In Pellegrini v. Weiss, (— Cal.Rptr.3d —, 2008 WL 2894849, Cal.App. 6 Dist., July 29, 2008), a California Court of Appeal reviewed a jury verdict that one business partner breached his fiduciary duty to a joint venture agreement when, following a disagreement, he took various unilateral actions to force his partner out of the business and caused him harm as a result.
The court upheld the verdict finding that the partners’ entry into their joint venture agreement created a fiduciary duty to their business that trumped either’s individual interest, and that by unilaterally taking actions against the second partner, the first had breached that fiduciary duty.
In 1999, George Pellegrini and David Weiss entered into a joint venture agreement in which they raised funds from a group of investors and purchased a corporation that owned real estate with the intent of developing and then selling that real estate at a profit. In 2001, a tax attorney advised Weiss to restructure the corporation so that the investors’ names appeared on the stock along with Weiss and Pellegrini. Weiss wanted to do so, but Pellegrini refused, claiming concern that it could reduce his ownership share. Weiss then told Pellegrini he wanted Pellegrini out of their joint venture, offered to buy out Pellegrini’s share, and when Pellegrini refused, Weiss advised him that he would no longer have any voice in partnership decisions.
Weiss filed documents with the California Secretary of State dissolving the original corporation and creating a new one without Pellegrini stating that the decision was made by a vote of more than 50 percent of the corporation’s voting power. Weiss also withdrew funds from the corporate account and placed them into another account to which Pellegrini had no access.
Pellegrini filed suit against Weiss alleging fraud, breach of contract and breach of fiduciary duty. The jury did not find fraud or breach of contract, but did find that Weiss had breached his fiduciary duty and ordered damages of $300,000 be paid to Pellegrini.
Weiss appealed the verdict and damage award. Pellegrini appealed the jury decision not to award him attorney’s fees.
The elements of a breach of a fiduciary duty lawsuit are:1) the existence of a fiduciary duty; 2) a breach of that duty; and 3) resulting harm, the court noted, citing City of Atascadero v. Merrill, Lynch, Pierce, Fenner and Smith, (1999) 68 Cal.App.4th 445.
The court found all three of those conditions existed. The court explained the formation of their joint venture created the fiduciary duty between Weiss and Pellegrini, which included a Memorandum of Understanding (“MOU”) they each signed stating their intent to work together toward the goal of buying, developing, and selling the property for a profit.
The court also found there was also ample evidence showing Weiss breached that duty and Pellegrini suffered harm as a result. Weiss took unilateral action seeking to buy Pellegrini out at a price Pellegrini found unreasonable. He subsequently made apparent false statements to the Secretary of State to oust Pellegrini as a stockholder and produced no corporate records or minutes authorizing him to so act. Finally, Weiss failed to justify his withdrawing corporate funds and placing them in an account inaccessible to Pellegrini. That evidence showed that Weiss had not acted in the best interest of the joint venture and therefore breached his fiduciary duty. The court also found the award of $300,000 well supported by the evidence as the joint venture’s potential real estate profits could have reached several millions of dollars.
Finally, the court found that even though he had prevailed, there was no legal basis to award attorney’s fees to Pellegrini because the object of Pellegrini’s lawsuit was for the enforcement of the joint venture’s MOU, which contained no provision providing for attorney’s fees in the event of a legal dispute. The court also modified the date from which a calculation of interest on the award was calculated to the date the final judgment was entered, rather than the earlier date on which the jury had returned its verdict.
In all other respects, the judgment was affirmed.