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Salovaara v. Eckert

A-2018-04T1 (N.J. Super. App. Div. 2006) (Unpublished)

PARTNERSHIPS; FIDUCIARY DUTY—Absent the right to do so in the partnership agreement, a partner’s accepting a leadership position with a competitor and ceasing to promote his or her own partnership constitutes breach of the fiduciary duty not to compete with the partnership and violates the implied covenant of good faith and fair dealing, even if the partner didn’t know such activities were impermissible.

Two businessmen agreed to become partners and formed several partnerships in the securities and investment business. The second partner took a leadership position in another company also in the securities and investment business. Thereafter, the first partner sued the other for breach of their partnership agreement. Ruling in favor of the first partner on most of the claims, the lower court awarded damages against the second partner. While the second partner appealed this ruling, he simultaneously sought indemnification from the partnerships for his legal fees. The first partner brought a second suit challenging the second partner’s right to indemnification. While this second suit was pending, the Appellate Division denied certification of the appeal from the first lawsuit. Thereafter, the first partner filed a third lawsuit to compel disbursement of monies held by two of the partnerships under the control of the second partner. The lower court consolidated the second and third lawsuits. On cross-motions for summary judgment in the consolidated action, the lower court ruled that the second partner was entitled to indemnification only as to those claims which the second partner successfully defended. Further, the lower court dismissed the first partner’s suit to compel a disbursement of monies. Seeking a greater award of counsel fees, the second partner appealed and the first partner cross-appealed opposing the award of attorney’s fees, opposing the second partner’s appeal to increase the award of legal fees, and appealing the dismissal of the action to compel a disbursement.

In affirming the award of counsel fees, the Appellate Division held that the issue of indemnification centered on interpreting the parties’ partnership agreement. It found that the agreement provided for full indemnification for all costs and liabilities arising out of any lawsuit, with the one exception for those suits claiming a breach of the partner’s duty “to act in a manner that does not ... constitute willful misconduct or bad faith[.]” The Appellate Division affirmed the lower court’s finding that accepting a leadership position in a competing company and ceasing to promote the partnerships: (1) violated the best efforts clause of the partnership agreement; (2) constituted breach of the fiduciary duty not to compete with the partnership; and (3) violated the implied covenant of good faith and fair dealing. According to the lower court, the fact that the second partner did not know he was prohibited from working with a competing business only limited the first partner’s ability to make a claim that the second partner made a knowingly false representation about the results of signing the partnership agreement. The lower court ruled that the second partner’s personal belief that he was free to offer his services to a competing business did not change the fact that such behavior constituted willful misconduct or bad faith in the management of the partnerships. In rejecting the first partner’s claim for punitive damages, the lower court found the actions of the second partner to be “ill-advised” rather than “ill-intended.”

On appeal, the second partner claimed that lower court could not find his actions to be merely “ill-advised” and still rule that his actions constituted either bad faith or willful misconduct. In this case, because the partnerships at issue were Delaware partnerships, the definition of willful misconduct and bad faith was controlled by Delaware law. According to the Appellate Division, Delaware law describes bad faith as implying the conscious doing of wrong. The lower court found that the second partner’s attempt to serve both the partnerships and the competing business was unprecedented in the financial industry and not “credible to suggest that [the second partner] could serve both ... equally well at all times.” Finding it impossible for the second partner not to be aware that in taking the leadership position at a another firm he would be competing with the partnerships, the lower court found it difficult to believe that the second partner did not know he could not apply his best efforts to enhance the success of the partnerships. The Appellate Division drew a parallel to Delaware corporate case law which holds that a director of a corporation breaches his duty of loyalty and acted in bad faith when he unjustly enriches himself. Under Delaware law, a fiduciary commits willful misconduct when it “knowingly takes a self-interested action that has no reasonable business or partnership purpose.” Although the second partner may not have known he could not work for a competing business, the lower court nonetheless found that the act of limiting his best efforts to the partnership was both willful and was an act of misconduct. In interpreting the partnership agreement under Delaware law, the lower court held that the parties’ purpose was to prevent indemnification of a partner who pursued his own self-interests. This interpretation of Delaware law and the partnership agreement was affirmed by the Appellate Division.

As to the specific amount of indemnification for legal fees, the lower court found that the second partner failed to submit an accurate accounting of his legal fees related to those claims which were successfully defended. The Appellate Division found that notwithstanding this shortcoming, the lower court made a good faith estimate of the proper allocation of the second partner’s attorneys’ time and affirmed the amount of the award of attorneys’ fees.

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