The reality is that many partnership disputes are grounded in a misunderstanding of the relationship and ownership rights among business partners. Sure, everyone starts off with good intentions but as time passes and the business grows disputes arise as to who owns what and, in some cases, whether or not a partner is really a partner.
Consider that when you are dealing with a small closely held business the shareholders, officers, and employees are all the same individuals. One partner typically gravitates toward managing the business and other partners focus on delivering technical services and acts more as a manager or an employee. So, you should not be shocked that many times in shareholder and partnership litigation one partner claims that the other is only an employee and that he or she does not own the company. Sounds crazy, but it is quite common.
So, what is a working “partner” to do when he or she is claimed to be a glorified employee, well, he proves his case and demonstrates that he is a partner. However, an important fall back position is to also assert a direct claim for “unjust enrichment.” By asserting a claim for unjust enrichment in a partnership dispute a partner is essentially claiming, “Hey, I am a partner and I will prove it but if I am not a partner than I should be paid damages because I did work, performed services, and helped this company grow. The defendants – my partners – have been unjustly enriched by my efforts. Unjust enrichment claims are critically important in partnership disputes.
In a recent decision in Scott v. Pro Management Services Group, LLC, Supreme Court of New York, Appellate Division, First Department ruled on an appeal by Pro Management Services Group, LLC that sought to strike down an unjust enrichment claim by one of the claimed partial owners. The appellate division sustained the unjust enrichment claim and did a good job of evaluating factors as to why the claim is appropriate for a partnership dispute.
For the Appellate Division, basically, if someone provides a service to another, in which they expect to be compensated, and are not – the person providing the service may have a case for unjust enrichment. In other words, the person receiving the goods or services was “unjustly enriched” because they failed to compensate the person providing said items. Keep in mind that while wrong-doing may play a role in the overall situation, it is not a key component of proving unjust enrichment.
In Scott, to sustain his partnership claim of unjust enrichment, Scott had to answer the following questions:
- Did Scott provide services or goods that enriched the defendants?
- Was said enrichment done at the expense of the plaintiff?
- Was the enrichment provided by Mr. Scott unfair or unjust?
- What defense can the other owners of Pro Management Services Group, LLC provide?
- Is the remedy or restitution that Mr. Scott is requesting fair?
Ultimately, five judges ruled in favor of Randolph Scott – who contested that the other owners of the holding companies in question were unjustly enriched by revenues, licensing fees, and royalties, both at the company’s and his expense. The Appellate Division agreed that as an 11.1 percent partner in the defendant’s companies, Mr. Scott is owed restitution for any unjust enrichment that occurred.
Important Point: If you are faced with a partnership or shareholder dispute and your partners claim that you are really not a partner – an “unjust enrichment” claim will be a critical tool that you must utilize in your arsenal. To learn more about protecting your partnership interests and rights order a complimentary copy of the Partnership Dispute Guide.