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The fiduciary duties of loyalty and care may be different when a partnership is involved, rather than a corporation.
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The duties that shareholders in a corporation owe to each other are different than those owed in a partnership. Shareholders have more discretion to consider their own interests first.
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Understanding the duties owed by those in a business is important to avoid liability to business partners
This fight between accountants in practice together demonstrates the different ways that courts will look at corporations on the one hand and partnerships, an entity that the what the law calls an unincorporated business association. Limitied liability companies are also unincorporated business assocations.
The case is also another lesson in the course: Bad Things Happen to People Who Don’t Bother with Contracts When They Start a Business with Others.
Fiduciary Duties Owed Between Partners
The takeaway from this case is that the duties that shareholders owe to each other are different from the duties that partners and LLC members owe to each other. That is not to say that there are no duties between shareholders in a closely held corporation, but those duties are not presumedto exist. They have to be proven from the circumstances. We will discuss some of the differences as we go through the details of the case.
Why does this matter? Because understanding the duties owed by those in a business is important to understanding the rights and liabilities of those involved, Those who have fiduciary obligations are personally liable when they ignore these duties. And those who are owed the fiduciary duty have a right to hold the fiduciaries responsible.
Accounting Partnership Dissolves
This dispute between the accountants turned into a lawsuit. The combatants were involved in Forward LLP, a poorly documented accounting partnership. Kristina Edwards and Sean Forman were locked out of the business, but they went to court and got temporary restraining orders (TROs) by the trial court.
These allowed them to get back to using Forward software, email, Google Drive, and client files and communications at the outset of the case. The defendants appealed that decision and lost.
The case we are looking at is from the California Court of Appeals, Edwards v. Forward, but the legal principles here will apply in most states, including New York and New Jersey, where I practice. Continue reading