A California Court of Appeals in Eng v. Brown, et al. has held that formation of a corporation can terminate a predecessor partnership and partnership fiduciary duties.
In Eng, two real estate agents, Eng and Levy, decided to purchase the Tin Fish Gaslamp restaurant in San Diego. Eng claimed that the agreement was an oral partnership. Their offer was written and executed by B.L.E. Fish, whose shareholders were Eng, Levy and Brown. The corporation was incorporated the same month in which the offer was made.
A dispute arose over operation of the restaurant and Eng alleged that Brown and Levy breached an oral partnership agreement wherein they agreed to a 10% management fee and set compensation and breached their fiduciary duties by charging a 20% property management fee and paying themselves excessive compensation. Brown and Levy contended the formation of the corporation terminated the predecessor partnership and the associated partnership fiduciary duties.
The Court of Appeals, as well as the trial court agreed with Brown and Levy – the corporation terminated the predecessor partnership and the associated partnership fiduciary duties.
Before turning partnership into a corporation or LLC consult with legal counsel to assure that whatever agreements the partners may have had are incorporated into the governing documents, shareholders agreement or membership agreement. If you don’t the
transition may be fraught with unexpected and unintended consequences – and expensive litigation.
The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.
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