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They Sell Swampland, Too

If your partner occupies partnership property, can that partner "pay" the partnership less than fair market value rent?  You probably know the answer, but might be surprised to hear the first part of court's resulting answer:  "Remarkably, we have found no case squarely addressing this precise question. [Fn. omitted.]  We are satisfied, however, that the answer is a resounding 'No.' "

The partner who occupies property that belongs to the partnership must do so in a manner that provides income to the partnership as if the property had been rented to a non-partner on the open market.  That just makes sense.  That's the whole idea behind the fiduciary relationship that partners owe to one another. 

The property-occupying partners in the case linked above claimed that they had no obligation to collect fair market rent (from themselves) because the partnership agreement did not require them to do so.  They also claimed that California's statutory scheme limited their responsibilities to only those enumerated in the statute.  Not surprisingly, this specific factual situation is not spelled out in the statute.  The trial court bought both of these arguments, but they didn't work on appeal.  Another argument that fell flat was the claim that the partnership property was held for purposes of appreciation and eventual sale.  No matter what they argued, the appellate court just wasn't buying.

The case reads like a soap opera, including this gem of an argument from the losing side:  the property-occupying partners claimed that the non-occupying partner waived his right to claim a breach of fiduciary duty "merely by neglecting to demand that his partners refrain from such breaches."  In other words, the argument goes something like this:  You can't come after me for something I know I can't do if you forget to tell me that I can't do it.

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Printer friendly page Permalink Email to a friend Posted by J. Craig Williams on Saturday, October 01, 2005 at 15:53 Comments Closed (0) |
 
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