Business partners often begin with shared goals, mutual trust, and an informal understanding of how the company will operate. Problems can arise when one owner begins controlling the business, withholding information, diverting money, or pursuing opportunities without the other owners.
These disputes may support a breach of fiduciary duty claim under California law. The exact duties depend on the company’s legal structure, governing agreements, each owner’s role, and the conduct at issue.
At Jafari Law Group, we represent California business owners in disputes involving self-dealing, misuse of company assets, withheld financial information, competing ventures, and other claimed breaches of fiduciary duty.
What Is a Fiduciary Duty?
A fiduciary duty requires a person who controls or manages another party’s interests to act with loyalty, care, and good faith within the scope of that relationship.
California law expressly imposes fiduciary duties on partners in a general partnership. A partner’s statutory duty of loyalty includes accounting to the partnership for certain profits or benefits, refraining from adverse dealings with the partnership, and avoiding competition with the partnership before dissolution. Partners must also refrain from grossly negligent or reckless conduct, intentional misconduct, and knowing violations of law.
Managers and members of California limited liability companies may also owe statutory duties, although the allocation of those duties depends in part on whether the LLC is member-managed or manager-managed and what the operating agreement provides.
A fiduciary duty claim generally requires proof of a fiduciary relationship, a breach of the duty, and harm caused by that breach.
Calling someone a “business partner” does not by itself resolve whether a fiduciary relationship exists. A court may examine the entity structure, ownership documents, management rights, course of dealing, and the authority each person exercised.
Misusing Company Money
One of the most common disputes involves an owner using company funds for personal purposes.
Examples may include:
- Paying personal expenses from a company account
- Taking unauthorized distributions
- Using business funds to pay personal legal fees
- Creating undocumented loans to an owner or related company
- Increasing compensation without required approval
- Directing payments to relatives or affiliated businesses
A business partner may also breach a duty by hiding those transactions or recording them inaccurately.
In Manlin v. Milner, a dispute between the co-owners of several LLCs included allegations that a managing member diverted LLC funds to pay legal expenses associated with his personal dispute against the other member. The case illustrates how the use of entity funds for an owner’s personal benefit can lead to fiduciary duty, contract, conversion, and accounting claims.
Not every questionable expense proves wrongdoing. The operating agreement, partnership agreement, past practices, approval requirements, and business purpose of the payment must be reviewed.
Self-Dealing Transactions
Self-dealing occurs when a fiduciary participates in a transaction that benefits the fiduciary at the company’s expense.
A partner might cause the business to lease property from a company the partner owns, purchase services from a family member, sell an asset to an affiliated entity, or approve compensation that primarily benefits that partner.
Related-party transactions are not automatically unlawful. Problems often arise when the interested owner fails to disclose the conflict, conceals material terms, prevents other owners from reviewing the deal, or causes the company to accept terms that are not commercially reasonable.
Records that may help evaluate a self-dealing claim include:
- Contracts and invoices
- Bank statements and general ledgers
- Ownership records for affiliated entities
- Meeting minutes and written consents
- Emails discussing the transaction
- Market comparisons and competing bids
- Documents showing who approved the deal
A partner who learns of a related-party transaction should preserve these records and avoid making accusations before the underlying facts have been reviewed.
Taking a Business Opportunity
A fiduciary may face liability for taking an opportunity that properly belonged to the company or partnership.
Consider two partners who operate a commercial real estate business. A customer approaches one partner with an investment opportunity that fits the company’s existing business. Instead of presenting it to the company, the partner purchases the property through a separate entity and keeps the profits.
California’s partnership statute requires a partner to account to the partnership for certain property, profits, and benefits obtained through partnership business, partnership property, partnership information, or the appropriation of a partnership opportunity.
Whether an opportunity belonged to the business may depend on:
- How the partner learned about it
- Whether company resources were used
- Whether the opportunity fell within the company’s existing or planned activities
- Whether the company had the ability and interest to pursue it
- Whether the opportunity was disclosed
- Whether the governing agreement addressed outside ventures
The analysis can be highly fact-specific. A partner’s right to pursue independent business activities may differ before and after dissolution and may also be affected by the parties’ written agreements.
Operating a Competing Business
A partner may breach the duty of loyalty by competing with an active partnership.
California Corporations Code section 16404 states that a partner must refrain from competing with the partnership in the conduct of its business before dissolution. The California Supreme Court has recognized that this restriction applies during the life of the partnership but does not impose the same prohibition after dissolution.
Conduct that may lead to a claim includes:
- Diverting current customers to a separate company
- Secretly performing the same services through another entity
- Using company employees for a competing venture
- Redirecting leads or sales inquiries
- Using confidential pricing or customer information
- Preparing to compete while actively harming the existing business
There is an important distinction between planning for future competition and competing while fiduciary duties remain in effect. The agreement between the owners and the timing of the challenged conduct often become central issues.
Withholding Financial Records
Business relationships frequently break down when one owner controls the books and refuses to provide meaningful financial information.
A lack of transparency may conceal unauthorized withdrawals, inflated expenses, related-party transactions, unpaid taxes, or declining revenue. It may also prevent another owner from evaluating distributions, compensation, company value, or a proposed buyout.
A partner seeking information should make a clear written request identifying the records needed. Depending on the circumstances, those records may include:
- Profit-and-loss statements
- Balance sheets
- Tax returns
- Bank and credit card statements
- Accounts-receivable reports
- Payroll records
- General ledgers
- Vendor agreements
- Loan documents
- Ownership and capitalization records
The owner should also review the company’s governing documents and the statutes applicable to the entity. Inspection rights and procedures differ among partnerships, LLCs, and corporations.
When financial information remains unavailable or appears unreliable, a claim for an accounting may be pursued along with other remedies.
Concealing Material Information
A fiduciary relationship may impose disclosure obligations that do not exist in an ordinary arm’s-length transaction.
A claim may arise when a partner knowingly conceals information about:
- A proposed sale of the business
- A pending customer loss
- Undisclosed liabilities
- A conflict of interest
- A side agreement with a buyer
- Compensation received from a third party
- Material financial problems
- An opportunity that belongs to the company
California courts have long treated misrepresentation, concealment, and taking an undisclosed advantage as potential breaches within a fiduciary relationship.
A disagreement about business strategy is not necessarily concealment. The claimant must connect the withheld information to a duty to disclose and resulting harm.
Squeezing Out a Minority Owner
A controlling owner may attempt to force a minority owner out of the business or reduce the value of that owner’s interest.
The alleged conduct may include:
- Terminating the minority owner’s employment while retaining the ownership interest
- Stopping distributions while increasing the controller’s compensation
- Issuing new ownership interests to dilute the minority owner
- Transferring profitable operations to a different entity
- Denying access to records
- Removing the minority owner from management
- Pressuring the owner to sell at an unfair price
California courts have held that controlling shareholders may not use their power to obtain an advantage for themselves to the detriment of minority shareholders. In Jones v. H.F. Ahmanson & Co., the California Supreme Court allowed claims based on allegations that controlling shareholders used corporate control to create benefits for themselves that were not made available to the minority.
The rights of a minority owner depend on the type of entity and the nature of the injury. Some claims belong directly to the owner, while others belong to the company and must be pursued through a derivative action.
Diverting Customers, Employees, or Company Information
A departing partner may create legal risk by taking customers, employees, confidential information, or other company resources before the business relationship has ended.
Possible claims may concern:
- Copying customer databases
- Redirecting contracts
- Recruiting employees while still managing the company
- Taking pricing information
- Deleting business records
- Using company passwords after access should have ended
- Transferring intellectual property
- Registering a similar business name or domain
These disputes may involve more than fiduciary duty. Depending on the facts, the company may also consider claims involving trade secrets, conversion, interference with contractual relations, breach of contract, or unfair competition.
Owners who suspect information is being removed should preserve electronic evidence promptly. Repeatedly accessing another person’s account without authorization or attempting self-help measures can create separate legal problems.
Mismanaging the Business
A poor business result does not automatically establish a breach of fiduciary duty.
Owners and managers often must make decisions under uncertain conditions. A failed investment, unsuccessful product launch, or loss of a customer may reflect an ordinary business risk rather than misconduct.
A stronger claim may exist when the conduct involves:
- Gross negligence or recklessness
- Intentional misconduct
- Knowing violations of law
- Undisclosed conflicts
- Personal profit at the company’s expense
- Decisions made without required approval
- Repeated disregard of financial warnings
- False reports to other owners
California partnership law states that a partner’s duty of care is limited to refraining from grossly negligent or reckless conduct, intentional misconduct, and knowing violations of law.
The applicable standard may differ for LLC members, managers, corporate officers, and directors. Governing agreements may also contain limits, authorizations, indemnity provisions, or procedures that affect the claim.
Breaches During a Business Breakup
Fiduciary duty disputes often intensify when owners decide to separate.
One owner may try to secure control over cash, employees, intellectual property, customer relationships, or physical assets before a dissolution or buyout is completed. Another may stop cooperating with operations or block access to company systems.
Dissolution does not necessarily end every fiduciary obligation. Under California partnership law, the duty to account for partnership property or benefits can continue through the winding-up process. At the same time, the statutory duty not to compete generally ends upon dissolution.
Owners preparing for a separation should avoid unilateral transfers, deletion of records, secret customer communications, and undocumented withdrawals. A written transition plan can address authority, expenses, customer contact, record access, pending contracts, and preservation of company property.
What Remedies May Be Available?
The available remedies depend on the legal structure, the misconduct, who suffered the injury, and the relief requested.
Possible remedies may include:
- Compensatory damages
- Disgorgement of improperly obtained profits
- Restitution
- An accounting
- Injunctive relief
- Appointment of a receiver
- Constructive trust
- Rescission of a transaction
- Judicial dissolution
- Buyout-related relief
- Punitive damages when the required legal standard is met
A court may also enforce provisions in an operating agreement, partnership agreement, shareholder agreement, or buy-sell agreement.
A claimant should not assume that every loss belongs to the individual owner. When the alleged misconduct harmed the company as a whole, the claim may be derivative and subject to different procedural requirements.
Evidence That Can Affect a Fiduciary Duty Claim
These cases are often decided through financial records, communications, and evidence of how authority was exercised.
A business owner who suspects misconduct should preserve:
- Governing and ownership agreements
- Amendments and written consents
- Bank and accounting records
- Tax returns
- Emails and text messages
- Customer and vendor communications
- Contracts and invoices
- Board or member meeting records
- Access logs and electronic files
- Records of distributions and compensation
- Documents involving affiliated companies
Owners should preserve records in their existing form. Deleting, altering, or removing business information can damage a claim and may result in court sanctions.
Steps to Take When a Dispute Emerges
A business owner facing a possible fiduciary breach should begin by reviewing the entity documents and creating a factual chronology.
Identify the disputed transactions, who approved them, when they occurred, what information was disclosed, and how the company or owner was harmed. Separate confirmed facts from suspicions.
Avoid sending hostile messages, cutting off access without authority, or removing company funds as a defensive measure. Those actions may lead to counterclaims and make an early resolution more difficult.
Legal counsel can assess whether the matter supports a direct claim, a derivative claim, an accounting demand, emergency injunctive relief, or a negotiated buyout.
Speak With a California Business Litigation Attorney
Fiduciary duty claims between business partners often involve more than a single transaction. The dispute may affect control of the company, access to records, ownership value, customer relationships, and the future of the business.
Jafari Law Group represents California business owners in partnership, LLC, shareholder, and closely held company disputes. We can review the governing agreements, trace disputed transactions, assess potential claims and defenses, and advise on litigation or a negotiated separation.