Partnership Litigation

What types of claims are most frequently made in Partnership Disputes?

Frequently partners or members of business entities sue partners for breach of fiduciary duty, breach of contract, fraud, and misappropriation. This is often accompanied by accusations that controlling partners or members have engaged in self-dealing by funneling funds and contracts to themselves personally or to other companies they control individually.

I found my partner is an investor in businesses that compete with the company we own together. Can I do anything about it?

General partners owe one another a duty of care and a duty of loyalty. This is generally construed to require the partners to avoid competing with the partnership and two allow the partnership the first opportunity to undertake any business opportunity within its scope of activity. Limited partners, however, do not owe these duties.  Although the Texas Limited Liability Company Act does not clarify the extent of the fiduciary liabilities of managers or other persons controlling limited liability companies, practitioners generally assume that they have fiduciary duties on par with those of corporate directors and officers and general partners.

I want to launch a business that competes with my former partner after we separate business assets, can I do this? Do I need to tell my former partner about it?

Although you will no longer owe a duty of loyalty to your former partner after separating, there is the possibility that your partnership or company agreement or business separation agreements contains a non-compete clause that may prevent you from competing with your former partner. You should review all agreements very carefully.

I just found out my partner was stealing form the business. How long do I have to bring suit against her?

Generally, you have four years to bring a cause of action for a breach of fiduciary duty, a breach of contract, and for a partnership accounting from the date of the relevant legal injury. However, the “discovery rule” or the “fraudulent concealment” doctrine may apply to lengthen the time period you have to bring suit. Unless you have reason to know of the complained of conduct or you would have discovered the conduct in the exercise of reasonable diligence, then it is likely you may still be able to bring suit on actions of which you only recently learned.

Can I withdraw from the partnership and receive payment for my equity?

The Business Organizations Code provides to partners in a general partnership a default right to withdraw the fair value of their investment from a partnership. Typically, limited partners, members in LLCs, and shareholders in close company are limited in their ability to convert their business interests into liquidity as they have no right of withdrawal. However, Texas law allows for these provisions to be liberally modified by contract.

In what circumstances can I seek dissolution of an entity in which I am an owner?

Under Section 11.314 of the Texas Business Organizations Code, if the entity is a Texas partnership or limited liability company, on application by an owner a district judge may order winding up and termination of a partnership if:

  1. The economic purpose of the entity is likely to be unreasonably frustrated;
  2. Another owner has engaged in conduct relating to the entity’s business that makes it not reasonably practicable to carry on the business with that owner; or
  3. It is not reasonably practicable to carry on the entity’s business in conformity with its governing documents.

This statute could apply to several situations, including ones in which owners of equal stakes in a business cannot agree on a future course of conduct or plan for the business.

What are my rights as an owner or member of a Texas entity to seek appointment of a receiver to control or liquidate an entity?

First, a court may appoint a rehabilitative receiver under Section 11.404 of the Texas Business Organizations Code, upon compliance with other requirements and, only if:

  1. the entity is insolvent or in imminent danger of insolvency;
  2. the governing persons of the entity are deadlocked in the management of the entity’s affairs, the owners or members of the entity are unable to break the deadlock, and irreparable injury to the entity is being suffered or is threatened because of the deadlock;
  3. the actions of the governing persons of the entity are illegal, oppressive, or fraudulent;
  4. the property of the entity is being misapplied or wasted; or
  5. with respect to a for-profit corporation, the shareholders of the entity are deadlocked in voting power and have failed, for a period of at least two years, to elect successors to the governing persons of the entity whose terms have expired or would have expired on the election and qualification of their successors;

Under Section 11.405 of the Texas Business Organizations Code, a partial owner of a business may seek liquidation only if the entity is in receivership and that the court des not find that any plan to rehabilitate the entity is feasible before the first anniversary of the receiver’s appointment. Further a court may only do so if all other legal and equitable remedies are inadequate and the circumstances demand liquidation to avoid damages to interested persons.