Martin v. Peyton
Court of Appeals of New York
158 N.E. 77 (1927)
The brokerage firm Knauth, Nachod & Kuhne (KN&K) faced financial trouble, so its partner Hall arranged a $2,500,000 securities loan from Peyton and other lenders (defendants) in exchange for 40% of KN&K's profits until repaid. The deal's documents appointed two lenders as "trustees" with rights to monitor KN&K's finances, veto certain risky decisions affecting their collateral, and hold Hall's life-insurance policy as extra security; gave Hall management control of KN&K until repayment; and gave the lenders an option to later buy into the firm or force a member's resignation. Martin (plaintiff), a KN&K creditor, sued the lenders, claiming these arrangements made them partners in KN&K and thus liable for its debts. The trial court held the lenders were not partners.
Whether agreements intended to protect the financial interests of creditors necessarily make them partners of a debtor firm.