Leff v. Gunter
189 Cal. Rptr. 377, 33 Cal.3d 508, 658 P.2d 740 (1983)
Rule of Law:
A partner's fiduciary duty not to secretly compete with the partnership for a partnership opportunity, and not to use confidential information acquired during the partnership, survives their formal withdrawal from the partnership for so long as the opportunity is actively being pursued.
Facts:
- In 1969, Ted Leff, a real estate developer, learned that the United States government was soliciting bids for the construction of an Internal Revenue Service (IRS) Center in Fresno.
- Leff and Henry Sender, an architectural engineer, agreed to enter a joint bid on the Fresno project.
- Sender then telephoned defendant William L. Gunter, introducing Leff as his associate and suggesting that Gunter, Robert B. Russell, and Russell & Associates join Leff and Sender in bidding on the Fresno project, to which Gunter orally agreed with a 2/3 share for his group.
- Leff kept Sender fully informed, and Sender forwarded extensive project information, including details on the specific Pilobos site, to Gunter for the joint bid.
- Between late February and late March 1970, Gunter advised Sender that he and his associates wished to withdraw from the Fresno joint venture, citing potential financial involvement in another project, without intimating any independent bidding.
- On April 10, 1970, defendants Gunter and Russell, along with Monroe Tapper, secretly submitted their own joint bid for the same Pilobos site under the name "Russell & Associates."
- On May 28, 1970, Russell & Associates was awarded the government contract to construct the Fresno IRS Center on the Pilobos site, after reducing their proposed rent.
- The joint venture between Gunter, Russell, and Tapper, which made the successful bid, was created by an oral agreement sometime in mid-January 1970, unknown to Leff or Sender until after the contract award.
Procedural Posture:
- Ted Leff sued William L. Gunter, Robert B. Russell, and Russell & Associates in a California trial court, alleging five causes of action, including breach of fiduciary duty and unfair competition.
- The trial court bifurcated the trial.
- A jury found the defendants liable only on the fifth count, relating to breach of fiduciary duty.
- Following a damages hearing, the trial court entered a judgment awarding Leff $416,666 in damages.
- The trial court denied Leff's motion for prejudgment interest on his recovery.
- Defendants appealed the judgment to the Supreme Court of California, challenging jury instructions and the sufficiency of evidence.
- Leff cross-appealed to the Supreme Court of California, challenging the denial of prejudgment interest.
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Issue:
Does a partner's fiduciary duty to their joint venture, specifically the duty not to compete for a partnership opportunity, continue after their formal withdrawal from the venture, especially if they secretly initiated competitive actions while still a member or used information gained during their participation?
Opinions:
Majority - Richardson, J.
Yes, a partner's fiduciary duty not to secretly compete with their joint venture for a partnership opportunity continues even after their formal withdrawal, particularly if they initiated competitive activities or utilized information gained during their participation. The court affirmed that partners are trustees for each other, bound to act in the highest good faith and not obtain advantages through misrepresentation or concealment. This duty extends to partnership opportunities that are actively being pursued and survives formal disassociation unless specifically agreed otherwise. The court cited precedents like Page v. Page, which emphasized a partner's continuing fiduciary obligation “not to exclude defendant wrongfully from the partnership business opportunity,” and Donleavey v. Johnston, which recognized that a former partner “cannot make any profit to himself from a secret transaction initiated while the relation of trustee and cestui que trust exists.” Corporations Code sections 15021 and 15030 also support that a partner must account for benefits derived from transactions “connected with” the partnership and that a partnership continues until winding up. The court found that the jury could reasonably conclude defendants secretly began work on their independent bid during their participation, utilizing acquired information, and their withdrawal before formal bidding did not immunize their conduct. Furthermore, the court found the trial court erred in denying prejudgment interest, stating that damages were “certain or capable of being made certain by calculation” under Civil Code section 3287, subdivision (a), because the method of computation was mechanical and based on uncontested valuations, despite a dispute over liability.
Analysis:
This case significantly clarifies and reinforces the scope of fiduciary duties in partnerships and joint ventures, establishing that these duties are not automatically extinguished upon formal withdrawal, especially concerning opportunities developed or information acquired during the partnership. It highlights the court's commitment to ethical conduct in business relationships, even at the expense of maximizing competitive bidding. The ruling means that partners contemplating withdrawal must be scrupulously honest about their intentions, or risk liability for breaching their continuing duty of loyalty, thereby impacting how partnerships dissolve and how partners pursue new opportunities immediately after a venture ends.
