Two Utah independent insurance agencies formed a partnership that ended in an ugly breakup. Not every partnership will work out, but their story illustrates the wrong way to call it quits.
The two agencies created a partnership in May 2012, with one agency owning 75% of the business and the other owning 25%. The minority owner was to receive a 90/10 commission split on all new and renewal business its principal wrote or brought over. It was also to receive a 50% commission from the initial fee for any satellite office it brought on.
The good times did not last long. Three years later, a dispute over commissions led to the partnership terminating the minority owner’s principal as an agent and sales representative. However, his agency remained in the partnership. The minority agency sent a letter to the partnership, demanding access to review and copy the partnership’s organizational documents, income tax returns, and financial records.
The partnership rejected the request and the minority agency sued. They asked the court to declare that they were a partner and to order the majority agency to buy out the minority’s interest at fair market value. They also sought damages of $300,000 without showing how they calculated that figure. The partnership wrote to the minority agency and requested a computation of damages, as required by state rules for civil legal actions. After a second request, the minority agency replied that they were working on the computation but lacked necessary information.
The majority agency produced spreadsheets showing that the minority agency was owed $67,317 in commissions, not $300,000. The minority’s expert witness arrived at a range of amounts closer to the $300,000 figure. However, the agency itself failed to provide the required computation of damages.
In the meantime, the majority agency countersued the minority, accusing them of interfering with the partnership’s business and asking the court to expel them from the partnership. Based on the minority’s failure to provide the required computation of damages, the majority asked the court to exclude all of the minority’s evidence of damages, and the court agreed in late 2016. The following summer the majority moved to have its own request for expulsion of the minority dismissed, since the evidence of damages was excluded. The court agreed to this as well, and the minority appealed.
The supreme court found that the minority agency had a clear duty under state law to provide a computation of the demanded damages, along with evidence supporting the computation. The same law prohibited the agency from using expert testimony when it failed to provide the computation unless the failure was harmless or for good cause. “Keystone’s failure impaired Inside’s ability to understand the nature and quantity of the damages Keystone claimed,” they wrote, “as well as the length, anticipated costs, and scope of the litigation being pursued.”
The court also upheld the dismissal of the expulsion order, finding that the dismissal did not affect the minority’s rights. They wrote, “The district court was well within its discretion in not forcing Inside to litigate a claim it no longer wished to pursue merely so that Keystone could compensate for its failure to manage its own claims.”
It is difficult to know whether the minority agency’s lawyers handled the computation of damages incompetently or if the agency was uncooperative. Either way, the agency proved to be its own worst enemy. They had certain rights under the partnership agreement, and they could have taken advantage of them without the lengthy, bitter litigation. Instead, they dragged out the proceedings and ended up losing. Not all partnerships will survive, and there are proper ways to handle their dissolution. Following state laws for producing evidence would seem to be fundamental. If a partnership is going to dissolve, both sides must be aware of what the law expects and do their best to meet those expectations.
