Volume 12, Issue 2

Partnership Lawsuits: Duties

We handle a lot of partnership lawsuits. In one form or another. While we call them ‘partnership’ disputes, these lawsuits can include disputes among limited liability company ‘members’, family members who run a business or own a property together, corporate share- holder disputes among ‘partners’ in a corporation and property co-owners.

All of them have to work together to make decisions. When those relationships break down, the decision making pro- cess can come to a halt. The relationship can be- come strained. And, yes, someone may feel he or she needs to file a lawsuit.

Some of our litigation involves sophisticated business people, often in the real estate development or investment world, who are very knowledgeable about their industry. Recent cases we have handled include very successful shopping center developers with a long his- tory of building and buying shopping centers through- out the United States. But their relationship broke down and they have spent the last two years focused on suing each other. Other partnership lawsuits that we handle involve family members who may not even be in the real estate industry but who own property in common with their siblings or other family members. Although these ‘partners’ are not as knowledgeable about real estate law and real estate issues, these cases can be just as heavily litigated as the litigation between sophisticated developers.

Partnership lawsuits arise when one or more partners breach a duty or duties owed to the other partners. Probably the most common partnership disputes arise because of money— someone is taking it, not handing it over or keeping it hidden. Not surprisingly most partnership duties are duties geared around money.

One of the most common reasons a client comes to us is because, although they are a partner or a co- owner, they do not know what is going on with the business or property. Whoever is handling the day to day operation of the partnership is not making distributions or providing records about the finances. However, a partner has a duty to both maintain the books and to disclose the information to his or her other partners. Oftentimes, when a relationship has soured, a partner will make matters worse by cutting off the flow of information or refusing to let another partner see the books and records.

Do not make this mistake. Your partners (even the annoying ones) are entitled to see the books and records. Another more serious money problem that arises in partnerships is when a partner takes money for himself that does not belong to him. A partner must account for the profits of the partnership. The partnership agreement will typically set forth the ownership interests and how profits are to be paid out. The partner who manages the business must follow the mandates of the partnership agreement. For oral partnerships or more informal arrangements, each partner must still treat the other partner or partners fairly. This includes paying each partner his share of the profits.

The common thread in partnership duties is the requirement that a partner treat the other partners fairly. This includes a duty to not compete with the partner- ship. In other words an opportunity that comes to the partnership must be shared with the other partners. One partner may not grab the opportunity for himself or another partnership unless the other partners have specifically agreed to it. There are limitations and exceptions that can be written into the partnership agreement and they are often used by professional real estate developers and investors. There are also limits that can be incorporated into the limited liability company operating agreement, partnership agreement or whatever type of agreement is being used. Moreover, a project in Los Angeles does not mean that the entity is a California entity. Delaware LLCs, for example, have more freedom to modify or eliminate duties than a California LLC. An experienced attorney can tell you what can and cannot be modified or eliminated.

A LLC managing member, a general partner, a co- owner who handles the day to day management of a property and other partners should all be aware of their duties towards their partners.

Wagenseller Law Firm specializes in real estate lawsuits involving partnerships and properties.

Experience: Trials, Arbitrations, Appeals

I am constantly surprised to hear that many “litigators” have never actually been to trial. This led me to think back on some of the many trials, arbitrations and appeals that I have had the honor of being a part of, especial- ly in light of our November calendar: an arbitration followed by a trial.

• Breach of Guaranty.

Our most recent trial involved a breach of guaranty case against a lawyer who guaranteed a commercial mortgage on an industrial building that his law firm used as an office. We won and secured a $500,000 judgment for our client.

• Corporate Shareholder Lawsuit.

In this Ventura County trial our client was the majority shareholder but was being sued by two minority shareholders for alleged malfeasance in running the corporation. We prevailed.

• Real Estate Development.

In this arbitration we represented a real estate developer relating to a luxury home. The parties settled on the third day of the arbitration.

• Partnership Dissolution and Fraud.

Our client was being sued for fraud and partnership dissolution in Orange County Superior Court. The plaintiff claimed he was ousted from the partnership and millions of dollars had been siphoned away from him. On the first day of trial we were successful in getting the cause of action for involuntary partnership dissolution dismissed. We then asked that the court bifurcate the proceedings to address a Corporations Code standing issue first. We were able to convince the plaintiff to dismiss his lawsuit on the second day of trial.

• Court of Appeal confirms expungement of lis pendens.

We represent- ed a real estate developer in litigation over 65 condominiums in Los Angeles. We were successful in get- ting the lis pendens on the property expunged and the Court of Appeals affirmed.

• Alter Ego.

In a trial in Los Angeles Superior Court we defended the President and Owner of a corporate import company from claims that he was the alter ego of two corporations. The court granted our client judgment in his favor.

• Joint Venture Litigation.

A corporate client was sued by a former consultant who claimed he was in fact a partner in a joint venture and was therefore owed stock, money and more. The jury found in our client’s favor. Aren’t there any losses, you ask? The alter ego trial also involved claims against our client’s defunct corporation. We advised the client that the corporation was likely to lose but because it was defunct it was an empty judgment. In another trial an attorney client was resistant to settling and lost his case. Our thought is that we should know whether there is a risk of losing prior to going to trial. If a client did in fact make a mistake or failed to pay for services rendered, that case should be settled without the extra expense of trial and exposure to a judgment and the opponent’s attorneys’ fees. Experience in litigation is a valuable commodity.

Message from Laine Wagenseller…

One of the Pat Summitt quotes below notes that in the absence of feedback people will fill in the blanks with a negative. They will assume you don’t care about them or don’t like them.

In the lawsuits that we handle many of the disputes can be traced back to a misunderstanding that arose from a failure to communicate.

And our relationships with friends and business colleagues are no different.

I am reticent about picking up the phone and checking in with my friends. I can’t blame it on anything except perhaps a mental block but I don’t do it nearly enough.

For the rest of this year I am hoping to focus on fixing this and reach ing out. Hold me accountable!

Insight Into A Winner: Coach Pat Summitt

I recently read Pat Summitt’s Sum It Up, an autobiography of her life as the winningest coach in NCAA basketball (men and women). It is an incredibly inspiring book about being driven, building teams and incredible love and commitment. Here are some quotes:

“But the truly ambitious teams find relief in honesty when they’ve lost, because it’s the diagnostic tool that leads to a solution—here’s what we did wrong and let’s fix it, so we don’t ever have to feel this way again. Great teams ex- plain their failure; they don’t excuse it. Then they pay a visit to Charles Atlas and get stronger. When you explain a loss aloud, it’s no longer a tormenting mystery. I believed in that brand of hones- ty my whole career, and I knew at least one other coach who believed in it too.”

“There is an old saying: a champion is someone who is willing to be uncomfortable.”

“In the absence of feedback, people will fill in the blanks with a negative. They will assume you don’t care about them or don’t like them.”

“Very few people are able to organize and direct followers, which is a far more subtle and multifaceted skill. Leadership is really a form of temporary authority that others grant you, and they only follow you if they find you consistently credible. It’s all about perception and if teammates find you the least bit inconsistent, moody, unpredictable, indecisive, or emotionally unreliable, then they balk and the whole team is destabilized.”

I highly recommend this book.