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Munoz v. Perla

A-5922-08T3 (N.J. Super. App. Div. 2011) (Unpublished)

PARTNERSHIPS; FIDUCIARY DUTY — The fiduciary duties from one partner to another may change over time if the relationship between those partners and in other businesses changes.

In 1992, the members of an engineering firm decided to buy a vacant building to both locate their business and to lease space to other businesses. To do so, the three of them formed a new partnership. Their engineering firm leased the third floor from the partnership to use as office space. Initially, the partnership set the rent based only on the cost to carry the building.

One of the three withdrew from the engineering firm in 1993, but remained a partner in the building. From 1993 to 2005, he took no part in the day-to-day operations. He received K-1s from the partnership but never made any inquiries about its operations. In 2005, he asked to be bought out from the partnership. His partners offered $200,000 for his interest after the building was appraised and other documents apparently exchanged. The withdrawing partner sued, alleging, among other claims, minority oppression, breach of fiduciary duty, unjust enrichment. He asked for an accounting.

At trial, the principal issues were the application of the statute of limitations – the lower court only considered events within six years of the complaint – and whether the allegedly wrongful acts of the other partners justified reformation of the lease under which the engineering firm occupied the third floor.

The lower court found that the other partners had a fiduciary duty to inform the withdrawing partner about lease renewals with the engineering firm. Significantly, the court found that the nature of their fiduciary duties changed after the third partner withdrew from the engineering firm. An arrangement that made sense when all three partners were still involved in the engineering business – i.e., making the rent equal to the cost of carrying the building – changed after the partner left the engineering practice. Even though the lower court denied the withdrawing partner’s request for dissolution of the partnership, it held – and the appeals court affirmed – that it was a breach of fiduciary duty not to inform him about renewals of the engineering firm’s lease arrangement; that the partner likely would have objected; and, that the rent paid by the engineering firm was below market rate. The lower court ordered the lease reformed to market rate.

On appeal, the Appellate Division affirmed the lower court’s holding that the conduct of the majority partners constituted a breach of fiduciary duty and constitute equitable fraud (that is, fraud without any bad intent or scienter requirement). In affirming, the Court deferred to the discretion given to the lower court’s fact finding.

It agreed with the lower court that a partner’s fiduciary duty can change with time and circumstances, and disclosures that may have been appropriate when all of the partners worked together in the engineering business could be inadequate when one of the partners ceased to be active in that business. In short, the conduct that the withdrawing partner once knew of, and approved of, as a member of the related engineering firm ceased to be reasonable as the years passed and the relationship between the parties changed. More complete disclosure was required and terms of the engineering firm’s relationship with the real estate partnership also should have changed to reflect the fact that the parties now had different interests.

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