Published on:

Partner Who Claims He Was Defrauded Gets Justice on Appeal

In a recent decision involving a partnership lawsuit, the Court of Appeals of Tennessee reversed a trial court’s decision to dismiss a partner’s fraud and promissory fraud claims against the other partner and a third party.  Here are the key facts of the case:

  • Plaintiff and Defendant were 50% partners in a Partnership
  • Defendant was the managing partner
  • The only significant asset of the Partnership was a large commercial building
  • Plaintiff expressed a desire to sell his partnership interest to a Third Party
  • The building was appraised at $3.3 to $3.6 million dollars
  • Defendant insisted that the building was worth less than the appraised value by about $1 million because of hail damage to the roof which would cost about $1 million to repair
  • Neither Third Party nor Defendant divulged to Plaintiff, before he sold his interest to Third Party, the fact that Defendant had submitted an insurance claim for the roof damage (They both knew it for over two months before Plaintiff sold)
  • Plaintiff sold his interest to Third Party, and, thereafter, discovered that the insurance company had paid just over $1 million to the Partnership for the roof damage after his interest had been sold
  • Plaintiff testified that he sold his interest for about a half a million dollars less than he would have had he known about the insurance claim

The Plaintiff filed a lawsuit for fraud. It is difficult for me to conceive, based on the facts of the case, how a trial court could dismiss the Plaintiff’s fraud claims on summary judgment, but the trial court did just that. The trial court held that the Defendants had negated essential elements of the Plaintiff’s claims “with respect to whether there was a failure to disclose.”  The Court of Appeals reversed the trial court.

The Court of Appeals’ analysis provides a helpful review of the law of fraud (often referred to as “intentional misrepresentation”) as applied to partnership cases.  First, the Court of Appeals pointed out that, to prove fraud, the Plaintiff did not necessarily have to prove that the Defendant made a misrepresentation to him.  Fraud, it stated, can occur as the result of concealment or nondisclosure when there is a duty to disclose.

As between partners, there is a fiduciary duty in all matters pertaining to the partnership, noted the Court of Appeals.  It also cited provisions of the Revised Uniform Partnership Act, which Tennessee adopted in 2002, for authority that the Defendant had a duty to disclose the insurance claim to Plaintiff.

For lawyers who handle partnership disputes and fraud cases, this case is a reminder that, in transactions between partners, the old adage of “let the buyer beware” has no application.