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CASE 16-2

Enea v. Superior Court of Monterey County

Court of Appeals of California, Sixth Appellate District 34 Cal. Rptr. 3d 513 (2005)

In 1980, Defendants William Daniels and Claudia Daniels, and other family members, formed a general partnership known as 3-D. The partnership’s sole asset was a building that had been converted from a residence into offices. A portion of the property had been rented since 1981, on a month-to-month basis, by the law practice of William Daniels (the firm’s sole member). From time to time, the property was rented on similar arrangements to others, including defendant Claudia Daniels. The partnership agreement has as its principal purpose the ownership, leasing, and sale of the only partnership asset—the building. The partnership agreement contained no provision that the property would be leased for fair market value.

The defendants asserted that there was no evidence of any agreement to maximize rental profits.

In 1993, plaintiff Benny Enea, a client of William Daniels, purchased a one-third interest in the partnership from William’s brother, John P. Daniels. In 2001, however, the plaintiff questioned William Daniels about the rents being paid for the property, and in 2003 the plaintiff was “dissociated” from the partnership.

On August 6, 2003, the plaintiff brought an action for damages, alleging that the defendants had occupied the partnership property while paying significantly less than fair rental value, in breach of their fiduciary duty to the plaintiff. The trial court granted the defendants’ motion for summary judgment, and the plaintiff appealed.

425 426

Justice Rushing

For present purposes it must be assumed that defendants in fact leased the property to themselves, or associated entities, at below-market rents…. Therefore the sole question presented is whether defendants were categorically entitled to lease partnership property to themselves, or associated entities (or for that matter, to anyone) at less than it could yield in the open market. Remarkably, we have found no case squarely addressing this precise question. We are satisfied, however, that the answer is a resounding “No.”

The defining characteristic of a partnership is the combination of two or more persons to jointly conduct business. It is hornbook law that in forming such an arrangement the partners obligate themselves to share risks and benefits and to carry out the enterprise with the highest good faith toward one another—in short, with the loyalty and care of a fiduciary. “Partnership is a fiduciary relationship, and partners are held to the standards and duties of a trustee in their dealings with each other.”

“[I]n all proceedings connected with the conduct of the partnership every partner is bound to act in the highest good faith to his copartner and may not obtain any advantage over him in the partnership affairs by the slightest misrepresentation, concealment, threat or adverse pressure of any kind.” Or to put the point more succinctly, “Partnership is a fiduciary relationship, and partners may not take advantages for themselves at the expense of the partnership.”

Here the facts as assumed by the parties and the trial court plainly depict defendants taking advantages for themselves from partnership property at the expense of the partnership. The advantage consisted of occupying partnership property at below-market rates, i.e., less than they would be required to pay to an independent landlord for equivalent premises. The cost to the partnership was the additional rent thereby rendered unavailable for collection from an independent tenant willing to pay the property’s value.

Defendants … persuaded the trial court that they had no duty to collect market rents in the absence of a contract expressly requiring them to do so. This argument turns partnership law on its head. Nowhere does the law declare that partners owe each other only those duties they explicitly assume by contract. On the contrary, the fiduciary duties at issue here are imposed by law, and their breach sounds in tort.

The trial court’s order is set aside and the motion for summary judgment by the defendant is denied.