JACK A. KAHN AND DENISE W. KAHN v. STEWART MESHER AND LIESELOTTE MESHER COURT OF APPEALS OF…

JACK A. KAHN AND DENISE W. KAHN v. STEWART MESHER AND LIESELOTTE MESHER

COURT OF APPEALS OF WASHINGTON, DIVISION ONE 2000 WASH. APP. LEXIS 2090 (2000)

Stewart Mesher and Jack “Alder” Kahn jointly invested in real estate for approximately 30 years. In October 1993, Mr. Kahn notified Mr. Mesher that he was dissolving the partnership. One year later, the parties entered into an agreement (the “SMAK Agreement”) which governed the terms of the wind-down of the partnership, including the distribution of partnership properties. The SMAK Agreement specifically addressed the sale of a parcel of land called the Bothell property.
An outside party known as Sundquist wanted to make an offer on the Bothell property. Mr. Mesher arranged to sell the property secretly for $984,000 without informing Mr. Kahn of the offer. Mr. Mesher then went to Mr. Kahn to arrange for Mr. Kahn to sell him his shares in the Bothell property, still without telling him about the impending sale of the property. After the transfer of shares, Mr. Mesher signed a purchase and sale agreement for the Bothell property for $961,000. Subsequently, Mr. Kahn sued Mr. Mesher for breach of fiduciary duty to the partnership during the winding-up process. The trial court ruled in favor of Mr. Kahn. Mr. Mesher appeals.

JUDGE WEBSTER Washington law has long held “that the relationship among partners is fiduciary in character and imposes upon the partners the obligation of candor and utmost good faith in their dealings with each other.” There is no stronger fiduciary relationship known to the law than that of co-partners, and each partner is a trustee for all. The good faith obligation of a partner demands that the partner abstain from any and all concealment concerning matters pertaining to the partnership business.
Furthermore, Washington statutory and case law provides that the partners owe one another these fiduciary duties through the “winding-up” period of the partnership. The Washington statute provides in pertinent part:
Every partner must account to the partnership for any benefit, and hold as trustee for it any profits derived by him without the consent of the other partners for any transaction connected with the formation, conduct, or liquidation of the partnership or from any use by him of its property.
Moreover, in Bovy, the Court of Appeals held that partners are “obligated to fully disclose any information pertaining to the winding up of partnership affairs.” Thus, the obligations of good faith and full disclosure continue during the winding up of the partnership and until the partnership affairs are completely settled.
The Meshers argue that Elmore v. McConaghy controls, and limits the scope of fiduciary duties the parties owed to one another during the winding-up of the partnership. In Elmore, the Supreme Court stated that:
Whatever fiduciary relation was imposed on the partners toward each other during the continuance of the partnership, the relation ceased when they began to negotiate between themselves as to the price to be paid by one for the other’s interest.
The Meshers’ reliance on Elmore is misplaced. Elmore was decided prior to this State’s adoption of the Uniform Partnership Act, which explicitly defined the fiduciary duty of partners as continuing through the winding-up of the partnership.
In this case, the winding-up of the partnership was not complete, and fiduciary duties did not cease, until the Kahn/ Mesher transaction closed on September 30, 1997. The closing of the real estate transaction represented the final settlement of the partnership affairs.
Indeed, the SMAK agreement, which delineated the terms of the winding-up of the partnership, specifically provided that the partnership would not terminate until all partnership accounts were settled. While Mesher argues that his fiduciary duties ceased upon the agreement of the parties on a price on August 22, 1997, the SMAK agreement required that Mesher pay Kahn and Kahn transfer the Kahns’ interest to Mesher. This requirement was not met until the transaction closed on September 30. Thus, under the SMAK agreement, Mesher owed Kahn fiduciary duties until at least September 30, 1997.
Because Mesher owed Kahn a fiduciary duty after August 22, 1997, we must determine whether he breached that duty by not revealing the Sundquist offer to Kahn.
As noted above, partners are “obligated to fully disclose any information pertaining to the winding up of partnership affairs.” Mesher admits that he never notified Kahn of the Sundquist offer, which is information pertaining to the winding up of partnership affairs. Moreover, when partners engage in transactions with each other, they are obligated to disclose all material facts. Here, the ability of the partnership to dispose of partnership property at a higher price is a material fact.
Instead of disclosing the Sundquist offer to Kahn, Mesher kept the offer to himself in order to keep the entire profit for himself. This was a breach of his fiduciary duty, and the Kahns were thus entitled to judgment as a matter of law.

CRITICAL THINKING

The Meshers relied on the precedent of Elmore v. McConaghy to support their conclusion that Stewart Mesher did not owe a fiduciary duty to disclose information to Jack Kahn. Why was reliance on Elmore erroneous?

ETHICAL DECISION MAKING

Suppose a classmate argues that injustice occurred with the court’s decision. Your classmate thinks that Mesher should not have been punished because he was just receiving the products of his labor. After all, he was the one negotiating the sale of the property, and he didn’t force Mr. Kahn to sell his shares. How would you argue against your classmate?

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