Partnership Disputes

A partnership dispute refers in general to a dispute between the owners of a business. It's not necessary that the business be conducted in the form of a partnership. It may be a general or limited partnership, a corporation or an unincorporated joint venture. A dispute between the owners of such a business is referred to as a partnership dispute.

The injured party's claim may be based on a written or oral agreement, such as a partnership agreement, a shareholders agreement or a joint venture agreement. But it may also be based on duties imposed by law even in the absence of an agreement.

For example, partners owe each other a fiduciary duty, which when breached give rise to a cause of action. Similarly, the majority shareholder owes the minority shareholder a fiduciary duty which will support a claim.

A typical partnership dispute arises when one of the partners is not getting his share of the profits. Most partnership agreements have a pie-whacking provision that governs how profits are split. Often, one of the partners feels that the pie is not being split according to the formula. That type of case is called an accounting case, since it turns on how profits have been accounted for.

Similarly, the majority shareholder may freeze the minority shareholder out of the business. For example, he may do it by taking all of the profits out in the form of a salary, and never declaring a dividend. New York law anticipates that situation by permitting the minority shareholder to seek the dissolution of the partnership or corporation-- in effect killing the goose that lays the golden egg. If the business is profitable, the mere threat of its dissolution may bring the dominant partner to the bargaining table.

A common problem is where one of the investors in a business tries to characterize his or his partner's investment as a loan rather than an investment. For example, if A and B pool their money to start up a business, and the business becomes valuable, A may try to characterize B's investment as a loan and try to limit his or the company's liability to repayment of the loan. By the same token, if the business becomes worthless, A may try to characterize his investment as a loan, and demand repayment of the loan rather than having a worthless interest in the business.

Where the an injury is suffered by the partnership, and not by the individual partner or partners, the proper plaintiff is the partnership. For example, suppose a partner fails to exploit a patent owned by the partnership. That's called a waste of partnership assets. But the injury is suffered by the partnership, not by the other partner. Thus, the proper plaintiff is the partnership.

But where the injury is sustained by the partner himself, he, rather than the partnership, is the proper plaintiff. For example, suppose that Partner A fails to pay Partner B the latter's share of the profits. Since the injury is sustained by Partner B, rather than by the partnership, Partner B is the proper plaintiff.

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