Lease Renewals Save Otherwise Time-Barred Breach of Fiduciary Duty Claims in a Partnership
The New Jersey Appellate Division affirmed a trial court decision holding that lease renewals would revive stale claims in a partnership dispute. In Munoz v. Perla, et al., A-5922-08T3, the Munoz brought claims, among others, for breach of fiduciary duty for his partners' failure to charge fair market rates in connection with the lease of the partnership's property. Despite that the rents were calculated and leases drawn up in 1994, the partnerships acts of renewing the leases in 2003 were found to be separate acts that revived the otherwise time-barred claims.
Formation of the Partnership
Munoz was one of three partners in a real estate venture called The Heritage Partnership. The three partners for started their business relationship in 1983 as principals of a professional engineering firm. Munoz was an inactive partner of Heritage and was not involved in the partnership's day-to-day operations. The purpose in forming Heritage was to "maintain, operate, manage, sell and/or lease" a commercial building. Each partner contributed capital to the venture and held a one-third ownership interest. The parties' partnership agreement provided that their rights and obligations were governed by the Uniform Partnership Act, N.J.S.A. 42:1A-1 to -56.
In 1992, Heritage purchased a three-story office building and the parties decided to move the business operations of their engineering firm into the space. The parties did not consider a calculation of fair market value for rent for the engineering firm, but decided that the rent should cover the building's expenses. The engineering firm would also manage the building for Heritage a charge for the service. In 1993, the parties incorporated a new business, which would also rent office space from Heritage. In 1994, Munoz received a letter from his partners outlining the rent calculations.
Munoz did not visit the building until 2005 and never requested to inspect the partnership's books and records during that time. Munoz did receive partnership tax returns and K-1 forms, but never read them thoroughly. The question of the fair market value of the rents that Heritage charged did not arise until Munoz sought to withdraw from Heritage in 2005. At that time, the rejection of Munoz's buyout offer led to the appraisal of the property and litigation ensued in 2007.
Statute of Limitations Defense
Munoz alleged in the complaint that his two partners breached their fiduciary duty to him in entering into leases that charge below fair market value rates. Defendants countered, as is expected, with the statute of limitations defense – stating that Munoz's claims expired 6 years after the leases were first executed. While both the trial court and Appellate Division agreed that Munoz possessed sufficient information that would prevent tolling of the statute of limitations, the claims were saved by lease renewals in 2003. The court found that the lease renewals, about which the partners failed to provide notice to Munoz, constituted separate acts and could be the basis for a breach of fiduciary duty. The court further found that the equitable defenses of estoppel, laches, and waiver also lacked merit.
The lesson in this case is that breaches of fiduciary duties may be continuous depending upon the parties' interactions. A prior breach may be revived by a later act long after the statute of limitations has passed. Despite Munoz's failure to keep himself informed about the partnership, the lease renewals created a new cause of action for breach of fiduciary duties for which the partners were found liable.
Bonnie C. Park, a principal of the firm, helped in the preparation of this post.
