New York New Jersey Partnership Dispute Guide

New York’s Expansive Definition of a Business Partnership: Written Agreements Not Required

By Charles Internicola on Posted in Partnership Agreements, Partnership Disputes, Partnership Laws

As a business owner or entrepreneur, typically, emphasis is placed on building your business with, many times, not enough emphasis placed on defining and understanding the “legal relationship” between you and your “business associates/partners”. Many times when faced with “partnership or shareholder litigation” an issue exists and arises as to whether or not a partnership relationship was created. Many times disputing parties focus on “written” agreements, however, under New York law partnership agreements and relationships do not require a formal agreement.

So, when faced with a partnership dispute or an issue as to partnership liability – if no written agreement exists – you must nevertheless evaluate the “substance” of your “actual” business relationship to determine whether or not a partnership exists. Factors that must be considered and evaluated include:

(i) Intent of the Parties In determining whether or not a business partnership exists the courts will evaluate the “intent” of each party to gain insight into this “intent” courts will typically

evaluate and review business records, tax returns and other communications;

(ii) Joint Control and Management If the parties shared joint control and/or management over business activities the courts are inclined to find a partnership relationship;

(iii) Sharing of Profits and Losses Whether there is a sharing of the profits and losses of the underlying business; and

(iv) Combined Business Assets Whether there is a combination of property, skill or knowledge. That is what have been and are the assets and resources contribute to the underlying business.

When faced with lawsuits, litigation and potential creditor claims business owners must be aware that New York adopts an expensive definition of a “partnership”. If a partnership interest is established the nature of your business relationship is altered from one based on “arms-length” transactions to that of “business fiduciaries” who owe extensive duties and loyalties to one another.

The Role of Litigation in Partnership Disputes

By Charles Internicola on Posted in Partnership Disputes, Partnership Litigation

Partnership disputes frequently result in litigation. But many times business owners/partners and shareholders get involved in partnership litigation without first establishing a clear plan as to (a) the purpose of commencing a lawsuit (unless you are a defendant being sued in which case you have no option other than to respond forcefully) and (b) the goal(s) that may, legitimately, be achieved. Before starting any lawsuit these questions must be first answered and thoroughly addressed.

Like the business decisions that you make everyday, your assessment of litigation must also include a “cost-benefit analysis” with a clear set of identifiable goals and benefits that no matter how hostile the dispute may have become, litigation, in and of itself, is just a “means to an end”.  Stay focused on the goals that you have established with your attorney and make sure those goals are realistic and legitimate. Some legitimate goals, include:

  • Preservation of Your Partnership Interests.  This issue comes up for both majority, minority and equal partners. When minority partners are faced with overreaching by the majority litigation serves as a useful tool to stabilize your rights. The goal of stabilization is equally important for majority and equal partners when faced with a partner misappropriating business assets or abandoning his or her duties and obligations.
  • Preservation of Your Business Assets.  Very frequently partnership disputes are accelerated when faced with a partner/shareholder misappropriating business assets. These misappropriated assets typically involve cash and accounts but may also involve the misappropriation of business opportunities. When faced with this issue litigation on, in particular, an emergency motion for injunctive relief is necessary and a critical tool to protect your business.
  • Establishing a Framework for Settlement.  Unfortunately, all too often partnership disputes are not settled until the partners face the cost and uncertainty of litigation. A rational and balanced settlement is always the most preferred course of action. However, more times than not, negotiations do not a advance fairly until litigation is involved. From this perspective litigation may expedite the process and, in doing so, preserve your business – or at least prevent any further deterioration.

Partnership disputes have a way of accelerating and progressing over significant periods of time. The impact of these disputes at both personal and business level is quite substantial. Address your dispute head on, make sure your legal interests are protected and that your goals for a successful outcome are realistic and achievable. Otherwise you may be jeopardizing your business and wasting money on “unproductive” litigation.

Partnership Disputes: What are They Really About?

By Charles Internicola on Posted in Partnership Disputes

Establishing a “successful” business is a difficult task that requires persistent effort, capital and commitment. So much so, that as a successful entrepreneur, more likely than not, the overwhelming majority of your time and effort has been and remains focused on the singular task of developing and improving your business, business systems and customer satisfaction. Along the way however it is possible and, even likely, that issues concerning your partner (or partners) have been put on the “back burner” and, now, after establishing a solid business you are faced with a “partnership dispute” that possesses the potential to jeopardize your business and livelihood. So what are “partnership disputes” all about?  What are they based on, and how can they be resolved?

While every partnership dispute is unique (just like every business is unique) there are nevertheless some core characteristics that underlie each dispute.  Some of these underlying characteristics include:

  • Unbalanced Business Relationship. As a business progresses, over time, partners and shareholders take on different roles in operating, managing and funding the underlying business.  Disputes typically arise when one partner / shareholder, over time, loses sight of his or her day-to day obligations to the business.  Basically, one partner / shareholder ends up doing more for the business while the other takes the business for granted.
  • Personal Disruptions. Many times a “partnership dispute” has nothing to do with your business and has everything to do with changed circumstances involving your partners personal life.  Good or bad, many “partnership disputes” arise due to various pressures and changes that your partner may experience in his or her personal like.
  • Misappropriation / Fraud. Although unclear and not easily determined, many, many “partnership disputes” are a function of fraud and the misappropriation of partnership / business assets and opportunities.  Actions that may have appeared to be benign for many years may only now be recognized as acts of fraud and misappropriation.

Ultimately”partnership disputes” are always about an imbalance in the business and partnership relationship.  Whatever the cause – when faced with this unfortunate circumstance – it is critical that you carefully evaluate your business and partnership interests.  Start with your partnership or shareholder agreement.  If you don’t have an agreement (an occurrence that is quite common for closely held businesses) understand that the partnership laws in both New York and New Jersey may, nevertheless, afford you legal remedies to “rebalance” your partnership relationship of – if necessary – terminate the relationship.  There are options.

Initial Factors to Consider when Faced with a “Partnership” Dispute

By Charles Internicola on Posted in Partnership Disputes

For partners, shareholders and members of closely held businesses in New York and New Jersey there are a number of legal options and remedies available to you when faced with a “partnership dispute”. These legal remedies/options are a function of (a) the terms and provisions agreed to in your written partnership/shareholder/member agreement (if you have one) and (b) the “statutory” protections and rules that will be afforded to you under New York’s or New Jersey’s partnership and shareholder laws. One avenue of protection/rights when faced with a partnership/stockholder dispute, many times, business owners – and sometimes their legal counsel – act too quickly and without a full evaluation and assessment of the contractual and legal options that are available to you and how your contractual and statutory rights may be combined to offer you the best avenue for relief.

So when faced with a partnership dispute, some of the factors and information that you should be assessing and evaluations with your legal counsel should include:

  • Shareholder/Partner/Member Agreements.For many apparent reasons, an honest assessment of your legal rights must start with an evaluation of your shareholder/”partnership” agreement. If you don’t have an agreement, it is important to understand that your situation is quite common (i.e. many “partners” never formalize a written agreement) and that you will nevertheless be afforded legal rights, remedies and options under the applicable “statutory” laws in New York and New Jersey.
  • Relevant Writings.  What are relevant writings? These are the written communications (letters, emails, and invoices) that document support or contradict the claims and rights that you will be asserting. For example, do you have emails discussing your partnership or how profits are divided? Do you have letters discussing salaries? Do you have “unsigned copies” of the partnership/shareholder agreement that you were negotiating? It is always better to be overinclusive when initially reviewing your legal options with your attorney. Documents that may seem inconsequential could have a positive impact on your case.
  • Tax Returns.  Federal tax returns (especially schedule K-1 for S corporations) are extremely informative and serve as an important analytical tool that should be initially reviewed with your attorney. Don’t be surprised if your tax returns contain errors or inaccurate information that you were unaware of – it happens often.
  • Corporate Records.  Your “corporate records” including your stock/member certificates, corporate by-laws and resolutions contain important information that should be initially assessed.

The foregoing documents (if they exist) should serve as a critical base of information that should be assessed and evaluated with your attorney. Once evaluated, you should discuss – in detail – the options available to you and the best course of action. Remember, if you think a document is important, it probably is.

Mistakes to Avoid: Triggering an Unintended Buyout of Your Shares in Your Company

By Charles Internicola on Posted in Partnership Agreements, Partnership Laws

When evaluating your rights as a partner, shareholder or member it is critical to assess (with your attorney) both (a) the buyout provisions and buyout “triggers” contained in your partnership/shareholder agreement (assuming that an agreement exists) and (b) buyout “triggers” that may exist under New York or New Jersey law. These triggers do exist and if the approach to your partnership dispute is not thoroughly planned you may be inadvertently triggering the sale of your stock/membership interests in your own business.

From a contract stand point these potential “triggers” (if they exist) will be defined in shareholder/member agreement provisions that you should be looking for and discussing with your attorney, which include:

  • Buy Sell Provisions
  • Rights of First Refusal
  • Buyout Events
  • Tag Along Rights

Also of relevance are corporate governance provisions that relate to majority votes and the steps that majority shareholders may or may not take to trigger a buyout.

The basic point is that there are many, many not so obvious buyout options and hazards within your corporate agreements and under both New York and New Jersey law. A successful outcome many times depends on how these options are best utilized.