Can I Sue My Business Partner for Abandonment?
Business partners almost always start off their ventures with the best of intentions. Unfortunately, good intentions aren't enough to make a partnership last. When one partner decides to call it quits before the other partner is ready, the remaining partner may wonder if they can sue for abandonment.
Generally speaking, a partner is free to leave a partnership when they want to, and doing so will trigger a business dissolution. The dissolution will take place according to the terms of the partnership agreement or operating agreement — or state law in the absence of a controlling document.
However, it may be possible to sue a business partner who abandons the business if:
- The desertion is in breach of the partnership agreement; or
- The departing partner intentionally or inadvertently acted against the business's best interests for their own gain.
This article outlines legal concepts that could cause a departing business partner to be liable to the other joint owners for the harms caused.
Was There a Breach of Fiduciary Duty?
Even though business partners have the right to leave the business when they choose, absent specific contractual terms, they also have fiduciary duties and other legal obligations to each other and the business itself.
Fiduciary duties include:
A business partner must continue to honor their fiduciary duties and act in the best interests of the partnership — and not for their own personal gain — while still a part of the partnership. Self-dealing is a term that is used to describe business partners who conduct business in a way that benefits themselves rather than those to whom they owe a duty.
It is common for business partners to "check out" of the partnership after they have made the decision to leave, but before their duties to the partnership are absolved. If fiduciary duties are breached, the partnership can sue individual partners for any financial losses related to the wrongdoing.
In order to have a successful breach of fiduciary duty claim, you must be able to prove three elements:
- There was a fiduciary duty that existed;
- The fiduciary duty was breached in some way; and
- Damages resulted from the breach.
It might be possible to recover both actual damages (the monetary losses that were the direct result of the breach) as well as punitive damages (damages awarded to punish the wrongdoer) if the breach of fiduciary duty was conducted in malice or fraud.
Was Fraud or Theft Involved?
A breach of fiduciary duty is taken a step further when theft or fraud is involved. If business partners steal from the business or engage in other fraudulent activities, it can be considered a crime in addition to being a civil breach of duty.
If your business partner stole money or property from the business, you may want to sue them in civil court to reclaim what you lost. Your business partner could also face criminal charges if they broke the law by committing fraud or stealing from the business (or third parties).
Stealing from the business would likely be considered embezzlement, which applies when someone who is in lawful possession of money or property uses it for unauthorized purposes or doesn't give it back to the rightful owner.
Other fraudulent activities that you could potentially sue your business partner for include if your business partner knowingly misrepresented themselves or provided fake information with the goal of reaching a favorable outcome. This could include falsifying financial statements or padding client lists with fake customers.
Were Intellectual Property Rights Taken?
Another breach of fiduciary duty, and a reason you may be able to take legal action against a former business partner, is if they infringed on the business's intellectual property rights.
A business doesn't have to be in the tech industry to have intellectual property. Whether you realize it or not, your business has trade secrets that are considered your intellectual property, including customer lists, sales methods, and distribution tactics.
It is relatively common when one partner decides to leave the business and takes with them proprietary information that is the intellectual property of the partnership. If a business partner used intellectual property in a way that breaches their fiduciary duties to the business, a lawsuit could be a way to recoup the losses.
Is the Abandonment a Breach of Contract?
Beyond a breach of fiduciary duty, the remaining partner may have legal standing to sue a departing partner if there are terms in the partnership agreement that were breached. For example, if the partnership agreement set a duration for the partnership and the partner abandoned the business before the terms allowed.
Most business partnerships are governed by a written partnership agreement or, for limited liability companies (LLCs), an operating agreement. If a partner breaches the terms of the agreement, the non-breaching parties can sue for breach of contract.
Other contractual terms that may allow remaining partners to sue a departing partner include:
One thing to keep in mind is that judges generally don't like enforcing contracts that are unfair or otherwise voidable. Therefore, the partner who left could potentially have a defense to leaving the business if good cause can be shown.
Additional Resources to Learn More
- Partnership Rules: FAQs
- Necessary Steps to Dissolve Your Company
- Partnership Change: Plan Ahead with a Buy-Sell Agreement
- Small Business Mediation
Get Help From a Business Attorney
Unfortunately, problems between business partners are common. If you have been abandoned by your business partner, a business law attorney in your area can help you determine whether you have legal standing to sue and if there are other options available to you to lessen the sting.
Remember that while it may be possible to sue a former business partner, it might not always make sense to do so. Litigation is expensive, time-consuming, and stressful, so it's important that the damages you seek would make filing a lawsuit worthwhile. This is another issue that your attorney can go over with you.
Finally, it may also be necessary to contact the police if fraud or other criminal conduct was involved. If this is the case, be sure to get legal advice to avoid liability.