What Are Partnership Disputes?
A partnership dispute arises when business partners or LLC members disagree about the management, finances, or direction of their business. These disputes can range from disagreements over profit distributions and decision-making authority to serious allegations of self-dealing, embezzlement, and breach of fiduciary duty. Left unresolved, partnership conflicts can paralyze business operations, destroy enterprise value, and permanently damage professional relationships.
If you are involved in a partnership or LLC dispute in San Jose, San Francisco, Palo Alto, Pleasanton, or anywhere in Santa Clara County or Alameda County, the attorneys at RV Litigation Group PC can help. We represent partners, LLC members, and shareholders in disputes involving fiduciary duty breaches, forced dissolution, accounting actions, and buyout negotiations.
What the Law Says
Corporations Code 16404 — Fiduciary Duties of Partners
"The only fiduciary duties a partner owes to the partnership and the other partners are the duty of loyalty and the duty of care... (b) A partner's duty of loyalty to the partnership and the other partners includes: (1) To account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner... (2) To refrain from dealing with the partnership... as or on behalf of a party having an interest adverse to the partnership; (3) To refrain from competing with the partnership..." — California Corporations Code Section 16404
Section 16404 codifies the fiduciary duties that every partner owes to the partnership and fellow partners. The duty of loyalty is the most frequently litigated obligation — it prohibits partners from secretly profiting at the partnership's expense, diverting business opportunities, engaging in self-dealing transactions, or competing with the partnership business. The duty of care requires partners to act with the diligence and prudence a reasonable person would exercise in similar circumstances. A partner who breaches these duties may be liable for all profits gained through the breach, plus any damages suffered by the partnership.
Corporations Code 16801 — Dissolution and Dissociation
"A partnership is dissolved, and its business shall be wound up... (5) On application by a partner, a judicial determination that: (i) The economic purpose of the partnership is likely to be unreasonably frustrated. (ii) Another partner has engaged in conduct relating to the partnership business which makes it not reasonably practicable to carry on the business in partnership with that partner. (iii) It is not otherwise reasonably practicable to carry on the partnership business in conformity with the partnership agreement." — California Corporations Code Section 16801
When a partnership relationship breaks down irreparably, California law provides several paths to dissolution. A partner in an at-will partnership can dissolve the partnership simply by giving notice. For partnerships with a fixed term, dissolution requires either the agreement of all partners or a judicial order. Courts will grant judicial dissolution when a partner's misconduct makes it impractical to continue, when the partnership's economic purpose has been frustrated, or when continuing the business would be unconscionable. Upon dissolution, the partnership enters a "winding up" phase during which its assets are liquidated and distributed according to statutory priority.
Corporations Code 17704.10 — LLC Member Disputes
LLC disputes follow a similar framework under the California Revised Uniform Limited Liability Company Act. Corporations Code 17704.10 provides that LLC members owe fiduciary duties analogous to those of partners — including duties of loyalty and care. The statute also allows for judicial dissolution of an LLC when it is "not reasonably practicable to carry on the company's activities in conformity with the articles of organization and any operating agreement." LLC disputes often involve questions of member authority, profit allocation, and the enforceability of operating agreement provisions.
Real-World Examples
These scenarios illustrate how partnership disputes commonly arise in the Bay Area:
Two partners operate a successful technology consulting firm in San Jose. One partner secretly forms a competing company and begins diverting clients and contracts to the new entity, all while drawing a salary from the original partnership. When the other partner discovers the scheme, the diverting partner has already redirected over $500,000 in revenue. This constitutes a clear breach of the duty of loyalty under Corp Code 16404, and the injured partner can recover all profits the disloyal partner earned through the breach.
Three equal partners own a restaurant group in Palo Alto. Two partners want to expand to a second location, while the third opposes the expansion and refuses to approve the lease. With unanimous consent required under their partnership agreement, the business is effectively paralyzed — unable to expand, unable to refinance, and unable to make critical operational decisions. This type of deadlock may justify judicial dissolution under Corp Code 16801(5) if the economic purpose of the partnership has been frustrated.
Two partners run a real estate investment partnership in San Francisco. The managing partner controls the partnership's bank accounts and has been paying himself a disproportionate share of rental income for years, claiming the extra payments are "management fees" that were never authorized in the partnership agreement. The other partner discovers discrepancies totaling $300,000 when reviewing tax returns. This situation calls for an accounting action under Corp Code 16405 to compel a full disclosure of all partnership transactions and recover improperly distributed funds.
A minority member holding 25% of an LLC in Pleasanton is systematically excluded from management decisions, denied access to financial records, and stopped receiving profit distributions — all while the majority members continue to draw salaries and distributions for themselves. This freeze-out or squeeze-out conduct may constitute a breach of fiduciary duties under Corp Code 17704.10 and grounds for judicial dissolution or a court-ordered buyout of the minority member's interest at fair value.
What's at Stake
Partnership disputes can involve substantial financial exposure and the very survival of the business. Here are the claims and remedies most commonly at issue:
| Claim Type | Legal Basis | Potential Remedies | Statute of Limitations |
|---|---|---|---|
| Breach of Fiduciary Duty | Corp Code 16404 | Disgorgement of profits + compensatory damages | 4 years |
| Partnership Dissolution | Corp Code 16801 | Judicial winding up + asset distribution | No SOL (equitable) |
| Accounting Action | Corp Code 16405 | Full disclosure + recovery of misappropriated funds | 4 years |
| Profit Distribution Disputes | Corp Code 16401 | Court-ordered distributions + interest | 4 years (contract) |
| Expulsion of Partner | Corp Code 16601 | Buyout at fair value + damages | Varies |
| LLC Member Disputes | Corp Code 17704.10 | Dissolution, buyout, injunctive relief + damages | 4 years |
Beyond monetary damages: Courts in partnership disputes have broad equitable powers. A judge may appoint a receiver to take control of partnership assets, issue injunctions to prevent a partner from dissipating assets or competing with the partnership, order a forensic accounting to trace misappropriated funds, or impose a constructive trust on property acquired through a breach of fiduciary duty. These remedies can be as important as — or more important than — a money judgment.
How We Help
Partnership disputes require lawyers who understand both the legal framework and the business realities at stake. Here is how RV Litigation Group PC approaches these cases:
1. Fiduciary Duty Claims
We investigate and prosecute claims against partners and LLC members who have breached their fiduciary duties. This includes gathering financial records, identifying unauthorized transactions, tracing diverted funds, and building a case for disgorgement of profits and compensatory damages. We also defend partners who have been wrongfully accused of fiduciary breaches, presenting evidence that their conduct was authorized, disclosed, or consistent with the partnership agreement.
2. Judicial Dissolution
When the partnership relationship has broken down beyond repair, we petition the court for judicial dissolution under Corp Code 16801. We demonstrate that continuing the partnership is not reasonably practicable — whether due to a partner's misconduct, irreconcilable deadlock, or frustration of the partnership's economic purpose. We guide clients through the winding-up process, ensuring that assets are valued fairly and distributed according to law.
3. Forensic Accounting
Many partnership disputes hinge on the numbers. We work with experienced forensic accountants to analyze partnership financial records, trace the flow of funds, identify hidden income and undisclosed transactions, and quantify damages. Forensic accounting is essential when a partner has been managing the books and the other partners suspect misappropriation or self-dealing.
4. Buyout Negotiation
Not every partnership dispute needs to end in litigation. When the partners agree that separation is necessary but disagree on the terms, we negotiate buyout agreements that protect our client's financial interests. We work with business valuation experts to determine the fair market value of the departing partner's interest, negotiate payment terms, and draft comprehensive settlement agreements that address non-compete obligations, intellectual property, and transition issues.
5. Receivership
In urgent situations where partnership assets are at risk of being dissipated, destroyed, or mismanaged, we seek the appointment of a receiver — a neutral third party appointed by the court to take control of the partnership's assets and operations. Receivership is an extraordinary remedy, but it can be essential when a partner is looting the business, refusing to cooperate, or engaging in conduct that threatens the value of the enterprise.
6. Mediation & Trial
We pursue resolution through the most effective channel available. Many partnership disputes are well-suited to mediation, where a neutral third party helps the partners reach a negotiated resolution. When mediation fails or when the circumstances demand immediate court intervention, we are prepared to take the case to trial. Our attorneys have experience presenting complex partnership disputes to judges and juries in Santa Clara County Superior Court, Alameda County Superior Court, and throughout the Bay Area.
Frequently Asked Questions
Under California Corporations Code 16404, partners owe each other a duty of loyalty and a duty of care. The duty of loyalty requires partners to account for profits derived from the partnership, refrain from self-dealing, and avoid competing with the partnership. The duty of care requires partners to act with the care a reasonably prudent person would exercise under similar circumstances. These duties cannot be eliminated by agreement, though they can be modified within limits.
Yes. Under Corporations Code 16801, a partner in a partnership at will can dissolve the partnership at any time by giving notice. For partnerships with a definite term, a court may order judicial dissolution under Corp Code 16801(5) if a partner's conduct makes it not reasonably practicable to carry on the business, or if the business can only be carried on at a loss. A partner can also petition for dissolution if another partner has breached fiduciary duties.
If there is no written partnership agreement, California's Revised Uniform Partnership Act (Corp Code 16000+) provides default rules. Under these rules, all partners share equally in profits and losses regardless of their capital contributions, all partners have equal management rights, and major decisions require unanimous consent. These default rules often lead to disputes, which is why a well-drafted partnership agreement is essential.
If partners are deadlocked and cannot agree on fundamental business decisions, options include mediation, buyout negotiation, judicial dissolution, or appointment of a receiver. A court may order dissolution if the deadlock prevents the partnership from operating effectively. In some cases, one partner may buy out the other's interest through a negotiated agreement or court-ordered buyout.
Minority partners in California have significant legal protections. They have the right to access partnership books and records, receive an accounting of partnership affairs, share in profits, participate in management decisions, and bring derivative actions on behalf of the partnership. If majority partners engage in oppressive conduct or breach fiduciary duties, the minority partner can seek judicial remedies including dissolution, damages, or a court-ordered buyout.
