Sandvick v. LaCrosse
747 N.W.2d 519 (N.D. 2008)
In May 1996, Sandvick, Bragg, LaCrosse, and Haughton purchased three, 5-year oil and gas leases in North Dakota. The leases were known as the “Horn leases.” Empire Oil Company, owned by LaCrosse, held record title to the leases.
In November 2000, Haughton and LaCrosse purchased three oil and gas leases on the Horn property. These leases were referred to as the “Horn Top Leases” and were set to begin at the expiration of the initial Horn Leases.
Prior to purchasing the top leases, LaCrosse and Haughton twice offered to purchase Sandvick’s and Bragg’s interests in the Horn leases, but Sandvick and Bragg refused. Haughton testified he did not inform either Sandvick or Bragg that he and LaCrosse had purchased the top leases.
Sandvick and Bragg then sued LaCrosse and Haughton, claiming they breached their fiduciary duties by not offering Sandvick and Bragg an opportunity to purchase the top leases with them.
The District Court dismissed the complaint, holding that neither a partnership nor a joint venture existed.
(1) Did a partnership or a joint venture exist?
(2) If so, was a fiduciary duty breached?
(1) Yes, a joint venture.
I. Partnership or Joint Venture:
(1) A partnership did NOT exist.
The crucial elements of a partnership are
1. an intention to be partners,
2. co-ownership of the business, and
3. a profit motive.
Under comment 1 to § 202 of the Revised Uniform Partnership Act, a “business” is defined as “a series of acts directed toward an end.”
- Here, the parties were not co-owners of a business – they entered into the leases for a set period of time and their activity, rather than being a series of acts, was limited to that occurrence.
- Also, their intention was to try to sell the leases, and the parties were involved in other oil and gas related undertakings with various other parties.
(2) A joint venture DID exist:
For a business enterprise to constitute a joint venture, the following four elements must be present:
1. contribution by the parties of money, property, time, or skill in some common undertaking, but the contributions need not be equal or of the same nature;
2. a proprietary interest and right of mutual control over the engaged property;
3. an express or implied agreement for the sharing of profits, and usually, but not necessarily, of losses; and
4. an express or implied contract showing a joint venture was formed.
Here, the court held that because the leases were purchased out of the parties’ checking account funds in equal shares, they were titled in Empire Oil’s name rather than each of the parties’ names, and profits were going to be shared if the leases were sold, a joint venture did exist.
II. Breach of Fiduciary Duty
Principles of partnership law apply to the joint venture relationship – a partner owes duties of loyalty and care to the other partners.
The duty of loyalty:
a. To account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner in the conduct and winding up of the partnership business or derived from a use by the partner of partnership property, including the appropriation of a partnership opportunity;
b. To refrain from dealing with the partnership in the conduct or winding up of the partnership business as or on behalf of a party having an interest adverse to the partnership; and
c. To refrain from competing with the partnership in the conduct of the partnership business before the dissolution of the partnership.
Here, although the original Horn leases did not contain an extension or renewal provision, the top leases purchased by LaCrosse and Haughton were effectively extensions of the original Horn leases.
Because of this, they breached their fiduciary duties of loyalty by taking advantage of a joint venture opportunity when they purchased the top leases without informing Bragg and Sandvick.