Frank’s Case

Frank was a very successful businessman and, from time-to-time, he looked for new investment opportunities. In the 1980’s he invested substantial funds to purchase four units in a real estate limited partnership.

The LP’s governing documents provided that Frank and the other limited partner investors were to receive a fixed distribution every quarter. In the event that there was not enough revenue to pay all operational obligations, the quarterly distribution had a higher priority than any other obligations except for mortgage payments.

For several years, the LP made regular payment of quarterly distributions. By then, however, the general partner realized that there might not be enough revenue to pay all obligations and he was tired of making up the difference by himself.

The general partner undertook to change the partnership payment priorities and use the LP’s revenues to benefit himself rather than the investors. A plan was devised to consolidate several of the real estate limited partnerships under the general partners’s control. Under the LP agreements, one hundred percent approval was required or the consolidation could not go into effect. Frank voted against the plan, but the general partner went ahead and advised all the investors that the plan had been approved.

Within three years’ time, the LP’s stopped making the promised quarterly distributions. Frank took no legal action because he and the other investors were advised that market conditions were poor and that distributions had to be suspended. Eventually, however, Frank grew suspicious that the general partner’s failure to pay distributions had less to do with the real estate market and more to do with the general partner’s self-dealing.

Frank retained the services of attorney Michael Bomstein to investigate the matter and, if appropriate, to take legal action. Attorney Bomstein filed suit alleging that: (1) the general partner had improperly enriched himself at the partners’ expense; (2) the general partner took additional interest on loans to which he was not entitled; (3) the general partner refinanced the real estate, increasing partnership debt and fattening his own bank account; and (4) the general partner persuaded many partners to turn in their units at a loss, on the false premise that the partnerships were insolvent.

Frank’s suit contended that the general partner had breached his fiduciary responsibilities and kept the LP from making the promised quarterly distributions. In order to assist their client, the Pinnola and Bomstein firm retained the services of an experienced forensic accountant to help review and analyse thousands of pages of financial documents and real estate records. Attorney Michael Bomstein then worked closely with the expert to try to expose the depth and details of the general partner’s scheme.

At every opportunity, defendants stonewalled and obstructed the litigation and the case was hard-fought in the courts. As the suit drew closer to trial, Michael Bomstein reviewed extensive records and took the deposition of the general partner’s long-term accountant. As it turned out, that accountant had detailed knowledge of the general partner’s doings for a period of decades, knowledge that directly implicated the general partner in extensive wrongdoing.

The accountant’s deposition and the prospect of the general partner’s upcoming deposition finally gave defendants pause as well as a newfound willingness to discuss a reasonable resolution of the case. Defendants then offered a substantial sum of money to settle the suit, but on terms of confidentiality. Frank was more than agreeable, feeling both financially satisfied and personally vindicated.