My business partner is misappropriating funds from our business. What can I do?

When faced with a difficult situation like this, there are two legal paths that you can follow.  First, you can bring an individual lawsuit against your business partner seeking monetary damages for misappropriated funds.  Second, depending on a number of factors, you may be able to force the corporation to bring the lawsuit against your partner seeking the same or similar recovery.  This is known as a shareholder derivative action.  The distinction between these two types of legal actions is very fine, but your decision to pursue one or the other could ultimately impact the outcome of your case.

 An individual suit is generally the more straightforward remedy.  In this type of action, you would bring suit, in your own name, against your partner for the damage and financial losses he has inflicted on you personally.  The typical legal claims in this sort of action might include breach of contract (assuming you have an operating or shareholder agreement); conversion, for your partner taking property that rightfully belongs to you; and breach of fiduciary duty, because as a officer/director/manger of the company,  you partner likely has a duty to act in good faith and in the best interests of the company.  Depending on the specific circumstances, you may also have claims for fraud and unfair and deceptive trade practices.  This later of these claim is  particularly useful because it allows you to triple your damages and also recover your attorney’s fees.

A shareholder derivative suit is more complex.  In a normal business operations, the board of directors has a duty to make sure that the corporate officers and other directors do not take any action to harm the corporation.  In small businesses (or “close corporations” in legal jargon), this sometimes does not happen because the officer or director harming the corporation is one of just a few officers or directors.  A shareholder derivative suit is the solution for situations where the bad actor is also in control of the company.  The derivative suit allows a shareholder who meets certain requirements to force the corporation to take action against officers or directors who are harming the corporation.

In order to file a derivative suit, you must have been a shareholder at the time the actions harming the corporation occurred, or you must have obtained your stock by operation of law from someone who was.  In addition, you must be able to fairly and adequately represent the corporation in enforcing its rights and send timely written notice to the corporation notifying it of the bad acts you seek to remedy.  The courts will dismiss your suit if any of these criteria are not met, or if a panel of independent directors (those not named in the suit) determines the action is not in the best interests of the corporation.  As long as all the requirements are complied with, the court should allow the corporation to take action against the officer or director who is harming the corporation, including filing any of the actions that could have been filed by an individual shareholder.

Whether pursuing the individual remedy, or going the derivative route, you will want to have an experienced attorney representing you in a suit against a business partner.  When faced with an intra-company dispute, it is critical to consult with an attorney that has experience litigating shareholder or partner disputes.  At Miller & Monroe, we have the experience and skill to help you navigate these complicated waters.  Our lawyers have prosecuted and defended these kinds of claims for our clients.  If you are having a problem with your business partner, please call today and setup a consultation to discuss your options.

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