Covalt v. High
100 N.M. 700, 675 P.2d 999 (1983)
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Rule of Law:
In a two-person partnership, where partners have equal management rights, one partner does not breach a fiduciary duty by refusing to consent to an ordinary business decision proposed by the other. The statutory remedy for a persistent deadlock between partners is dissolution of the partnership, not a cause of action for damages.
Facts:
- Louis E. Covalt and William L. High formed a two-person oral partnership to purchase and own real estate.
- The partnership constructed a building and leased it to Concrete Systems, Inc. (CSI), a corporation where High was the 75% shareholder and president, and Covalt was the 25% shareholder.
- After an initial five-year written lease expired, CSI continued to occupy the building as a tenant under an oral agreement, with rent set at $1,850 per month.
- In December 1978, Covalt resigned from his corporate position at CSI but remained a partner with High in the ownership of the building.
- On January 9, 1979, Covalt demanded in writing that the monthly rent for the partnership property be increased to $2,850.
- High, acting as president of CSI, refused to agree to the rent increase, stating he felt the corporation could not afford it.
- The partners had no prior agreement on how to resolve disputes or set rental rates, having previously left such calculations to High.
Procedural Posture:
- Louis E. Covalt sued William L. High in New Mexico district court (trial court), alleging, among other things, a breach of fiduciary duty for failing to raise the rent on partnership property.
- The trial court bifurcated the rental income claim from the other issues and held a separate trial on that claim.
- The trial court ruled in favor of Covalt, finding that High had breached his fiduciary duty and awarded Covalt $9,500 in damages plus prejudgment interest.
- High, as the appellant, appealed the trial court's partial judgment to the New Mexico Court of Appeals.
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Issue:
Does a partner in a two-person partnership breach his fiduciary duty by refusing to agree to his co-partner's demand to increase the rent on partnership property, thereby entitling the demanding partner to damages?
Opinions:
Majority - Donnelly, J.
No, a partner in a two-person partnership does not breach his fiduciary duty by refusing to agree to a co-partner's demand to raise rent. Under the Uniform Partnership Act, partners have equal rights in the management of partnership business, and ordinary business decisions require a majority vote. In a two-person partnership, this effectively requires unanimous consent. A deadlock does not constitute a breach of fiduciary duty; rather, when partners are equally divided, those who forbid a change prevail. The court, citing Summers v. Dooley and legal treatises, reasoned that the fiduciary obligation of utmost fairness does not compel one partner to accede to the demands of another regarding the management of partnership business. The proper remedy for an irreconcilable impasse between partners is dissolution of the partnership, not a lawsuit for damages against the disagreeing partner.
Analysis:
This decision clarifies the default governance rules for small partnerships under the Uniform Partnership Act, particularly in the common two-partner scenario. It establishes that a business disagreement or deadlock, without more, does not give rise to a claim for breach of fiduciary duty. By holding that the proper remedy for such an impasse is dissolution, the court reinforces the principle that courts will not impose one partner's business judgment on another. This ruling underscores the critical importance of comprehensive written partnership agreements that provide mechanisms for resolving deadlocks, as the statutory default may lead to the termination of the business.
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