Adams v. Land Services, Inc.
194 P.3d 429, 2008 WL 2684115, 2008 Colo. App. LEXIS 1153 (2008)
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Rule of Law:
A minority general partner lacks standing to bring a derivative action on behalf of a general partnership or to sue individually for claims belonging to the partnership, unless the partnership or a majority of partners authorized the suit, or in exceptional circumstances where controlling partners decline to sue for improper, ulterior motives.
Facts:
- Brighton Farms, LLP was formed in 1972 as a general partnership to acquire and hold a parcel of land in Adams County, Colorado for appreciation.
- In 1998, Brighton Farms hired Land Services, Inc. (LSI) and Douglas A. Barnes to manage and find a purchaser for its Adams County property.
- In 2004, Brighton Farms and LSI entered into a 'platting agreement,' approved by a majority of Brighton Farms partners (but opposed by some of the individual plaintiffs), which provided that LSI would undertake various services to increase the property's value in exchange for 40% of any net sales proceeds above $24,000 per acre.
- Brighton Farms subsequently received and accepted an offer to purchase the property for approximately $48,560 per acre.
- Upon the sale of the property, LSI received its real estate broker's commission pursuant to a listing agreement and its 40% share of the increased property value pursuant to the platting agreement.
- The balance of the net sale proceeds was distributed to the Brighton Farms partners, and the partnership was dissolved.
- The individual plaintiffs, who are minority general partners, alleged that LSI and Barnes had procured the platting agreement by fraud and failed to perform services that would have entitled them to compensation under the agreement.
Procedural Posture:
- Plaintiffs (the individual minority partners) filed an action in trial court against Land Services, Inc. (LSI), Douglas A. Barnes, and The Barnes Family Foundation (BFF), asserting claims including civil theft, breach of fiduciary duty, unjust enrichment, false representation, and breach of contract, among others.
- All parties filed motions for summary judgment.
- The trial court entered summary judgment for defendants on plaintiffs' civil theft and false representation claims.
- The trial court subsequently ruled that plaintiffs lacked standing to bring any of their remaining claims, either as a derivative action on behalf of Brighton Farms or as individuals, and dismissed all remaining claims on this basis.
- Plaintiffs appealed the trial court's summary judgments dismissing their claims.
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Issue:
Does a minority general partner have standing to bring a derivative action on behalf of a general partnership or to sue individually for claims belonging to the partnership when a majority of partners did not authorize the suit and the challenged transactions were approved by the managing general partners in good faith?
Opinions:
Majority - Judge Vogt
No, a minority general partner does not have standing to bring a derivative action on behalf of a general partnership or to sue individually for claims belonging to the partnership when a majority of partners did not authorize the suit and the challenged transactions were approved by the managing general partners in good faith. The court affirmed the trial court's dismissal, holding that the individual plaintiffs (minority general partners of Brighton Farms) lacked standing. Colorado's Uniform Partnership Law (UPL), which governed Brighton Farms, does not afford a general partner the right to bring a derivative action analogous to those available to corporate shareholders or limited partners; the UPL provides other remedies like formal accounting or judicial dissolution. The court agreed with the general rule that a partner cannot maintain a suit to enforce a partnership claim if a majority of the partners do not agree to do so. While an exception for 'exceptional circumstances' exists where controlling partners decline to sue for improper, ulterior motives (as discussed in Cates v. International Telephone & Telegraph Corp.), the court found no such circumstances here. The transactions with defendants were authorized by the managing general partners, and the record indicated their decision was a good faith business decision. The partnership agreement delegated management to a committee, and the managing partners acted within their authority, binding the partnership. Furthermore, the court rejected plaintiffs' claim of individual standing. The claims alleged losses to Brighton Farms in connection with the property sale, not unique individual losses. Claims for redress of injuries to the partnership belong to the partnership itself and cannot be asserted by partners in their individual capacity. Diminution in value of a partnership interest or share of partnership income due to a wrong to the partnership is subsumed within the partnership's cause of action, consistent with corporate law principles that shareholders cannot assert individual claims for wrongs to the corporation unless they suffered separate and distinct injuries.
Analysis:
This case significantly clarifies the limitations on a minority general partner's ability to initiate litigation on behalf of or for alleged injuries to a general partnership under Colorado's Uniform Partnership Law. It reinforces the principle that claims fundamentally belonging to the partnership must be pursued by the partnership itself, typically with majority partner approval. The ruling emphasizes the importance of partnership agreements in defining management authority and establishes a high bar for the 'exceptional circumstances' exception, requiring evidence of bad faith or ulterior motives by controlling partners. It effectively prevents minority partners from unilaterally challenging good-faith business decisions made by authorized management.
