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False Notes in the Music Industry: Fiduciary Duty of Business Partners

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James Irving
BKK Business Law Newsletter
November 2013

A “fiduciary duty” is imposed by law upon parties with certain relationships dependent on a high level of trust and confidence. According to the Supreme Court of Virginia, a fiduciary relationship is established “whenever a special confidence has been reposed in one who in equity and good conscience is bound to act in good faith.” The duty requires scrupulous good faith and candor between the parties. It typically arises between trustee and beneficiary and guardian and ward, but also between business partners, where the obligations are not merely contractual.

In the spring of 2008, Schur and Sprenkle entered into discussions to start a musical management and production business in the Richmond area. Schur believed they had a deal in place by which Sprenkle would form an LLC with both individuals as members. Schur claimed he provided financial capital for the new venture and that Sprenkle had agreed to assign rights to certain musical acts to it as his contribution to the LLC. However, Sprenkle did not do as Schur expected. He formed the LLC, but without Schur as a member and, according to Schur, converted the $49,675 Schur contributed to his own use.

Schur filed suit, claiming that Sprenkle (among other things) breached their joint venture agreement by forming the LLC with himself as the sole member, tortiously interfered with Schur’s business contract or expectancy, committed statutory and common law conspiracy and wrongfully converted the money Schur intended as capital for the LLC. Sprenkle contended that the facts were otherwise, but at a preliminary hearing to determine the sufficiency of Schur’s claim, the allegations were analyzed favorably for the plaintiff.

Schur alleged that Sprenkle breached his fiduciary duty to Schur when he intentionally failed to include Schur as a member of the LLC. Agreeing with Schur at the preliminary hearing stage, the court ruled that Schur had sufficiently alleged a breach of fiduciary duty because upon the formation of a partnership or joint venture, the partners are obligated “to use utmost good faith and their best efforts to secure” the object of the partnership or joint venture. In other words, persons forming an LLC owe fiduciary duties to each other.

Complicating the suit is Schur’s demand that the operating agreement be rescinded because it never became a valid, enforceable or existing contract. Schur claimed that Sprenkle did not have the rights to the music artists he claimed to have assigned as his contribution to the LLC and because Sprenkle failed to provide consideration, the LLC operating agreement was void. Thus the court will need to make a factual determination as to the LLC’s existence, but it would seem that rescission is not an available remedy, since an award of money damages would provide Schur with adequate relief.

Whether or not Sprenkle acted as Schur has alleged is a factual question to be determined later in the proceeding, but Virginia business people should know that Virginia law imposes this high standard of conduct on parties entering into a joint venture, limited liability company or partnership.