Can You Sue a Business Partner for Mismanagement or Fraud?

Business partnerships are built on trust, openness, and shared goals. Unfortunately, some partnerships do not go as expected. Business partner betrayal is a common occurrence. Two examples of betrayal include mismanagement and fraud. If your business partner has engaged in mismanagement or fraud, you may wonder if you can sue them. In California, you can sue a business partner for mismanagement, fraud, or breach of fiduciary duty.

What are Your Legal Rights as a Partner?

In California, business partners owe each other a fiduciary duty. This means that your business partner is legally required to act in good faith and prioritize the business’s best interests. The same rule applies to you. Business partners must be honest and avoid misusing partnership assets for personal gain.

When a business partner fails to fulfill their obligations and acts negligently or recklessly, it constitutes a breach of fiduciary duty. If your business partner, for example, embezzled funds or concealed financial details, you may be eligible to seek legal remedies.

When Mismanagement Becomes a Legal Issue

For you to have a valid legal case of mismanagement, your partner’s actions must have been more than just poor judgment. Examples of instances when mismanagement could warrant legal action include;

• Embezzling or misappropriating assets
• Not keeping or failing to provide accurate accounting or tax records
• Misusing business funds for personal expenses
• Taking excessive risks that endanger the partnership

If your partner’s mismanagement has resulted in measurable financial harm to the partnership or to you personally, you may have a valid legal case.

When a Business Partner Commits Fraud

Fraud is a more serious issue than mismanagement. California law defines fraud as intentional deception to gain an unfair advantage. Usually, people commit fraud for financial gain or to cause loss or harm to another person.

In the context of a business partnership, acts that constitute fraud may include;

• Falsifying financial records
• Lying about business expenses or liabilities
• Hiding assets or profits
• Diverting clients or contracts for personal gain

How to Handle a Case of Mismanagement or Fraud

If you suspect your partner is engaging in mismanagement or fraud, there are certain steps you should take before filing a lawsuit in court. Here are the steps to take if you believe your business partner has engaged in mismanagement or fraud;

Step 1: Document Everything

Take dated notes on incidents and conversations, and save emails, texts, call records, financial statements, contracts, and any other relevant evidence. Also, gather witness accounts. This documentation is vital for building a strong case.

Step 2: Review Your Partnership Agreement

Check your contract for details regarding fiduciary duties, dispute resolution procedures, and buyout clauses. In some cases, partnership agreements require mediation before a partner can initiate legal action.

Step 3: Consult an Attorney

Consult an experienced California business litigation attorney for help assessing your options and protecting your rights. An attorney can help you file your lawsuit, if necessary. They can help you fight for compensation and accountability.

In California, a business partner who engages in mismanagement or fraud may be held liable for financial losses, lost profits, or other harm suffered as a result of their actions.

Contact Us for Legal Help

If you suspect your business partner has breached their fiduciary duty, contact our skilled business litigation attorneys at SAC Attorneys LLP today to understand your rights and the best way to proceed.