The most efficient way to litigate a dispute between business partners with axes to grind: partnership accountings.

AuthorHo, Christine M.

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Not unlike a marital divorce, litigation between quarreling business partners can quickly deteriorate into trivial battles involving collateral personal issues. The petty tenor of this type of business litigation is understandable given the background of the parties. Business partners are often lifelong friends. They have voluntarily chosen to dedicate their time and resources to their relationship. Typically, they have come to closely trust and rely on each other. A betrayal among associates of this caliber can even be more traumatic than a betrayal among family members. As a result, litigation between business partners is often rife with arguments over minor issues of seemingly little financial or legal consequence. It can quickly become both very expensive and highly counterproductive. Fortunately, there is an alternative path--instead of litigating over each minor issue, a spurned partner may seek to obtain an accounting as to the entire business relationship.

What is an Accounting?

Under Florida law, an accounting is a cause of action in which a party requests an equitable settlement of claims and liabilities arising out of its relationship with another party. (1) Discussing the usefulness of an accounting cause of action, the Florida Supreme Court observed, "[t]he variety of its uses and possible applications is practically unlimited; it can be adapted to all circumstances and relations in which an account is necessary for the settlement of claims and liabilities, and for the doing of full justice to the litigant parties." (2) In short, an accounting allows a court to "balance the equities, adjust the accounts of the parties, and render complete justice between them." (3)

To be entitled to an equitable accounting, a plaintiff must bring an action that arises out of either 1) a confidential or fiduciary relationship, or 2) extensive or complicated transactions. (4) The most common equitable accounting action stems from lawsuits concerning partnership disputes. Under the Uniform Partnership Act, an accounting is defined as a "statement of receipts and disbursements which [shows] ... all of the detailed financial transactions of the business including a listing of the original contributions and current assets and liabilities of the partnership." (5) A partnership accounting has also been defined as "a comprehensive investigation of transactions involving the various partners and an adjudication of their relative rights." (6) In short, an accounting claim is often the most efficient way to resolve a partnership dispute involving numerous issues among bickering former friends. This article focuses particularly on accountings involving partnerships. Accountings that concern other entities or relationships are not addressed. With respect to partnership accountings, we will examine the litigation process from drafting pleadings, the likelihood of obtaining summary judgment, the limitations on discovery, appellate issues, and the recovery of attorneys' fees.

Accounting: A Two-step Process

In an action for accounting, two triable issues exist: 1) the entitlement to an accounting, and 2) the accounting itself. (7) The proceedings are usually bifurcated. Before determining the second issue, the first issue must be resolved in favor of the plaintiff. (8) In other words, the court must determine the plaintiff is entitled to an accounting before it will turn to the accounting itself. (9) For ease of reference, the first triable issue that involves showing entitlement to the accounting will be referred to as "phase one," and the accounting itself will be "phase two."

Litigation during phase one concerns the overall relationship of the parties. At this point, the litigation is focused on the "forest" rather than the "trees." If the parties move past phase one, they enter phase two, during which the "trees" will be counted and cataloged by addressing the individual allegations of wrongdoing claimed by each side. This bifurcated process allows the court to determine whether an accounting is appropriate before having the parties incur the fees and costs associated with an actual accounting. As a result, if the plaintiff is not able to prove its entitlement to an accounting at the conclusion of phase one, then the parties never enter into phase two. This bifurcation tends to limit the attorneys' fees and costs incurred by both the parties.

Phase One--Entitlement to a Partnership Accounting

Phase one becomes rather straightforward if the parties agree they were members of a partnership. A partner is automatically entitled to an accounting as to the partnership's affairs under both common law and statutory law. Under common law, as a result of the fiduciary relationship inherent in a partnership, a plaintiff only has to demonstrate that it is a partner of a partnership in order to show entitlement to an accounting:

Every partner is entitled to an accounting of partnership affairs in a proper case. A retiring partner is entitled to an accounting of his interest in the partnership.... [I]t is the normal duty of a partner to render an accounting to his copartners and a performance of this duty can be enforced by appropriate judicial proceedings. The fiduciary relation inherent in partnerships is sufficient to invoke the jurisdiction of equity for the purpose of compelling an accounting. (10)

Moreover, a partner is entitled to an accounting regardless of whether the partnership is only of short duration and regardless of whether the partnership is financially complicated. (11)

Statutory law also provides a limited right to a partnership accounting. Under F.S. [section]620.8807, a partner is entitled to "a settlement of all partnership accounts upon winding up the partnership business." (12) In addition, under F.S. [section]620.8403, a partnership "shall provide partners and their agents and attorneys access to the books and records of the partnership." (13) Section 620.8807 only allows for an accounting upon winding up of the partnership. Access to books and records under [section]620.8403 does not include a determination of all disputes necessary to ascertain who owes who what. Plaintiffs, therefore, typically rely on their common law right to an accounting of the partnership.

During phase one of a partnership accounting action, the primary issues are typically whether a party is a partner of the partnership or whether a partnership exists. In fact, these two questions have been the subjects at issue in most partnership accounting litigation in Florida. (14)

Surviving a Motion to Dismiss in Phase One

In order to survive a motion to dismiss in phase one of a partnership accounting, the plaintiff must allege 1) ultimate facts to show its entitlement to an accounting of the partnership, and 2) that the remedy at law is inadequate. First, a complaint must present "triable issues bearing on the right, basis or necessity for an accounting." (15) A complaint that fails to plead the basis of the alleged entitlement to an accounting may be dismissed. (16) In partnership accountings, a plaintiff must generally plead that it is a member of a partnership and that its presuit request for an accounting of that partnership has been rejected.

When pleading the existence of a partnership, it is useful to refer to the Revised Uniform Partnership Act, which Florida has adopted at F.S. Ch. 620. Pursuant to F.S. [section]620.8202, a partnership is formed as soon as two or more people associate to carry on as co-owners of a business for profit. (17) There is no requirement that the parties subjectively intend to form a partnership, only that they intend to engage in business as co-owners. (18)

Often the parties' intent is unstated, and the court must consider other factors which may serve as indicators of their intent to form a partnership. For example, sharing of profits and losses raises the presumption of a partnership. (19) Other factors courts have considered include the right of the parties to share in the management of the business; the right of each party to act on behalf of the other party; and entering into leaseholds or the purchase of personality or insurance in the name of either party. (20) Courts have explained that "[i]t is not necessary that all of these indications must exist or even that the term 'partnership' or 'partner' be used by the parties in their business dealings so long as the acts and conduct of the parties indicate an intent to carry on as co-owners a business for profit." (21) However, "[j]oint tenancy, tenancy in common, tenancy by the entireties, joint property, common property, or part ownership does not, by itself establish a partnership, even if the co-owners share profits made by the use of the property." (22) Additionally, sharing gross returns does not by itself establish a partnership. This is true "even if the persons sharing them have a joint or common right or interest in property from which...

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