Whether the disagreement is over money, business operations, disproportionate workloads, or even personal matters, a dispute between partners can lead to a disappointing but sometimes unavoidable end to the business. If the issue is not resolved amicably through an early settlement or buyout agreement, the end of the partnership may come in the form of a dissolution. However, business disputes can quickly escalate to full-blown litigation involving the right to an accounting, claims of breach of contract, breach of fiduciary duty, or equitable relief. The New York business law and commercial litigation attorneys at Levy Goldenberg LLP are experienced in all facets of partnership disputes.
New York courts generally will not interfere in internal disputes among members of a partnership and prefer that partners settle their differences among themselves. If those differences cannot be resolved, the partnership should be dissolved and their affairs settled by a full and final accounting. Any general partner has the right to a formal accounting as to partnership matters, if:
- The partner is wrongfully excluded by the copartners from the partnership business or property;
- There is a contract that provides for an accounting; or
- Whenever other circumstances render it just and reasonable.
A general partnership can be dissolved by either partner expressing the intent to not continue the partnership. Dissolution occurs at the moment when a partner leaves or withdraws from it, but there are times when a court-ordered dissolution is warranted. A partnership is not terminated automatically upon dissolution by agreement or court order. Rather, the dissolved partnership and the liability of the partners will continue until the winding up of partnership affairs is completed.
Partners are fiduciaries of one another, meaning that the members of a partnership owe each other a duty of loyalty, honesty, and good faith. As fiduciaries, partners must refrain from self-dealing, neglect of their responsibilities, waste, and misuse of partnership funds and property, all of which may give rise to a claim for breach of fiduciary duty. A partner’s fiduciary obligations to the other partners end upon giving notice of dissolution.
Suing a Business Partner
The general rule is that a partner may not sue another for any claim arising out of the partnership until there has been a full accounting. However, there are exceptions, such as when the alleged wrongdoing of the other partner involves a partnership transaction that can be ascertained without the need for an examination of the partnership accounts. Another limitation to suing a general partner may be the partnership agreement itself.
The prohibition against suits at law by partners without a full accounting does prevent one partner from seeking equitable remedies against another partner. Injunctive relief may be available in order to stop a partner from confiscating or diverting the use of partnership assets before the aggrieved partner can institute or conclude an action for an accounting.
Issues involving Limited Partnerships
In a limited partnership (LP), a general partner is tasked with managing and overseeing the business, while the limited partner(s) are not involved with the business operations. General partners have unlimited liability. Limited partners are liable only up to the amount of money they invested in the partnership. In New York, a limited partner is not a proper party to a lawsuit by or against the partnership unless the case involves a limited partner who seeks to enforce rights against the partnership. Under New York law, a limited partner has standing to bring an action on behalf of a limited partnership if the general partners have refused to do so or if efforts to persuade the general partners to do so are futile. These are called derivative actions.
Alternative Dispute Resolution
A partnership contract may provide for the submission of disputes among partners to neutral third parties for mediation or binding arbitration. Mediators help to facilitate the negotiations and try to bring the sides to an agreement but are not the arbiters of the dispute. With arbitration, the parties present their claims, defenses, and arguments to the neutral third party who makes a legally binding award that can be enforced by the courts.
Choose Levy Goldenberg LLP for Your Partnership Disputes Resolution
The right business plan and proper legal advice can make all the difference in the world in avoiding disputes between partners. If the disagreement cannot be resolved early on, there are ways to minimize the conflict. Whether or not the business can be saved, working with a business transaction lawyer or commercial litigation attorney can help partners understand their legal rights and obligations. Contact Levy Goldenberg LLP today.