The Real Estate Referee – Limited Partnership

Limited Partnership

The Facts

Two companies form a Texas limited partnership (the “Limited Partnership”) to own and operate a 200 room hotel (the “Property”).  The two companies are owned by individuals who we will call Partner A and Partner B. Under the terms of their written agreement, the two companies, as limited partners, each acquired a 49% interest in the Limited Partnership; A and B, as general partners, each acquired a 1% interest in the Limited Partnership.

During the time the limited partnership owned the property, it directly employed staff to manage the hotel, and a chief financial officer responsible for the day-to-day operations.

In 2008, the Limited Partnership determined that it would sell the Property and efforts to locate a qualified buyer began.  The partners also discussed a possible sale of their interests to one another or to a third party.

In early June 2009, Partner B, without telling his partners, entered into an agreement with a third party to form a new partnership to own the Property.  Under the terms of the agreement, the third party agreed to pay $8 million for a fifty percent (50%) interest in a new partnership to be formed.

After signing this agreement, Partner B negotiated to purchase Partner A’s interests in the Limited Partnership for a total of $6.0 million, without disclosing that he had already secured an agreement from the third party to purchase a fifty percent (50%) interest in the Limited Partnership for $8 million.

Partners A and B signed an agreement whereby Partner A agreed to sell its interest to Partner B for a total of $6.0 million. In connection with the signing of this agreement between the two partners Partner B failed to report to Partner A that there was any prospect or opportunity to sell. Instead, Partner B affirmatively advised Partner A that he knew of no opportunity to sell the Property.

The Questions

Did Partner B have an obligation to tell Partner A about the opportunity to sell a half interest in the hotel for a price more than that which Partner B had agreed to pay Partner A? Does this conduct amount to fraud or is it a breach of any duty imposed by law?

Official Ruling

While full disclosure and transparency are preferable in business dealings, these facts alone may not be enough to show fraud. However, a partner does owe duties to his partner to be loyal and to not compete with the partnership. The issue is whether that duty was breached by failing to tell the selling partner, who was under no compulsion to sell, about the opportunity.


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