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Steeby vs Fial

In: Business and Management

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Tort Liability Charles Fial and Roger J. Steeby entered into a partnership called Audit Consultants to perform auditing services. Pursuant to the agreement, they shared equally the equity, income, and profits of the partnership. Originally, they performed the auditing services themselves, but as business increased, they engaged independent contractors to do some of the audit work. Fial’s activities generated approximately 80 percent of the partnership’s revenues. Unhappy with their agreement to divide the profits equally, Fial wrote a letter to Steeby 7 years later, dissolving the partnership.
Fial asserted that the clients should be assigned based on who brought them into the business. Fial formed a new business called Audit Consultants of Colorado, Inc. He then terminated the original partnership’s contracts with many clients and put them under contract with his new firm. Fial also terminated the partnership’s contracts with the independent-contractor auditors and signed many of these auditors with his new firm. The partnership terminated about 11 months after Fial wrote the letter to Steeby. Steeby brought an action against Fial, alleging breach of fiduciary duty and seeking a final accounting. Who wins? Steeby v. Fial, 765 P.2d 1081, Web 1988 Colo.App. Lexis 409 (Court of Appeals of Colorado)
In the Steeby vs. Fial case Roger Steeby is the plaintiff and Charles Fial is the defendant. Steeby and Fial formed a partnership at will to perform auditing services.
Pursuant to the agreement, equity, income, and profits of the partnership were shared equally. In the infancy stage of the partnership they conducted audit services themselves. As business success started to trend upwards they decided to employ independent contractors (auditors) to assist in performing audit service. Eventually the auditors were carrying out the audits while the partners focus shifted to supervision and prospecting new clients.
Fial’s ability to solicit new business was superior and in fact generated about 80% of revenue while Steeby was responsible for the other 20%. Unhappy with the current profit sharing arrangement Fial issued a letter to Steeby dissolving the partnership. The letter claimed since there was “no common property and no common liabilities," the separation should "should merely involve the assignment of accounts." Fial believed the partners would be entitled to the profits brought in by the clients they successfully solicited new business from. Fial proceeded to terminate the contracts of the auditors and the partnership clients. He then signed the clients to a new firm he formed Audit Consultants of Colorado, he also hired many of the auditors previously employed to work under his new firm. The partnership was officially terminated 11 months from the time Fial issued his letter.
Steeby filed an action against Fial for breach of the partnership agreement and for a final accounting of all partnership assets. The trial court determined that Fial had violated the partnership agreement by breaching a fiduciary duty he owed to Steeby. This a duty where one is not to act a way having conflicting interests. The first manner in which Fial had breached his fiduciary duty was by terminating the auditors, therefore dispersing partnership assets. He also terminated contracts with partnership clients, and signed the auditors to work on audit engagements that belonged to the partnership under his new firm. A receiver was appointed by the court a to issue a final accounting and distribution of all partnership property and assets (

Fial disagrees with the court’s ruling on his breach of fiduciary duty during prior to partnership termination. However partners are fiduciaries to each other. Partners share a fiduciary relation to one another in all matters concerning the partnership. The “partnership relation is one of trust, loyalty and confidence. It imposes upon the partners the highest standards of good faith, the duty to act for the common benefit of all partners in all transactions relating to the business and the duty to refrain from taking any advantage of one another by the slightest misrepresentation, concealment, threat or adverse pressure of any kind” ( There should also be full disclosure and continuous obligation amongst partners. The issue is did Fial act in good faith as a fiduciary?
The dissipation of a business or partnership in this case usually goes through proceeds through three steps which are: dismantling: dissolution, winding up, and termination. Dissolution occurs when there is a change in ownership, this results in new accounting entity (Delaney, Borke, Baker, McDougard, Simon & Smith, 2000 p.665). The dissolution does not terminate the partnership immediately, rather it goes through the wind up stage until are affairs have been resolved. Upon the completion of winding up, the partnership is thereby terminated. In the wind up stages Steeby and Fial agreed that the auditors would be told that the partnership was being dissolved but that they were to continue their work on partnership accounts (
Fial’s actions of contracting the auditors and clients of the partnership on behalf of the his new firm violated the his duty of loyalty. The courts had correctly determined that Fial had breached his fiduciary duty to Steeby by not disclosing the termination of the contracts with the auditors and partnership client. He also renegotiated the contracts for his own personal gain.
Following the dissolution of a partnership, both partners continue to have a fiduciary duty to the other partner that continues until the partnership assets have been divided and the liabilities have been satisfied. A partner should not engage in activities any action with respect to unfinished partnership business which leads to purely personal gain ( Also, a partner completing unfinished partnership business cannot extinguish the rights of the other partners in the dissolved partnership by the tactic of entering into a "new" contract to complete such business ( The court was correct in its initial ruling determining that Fial had breached a fiduciary obligation by dissipating the assets of the partnership and by refusing to account for their value during the period of winding up (www.
Fial contends that, even if he breached a fiduciary duty, Steeby suffered no harm, and thus, the trial court ruled incorrectly by calculating and awarding damages. The courts concluded the only fair way to asses Steeby's lost profits was to assign a value to the auditors and existing partnership clients as partnership assets ( The court ruling was all of the auditors work with partnership clients and all new contracts entered into under the partnership umbrella were partnership assets. On the contrary court ruled all contracts entered into with new clients who were not initial clients of the partnership would not be considered a partnership asset (

Delaney, P. R., Baker, R. E., Borke, J. C., McDougald, J., Simon, J. R., & Smith, S. (2000). Wiley CPA Examination Review: Financial Accounting and Reporting, Business Enterprises. Wiley…...

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