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How To Win In a Business Divorce Despite Lousy Documentation

By: Geoffrey M. Gold

Los Angeles, CA

To one poised to battle with his business partner, it is easy for the lawyer to say, Where is the contract? However, all too often, there is no written contract or easily understood agreement. That is when a battle may turn into a long-running war.

Many treat business relationships like personal ones. Asking for a prenuptial agreement can kill a romance. Demanding detailed documentation before starting a business with a friend may arouse suspicion or promote distrust. Getting lawyers involved early may result in expenses that the evolving partnership wants to avoid or postpone.

For every affliction that arises in business partnership cases, there exists a cure. Winning the business partnership dispute is best achieved by picking the right strategy to end the controversy as soon as possible, eschewing disruptive petty or emotional feelings.

Holding Real Property as Tenants in Common

Unthinkingly, business people will hold real property with their partners in equal parts, as tenants in common. When discord flairs at separation, the only way to divide the property may be to seek a partition. The key to getting such a case resolved expeditiously is to find a good mediator, and then to compromise. But, due to personality conflicts or one sides view that irrationally may ultimately prevail, things can drag.

The most efficient solution is to file an action for partition, move for an interlocutory judgment on the issue of partition, get a referee appointed and have the court conduct a sale. While this may seem aggressive, it is the only way to force closure quickly. Absent decisive action, the lingering feud can persist, yielding even worse expenses and angst. Ultimately, the specter of the parties suffering tax penalties, incurring attorney and expert costs, and enduring further uncertainty will promote resolution. One must have the temerity to push the litigation.

Deadlock and Dissolution

Partners may reach an impasse over issues such as selling the company, raising capital, taking out loans, or hiring and firing. Day-to-day management conflicts may also make operations impossible. Ideally, partners should have an agreement that specifies a buy-out procedure when remaining in the partnership cannot work and neither side has the right to out-vote the other.

A common case results where the parties, in an effort to minimize legal fees at the beginning of a partnership, fail to hash out the terms for a corporate entity formation and governance agreement (often called a shareholder or partnership agreement or by-laws). The saving of lawyer expenses at the front end will almost certainly be outmatched by the costs associated to split up later. In the end, the court will divide the assets and liabilities, and the parts will almost certainly be worth less than the whole.

Receivership

When one becomes involved in a business divorce, where no business can be conducted and no guiding document controls, a remedy is receivership. In a receivership, a third party appointed by the court takes over operations.

Be forewarned, receivers are costly and may do little more than destroy the assets that they are tasked to preserve. Why? Because receivers can only manage affairs on a relatively temporary basis, until the business is sold or the litigation is resolved. Receivers cannot be expected to accomplish more than prevent fraud and mismanagement, and to maintain the status quo. The way to use a receiver successfully is to hire an honest, responsible, bonded professional, while executing a plan for concluding the litigation smartly and quickly.

Injunctions

Injunctions are provisional remedies that are less drastic and highly preferred over receiverships. A party may go to court to ask that an order be issued that restrains and enjoins an offending partner from engaging in certain behavior. Another possibility is to request a court ordered monitor to be installed in the business. A monitor can be retained to check that amounts are deposited properly, for example. Similarly, in the case of stalemate in a corporation, the court is empowered upon request to appoint a director to break ties. Any court order may ultimately have to be enforced by contempt proceedings.

Accounting

Partnership cases almost inexorably get drawn into protracted exploration of accounting issues. parties should pay attention to the financial records and take action to protect the back-up information which will support an accounting audit. In an audit, expert forensic accountants will conduct the equivalent of an autopsy on the demised partnership. While conducting an audit, the parties will likely pursue claims for breach of fiduciary duty, fraud, and constructive trust.

Partnership disputes can be messy. With better contracts the parties might be able to minimize conflicts and lessen intrigue. Strategic thinking and bold action are required to help accelerate the end to a destructive fight over a tattered partnership, and to allow the parties to move on to more productive activities.Usually, the best result for the client is a quick negotiated end. The quandary is that negotiations are unlikely to be fair or fruitful unless the right course is promptly pursued.

Geoff is a trial lawyer specializing in business and real estate matters. He has litigated to successful conclusion cases involving a wide variety of corporate and business issues as well as commercial and real estate transactions. Geoff also acts as outside general counsel to many developing businesses and assists his individual and corporate clients with their everyday legal affairs

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