When Family and Business Don't Mix - Part Two

INTRO: In Part One of this series, I described the behaviors that led to litigation between relatives who co-own real estate and a business. Fortunately, the "Partition" action provides an interesting and effective legal remedy to potentially resolve the real estate portion of the dispute between my clients and their Uncle. But the real moral of the story is that communication, planning and appropriate legal documentation should be employed as early as possible between co-owners so they can avoid, or at least mitigate, misunderstandings, disputes and litigation.

John was referred to me, and after doing some due diligence for John and his sisters, I informed them that: a) they were not at the mercy of Sam to continue to be co-owners of the property; b) Sam could be compelled to produce an accounting for the business and the property; and c) Sam had breached the fiduciary duty he owed to my clients as co-owners of both the property and the business, unjustly enriching himself as to his 90% interest in the business at the expense of my clients who were receiving far less than market value rent for their 50% interest in the property.

I informed my clients that they could file a lawsuit, in which they could seek a Partition of the property. In a Partition action, if one (or more) co-owner of a property is not getting along with another co-owner or one wants to sell and the other does not, the judge will, except in rare circumstances, order the sale of the property. In addition, my clients had a right to demand an accounting and had various claims for damages.

I wrote a demand letter to Sam, giving him an opportunity to buy out my clients and settle as to damages sustained by my clients. Sam's lawyer responded, acknowledging that my client would ultimately be able to force the sale of the property in the Partition action, but rejected my clients' valuation of the property and denied liability for damages. So, I filed suit for my clients.

The parties have engaged in early settlement discussions and reaching a pre-trial settlement is likely. Unfortunately, however, the lack of any written agreements between the parties - either between Sam and Carol of the first generation or between Sam and my clients of the second generation - helped enable a conflict to spin out of control and ruin a previously close family relationship.

This article is intended to provide information of a general nature, and should not be relied upon as legal, tax, financial and/or business advice. Readers should obtain and rely upon specific advice only from their own qualified professional advisors. This communication is not intended or written to be used, for the purpose of: i) avoiding penalties under the Internal Revenue Code; or ii) promoting, marketing, or recommending to another party any matters addressed herein.

Mr. Silverman is an attorney with R. Silverman Law Group, 1855 Olympic Blvd., Suite 125, Walnut Creek, CA 94596; (925) 705-4474; rsilverman@rsilvermanlaw.com.

BUSINESS LEGAL SERVICES: Need to find an experienced estate & trust administrator in Walnut Creek CA? Contact Robert Silverman at 925-705-4474 for legal advice on prospective business purchase, business entity formation and general business counsel, including vendor contracts, customer contracts, independent contractor agreements, employee matters, acquiring another business, offering to sell and selling or gifting fractional interests in the business (e.g. fractional LLC membership interests or corporate shares), insurance matters, establishing business retirement plans, disputes or potential disputes with customers, vendors, employees, or selling the entire business.