A Serious Partnership Breach In Arizona: Should You Litigate?

Signing Legal Contract

Are you engaged in a partnership that isn’t satisfying your original goals? Perhaps you and your partner no longer have a compatible vision of your company’s future. Or maybe there are more serious issues, such as a material violation of the terms of your partnership agreement. Or even worse, you suspect theft or fraud. What are your next steps?

General partnerships can be fraught with problems. We’ve developed the following hypothetical case study to help you understand when it may be in your best interest to move forward with legal action. Please be aware that this case study is instructional only, and not legal advice for your specific situation. 

A Troubling Discovery

Shane and Alejandro were college friends and classmates at Arizona State, and they had a lot in common. They both loved to play ultimate frisbee and hike South Mountain trails.  They both were accounting majors and became CPAs after graduation. Several years after working for other companies, they decided to go into business together. 

Shane and Alejandro formed Sun Devils CPAs, an Arizona General Partnership under Az. Rev. Stat. Sec. 29-1012.  A general partnership is a business arrangement by which two or more individuals agree to share in all assets, profits, and financial and legal liabilities of a jointly-owned business.

Over many years, Shane and Alejandro grew a successful business with devoted clients and a suite of talented employees and generated a lot of income.

But over the past six months, something has changed. Shane recently divorced. He is acting secretively, and not engaging with Alejandro and the CPA practice as he has in the past. Alejandro wonders if Shane has something to hide and decides to audit the partnership’s books and bank accounts. Alejandro realizes that one of their bank accounts is being diverted into a non-partnership account.

He confronts Shane, who quickly confesses, saying that he has been unable to keep up with his personal finances due to the financial pressures of his divorce. Shane is very regretful of his actions, and means to pay the money back, but has not yet been able to. Alejandro decides to consult an attorney to see what his options are. 

Potential Legal Causes of Action

After spending some time talking with his attorney, Alejandro realizes he has several possible paths forward. First, he could decide to handle this matter informally, either through personal negotiations with Shane, or working through their respective attorneys. They had many good years as friends and partners, and this option has some appeal to Alejandro. 

But Alejandro feels that Shane’s theft of their partnership assets, which can be both a civil and criminal matter in Arizona, is an extremely serious charge and he doesn’t want to just brush the matter off. Shane’s dishonesty has eroded Alejandro’s trust, and he can’t really imagine continuing to work with Shane. Alejandro’s attorney advises him that, if he decides to sue for theft, he will likely be able to dissolve the partnership and recover what was stolen.

His attorney also proposes several other legal avenues to pursue. These include litigation for the following causes of action:

– Breach of Fiduciary Duties – Business partners owe an obligation to each other and the company to act with honesty, loyalty, and in good faith. Az. Rev. Stat. Sec. 29-1034 (2015). Those fiduciary duties are breached when a partner acts in his own best interests instead of doing what is right for the company that the partners have created together. 

– Breach of the Partnership Agreement – A Partnership Agreement, whether written or oral, constitutes a contract between the partners. When a partner breaches this contract, the partner who was the victim of such a breach can sue for damages.

Alejandro has a lot to think about. Specifically, should he sue to remove Shane from the partnership and recover the financial assets stolen from Sun Devils CPAs? 

Contact Counxel Legal Firm

In most cases, problems in a partnership don’t rise to the level of requiring litigation. But when they do, it’s important to engage the right talent. Counxel Legal Firm can help you set up a partnership agreement that’s fair and protective of the parties, and advise you when your partnership needs an adjustment, including legal action. Contact us at (480) 744-6621 or at request@counxel.com. Don’t forget to check out the good things that others are saying about the services they received from Timothy Coons on Google.

This article is intended for informational purposes only and does not constitute legal advice for your specific situation. Use of and access to this article does not create an attorney-client relationship between you and Counxel Legal Firm. Please contact request@counxel.com or (480) 744-6621 to request specific information for your situation.

*Conveniently located off the 101 Freeway and the US 60 in the middle of Phoenix, Scottsdale, Tempe, Chandler, Gilbert, Mesa, and Queen Creek!

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