Dissolution and the End of Partners’ Fiduciary Duties

Stock Photo Partnership

Sirazi v. Panda Express, Inc., No. 08 C 2345, 2011 WL 6182424 (N.D. Ill. Dec. 13, 2011), affirms that “[t]he partnership relationship does not extend to all affairs and transactions between the partners . . . and when the partners have entered into an arm’s length transaction in order to effect dissolution, their relationship is not fiduciary in nature.”

At the center of Sirazi is a partnership originally entered into by and between Rezko Concessions, Inc. (“Concessions”), which was controlled by Antonin “Tony” Rezko (“Rezko”), and Panda Express.  In 1998, a few years after the partnership was formed, Concessions transferred its interest to PE Chicago, LLC (“PE Chicago”), another entity controlled by Rezko.  The court in Sirazi considered whether Panda Express breached its fiduciary duty to PE Chicago when, in 2006, it bought out PE Chicago’s interest in the partnership.

By 2006, Panda Express wanted to be rid of Rezko as a partner.  Rezko was facing dire legal and financial threats, including his indictment (and subsequent conviction) on a variety of criminal charges, and he and his companies owed more than $6 million to Panda Express.  After Panda Express declined Rezko’s request for yet another loan, Rezko and Panda Express agreed that Rezko would sell PE Chicago’s fifty-percent partnership interest to Panda Express at the price proposed by Panda Express.  Rezko did not have counsel representing him in this transaction, but the contract executed by the parties contained a statement that each party had a full opportunity to seek advice of counsel.

After Rezko was no longer in control of PE Chicago, PE Chicago claimed, among other things, that Panda Express violated a fiduciary duty it owed to PE Chicago by paying a low price for PE Chicago’s interest.  Panda Express argued that it did not owe fiduciary duties to PE Chicago at the time the sale was negotiated and carried out.  Specifically, Panda Express argued that even though partners typically owe each other fiduciary duties under Illinois law, those duties cease to exist once the partnership has been dissolved and the partners have adverse interests.  The court agreed with Panda Express, holding that Panda Express did not owe a fiduciary duty to PE Chicago — and thus could not have breached a fiduciary duty by offering PE Chicago a low price or by taking advantage of Rezko’s financial distress — because the sale would terminate the partnership and the parties had directly adverse interests.

Accordingly, it is important for partners to be aware that if they engage in an arm’s length transaction with each other, and the transaction involves adverse interests and results in a dissolved partnership, they are no more responsible to each other than they would be to any other third party.

Amanda M.H. Wolfman, Contributing Author

(This is for informational purposes and is not legal advice.)

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