You are a partner in a partnership and suspect your partner is stealing from the business.
Alternatively, perhaps you are a member/manager of an LLC and suspect a member/manager is
stealing from the business. This situation requires action. This article is here to empower you
with knowledge of your options.
Types of Theft
1) Breach of Fiduciary Duty of Loyalty
Partners typically owe each other a fiduciary duty of loyalty. This duty requires the partner to
place the interests of the business before any of their personal interests. For example, if someone
approaches a partner in a real estate investment partnership with a lucrative real estate
opportunity, the partner should bring the opportunity to the other partners to determine if the
business wants to pursue it. Unless the partnership agreement provides otherwise, the partner can
only pursue this opportunity after the partnership passes on it.
To prove someone breached their fiduciary duty, you must show (1) that the person owed you a
fiduciary duty, (2) that they engaged in an action in breach of that duty, and (3) that you’ve
incurred damages.
2) Fraud
Fraud comes in many different forms. One of the more common forms of fraud is when a partner
takes money under the pretext of using it for the business but then uses it for personal reasons or
diverts the funds to another business. For example, if you participate in a partnership that trades
stocks but your partner funnels the money towards his real estate investments, your partner likely
has committed fraud.
To prove fraud, you must prove (1) your partner lied about a material fact; (2) that your partner
knew it was a lie; (3) your partner meant to induce you to act; (4) that you reasonably relied on
the lie; and (5) you suffered harm from doing so.
3) Embezzlement
Embezzlement is a criminal offense. Embezzlement is the theft or larceny of assets by someone
in a position of trust or responsibility for the assets. Typically, if you discover your partner has
embezzled money, you can sue them in civil court for fraud or breach of fiduciary duty and
recover the damage done by the partner’s embezzlement. Embezzlement occurs most frequently
when a partner is a signatory on a financial account. The same goes for someone who is the CFO
of a closely held corporation with insufficient checks and balances.
What to Do if You Believe a Theft Occurred
1) Gather Evidence
Evidence must be gathered to prove the bad acts and rule out mistakes, poor communication, or
accounting errors. Check the company bank accounts to ensure the flow of cash into and out of
the company comports with the normal course of business. Review any periodic financial
statements. Review the tax returns. Comparing the bank account with the financial statements
and tax returns can reveal discrepancies to help discover the issues. Lastly, check the company’s
governing documents to see if the actions you think may be improper are, in fact, allowed by the
documents. Depending on the form of your entity, these documents may include things such as a
partnership agreement, operating agreement, company agreement, shareholder agreement,
management agreement, or membership agreement. If you’re an owner of the business—like a
partner, a shareholder, or a member—you’re entitled to these documents. Additionally, you may
need copies of records from any shareholder, member, or partner meetings.
2) Recover Your Losses
You reviewed the bank account and tax returns and discovered bad actions by your partner.
Contact an attorney immediately to get ahold of this problem. The sooner you engage counsel to
assess your options and stop any bad actions, the better. Partnership and shareholder disputes are
time-sensitive. Your team of attorneys will outline a detailed plan on how you will recover your
losses and how the business can operate moving forward.
King & Jones specializes in partnership and shareholder disputes. Do not hesitate to contact us if
you suspect a business partner is engaged in bad acts.