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When a business partnership goes wrong, part I

A good partnership in a small business can be profitable and enjoyable for all partners. But a troubled partnership can lead to the courthouse, if things get bad enough. Though the following case does not take place in Illinois, it provides a good example of a business partnership where the partners do not have a meeting of the minds about their respective rights.

In February, a federal judge in Kentucky ordered a woman to pay her cousin $1 million from the proceeds of the sale of the beer distribution business they once were partners in. It was the latest chapter in a successful partnership that deteriorated into a lawsuit within just a few years.

The woman started the business, Beer House Distributors in 1985, but struggled to stay in business. Over the years, she received more than $500,000 in loans from her cousin, a real estate investor and economist at the International Monetary Fund.

Finally, the business began to become successful, by becoming one of the few companies to sell craft beer wholesale in the area. In 2001, the cousin formally agreed to forgive the debt he was owed, in exchange for a 34 percent stake in the business and a say in all business agreements worth at least $50,000.

At first, things seemed to go well. But court records indicate that the majority owner ignored her cousin’s shares. At one point, she paid herself dividends from the company, but did not provide any to the cousin. In 2011, she paid herself nearly $3 million in loans and “catch-up compensation” from the business.

Prior to that, the cousin suffered financial problems and asked the woman for repayment of his loans, their 2001 agreement notwithstanding. He ended up getting $400,000, but retained his stake in the beer distributor.

Then the woman sold the company without consulting the cousin, or even telling him. We will discuss what happened next in our next blog post.

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