranged matters so his brother would be buying into sand – supporting George’s operations without receiving anything tangible in return.
That said, Eisenberg/Cox is wrong about at least one thing, while Allen/Kraakman/Subramanian has it right: George’s business was no start-up in need of seed capital; it had been operating for at least 19 years before H.B. entered the picture in Santa Maria.
Now you might say H.B. was a naif. After all, this arrangement looks designed to leave H.B. at a disadvantage from the start. But the rest of the story suggests that H.B. may have been intentionally giving his brother a helping hand in his efforts to build his business.
If we round out more of the story from Lexis/Westlaw and Google, we first discover that contrary to the inferences drawn by Allen/Kraakman/Subramanian, the $47,000 debt owed by the Santa Maria partnership to George’s corporation was not due to a new loan extended to save a failing business; rather, over the 10-year term, the partnership had paid over $236,000 to George’s corporation, presumably as fees for its supply of the necessities for the day to day operations of the partnership. See Page v. Page, 5 Cal. Rptr. 652 (1960).
But there’s more. It turns out that George Page started his linen supply corporation in 1930. He entered into at least three separate linen supply partnerships with his brother H.B. – the Santa Maria partnership in 1949, the term partnership in Bakersfield, and a third partnership in Santa Cruz in 1945. I’m guessing that the Bakersfield partnership, which was formalized, came first; H.B. and George probably ran the Bakersfield partnership until it was able to pay for itself, at which time H.B. dropped out and George continued on providing linen services in the territory.
The Santa Maria and the Santa Cruz partnerships were by oral agreement – likely reached after the precedent set by Bakersfield, and – I’m guessing – upon H.B.’s expectation of similar terms. Both required H.B. and George to invest substantial amounts of capital, and both (presumably) depended on the services of George’s corporation for their daily operations. (The Santa Cruz partnership included a third member, who also contributed capital.)
However, while the Santa Maria partnership faltered, the Santa Cruz partnership thrived.
In 1959, George decided to withdraw from both partnerships, over H.B.’s objections. The record suggests that the brothers may have fought over matters unrelated to the Vandenberg Air Force base; either that, or the air force base conflict led George to withdraw from both. See Page v. Page, 199 Cal. App. 2d 527 (Cal. App. 2d Dist. 1962).
H.B.’s position was that the Santa Maria and Santa Cruz partnerships were intended to represent an ongoing business that would eventually expand to other territories. The courts, however, concluded that the partnerships were at-will; thus, George was free to leave, leaving H.B. with very little to show for his investments.
In other words, from my reading, George did, in fact, solicit passive investments from his brother to help him expand his business into various communities. The first partnership in Bakersfield was formalized as a deal that would terminate once it was self-sustaining, while the others were done on a handshake. At some point – maybe because George thought the Vandenberg Air Force base made the Santa Maria partnership self-sustaining and thus at an end, or maybe not – the brothers had a falling out, and George cut H.B. off, and the courts supported him.
But the story doesn’t end there.
George, free of the partnerships with his brother, and sole owner of his linen supply corporation, did continue to expand. In particular, in Bakersfield – now free of H.B. – he joined forces with a third Page (identified by the California courts only as L.W. Page). L.W. Page also owned an industrial linen business, called Kern Industrial Laundry, and apparently, L.W. and George together sought to corner the Kern County market with their respective corporations. If I had to bet, judging from the cordial relationship between George and L.W., I’d say the mysterious L.W. Page was George’s son or daughter, following in George’s footsteps.
In any event, the chief obstacle in two Pages’ efforts to dominate the Kern County industrial linen market were the owners of Bakersfield Uniform & Towel Supply Co. The conflict between the two factions was described as a “bitter-end laundry war” by the California courts. See Page v. Bakersfield Uniform & Towel Supply Co., 239 Cal. App. 2d 762, 764 (Cal. App. 5th Dist. 1966). Both sides sought to destroy their competitors by offering below-cost and free services, in violation of California’s Unfair Practices Act. The battle was so vicious that ultimately, the courts threw up their hands and refused to award damages to either side; instead, the courts held that each had inflicted equal harm on the other, and both were enjoined from further predatory pricing practices.
The court opinions end there, but the story does not. George, in spite of – or because of – his ruthless approach to business ultimately won the war, not only with his brother, but with Bakersfield Uniform Towel & Supply. George’s business, Mission Linen Supply, now operates in 5 states – and continues to be owned by the Page family.