Partnerships and Joint Ventures

Applicable Law

The law applicable to general partnerships and joint ventures is found in Business Organizations Code Title 4. The BOC defines a general partnership is an association of two or more persons or entities (all of which assume unrestricted personal liability for partnership debts and activities) who intend to carry on a business for profit. Each partner has equal rights in the management and conduct of the business of a general partnership.

Are joint ventures different? No. A “joint venture is governed by the same rules as a partnership.” Enterprise Prods. Partners, L.P. v. Energy Transfer Partners, L.P., 529 S.W.3d 531 (Tex.App.—Dallas 2017, pet. filed). “Generally a joint venture is governed by the [same] rules applicable to partnerships.” Smith v. Deneve, 285 S.W.3d 904, 913 (Tex.App.—Dallas 2009, no pet.). Joint ventures are a subset of partnerships. Many if not most joint ventures use, as their structural basis, a general partnership.

General Partnerships Versus Joint Ventures

Joint ventures, a popular vehicle for real estate investors, are a form of general partnership. Many if not most joint ventures use, as their structural basis, a general partnership. This approach will be discussed first. However, it is also possible to create a joint venture based on a limited partnership.

A joint venture differs from a general partnership in its narrower scope and focus (usually investment in a single property venture), but is otherwise governed by the law of partnerships. Smith v. Deneve, 285 S.W.3d 904, 913 (Tex.App.—Dallas 2009, no pet.). A partnership or joint venture is a form of contract, whether written or oral. Texas courts have historically supported the concept of freedom of contract, allowing the parties to make agreements and allocate risks as they see fit, so long as statutory and common-law principles are not violated in the process. El Paso Field Servs., L,P. v. MasTec N. Am., Inc., 389 S.W.3d 802 (Tex. 2012).

In contrast to a joint venture, the typical general partnership is created for the long term for a broad range of business purposes. The partners may contemplate engaging in various enterprises with the intention that the partnership will endure from one transaction to the next into the indefinite future. Most joint ventures, by contrast, have a specific task or time frame. They perform that task, net profits are distributed, and they are done. One example would be investors pooling resources and efforts in order to buy, rehab, and re-sell either a specific residential house or a commercial project—a flip, in other words.

The Entity Theory

Texas subscribes to the entity theory when it comes to general partnerships and joint ventures. Both are considered to be legal entities that may be sued and held liable for damages. A partnership is an entity distinct from its partners, and partnership property is not considered to be the individual property of the partners (BOC Sec. 152.056 and Sec. 152.101). A partner may use or possess partnership property only on behalf of the partnership. This ties in with the fiduciary duty of partners both to the partnership and to one another, specifically including a partner’s duty of loyalty (BOC Sec. 152.205) and duty of care (BOC Sec. 152.206). More on the partners’ fiduciary duty below.

“A joint venture is a distinct legal entity. This relationship is similar to a partnership, but the principal distinction is that a joint venture is usually limited to one particular enterprise. A joint venture must be based on an agreement, either express or implied.” Varosa Energy, Ltd. v. Tripplehorn, No. 01-12-00287-CV (Tex.App.—Houston [1st Dist.] 2014, no pet.). The agreement must provide for the sharing of both gains and losses. Arthur v. Grimmett, 319 S.W.3d 711 (Tex.App.—El Paso 2009, pet. denied). “A joint venture has four elements: (1) a community of interest in the venture; (2) an agreement to share profits; (3) an agreement to share losses; and (4) a mutual right of control or management of the enterprise.” Smith v. Deneve, cited above.

Real Property Ownership

Because of the entity theory, when real property is titled in the name of a duly-established partnership, it is the partnership and not the partners who own the real property assets. In such a case, a partner’s interest in the partnership is personal property, not an undivided interest in the realty.

An interest in a partnership that deals with real estate does not, by itself, represent an interest in property or act as a transfer of that property. For that, a deed is required. Sewing v. Bowman, 371 S.W.3d 321 (Tex. App.—Houston [1st Dist.] 2012, pet. dism’d].

DOES A PARTNERSHIP EXIST?

Criteria for a Partnership

Whether or not a partnership exists is the subject of much litigation. A plaintiff typically alleges the existence of a partnership in order to invoke the fiduciary duty responsibilities of a partner—or, more specifically, how the defendant partner in question may have violated that duty by misappropriating funds or assets.

BOC Section 152.051(b) provides that a partnership exists when two or more persons associate together for the purpose of carrying on a business for profit, regardless of whether or not they actually intend to create a partnership or use the term partners. All sorts of circumstantial information can be used to make this determination, even the bankruptcy schedules later filed by the parties after the business has failed. Palasota v. Doron, No. 10-16-00326-CV, 2018 WL 2054511 (Tex.App.—Waco May 2, 2018, no pet. h.).

Unfortunately, partnerships and joint ventures are often undertaken informally, without a written agreement, so doubt can arise as to whether, legally speaking, a partnership has been formed at all. BOC Section 152.052 sets forth rules for determining if a partnership has been created (five factors to which reference is frequently made in partnership case law):

(1) receipt or right to receive a share of profits of the business;

(2) expression of an intent to be partnership in the business;

(3) participation or right to participate in control of the business;

(4) agreement to share or sharing: (a) losses of the business; or (b) liability for claims by third parties against the business; and

(5) agreement to contribute money or contributing money or property to the business.

No one of the above factors is dispositive. They are also non-exclusive, meaning that not all factors need be demonstrated in any particular case. Just “one factor standing on its own can be strong enough to support the existence of a partnership”—even an oral general partnership. Black v. Redmond, 709 Fed. App. 766 (5th Cir. 2017). The existence or non-existence of a partnership thus depends on the totality of the circumstances.

The most important of the [five] factors are sharing profits and participating in the control of the business. Big Easy Cajun Corp. v. Dallas Galleria Ltd., 293 S.W.3d 345 (Tex.App.—Dallas 2009, pet. denied).

In contrast with the common law, the BOC does not specifically require an intention to share profits or losses, although this is an important evidentiary factor in determining whether or not a partnership exists. Ingram v. Deere, 288 S.W.3d 886, 895-96 (Tex. 2009).

Mere Collaboration is Insufficient

A true legal partnership must rise to a higher level than mere casual collaboration. A Houston appeals court decision describes a situation where a partnership was not found to exist: “The parties did not associate for the purpose of carrying on a single business in which they each held an ownership interest; instead, the four separate [parties] agreed to work together for their mutual, but individually realized, benefit. Such coordinated business efforts do not, alone, create a partnership under Texas law. The parties did not share profits, losses, or liabilities.” Further, the court failed to find any evidence that the businesses in question ever actually intended to be partners in the legal sense—an important and essential element. Westside Wrecker Serv. v. Skafi, 361 S.W.3d 153, 173 (Tex.App.—Houston [1st Dist.] 2011, pet. denied).

Inadvertent Partnerships

A partnership should be established deliberately and correctly with a comprehensive written partnership or joint venture agreement. One does not want to casually slide into an inadvertent partnership that could have unfortunate consequences in terms of liability.

One should not, for instance, casually refer to one’s business associates as partners unless they are in fact partners in the legal sense. You may be creating an unintended partnership. Also, if an associate of yours falsely represents to others that a partnership exists, and those others reasonably rely on that representation to their detriment, then a partnership (partnership by estoppel) may be created. Fleishman-Hillard, Inc. v. Oman, No. SA-11-CA-921-H, 2012 WL 13028770 (W.D. Tex. Nov.21, 2012).

THE PARTNERSHIP AGREEMENT

Written Versus Oral Partnerships

A general partnership agreement may be oral or written, although it is certainly more prudent for real estate investors to reduce their agreement to writing.

A partnership agreement consists of “any agreement, written or oral, of the partners concerning a partnership” (BOC Sec.151.001(5)). To the extent that a partnership agreement does not otherwise provide, the BOC governs. Deere v. Ingram, 198 S.W.3d 96,101 (Tex.App.—Dallas 2006).

Fundamentally, partnership agreements are contracts between the partners, and the law applicable to the construction of contracts applies unless the BOC provides to the contrary. Sensible investors will insist on having a clear and comprehensive written partnership agreement that does not require the intervention of a court to interpret and apply it. Exxon Corp v. Breezevale Ltd., 82 S.W.3d 429, 443 (Tex.App.—Dallas 2002, pet. denied).

There’s an old saying about marriage that is equally applicable to partnerships: Going in, it’s all about love. Coming out, it’s all about the money.

Minimal Contents of a Partnership Agreement

The first step in creating a sound partnership or joint venture is to draft a clear written agreement. The second step is usually to convey the subject property into it. Certain core issues are key:

What are the respective percentage interests of the partners?

How will the partnership be managed? By majority vote? Will some issues require unanimous vote? Will there be a managing partner? What are the limits of his authority? What are the specific actions and duties required of each partner?

What about the investment property or project itself? Are there parameters for its rehabilitation and resale that need to be stated?

What will be the term (length) of the agreement? Presumably it will end when the project is finished and net proceeds are distributed, but this needs to be spelled out.

How will funds be handled? Who will sign checks? What about additional, future contributions if necessary?

Will there be loans as well as capital contributions by the partners? What about loans made by banks or hard money lenders? Promissory notes may need to be authorized and executed.

What about meetings of the partners? What constitutes a quorum? Who controls the agenda?

Suppose a partner wants to sell his interest or cash out? Suppose a partner dies? Will remaining partners have a right of first refusal to buy the decedent’s interest? On what terms?

What happens if a partner’s spouse files for divorce? Will remaining partners unwillingly wind up in business with the ex?

Every contract or agreement should have a default paragraph. What constitutes a default by a partner? If default occurs, what is the procedure for expelling a defaulting partner?

A good partnership agreement should address the issue of dispute resolution. Will mediation be required before one partner may sue another? That is usually good policy.

Finally, never underestimate the “miscellaneous” paragraph at the end of a contract. It deals with such issues as amending the agreement, which law applies and where venue will be located if a suit is filed, and so forth.

A complete partnership agreement will address all of these items and more, which is not to say that partnership agreements need to be unduly complex, long, or intimidating. Consult an attorney knowledgeable in the field in order to draft a partnership agreement and before signing one. Never use forms off the Internet for this purpose.

Good partnership agreements also include provisions by which they can be amended. Partnerships, like marriages, evolve over time and there should be an express mechanism in the partnership agreement that allows for amendments.

LIABILITY OF PARTNERS

Partnership Debts

Even though a partnership is a distinct legal entity, each general partner nonetheless remains jointly and severally liable for all debts and obligations of the partnership. Personal liability is not automatic, however, at least not if the partnership alone is the object of a lawsuit. A judgment against a partnership as an entity must be accompanied by a judgment against the individual partners (named separately as defendants) in order to be enforceable against the partners’ individual non-partnership assets. American Star Energy and Minerals Corporation v. Stowers, 457 S.W.3d 427 (Tex. 2015). See also BOC Section 152.306, which requires that a judgment against a partnership must go unsatisfied for 90 days before a creditor may proceed against an individual partner and his assets.

Liability for the Actions of other Partners

In theory, a general partnership (and the individual partners) are liable only for actions of a partner when those actions fall within the ordinary course of business of the partnership or are authorized by the partnership (BOC Sec.152.303).

Two things need to be considered in this context: first, the fact that real estate investing involves a truly broad range of activities, which means that almost anything done on or about an investment property, or even indirectly affecting the property, can conceivably be considered as within the partnership’s ordinary course of business; and second, trial courts (in their capacity as finders of fact) have significant flexibility in interpreting any given set of circumstances before them, a level of flexibility to which appeals courts tend to defer.

Take an admittedly extreme example: suppose your managing partner, unbeknownst to you and the other partners, opens a shady massage parlor on the premises. Are you liable for the consequences (at least the civil ones)? The answer is almost certainly yes, given that the actual use of the property is something that is definitely the business of the entity that owns it. This is another good reason to enter into partnerships, if at all, in the capacity of an entity that possesses a liability barrier, and not in your personal name.

In Texas, a plaintiff must first secure a judgment against the partnership before pursuing actions against the individual partners. American Star Energy and Minerals Corp. v. Stowers, 457 S.W. 3d 427 (Tex. 2015) referencing Bus. Orgs. Code Sec.152.306.

Veil-Piercing and Personal Liability

Can the veil of a general partnership be pierced? The question is based on a misunderstanding of the law since a general partnership or joint venture has no veil to pierce. Shoop v. Devon Energy Prod. Co., L.P., No. 3:10-cv-00650-P, 2013 WL 12251353 (N.D. Tex. Mar. 29, 2013).

Piercing and alter-ego-type allegations are “inapplicable with regard to a partnership because there is no veil that needs piercing. . . . Pinebrook Props., Ltd. v. Brookhaven Lake Prop. Owners Ass’n, 77 S.W.3d 487, 500 (Tex.App.—Texarkana 2002, pet. denied). The partners in a general partnership or joint venture are potentially jointly and severally liable for all of it, which reiterates the importance of engaging in a partnership only in the capacity of an LLC or corporation.

Veil-piercing in the case of limited partners is a slightly different case, but is generally rejected in Texas because a “person doing business with [a limited partnership] always has recourse against [the] general partner. . . .” Peterson Grp. v. PLTQ Lotus Grp., 417 S.W.3d 46, 56-57 (Tex.App.—Houston [1st Dist.] 2013, pet. denied).

The presence of fraud or misrepresentation can affect the outcome of any court case, but especially ones involving piercing. As is true with LLCs, one should not rely on a limited partnership to limit personal liability if one utilizes the entity to commit actual fraud. “As a general matter, a limited partnership is an entity separate and distinct from its partners, with separate, distinct liabilities and obligations. Nevertheless, Texas law allows the separateness of the entity to be ignored if the limited partnership is used as a straw man for the purposes of obtaining an impermissible result [by means of actual fraud] under Texas law. . . .” In re. Sewell, 413 B.R. 562, 571-72 (Bankr.E.D.Tex. 2009).

Even so, “limited partners are generally not responsible for the limited partnership’s obligations unless they take some action to accept or subject themselves to such liability”—such as interfering with management or control of the business. Peterson Grp. v. PLTQ Lotus Grp., 417 S.W.3d 46, 56-57 (Tex.App.—Houston [1st Dist.] 2013, pet. denied).

FIDUCIARY DUTIES OF
PARTNERS AND JOINT VENTURERS

Partners are Fiduciaries

BOC Section 152.205 describes the general partners’ duty of loyalty to one another. Joint Venturers operating in the context of a general partnership are, to use the legal term, fiduciaries, which requires honest and honorable conduct with respect to both the partnership enterprise and the other partners. “As a fiduciary, a partner is under an obligation not to usurp opportunities for personal gain, and equity will hold a partner accountable to the partnership if he does so. . . . Thus, the [general] partnership relation imposes upon all partners an obligation of the utmost good faith, fairness and honesty in the dealings with each other with respect to matters pertaining to the partnership business.” In re. Leal, 360 B.R. 231, 235-6 (Bankr.S.D.Tex. 2007).

If the totality of circumstances supports it, courts will go to considerable lengths, first to find that a partnership exists where none was expressly stated, and then to find that one partner breached his fiduciary duty to the other, all resulting in an award of actual and exemplary damages plus attorney’s fees. Harun. v. Rachid, No. 05-16-00584-CV, 2018 WL 329292 (Tex.App.—Dallas Jan. 9, 2018, no pet. h.).

Different rules apply to partners in limited partnerships so long as the limited partner in question does not change hats and exercise operating control over the LP business, since that crosses a legal boundary that has multiple implications. No fiduciary duty exists in the case of a limited partner simply because he is a limited partner. Strebel v. Wimberly, 371 S.W.3d 267, 281 (Tex.App.—Houston [1st Dist.] 2012, pet. denied).

Statute of Limitations in Fiduciary Cases

There is a four-year statute of limitations for breach of fiduciary duty (Civ. Prac. & Rem. Code Sec. 16.004(a)(5)). In computing the duration of the statute, fiduciary cases usually involve applicable of the discovery rule (the date the harm was or should have been discovered) rather than the legal injury rule (the date of the damaging event). The reason is that “in the fiduciary context, the nature of the injury is presumed to be inherently undiscoverable because fiduciaries are presumed to possess superior knowledge.

So a person to whom a fiduciary duty is owed may be unable to inquire into the fiduciary’s actions or may be unaware of the need to do so. Accordingly, even if inquiry is made, facts which might ordinarily require investigation likely may not excite suspicion where a fiduciary relationship is involved.” Marcus & Millichap Real Estate Investment Services of Nevada v. Triex Texas Holdings, LLC, No. 21-0913 (Tex. 2023).

LIMITED PARTNERSHIPS

Law Applicable to LPs

Limited partnerships are governed by BOC Title 4, Chapter 153, but also Chapters 151, 153 and 154 and Title 1, to the extent applicable. There are certain critical differences between general and limited partnerships.

Firstly, a limited partnership is a registered entity, meaning that, like a corporation or an LLC, it must pay fees to file a certificate of formation which becomes public record (Accordingly, there is no such thing as an oral limited partnership.). An LP is also subject to annual reporting and fees. A general partnership is burdened by none of this and has the ability to operate privately.

Secondly, different operational rules apply. In a general partnership, all partners may take part in the enterprise, and all partners have full, unrestricted liability. In a limited partnership, only the general partner may engage in management. In exchange for giving up control, the limited partners are held liable only to the extent of their respective contributions to the LP.

The general partner is the only member to assume unrestricted liability. For this reason, the general partner is a corporation or LLC with minimal assets established specifically for the purpose of managing the LP and nothing else.

Typical LP Structure

Limited partnership tend to be more common in commercial transactions, but their usefulness in other investment arenas should not be overlooked. An LP is an excellent way to bring in a passive money partner who is cautious about incurring liability beyond the amount invested.

In the most basic form of a limited partnership (two partners), the general partner owns a 1% interest and a limited partner owns a 99% interest. Since management is the sole province of the general partner, LP agreements tend to be heavy in their emphasis on the powers and duties of the general partner.

There may of course be more partners with different percentages of ownership. If there is more than one general partner (and this is allowed) then one of them should be designated the managing partner.

Limited partners may be any sort of entity but it is recommended for asset protection purposes that they be entities, not individuals.

TENANT-IN-COMMON ARRANGEMENTS

The Typical TIC

TICs are often written up as general partnerships but are nonetheless focused on a specific deal, often a larger project such as an apartment complex or a strip center. A large number of TICs seem to come out of California.

TIC promoters seek out investors, usually affluent novices, who are packaged together in their individual and personal capacities. In other words, these newbie investors do not form an LLC or corporation to act on their behalf in the deal; they sign the TIC agreement individually and often go on to personally guarantee a seven or eight-figure note to a bank. If the value of the investment (often inflated to begin with in order to provide up-front fees for the promoters) declines, the results are usually unfortunate for the investors.

Real estate lawyers are accustomed to counseling TIC investors who have awakened to find that a lender suddenly seeks to hold them individually liable for a very large sum. Few consulted an attorney before signing up with the TIC. Many are otherwise smart and successful professionals who should have known better.

When considering joining any kind of investment partnership, it is almost always better to do so by means of a personal LLC rather than individually.

SYNDICATED PARTNERSHIP INVESTMENTS

Doctor Deals

These are generally a multi-layered combination of LLCs and at least one limited partnership. They are designed by their promoters to offer affluent professionals a passive investment that also protects the investors from personal liability.

Certain elements are common: a real estate project is usually at the core—examples are a hospital or surgery center, an apartment complex, a shopping center, or a development of townhomes. The property or project is either not yet under contract or it may be (sort of) under contract but with a variety of exits available if necessary up-front capital is not raised.

Well-documented presentations by the promoters will include slick multi-media, an optimistic pro forma projecting earnings, a copy of the property purchase contract, a survey, an appraisal, and a title commitment. Also available will be legal documents relating to the purchase of units in an already-formed entity such as an LLC. It is this LLC that the passive investors will be investing in. They are usually asked to sign a subscription agreement that commits them to purchase a portion of the investment LLC membership that has been blocked off for passive investors.

All of these documents need to be scrutinized closely. A frequent commonality is that the portion of the investment LLC or other entity that has been dedicated to outside investors is a minority interest (say, 40% of available units) while the remaining 60% of units are owned (indirectly) by the promoters. The key point here is that the passive investors will always be minority owners with no voice or control.

The promoters’ ownership in the investment LLC will be indirect, meaning they will not own membership interest in their personal names—only through an intermediary entity as an additional shield against personal liability. The total aggregate interest in the investment LLC owned by the promoters’ various personal LLCs will thus be, per this example, 60%. The result is that the physician investors, even if they combined all their interests, could never control (or even influence) any decisions of the investment LLC.

Not a Real Estate Investment

The layers often continue. It is very unlikely that the investment LLC will own the property or project directly. There will likely be at least one other entity, perhaps two, in the chain before reaching an entity that actually owns the real estate. In other words, the passive investors are not investing in a real estate project; they are investing in an entity that will have only an indirect interest.

The typical doctor deal is NOT a real estate investment, no matter how it is pitched by the promoters. It is a financial investment designed to deliver a predicted rate of return.

The good news for the passive investors is that they are well-sheltered from personal liability relating to the project’s operations, particularly if they form their own individual LLCs as vehicles for their participation. The bad news is that they are at the bottom of the food chain when it comes to any distributions or returns. A careful examination of the documents will usually reveal that the promoters not only control the amount and timing of distributions (if any), they also have the right to pay themselves first—not only when it comes to distributions but also as to salaries, commissions, fees, and other forms of compensation available only to them.

Cash Calls

In the above scenario, few of the physician investors ever ask to see the company agreement of the investment LLC. They are therefore unaware that it likely provides for arbitrary cash calls if the project runs short of money. The investors may be called upon to write additional checks—so a doctor investing (say) $100,000 cannot be assured that that amount will be the total financial commitment. A cash call may compel the investors to add more funds. If the they do not comply, the penalty could be a forced dilution of interest or even expulsion from the investment LLC (with no refund, of course). It’s all in the fine print.

The Promotors Win

It is certain that the promoters will have bullet-proofed themselves against liability. The legal documents will conspicuously lack affirmative representations or warranties; in fact, such representations and warranties will be extensively and repeatedly disclaimed throughout. If the project fails to generate a positive return for the doctors, they will have no meaningful legal recourse against any promoter or entity involved. The LLC in which they invested will be an insolvent dead end. The promoters will be legally unreachable.

What do promoters contribute to all of this? Not cash. Their contribution is the elaborate legal structure and the prospective purchase of an asset that may or may not be fully under signed contract. There are start-up costs, of course, but these soft costs are minimal and easily written off.

Going forward, the promoters get the most substantial benefit of all: they get paid first. Really large projects organized along these lines, even if they fail, can still make the promoters rich. Occasionally, the doctors may even make a little money.

EVALUATING A PARTNERSHIP INVESTMENT

Evaluating The Real Estate Product

It goes without saying that basic due-diligence is required on the investment and its numbers. What is the investment product being sold? Are the fundamentals underlying the real estate, the management of the project, and the anticipated ROI solid? This inquiry is essential and most everyone knows to do this. Unfortunately, that is where most investors stop.

Evaluating The Legal Product

In not delving deeper (beyond the project numbers) into the legal structure of the investment and its associated documentation, investors miss the essential second question: What is the legal product associated with this investment? There are a couple of parts to this question:

(1) Firstly, what specific documents are involved and are they of first-class quality? Are they serious legal work or a lot of random contract clauses amateurishly cobbled together from the Internet?

(2) Secondly, what reputable lawyer or law firm created the entity structure and drafted the documents? Do these attorneys actively and openly stand behind the project (at least in a legal sense) or is the law firm’s name nowhere to be found? Is the promoter’s attorney available for the investor’s attorney to call and ask questions?

The visibility (presence or absence) of a quality attorney standing behind a project and its promoter can be quite telling. As much as anything else, it can provide an indication as to the legitimacy and trustworthiness of both.

Good lawyers and law firms, in order to protect their reputation and liability, tend to look into investment promoters before allowing the firm’s name to be used in association with the project. The absence of this should be a red flag if not an outright disqualifier.

Examine the Structure for a Firewall

Anytime an investor is considering a transactional structure, one of the first questions should be Where is the firewall? Where is the liability barrier that is going to protect my personal assets?

Neither a general partnership nor a joint venture based on a general partnership has a liability barrier. There is no inherent firewall as is the case with an LLC. This is a distinct disadvantage in a business as litigation-prone as real estate investing. When it comes to potential liability and protection of personal assets, there is little difference between a partnership format and simply owning assets in one’s individual name.

A firewall should be inserted into the structure somewhere. General partnerships and joint ventures should almost always be structured so that the partners are LLCs or corporations, not individuals.

Document Review

Lawyers routinely receive requests to look over proposed documents for a promoted investment. Often these consist only of a prospectus, or perhaps a marketing plan with impressive graphs and tables but without any substantive underlying legal documents that the client will be asked to sign. There may be no mention of the law firm that prepared these documents or is standing behind the promoter. In such situations, caution is in order for both the investor and the investor’s attorney. A mere review of the prospectus is insufficient.

Before signing up for any promoted investment vehicle or project, one should insist on seeing (well in advance) all documents that the investor will be asked to sign.

CONCLUSION

Partnering with Family and Friends

In concluding this chapter, an inevitable question must be asked: why not partner with friends and family members? They know you best, after all.

All lawyers can tell stories of clients who propose doing a transaction with a brother-in-law, or perhaps borrowing money from parents, and declare that no partnership agreement is necessary because the other party is family or a close friend. In fact, the reverse is true. In transactions involving family and friends it is more important to reduce the agreement to a signed writing, not less so. Anyone who has witnessed the agony of intra-family litigation knows this to be true.