Partnership Breach of Fiduciary Duty: Attorney Update

Partnership and breach of fiduciary duty attorneys may have noticed a new California Court of Appeals case dealing with breach of fiduciary duty. This case arose from a real estate partnership in northern California in which four individuals entered into a partnership to purchase and develop a parcel of land into residential homes.  They had already subdivided the property into three lots but then the economy collapsed and the partners began squabbling.  The synopsis of the case reads as follows:  “Majority partners brought action for breach of contract and breach of fiduciary duties to partnership.  Minority partners cross-complained for breach of contract.”  The trial court entered judgment for a majority partner and the Court of Appeals affirmed.  [Agam v. Gavra (2015) 236 Cal.App.4th 91].

The trial court held a nine-day bench trial and then issues its final statement of decision.  The court held that two of the partners (husband and wife) had breached the partnership agreement by “refusing to go to construction or ‘to pay for any Partnership expenses other than those dedicated to the sale of the undeveloped lots.’  “The Gavras’ breaches were both actual (cutting off their contributions of time and money for a period of time) and anticipatory (declaring they will not support a construction loan).”  With respect to causation, the court found persuasive Agam’s contention that the Gavras’ breaches caused the partners not to submit a joint construction loan application.

The court concluded that ‘the Gavras’ refusal to participate in any way in obtaining a construction loan prevented Agam from applying for a construction loan backed in party by the Gavras’ assets and thus effectively prevented Agam from pursuing the chief aims of the Partnership Agreement:  obtain a construction loan, build a home on the property, and sell it at a maximum profit.  The court then concluded that the Gavras’ breaches were a substantial factor in causing harm to the partnership, and hence to Agam.”  The court also held that the Gavras’ had breached the implied covenant of good faith and fair dealing and breached their fiduciary duties, but it awarded no additional damages on those claims.  The court denied the cross-complaint causes of action.

While this blog post does not address the case at length, the case does have a good summary of California law as it relates to partnerships and the breach of fiduciary duty that will be helpful for partners and partnership litigation attorneys in Los Angeles.

Here are selected quotes from the Court’s opinion:

Partnership:  Loyalty and Care of a Fiduciary

“The defining characteristic of a partnership is the combination of two or more persons to jointly conduct business.  It is hornbook law that in forming such an arrangement the partners obligate themselves to share risks and benefits and to carry out the enterprise with … the loyalty and care of a fiduciary.”

Partnership Is A Fiduciary Relationship

“Partnership is a fiduciary relationship, and partners are held to the standards and duties of a trustee in their dealings with each other.  In all proceedings connected with the conduct of the partnership every partner is bound to act in the highest good faith to his copartner and may not obtain any advantage over him in the partnership affairs by the slightest misrepresentation, concealment, threat or adverse pressure of any kind.”

Partner Must Prove Fairness of Business Advantage

“A partner who seeks a business advantage over another partner bears the burden of showing complete good faith and fairness to the other. (i.e., that the advantage was not procured by misrepresentation, concealment, threat or adverse pressure.”

Partner’s Own Interest Must Not Damage Partnership

“A partner does not violate [his or her fiduciary duties] merely because the partner’s conduct furthers the partner’s own interest.  (Corp. Code, section 16404, subd. (e).)  The apparent purpose of this provision … is to excuse partners from accounting for incidental benefits obtained in the course of partnership activities without detriment to the partnership.”

Whether a fiduciary duty has been breached is a question of fact.

Partnership attorneys take note–the Gavras had an attorney advising them in this transaction.  Apparently, however, that legal advice was not good enough to prevent them from incurring liability for their actions.  Partners take note–make sure that you are working with an experienced partnership attorney who can advise you on potentially troublesome actions.

Los Angeles partnership attorney Laine T. Wagenseller handles all facets of partnership litigation.  Attorney Wagenseller is the founder of Wagenseller Law Firm and can be contacted at (213) 286-0371.  For more articles and information on Los Angeles partnership lawsuits, please visit www.wagensellerlaw.com/blog.