Biting the Hand That Feeds You

Biting the Hand That Feeds You; New Jersey Court Rejects Effort by General Partners to Sue Limited Partners Who Brought a Derivative Action Against Those Same General Partners

      A recent New Jersey decision considered the curious facts of, in response to a suit brought by the limited partners against the general partners of a failed real estate venture, those general partners counter-suing the limited partners alleging breach of fiduciary duty, waste and violation of the covenant of good faith and fair dealing.  The court, on sound grounds, rejected the viability of that counterclaim.  Baratta v. Deerhaven, LLC, 2013 WL 3486743 (N.Y. Super. L. July 12, 2013). 

      After the failure of a real estate venture in which they had invested $1.9 million, the limited partners brought suit against the general partners asserting that they had usurped certain partnership opportunities.  In response, those general partners filed a counterclaim asserting that the limited partners’ suit constituted waste, breach of fiduciary duty and breach of the covenant of good faith and fair dealing.  Ultimately, that entire counterclaim was dismissed.

      On the motion to reconsider the dismissal of the counterclaim, the court noted that the defendant general partners had been unable to identify a single case in which an investor was successfully sued for filing  lawsuit to recover his or her investment.  As to the claim of breach of fiduciary duty, while noting that partners generally owe such duties to one another, such is imposed upon the majority/control partner.  In that the limited partners were not majority owners nor in any position of dominance, they were not bound by any fiduciary duty to not bring suit. 

       Because the counterclaim was so lacking in merit, the trial court's award of sanctions was affirmed.