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Self-Dealing in California Partnerships and the Potential for a Lawsuit

Some might say that the system of capitalism is built on the notion that we all act in self-interested ways, and thus, through competition and basic rules of fair play, we as a society can harness our natural self-interested motivations to create more prosperity for all. That is, of course, true to a certain extent, but acting in self-interested ways can come into direct conflict with other parties and the law when it is done at the expense of other partners with whom you have formed a partnership.

 

California partnership law specifically states that partners in a partnership have a duty “To refrain from dealing with the partnership in the conduct or winding up of the partnership business as or on behalf of a party having an interest adverse to the partnership.” What this means is that, whenever partners are carrying on business that affects the partnership itself, they should be acting in the interests of the partnership and not themselves.

 

Thus, when a partner enters into a transaction between himself and the partnership (or between the partnership and a party adverse to the partnership, such as a competitor), that partner risks breaching a fiduciary duty by engaging in self-dealing, which could lead to a partnership dispute with the other partners, resulting in litigation.

Potential Examples of Self-Dealing in a California Partnership

When thinking about self-dealing in a California partnership and why such rules even exist, it is important to remember that general partners in a partnership have the ability to act as agents for the partnership. Being an agent means the partner can enter into transactions on behalf of the partnership itself without necessarily having to bring it to the other partners for approval (unless a partnership agreement exists which specifically includes methods for approving transactions).

 

Thus, there is the potential for abuse through a partner acting to further his own interests at the expense of the partnership, and, by extension, the other partners by creating self-dealing transactions between the partnership and himself. Examples of this type of exploitative self-dealing by a partner include:

  • A partner selling the partnership any type of property (vehicles, equipement, financial holdings, etc.) or services for more than the property or services are worth
  • A partner buying property or services from the partnership for less than it is worth
  • A partner creating a contract between the partnership and himself (or another business interest) for goods or services
  • A partner creating a contract for employment by himself by the partnership

 

This does not necessarily mean any financial dealing with the partner and the partnership is illegitimate, but it does mean that there is the potential for a partnership dispute based on an alleged breach of the duty of loyalty (and specifically self-dealing) where a partner conducts business with the partnership which is not adequately approved and made fully transparent with the rest of the partnership (and in accord with any partnership agreement requirements).

 

Speak to a California partnership dispute attorney to learn more about your legal rights and obligations in your specific situation.

Work With an Experienced Los Angeles Partnership Dispute Attorney

At Wagenseller Law Firm in downtown Los Angeles, our attorneys have extensive experience in resolving all types of partnership litigation matters, including those related to fraud and alleged breaches of the duty of loyalty and duty of care. Contact Wagenseller Law Firm today to schedule a consultation to discuss your partnership dispute.

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