What to do when your business partner steals from the business

Posted & filed under Corporation, Limited Liability Company (or LLC), Ownership Interest.

SJP_1423v1Many business owners in business disputes with their partners find themselves in such situations after learning that their business partners are or have been stealing from the business. There are a variety of civil claims that business owners and sometimes the business itself may be able to assert against their partner for improperly taking money from the business. While this post will briefly highlight some of these claims, whether a particular claim is applicable (as well as the likelihood of success) depends on the facts and circumstances of each unique case.

A commonly asserted claim in this situation is conversion. However, if what was allegedly stolen was money, a claim for conversion only exists if the money is part of a specific, separate, identifiable fund (i.e., money clearly allocated for a particular fund or purpose). Additionally, specific stolen checks can support a claim for conversion. Next, to establish a claim for conversion, a plaintiff generally needs to establish that the plaintiff owns the property or has the right to possess the property, the defendant currently possesses the property, the plaintiff demands that the defendant return the property, the defendant refuses to return the property, and how much the property is worth. A few of these elements, however, can be tricky. For example, a plaintiff does not have to make a demand when the defendant unlawfully obtained the property.

Other potential claims include misappropriation and breach of fiduciary duty against the partner stealing from the business. Claims for misappropriation of funds are often easier to establish than a claim for conversion, as a plaintiff only needs to establish that the funds were supposed to be used for a particular purpose, the funds were wrongfully taken by the defendant, and the plaintiff has been damaged by loss of the funds. Likewise, to establish a claim for breach of fiduciary duty, the plaintiff needs to show the existence of a fiduciary duty, breach of that duty, and damages proximately caused by the breach. A fiduciary relationship usually exists between partners.

This article is not intended to establish an attorney-client relationship and is not intended to confer legal advice. No attorney-client relationship should be inferred in the absence of a written and executed engagement agreement that expressly indicates the creation of an attorney-client relationship.

Written by: Heather Wagner