Opinion
NOT TO BE PUBLISHED
APPEAL from an order of the Superior Court of Los Angeles County No. BC 360652, Gregory W. Alarcon, Judge.
Loeb & Loeb, Andrew S. Clare, Lawrence B. Gutcho and David Grossman for Plaintiffs, Cross-defendants and Appellants.
Greenberg Traurig, Frank E. Merideth, Jr., Jordan D. Grotzinger and Lori Chang for Defendants, Cross-complainants and Respondents.
VOGEL, J.
For 13 years, a two-man partnership successfully bought and sold real property and other investments. When a dispute arose, the managing partner stopped making distributions to himself and to his partner, and instead used all available cash to repay loans he had made to the partnership. The other partner filed suit and obtained a preliminary injunction maintaining the status quo pending resolution of this litigation. The managing partner appeals. We affirm.
FACTS
A.
For a number of years beginning in the early 1990’s, Michael Kamen and Gerson Fox bought and sold commercial, industrial, and residential properties. Scott Schwartz, a broker and property manager who shared office space with Kamen, provided services for some of the properties owned by Kamen and Fox.
With his wife, Patricia Schwartz, Schwartz does business as Spencer-Scott, Inc., and their assets are held by the Schwartz Family Trust. Unless the context suggests otherwise, our references to Schwartz include his wife, business, and trust.
On October 29, 1993, Kamen and Schwartz formed a general partnership, the November First Partnership (NFP), to own, operate, and sell real estate and other business interests. Their agreement designates Kamen, who contributed all of the firm’s cash, as the managing partner (Schwartz contributed his management and brokerage services for the partnership’s properties). Although the partners initially owned unequal shares, they later became equal partners.
The NFP partnership agreement gave Kamen, as managing partner, (1) the “exclusive authority to direct and manage the affairs of the Partnership,” (2) the power to borrow money and to “repay in whole or in part . . . any obligation affecting any property interest, real or personal, owned by the Partnership including without limitation any partnership interests,” and (3) the discretion to distribute cash at any time so long as the distribution did not jeopardize the partnership’s interests. The agreement gave both partners the right but not the obligation to loan money to the partnership, and provided that, in the event either partner did so, the lender would have all the rights of a general creditor except as otherwise required by law, but that the loan would not affect the lender’s ownership interest in the partnership. Kamen regularly made loans to NFP (the current balance due to Kamen is about $6 million); Schwartz did not.
The NFP partnership agreement gave Kamen “the sole and absolute discretion” to determine the amount of cash available for distribution, “the sole discretion” to distribute cash, and the power to borrow money and “repay [it] in whole or in part.”
B.
In practice, Kamen and Fox (through entities in which each held a 50 percent interest) purchased properties, and NFP (owned in equal shares by Kamen and Schwartz) then purchased 25 percent of Kamen’s 50 percent interest in each property. As a result, as to each property, Fox owned 50 percent, Kamen owned 25 percent plus half of NFP’s interest, and Schwartz owned the other half of NFP’s interest. From 1993 to 2006, Kamen and Schwartz co-managed and developed NFP’s properties through Mika Co., an informal partnership owned equally by Kamen and Schwartz, with Kamen as its general partner.
By way of example, Fox would have a $50,000 interest in a $100,000 property; Kamen would initially have a $50,000 interest, half of which ($25,000) would be purchased by NFP, which was owned half by Kamen and half by Schwartz, so that Kamen would end up with a $37,500 interest in the property, and Schwartz with a $12,500 interest.
Through the 13-year period of Kamen’s relationship with Schwartz, NFP distributed its cash (mostly rental income) to its partners at the beginning of each month, except that cash generated by the sale or refinancing of a property was distributed to repay any loans made by Kamen before the remaining proceeds from that transaction, if any, were distributed equally to Kamen and Schwartz.
C.
The relationship collapsed in 2006. According to Schwartz, Kamen’s behavior became so “erratic and offensive” that Schwartz suggested they find a way to separate their interests. According to Kamen, Schwartz was concerned about the difference in their ages (Schwartz is 47 and in good health, Kamen is 67, diabetic, and has had two bypass surgeries). In any event, Schwartz, Kamen and Fox met in January 2006, at which time Schwartz presented the others with a letter from his lawyer suggesting various options, all of which Kamen rejected. In June or July, Schwartz moved out of the shared premises.
According to Kamen, he decided upon Schwartz’s departure to exercise his right to repay himself for the loans he had made to NFP before he made any further distributions to himself and Schwartz. According to Schwartz, the withheld distributions were retaliation for Schwartz’s departure. It is apparently undisputed that Kamen created a new management entity, Mika Realty, LLC, which he now runs without Schwartz.
To resolve their dispute, Kamen sued Schwartz for declaratory and injunctive relief (and damages), asking for a judicial determination that he had the right to repay himself for his loans to NFP before making distributions to the partners (himself and Schwartz). Schwartz cross-complained for injunctive relief and damages for breach of the partnership agreement and breach of fiduciary duty, then filed a motion for a preliminary injunction compelling Kamen to make distributions to the partners (on the ground that Kamen’s actions will cause Schwartz to incur tax liability on “phantom income”). Kamen opposed the motion, contending he has the absolute discretion to repay himself before making cash distributions and that the purported tax issue is a red herring.
To be precise, Kamen and Mika Co. sued Schwartz, his wife, and their trust, and the cross-complaint was filed by Schwartz, his wife, and their trust against Kamen, Mika Co., Mika Realty, LLC, and other Kamen entities. Fox is not a party to the lawsuit.
D.
The trial court granted Schwartz’s motion, finding among other things that a managing partner’s fiduciary duty circumscribes his contractual discretion, so that his decisions have to be made in good faith, and that partners are held to the standards of a trustee in their dealings with each other. The court concluded that Schwartz had met his burden by showing it is likely that he will prevail on the merits of his breach of fiduciary duty claim, summarizing the evidence this way:
“[F]or 13 years, Kamen distributed to [Schwartz his] share of the available cash flow and [his] share of the proceeds of the sales of the [properties]. When disputes arose between Kamen and Schwartz, Kamen paid the cash flow to himself to re-pay loans he made to NFP, rather than continue cash flow disbursements to [Schwartz]. It appears likely that a trier of fact may consider this conduct, ‘measured by fiduciary standards,’ . . . as impermissible self-dealing in violation of Kamen’s duties of loyalty and good faith to [Schwartz]. Kamen acknowledges that his conduct was ‘simply exercising [his] bargained for rights under the partnership agreement’ . . ., without regard to his fiduciary obligations to [Schwartz]. There is nothing in the NFP Partnership Agreement that ties the monthly cash flow distributions or other payments to services by Schwartz [so that his departure did not give Kamen the right to withhold distributions]. . . . [¶] . . . [¶] . . . [¶] [Schwartz] has made a sufficient showing that [he] will incur tax liability for NFP cash flow [income] ‘whether or not distributed.’ 26 C.F.R. § 1.701-2(a). . . . As [Schwartz] argues . . ., its potential injuries may include ‘potential penalties and other adverse consequences of incurring substantial tax liability without the ability to pay the taxes’ . . . .”
The court entered a preliminary injunction restraining Kamen from directly or indirectly “[d]istributing, transferring or paying any money or other property from NFP . . . to [himself] or to anyone on his behalf or at his direction, whether such distribution, transfer or payment is characterized as a profit distribution, guaranteed payment, return of capital, preferred return, repayment of a loan (except to the extent provided below) or otherwise, without concurrently distributing to [Schwartz his] 50% share of all cash flow and other proceeds accrued at NFP. However, following the sale or refinance of a property owned by NFP or by any entity in which NFP has an interest, Kamen may deduct from NFP’s interest in those sale or refinance proceeds any amount necessary to repay to [himself] the outstanding balance of any loan he made to NFP specifically to purchase [or] develop the particular property that generated those proceeds.”
Kamen (and Mika, which is included in our subsequent references to Kamen) appeal.
DISCUSSION
In a series of related arguments, Kamen contends the trial court rewrote the express terms of the parties’ agreement, Schwartz did not establish irreparable harm, and the alleged injury is inevitable and thus does not provide an adequate basis for injunctive relief. We reject these arguments seriatim.
The parties agree that the standard of review is that the trial court’s finding of facts are binding if supported by the evidence, and its decision whether to issue a preliminary injunction is one within its discretion that will be affirmed unless an abuse of discretion is shown. (Wind v. Herbert (1960) 186 Cal.App.2d 276, 283-284; Cohen v. Board of Supervisors (1985) 40 Cal.3d 277, 286.) Although a mandatory injunction is reviewed more strictly than a prohibitory injunction (Shoemaker v. County of Los Angeles (1995) 37 Cal.App.4th 618, 625), the nature of the preliminary injunction before us (although plainly prohibitive) is not determinative of the result -- it is valid no matter how strictly it is viewed. (See Davenport v. Blue Cross of California (1997) 52 Cal.App.4th 435, 447.)
A.
In determining whether to issue a preliminary injunction, the trial court must consider the likelihood that the moving party will ultimately prevail on the merits of his case, and the relative harm the parties will suffer in the absence of pendente lite relief. (Hunt v. Superior Court (1999) 21 Cal.4th 984, 999.) Accordingly, it is the moving party’s burden to present evidence establishing both a likelihood (not a certainty) that he will prevail on the merits and that he will suffer irreparable injury if the injunction is not issued. (White v. Davis (2003) 30 Cal.4th 528, 554; Baypoint Mortgage Corp. v. Crest Premium Real Estate etc. Trust (1985) 168 Cal.App.3d 818, 823-824.) Ultimately, the decision whether to issue the injunction is within the trial court’s discretion (IT Corp. v. County of Imperial (1983) 35 Cal.3d 63, 72) and where, as here, the preliminary injunction maintains the status quo and it is very likely that the moving party will prevail, the less severe must be the harm he will suffer if the preliminary injunction does not issue. (King v. Meese (1987) 43 Cal.3d 1217, 1227.)
B.
Kamen contends the trial court abused its discretion by rewriting the express terms of the NFP partnership agreement. We disagree.
It is true, as noted above and as Kamen contends, that the agreement gives Kamen (as managing partner) the sole discretion to make distributions (a right he claims was granted to him because he was the only partner who contributed capital to NFP). As the trial court found, however, that discretion is circumscribed by Kamen’s duty to act in good faith, a duty arising out of his partnership relationship with Schwartz. (Laux v. Freed (1960) 53 Cal.2d 512, 522 [partners have a confidential and fiduciary relationship to each other, and neither has the right to secure an undue benefit at the expense of the other]; BT-I v. Equitable Life Assurance Society (1999) 75 Cal.App.4th 1406, 1410-1411 [every partner is bound to act in the highest good faith to his partners, and a partner cannot by contract relieve himself of this responsibility]; Enea v. Superior Court (2005) 132 Cal.App.4th 1559, 1566 [nowhere does the law declare that partners owe each other only those duties they explicitly assume by contract]; Bardis v. Oates (2004) 119 Cal.App.4th 1, 12.) More to the point, a managing partner’s duties to the other partners are “especially marked,” and he cannot in any fashion engage in self-dealing. (Bardis v. Oates, supra, 119 Cal.App.4th at p. 13.)
The trial court found, based on substantial evidence, that for 13 years Kamen made distributions to Schwartz every time he made one to himself, and that he only repaid himself for his loans when there were proceeds from the sale or refinancing of one of NFP’s properties. When Schwartz left, Kamen stopped making any distributions at all and used all proceeds, including those usually distributed to the partners, to reduce the balance owed by NFP to Kamen. The only logical inference is that drawn by the trial court -- that Kamen acted in retaliation and, therefore, in breach of his fiduciary duty by taking all of the distributions and declaring that he intended to do so indefinitely, until all his loans were fully repaid. As the trial court found, the discretionary powers granted to Kamen by the partnership agreement are limited by his duties to act in good faith in his dealings with his partner. (See Labovitz v. Dolan (1989) 189 Ill.App.3d 403, 404-406, 545 N.E.2d 304.)
Kamen’s assertion that he “was not attempting to take advantage of his partner, but was simply exercising his right, at the age of 67, to finally repay $6 million in loans that have served to benefit Schwartz for over a decade” is belied by his timing and was in any event rejected by the trial court as a less than credible description of Kamen’s actions.
In short, the trial court did not ignore the agreement; it simply construed it as required by law.
C.
Kamen contends the preliminary injunction should not have issued because Schwartz did not establish that, absent injunctive relief, he would suffer irreparable harm. We disagree.
Kamen’s premise -- that irreparable injury wasn’t shown because Schwartz established only that he might incur a tax liability on “phantom income,” not that he would have to pay taxes on income he had not received -- misses the point. Where, as here, a preliminary injunction maintains the status quo ante, the moving party’s need to establish irreparable injury is not as important as it is when a preliminary injunction requires a change of position. (King v. Meese, supra, 43 Cal.3d at p. 1227.) Moreover, where the trial court finds the wrong insufferable because it constitutes an assumption by one person of superiority and domination over the rights and property of others, the injury, likely or absolute, great or small, justifies injunctive relief. (Fretz v. Burke (1967)247 Cal.App.2d 741, 746.)
Although the trial court’s current findings are not determinative of the ultimate outcome of this case (Baypoint Mortgage Corp. v. Crest Premium Real Estate etc. Trust, supra, 168 Cal.App.3d at pp. 823-824), the record before us supports the court’s finding that Schwartz has a genuine concern about his tax liability. (See United States v. Basye (1973) 410 U.S. 441, 447-448 [partners are taxed on proportionate shares of current partnership income regardless of whether that income is actually distributed to them].) In the context of this appeal, no more is required.
We agree with Kamen that the issue is not whether Schwartz will be taxed on his share but when that liability will be incurred -- but find the point irrelevant in this context. Absent the preliminary injunction, Schwartz -- who would not be receiving any distribution from NFP -- could be taxed on his share of the $6 million Kamen repaid himself. Unwinding any interest payments and penalties that might accrue would be substantially more difficult than the allocation that will occur at the conclusion of this lawsuit with the preliminary injunction in place. (Compare Jessen v. Keystone Savings & Loan Assn. (1983) 142 Cal.App.3d 454, 459.)
DISPOSITION
The order and the preliminary injunction are affirmed. The parties are to pay their own costs of appeal, subject to reallocation by the trial court at the conclusion of this litigation.
We concur: MALLANO, Acting P.J., JACKSON, J.
Judge of the Los Angeles Superior Court, assigned by the Chief Justice pursuant to article VI, section 6 of the California Constitution.