Partnership Theft And Fraud Disputes
Partners in a business – whether in an actual partnership or in another entity like a limited liability company – normally owe each other fiduciary duties. Such duties require a partner to care for the business’ property as if it was his own – and most partners will do exactly that. But fiduciaries like partners must also behave with loyalty to the business – which means their fellow partners. So what happens if two business partners’ relationship breaks down, and they begin to struggle for control of the company or partnership?
One common partnership dispute occurs when one partner – who has responsibility for the business’ books and accounts – refuses to provide information to the others. Law requires managing partners of a partnership, or managers of a limited liability company, to produce certain key documents (like a list of all partners or company members) upon request. A business’ governing documents also often require the manager to provide copies of financial records for several years (and may require regular reports or audits of those records). A manager’s failure to perform this basic duty often signals embezzlement, severe financial issues within the company, or even fraud that the company still exists.
Another common partnership dispute is shareholder oppression, where one partner (who owns most of the company) uses his greater power to push another partner out of the company at a discount. One common dilution tactic – a “squeeze-out” – occurs when the majority owner makes a cash call (where all partners must pay in proportion to their ownership shares) or lose part of their interests (proportionally to the size of the payment missed). While cash calls are legitimate ways to raise funds when a business needs them, an unscrupulous majority owner can abuse them to force out less-capitalized partners. Another common tactic is to “freeze out” a minority owner: because most businesses are governed by majority vote, a majority owner can abuse his voting rights to deprive minority owners of any control, trying to pressure them into a sale. This tactic is especially harmful when shares in the business cannot be resold to third parties, or the minority owner works for (and can be fired by) the business – the minority partner’s financial risk makes it even more difficult to resist an aggressive majority owner.
Seizing control of the business is only one method for an overbearing partner to gain an underhanded advantage; a disloyal partner may usurp partnership opportunities or misappropriate confidential information. This tactic is particularly difficult to detect: when business slows, is it because the economy has taken a downturn, or because one of the partners held back potential clients for himself? General partners, managing limited partners, and managers of LLC all owe fiduciary duties to the business’ other owners, which prohibit them from benefitting at the partnership’s expense. Yet all too often, a managing partner will bind the partnership to contracts with the partner’s own companies, draining the business dry – and often with the unwitting approval of the minority partners, who think they’re getting a bargain! Only consistent monitoring of the partnership can detect these acts in time to shut down such wrongful competition before it collapses the entire business.
Partnership disputes are almost always “bet the company” lawsuits: if a dishonest partner succeeds at looting a partnership once, he has no reason to stop until the business is picked to the bone. Without a credible threat that the partnership’s rules will be enforced, negotiation and compromise only promote further abuse of the partnership structure. If you suspect that one of your partners is defrauding you, call us at 516-470-1379 for a free consultation. We have handled numerous partnership and business disputes in a variety of fields, and we may be able to help resolve yours – but only if you act before the statute of limitations runs.
Nehal (Neal) Trivedi, Esq.
TRIVEDI LAW GROUP P.C.
400 Jericho Tpke, Suite 318
Jericho, New York 11753
Written by:Nehal Trivedi