For over a year, Zerillo Law Firm, LLC has represented a minority owner in a marijuana retail business. The minority owner alleged that that the majority owner embezzled money from the partnership. Our claims were that the majority owner should lose ownership in the business.
After a year of litigation and a trial this Summer, I am happy to report that we were successful. Our client now owns 100% of the retail store and the real estate associated with it.
This case was truly a group effort, with Tim Zerillo trying the case, but with Stephen Sweatt and Seth Russell, and all the staff pitching in.
So, how did we do it? Well, it is complicated.
First, it should be noted that there was no corporate structure for the partnership. As such, we primarily took action under the Maine Uniform Partnership Act. §1045 of the Uniform Partnership Act expressly authorizes a partner to maintain an action against the partnership or another partner to enforce the partner’s “rights under sections 1041 … and 1044”. Though not expressly stated in §1045 or elsewhere in the Act, an action to enforce those rights can presumably seek legal and equitable relief, such as money damages or the return of property.
§1041 of the Uniform Partnership Act spells out the scope and limits of a partner’s authority as a partner. We alleged two specific claims under that section.
§1041(7) states that a partner “may use or possess partnership property only on behalf of the partnership.” We alleged that the majority partner used partnership property for himself or on behalf of third parties. Therefore, an action under this provision may seek damages for the harm done to the partnership by his doing so, and/or return of the property at issue.
§1041(10) states that only unanimous consent of the partners can authorize acts outside the ordinary course of business of the partnership. We alleged that the actions the majority owner took, which essentially split-off the partnership’s business operations into separate entities and made capital investments in other businesses, would have required unanimous consent.
Moreover, §1044 of the Uniform Partnership Act spells out the partners’ limited fiduciary duties of loyalty and care, and their obligation of good faith and fair dealing with each other.
§1044(3) establishes a partner’s duty of care as an obligation to refrain “from engaging in grossly negligent or reckless conduct, intentional misconduct or a knowing violation of law.” In the context of corporate fiduciary obligations, Maine courts define “gross negligence” as “reckless indifference to or a deliberate disregard of the whole body of [stakeholders,] or actions which are without the bounds of reason.” Wahlcometroflex, Inc. v. Baldwin, 991 A.2d 44, 48, 2010 M.E. 26 ¶16 (Me. 2010).
§1044(2)(B) establishes a partner’s duty of loyalty to “refrain from knowingly dealing with the partnership in the conduct … of the partnership business as or on behalf of a party having an interest adverse to the partnership.”
§1044(4) establishes a partner’s obligation to “discharge the duties to the partnership and the other partners under this chapter … and exercise any rights consistently with the obligation of good faith and fair dealing.” This generalized obligation of “good faith” is not the same as an implied contractual covenant of good faith and fair dealing. See generally Gerber v. Enterprise Products Holdings, LLC, 67 A.3d 400, 418 (Del. 2013) (“contractual fiduciary duty describes a concept of ‘good faith’ very different from the good faith concept addressed by the implied covenant”). Rather, it is more appropriately read as a generalized obligation not to act “dishonestly, with ulterior motives, or for anything other than business reasons”. Diversified Foods, Inc. v. First Nat. Bank of Boston, 605 A.2d 609, 614 (Me. 1992) (explaining a bank’s statutory obligation of “good faith” under the UCC).
The net effect of these and other claims is that we were able to establish that the majority owner violated the Uniform Partnership Act. The result is his disassociation from the retail store and all of the ownership in the same to our client, who goes from the minority owner to the sole owner. Congrats to our client!