Breaking Up Is Hard to Do: Navigating Partnership Disputes and Litigation | Articles

Partnerships are a popular business structure due to their flexibility and shared decision-making. However, they also come with inherent risks. Disputes among partners can arise over financial matters, management decisions, or breaches of fiduciary duty. When conflicts escalate, partnership litigation may become necessary to resolve the issues and protect the business or the rights of the partners involved.

This article explores common types of partnership disputes, examples of litigation, and the legal frameworks in California, Texas, Florida, and New York that govern these cases.

Common Types of Partnership Disputes

Breach of Fiduciary Duty
Partners owe each other fiduciary duties of loyalty and care. Disputes often arise when one partner acts in their own interest at the expense of the partnership or other partners.
- Example: A partner secretly diverts business opportunities to a competing company they own.
Profit Distribution Conflicts
Disagreements over how profits and losses are allocated among partners are a frequent source of litigation, particularly when the partnership agreement lacks clarity.
- Example: A partner accuses another of manipulating financial records to inflate their share of profits.
Disputes Over Management and Control
Partners may clash over the direction of the business, major investments, or operational decisions, especially if control is not equally shared.
- Example: A partner makes unauthorized decisions, such as selling partnership assets without the consent of others.
Partnership Dissolution
When partners decide to end the partnership, disputes can arise over asset division, liability for debts, and winding up operations.
- Example: Partners disagree on the valuation of the partnership’s assets during dissolution.
Misappropriation of Assets
Litigation may occur when a partner is accused of embezzling funds or misusing partnership resources for personal gain.
- Example: A partner uses partnership funds to finance personal projects without approval.

Legal Frameworks for Partnership Litigation

Each state has specific laws governing partnerships, often based on versions of the Uniform Partnership Act (UPA) or Revised Uniform Partnership Act (RUPA). These laws address partnership formation, fiduciary duties, and dispute resolution.

California Partnership Law

California follows the Revised Uniform Partnership Act (RUPA), codified in the California Corporations Code §§ 16100–16962. Key aspects include:

Fiduciary Duties: Partners owe duties of loyalty and care, including avoiding conflicts of interest and accounting for profits derived from partnership activities.
Dissolution: Partnerships may dissolve upon the withdrawal of a partner unless the partnership agreement specifies otherwise.
Litigation Example:
- Case: A partner sells partnership property without consent, violating fiduciary duties. The remaining partners sue to recover the proceeds and remove the offending partner.

Texas Partnership Law

Texas governs partnerships under the Texas Business Organizations Code (BOC). Key features include:

Partnership Agreements: Texas strongly enforces partnership agreements, even if they alter default statutory provisions.
Litigation Example:
- Case: One partner accuses another of withholding financial information and sues for an accounting and damages for breach of fiduciary duty.

Florida Partnership Law

Florida follows the Revised Uniform Partnership Act, codified in Chapter 620 of the Florida Statutes. Key provisions include:

Fiduciary Duties: Partners must act in good faith and with fair dealing.
Litigation Example:
- Case: A partnership dispute arises when one partner uses partnership funds to purchase personal property. The other partners sue for fraud and breach of fiduciary duty.

New York Partnership Law

New York’s partnerships are governed by the New York Partnership Law. Unlike some states, New York retains elements of the older Uniform Partnership Act (UPA). Key features include:

Litigation Example:
- Case: In a professional partnership (e.g., law or medical practice), one partner alleges exclusion from decision-making and sues for equitable relief and damages.

Examples of Partnership Litigation

Breach of Contract Disputes
- Scenario: Partners disagree on the scope of authority granted in their partnership agreement. One partner exceeds their authority, leading to financial loss. The other partners sue for breach of contract.
Fraud and Misrepresentation
- Scenario: A partner is accused of falsifying financial documents to conceal misappropriation of partnership funds.
Disputes Over Valuation
- Scenario: During a buyout or dissolution, partners cannot agree on the value of partnership assets. Litigation is initiated to appoint a neutral third-party appraiser.
Expulsion of a Partner
- Scenario: The majority partners vote to expel a partner for violating partnership terms. The expelled partner sues, alleging wrongful expulsion.
Dissolution and Winding Up
- Scenario: Partners dissolve the partnership but disagree on how to distribute liabilities and remaining assets. A court intervenes to resolve the dispute.

Strategies for Avoiding Partnership Litigation

Clear Partnership Agreements: Draft comprehensive agreements that address profit sharing, decision-making authority, dispute resolution, and dissolution processes.
Regular Financial Transparency: Maintain clear and consistent financial records accessible to all partners.
Alternative Dispute Resolution: Include clauses for mediation or arbitration to resolve conflicts without litigation.
Legal Counsel: Consult attorneys to ensure compliance with state laws and prevent disputes from escalating.

Final Thoughts

Partnership disputes can be highly disruptive, jeopardizing business operations and relationships. Understanding the legal frameworks in California, Texas, Florida, and New York is essential to navigating these disputes effectively. By proactively addressing potential conflicts and seeking experienced legal counsel, partners can minimize the risk of litigation and protect the partnership’s success.

If you’re facing a partnership dispute, consulting with a business litigation attorney can provide the guidance you need to explore your options and protect your rights. With the right strategy, you can resolve conflicts and focus on building a stronger future for your business.

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Mark Adams is a trial lawyer at JMBM who focuses his practice on business litigation including contracts, products liability, corporate and partnership disputes, and hospitality litigation. He has tried numerous cases in state courts, federal courts, and in domestic and international arbitrations. Contact Mark at MarkAdams@jmbm.com or (949) 623-7230.

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