Carlo
and Denise Bazan went into business with their long time friend, Luis Muoz, by
opening a restaurant in Laredo called Vamp Ultra Lounge & Café. Two years
later Luis sued Carlo and Denise, claiming they had wrongfully taken money from
the café.
The partnership decision was made
when Carlo, Denis and Luis were vacationing together in Cancun in 2008. A year
later they signed a contract designating Denise as the Manager of their new
enterprise. But as a matter of practicality, Denise delegated her management
duties to Carlo.
According to the contract, the
Bazans owned a 50% interest in the business, and Luis owned the remaining 50%.
Initially, Luis contributed $80,000 to buy an existing nightclub, while Bazans
contributed $15,000 which was used to remodel.
The business opened on October 31,
2009. Carlo collected cover charges at the door and installed cash controls in
a point-of-sale system. It seems Luis may not have been consulted and expressed
his displeasure about the cover charges, and his unhappiness was likely
accelerated when Denise and Carlo started paying themselves a salary without
Luis’ consent.
Record-keeping was poor or
non-existent as cash receipts were counted at Denise’s residence. More often
they were not counted at all. Distributions were made, also without Luis’
consent or participation, to Carlo and Denise.
The business did not make bank
deposits for months, and as a consequence, bank accounts were frozen. When
questioned, Carlo claimed that vendors, staff and DJs were paid by cash and
that explained whey receipts were not deposited at the bank.
Finally, Luis asserted a lawsuit
against Carlo and Denise. It seemed the business was making $60,000 to $70,000
a month, but the bank records only reflected deposits of $20,000 per month.
A jury found in favor of Luis on his
claims for breach of contract, breach of fiduciary duty and fraud. The jury
awarded Luis $120,000 and the trial court converted the jury award into
Judgment.
Denise and Carlo appealed.
In
a lengthy decision, the Court of Appeals found there was ample evidence of
fraud committed by the Bazans’ failure to disclose information. Business
partners owe fiduciary duties to each other – the same high standard that
brokers and agents owe to their principals.
There
was a special relationship of trust, confidence and loyalty in the café
business. As such, Carlo and Denise had a duty to disclose material information
to Luis.
Secretly
taking money from the business breaches that duty, and supports the jury’s finding
of fraud by nondisclosure.
The
Appellate Court agreed with the Luis. Luis Muoz won and the Bazans lost. See Bazan v. Muoz; No. 04-13-00184-CV;
Texas Court of Appeals; 4th District; November 5, 2014.
Lessons
learned:
1. It’s
not newsworthy to state that friends don’t always make good business partners.
In fact, I see the opposite is also true: sometimes friends make the best
business partners. But, be sure that the relationship is properly documented.
2.
This
appellate decision states something we all know – the highest duties in law are
imposed upon those who have a special relationship or duty of trust. Like
brokers and agents. Breach of that duty means a lawsuit.
3.
Practice
Point: All
parties in a business venture should have their own separate lawyers. When that
is not possible, at least be sure that the Contract has a provision where
anyone who needs to exit can do so.
