At the outset of a joint venture, many real estate investors don’t focus on the inevitable question – what could possibly go wrong?
At the recent Real Estate Bar Association for Massachusetts (REBA) 2008 Spring Conference Attorney Mark Furman, chairman of the litigation department of Tarlow, Breed, Hart & Rodgers, P.C., outlined not only what can go wrong, but also how to approach the resolution of disputes among co-venturers.
Disputes or claims that arise out of joint ownership agreements run the gamut. Common areas of discord include: self dealing, usurping corporate opportunities, entitlement to compensation or fees not fairly allocated, the right to work in a venture, mismanagement, unequal treatment, or exclusion from information, participation, and decision-making.
Under Massachusetts law, joint venture parties have the same fiduciary duties as partners, owing each other the duty of utmost good faith and loyalty, particularly in regard to minority shareholders. Co-venturers may not act out of self-interest or avarice in violation of their duty of loyalty to their partners and the business.
In matters involving business policy, majority shareholders have the initial burden of demonstrating a legitimate business purpose for the action taken. This includes majority shareholders exercising discretion in declaring or withholding dividends, deciding whether to merge or consolidate, establishing the salaries of corporate officers, dismissing directors with or without cause, and hiring and firing corporate employees. The minority shareholders then have the burden of demonstrating that the same legitimate objective could have been achieved through an alternative course of action less harmful to the minority’s interest. The Courts then weigh the legitimate business purpose against the practicability of a less harmful alternative. The Courts also consider the reasonable expectation of the parties.
In situations involving corporate opportunities and self-dealing, the burden is on those who benefit from the venture to prove that the decision was fair to the corporation. An agreement among owners should minimize claims. If it is a joint venture, the scope of the venture should be narrowly defined.
Although Massachusetts courts have indicated that the fiduciary duties owed between joint venturers can be modified or limited by contract, there has been a reluctance to allow for the total elimination of fiduciary duties. Statutory provisions also exist under Massachusetts law that can be used to limit or eliminate the personal liability of a manager or member of a Limited Liability Corporation (LLC) or limit the liability of a director of a business corporation.
Massachusetts courts will apply the law of the state of incorporation to claims concerning the internal affairs of a corporation, including claims for breach of fiduciary duty. The scope of fiduciary duties can vary from state to state, and the statute of limitations, burdens of proof, and available remedies may also differ.
Some claims may only be brought as derivative claims on behalf of a company. A derivative action must be brought to recover for breach of duties owed to the corporation. Because a derivative action is brought on the grounds of breach of duty owed to the corporation, any recovery will benefit the corporation. Claims that the majority has been paid excessive compensation must be brought as derivative claims. Direct claims for breach of duty owed to a shareholder may be brought directly by the aggrieved minority shareholder. Direct claims include those challenging the termination of employment and certain “freeze out” techniques.
In Massachusetts, breach of fiduciary duty through diversion of corporate opportunities and self dealing is usually subject to a three year statute of limitations while certain other contractual claims may be subject to a six year statute of limitations. The statute of limitations may be extended by virtue of the Plaintiff not having knowledge of the wrongdoing, fraudulent concealment, or in derivative actions, the adverse domination of the corporation by the alleged wrongdoers.
The court has broad equitable powers to fashion remedies where there has been a breach of fiduciary duty. Courts attempt to restore as nearly as possible the wronged party to the position they would have been in had there not been wrongdoing. Remedies should neither grant the minority a windfall nor excessively penalize the majority. The remedy should be consistent with the reasonable expectations of the parties.
Massachusetts statutory remedies are determined by provisions of the Limited Liability Company Act, the Uniform Partnership Act, the Limited Partnership Act, and the Business Corporations Act.
Tarlow, Breed, Hart & Rodgers, P.C.
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