Sanchez v. Saylor
129 N.M. 742, 13 P.3d 960 (2000)
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Rule of Law:
In a two-person partnership, absent an agreement to the contrary, one partner does not breach a fiduciary duty by refusing to consent to a transaction or provide personal financial information, even if it would benefit the partnership. The legal remedy for such a deadlock is dissolution of the partnership, not a claim for damages.
Facts:
- Robert Sanchez and Robert Saylor were general partners in two limited partnerships, RSRS and Coors, which owned commercial real estate.
- The RSRS partnership held two promissory notes from a company, Fidelity-Arizona, which had purchased a shopping center from RSRS.
- After Fidelity-Arizona defaulted on the notes and filed for bankruptcy, Saylor individually purchased the shopping center out of the bankruptcy.
- To complete his purchase, Saylor used the RSRS partnership's promissory notes as partial consideration by forgiving and releasing the debt owed to the partnership.
- For the Coors partnership, an opportunity arose for a financially beneficial debt refinancing with Sunwest Bank.
- The bank required personal financial statements from both Sanchez and Saylor as a condition of the loan.
- Sanchez refused to provide his financial statements because he was attempting to hide his assets from a creditor, United New Mexico Bank, which held a multi-million dollar judgment against him.
- As a direct result of Sanchez's refusal, the refinancing deal failed, causing a financial loss to the Coors partnership.
Procedural Posture:
- Robert Sanchez sued Robert Saylor in New Mexico district court (trial court).
- Saylor filed a counterclaim against Sanchez.
- Following a bench trial, the court found Saylor liable for converting partnership notes and awarded Sanchez $250,000.
- The trial court also awarded Saylor $351,739 from the Coors partnership for fees and expenses.
- The trial court found Sanchez breached his fiduciary duty by failing to provide financial statements and awarded the Coors partnership $522,488 in damages against Sanchez.
- The trial court denied Sanchez’s claim for profits from Saylor's conversion based on the doctrine of 'unclean hands'.
- Post-judgment, the trial court granted a motion to formally add the Coors partnership as a party and entered an amended judgment.
- Saylor (as appellant) appealed the conversion judgment, and Sanchez (as cross-appellant) appealed the other adverse rulings to the New Mexico Court of Appeals.
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Issue:
Does a partner in a two-person partnership breach a fiduciary duty by refusing to provide personal financial statements for a partnership loan application, even when the loan would benefit the partnership, if the partnership agreement is silent on the matter?
Opinions:
Majority - Sutin, Judge
No, a partner in a two-person partnership does not breach a fiduciary duty by refusing to provide personal financial statements for a partnership transaction where the partnership agreement is silent. The court reasoned that under the Uniform Partnership Act, partners have equal rights in the management of the business, and any difference arising as to ordinary matters is decided by a majority. In a two-partner partnership, a disagreement results in a deadlock, and one partner cannot impose his will upon the other. Citing Covalt v. High, the court affirmed that the remedy for such an impasse is dissolution of the partnership, not a lawsuit for breach of fiduciary duty. The court found no express or implied agreement obligating Sanchez to provide his statements. While Sanchez’s motive was to deceive his own creditors, this did not translate into a tortious act or a breach of his duty to the partnership itself. The court also affirmed that Saylor converted the RSRS notes by using them for his personal benefit but denied Sanchez any resulting profits under the 'unclean hands' doctrine, because Sanchez's own conduct regarding his creditors was inequitable and related to the overall dispute. Finally, the court upheld the award reimbursing Saylor for expenses he paid on behalf of the Coors partnership, finding sufficient evidence supported the claim.
Analysis:
This case reinforces the principle established in Covalt v. High, clarifying the limits of fiduciary duties in small, closely-held partnerships. It establishes that a partner’s general duty of good faith does not create a specific, enforceable obligation to participate in a new business transaction, even a beneficial one, against their will. The decision protects individual partner autonomy but underscores the vulnerability of partnerships, particularly two-person partnerships, to deadlock. The ruling strongly implies that partners should address such contingencies through detailed partnership agreements, as courts will not step in to force a partner's cooperation and the only statutory remedy is the drastic step of dissolution.
