Partnership and Corporate Disputes -- Final Settlement

I've been writing lately about different clients who've found themselves in disputes with their small business partners or co-owners. This week I settled one case, involving a man who'd owned both a corporation and a partnership with one other co-owner. Although emotions ran high between the two former friends, and they'll likely not be on speaking terms for a long time, the actual dissolution process was fairly tame and was resolved without going to court. Looking back on it, there are a few lessons to be drawn from this experience.


1. Put your agreements in writing. Although both gentlemen were the type who liked to do business on a handshake, they'd had the sense, 20 years ago, to put their business agreement in writing. When things between them went sour, and they started rattling their swords at one another, at the end of the day their resolution of the conflict was governed by the written documents that had been drafted two decades earlier. Had the two men operated on simply a handshake, as is quite often the case, I believe my client would likely have been simply shut out of the company and would have had no recourse to protect himself other than go to court.

2. Look at the balance of power. One thing my client, in retrospect, would have done differently is to have put more thought into the balance of power. The two gentlemen were each 50 percent owners, so the opposing party was agreed upon as President, and my client was the Vice President. They created, however, a three-person board, made up of my client, the opposing party, and the opposing party's wife. When things went bad, my client was, to a certain extent, shut out of decisions because his partner and partner's wife constituted a majority of the board of directors. If he had it to do over, I think he'd rather have appointed an independent third party (such as an accountant) as the tie-breaking director.

3. Know your rights. When things between my client and his partner first went south, his partner threatened to just push him out of the business. My client, quite frankly, was scared that he could simply be pushed out of the business. However, he came to an attorney specializing in business matters. We reviewed his business agreement as well as the applicable law, and I was able to advise him of both the strengths and weaknesses of his position. My client learned, for example, that if he and his partner could not agree, the worst thing that could happen is that the business could be judicially dissolved and the assets divided (or sold and the proceeds divided) between the two of them. On the other hand, he also learned that if the corporation and partnership were judicially dissolved, it would involve high court costs and would likely not bring the full value of the property. Armed with this knowledge, my client was able to go into negotiations with a certain degree of confidence, yet also knew that he needed to work together with his former partner so that they both could come out better.

If you have questions about a partnership or corporate dissolution, contact me at wldeaton@vnet.net.

Limited Liability Companies, new case

I've written before on this blog that, in my opinion, LLCs are not only as protective as a regular corporation, but that recent caselaw suggests they may be stronger than corporations. A new case from the North Carolina Court of Appeals appears to support this.

In Babb v. Bynum & Murphrey, PLLC, the Plaintiff sues a professional LLC, and one of the members of the LLC (Mr. Murphrey), for alleged wrongful acts committed by the LLC's other member, Mr. Bynum (basically, misappropriation and/or theft of trust account monies held for the Plaintiff).

Plaintiffs stated that they were not following a theory of vicarious liability (i.e., they did not allege that Mr. Murphrey was liable just by virtue of being a member), and the Court appears to tacitly acknowledge that this theory would have gotten the plaintiffs nowhere. Instead, the Plaintiffs proceeded on the theory that the Defendant failed to act to stop the misdeeds of his fellow member. The Court of Appeals held that the "innocent" member had no affirmative duty, absent actual knowledge of wrongdoing, to investigate his fellow member.

This case appears to further buttress the theory that LLCs are strong. Had the defendant law firm been a corporation of some sort, the case most likely would have included additional allegations that corporate formalities weren't followed, or would otherwise argue that the corporate veil should be pierced.

To read the text of the case, go to:

http://www.aoc.state.nc.us/www/public/coa/opinions/2007/060876-1.htm