Business Asset Misappropriation: When a Departing Partner Takes More Than Their Share

Partnership dissolutions and agency breakups are among the most contentious business disputes I handle. After thirteen years of practicing business law, I’ve seen the pattern repeat dozens of times: partners who were once friends and collaborators become adversaries fighting over who owns what, who’s entitled to which clients, and who took assets that belonged to the business. The emotional intensity of these disputes often exceeds the financial stakes because people feel betrayed by someone they trusted.

The scenario typically unfolds like this: your business partner announces they’re leaving to start a competing venture. Within days or weeks, you discover that client lists have disappeared, the company’s best employees have been recruited away, intellectual property has been copied, business opportunities have been diverted, and sometimes even cash or physical assets have gone missing. Your former partner claims they’re only taking what’s rightfully theirs, but you know they’ve crossed the line from legitimate departure to outright theft.

The legal term for this conduct is “business asset misappropriation,” and it encompasses everything from outright theft of physical property to more subtle forms of wrongdoing like misusing confidential information, diverting corporate opportunities, or breaching fiduciary duties owed to the partnership. The challenge is that the line between what a departing partner can legitimately take and what constitutes misappropriation is often blurry, especially when partnership agreements are poorly drafted or when no written agreement exists at all.

This article breaks down the legal framework governing partner departures, identifies common forms of asset misappropriation, explains how to detect and document wrongdoing, and provides strategic guidance on using demand letters and legal action to recover misappropriated assets and prevent ongoing harm. Whether you’re dealing with a partner who’s actively stealing from the business or trying to figure out if your suspicions justify action, understanding the legal landscape is essential to protecting your interests.

Understanding Fiduciary Duties in Partnerships and Agencies

The foundation of every asset misappropriation claim against a departing partner is the concept of fiduciary duty. Partners in a general partnership, members of an LLC, and principals in an agency all owe each other fiduciary duties under California law. These duties continue until the partnership is formally dissolved and wound up, not just when someone announces their intention to leave.

California’s Revised Uniform Partnership Act codifies two core fiduciary duties: the duty of loyalty and the duty of care. The duty of loyalty requires partners to account to the partnership for any benefit derived from partnership business or property, refrain from competing with the partnership, and avoid conflicts of interest. The duty of care requires partners to refrain from engaging in grossly negligent or reckless conduct, intentional misconduct, or knowing violations of law.

The duty of loyalty is particularly important in departure scenarios. A partner cannot use partnership property, information, or opportunities for personal benefit. They cannot divert business opportunities that belong to the partnership to themselves or a new venture. They cannot compete with the partnership while still a partner. They cannot secretly prepare to compete while pretending to remain committed to the partnership’s success.

In practice, the line between permissible preparation to compete and impermissible competition becomes critical during departures. California law allows partners to make preparations to compete before actually leaving, but those preparations cannot involve using partnership assets, diverting partnership opportunities, or breaching confidentiality obligations. You can line up office space for your new venture, but you can’t copy the client database. You can talk to potential business partners, but you can’t recruit employees away while still drawing a partnership salary. You can plan your competitive strategy, but you can’t start taking clients before you’ve actually left.

The LLC operating agreement or partnership agreement can modify these default fiduciary duties to some extent, but California law limits how much they can be waived. You cannot eliminate the duty of loyalty entirely or the obligation to act in good faith and fair dealing. Many agreements attempt to address departure scenarios by specifying what assets the departing partner can take, what notice must be given, and what restrictions apply post-departure. These contractual provisions layer on top of the baseline fiduciary duties, creating a framework for evaluating whether asset misappropriation has occurred.

One critical point that many partners misunderstand: your fiduciary duties continue even after you announce your departure until the partnership interest is actually terminated and the business relationship is wound up. Announcing “I’m leaving in 30 days” doesn’t mean you can spend those 30 days plundering partnership assets, competing for clients, or positioning yourself for competitive advantage. You’re still a fiduciary until you’re actually out.

Common Forms of Business Asset Misappropriation

Asset misappropriation takes many forms, from obvious theft to subtle breaches that are harder to detect. Understanding the common patterns helps you identify wrongdoing early and take action before the damage becomes irreversible.

Client Lists and Customer Information

The single most common asset misappropriation scenario I see involves client lists and customer databases. In service businesses, agencies, and professional practices, the client relationships are the core business asset. A departing partner who takes the client list effectively takes the business.

The legal status of client information is nuanced. If the partnership built the client relationships through collective effort, investment, and partnership resources, those relationships belong to the partnership, not to any individual partner. The fact that one partner had primary client contact doesn’t make those clients “their” clients personally. However, if a partner brought existing clients into the partnership and maintained separate relationships with them throughout the partnership, there’s an argument those clients remain personal to that partner.

Most misappropriation scenarios involve the departing partner copying the entire client database – names, contact information, project histories, pricing information, preferences, and relationship notes. They then systematically contact these clients, often before formally leaving, to announce their new venture and encourage clients to follow them. This is classic misappropriation because it uses partnership property (the database and information) for personal competitive advantage.

Some partners try to be clever by not physically copying the database but instead memorizing client information or taking notes about key clients. This doesn’t avoid liability. The information itself is confidential partnership property, and using it to compete violates fiduciary duties regardless of how the information was extracted. The partnership owns the information content, not just the physical database.

California courts have consistently held that client lists compiled through substantial time, effort, and expense by a business are protectible trade secrets. Even if individual client names might be discoverable through public sources, a compiled list with detailed information about preferences, pricing, project history, and relationship dynamics has independent value and deserves protection. A departing partner cannot claim “I could have found this information myself” when they actually used the partnership’s compiled information.

Intellectual Property and Work Product

Creative agencies, consulting firms, and professional service businesses produce intellectual property as their core product. When partners split up, fights over who owns what IP are almost inevitable. Did the logo designs belong to the partnership or to the designer personally? Who owns the software code written during the partnership? What about the strategic frameworks, methodologies, and processes developed collaboratively?

The default rule is that IP created using partnership resources, during partnership time, and for partnership purposes belongs to the partnership, not to the individual creator. This is true even if one partner did the creative work while others handled business development or operations. The partnership paid for the time and resources that created the IP, so the partnership owns it.

Misappropriation occurs when a departing partner takes copies of work product, templates, frameworks, designs, code, or other IP to use in their new competitive venture. I’ve seen partners download the entire shared drive on their last day, taking years of collective work product. I’ve seen developers copy proprietary code repositories. I’ve seen consultants take methodology decks and strategic frameworks developed through partnership resources.

The partner usually justifies this by claiming they contributed substantially to creating the IP, so they should be able to use it. But contribution doesn’t equal ownership. If the IP was created as part of partnership business, it belongs to the partnership. The partner’s contribution entitles them to their share of partnership distributions and their portion of partnership value upon departure, not to unilateral appropriation of partnership assets.

Trade secrets law provides additional protection. If the partnership took reasonable measures to keep information confidential (access controls, non-disclosure agreements, password protection), and the information derives economic value from not being generally known, it qualifies as a trade secret. Misappropriating trade secrets provides a basis for injunctive relief and damages separate from breach of fiduciary duty claims.

Financial Assets and Business Opportunities

Sometimes asset misappropriation is straightforward theft of money. I’ve handled cases where departing partners wrote themselves unauthorized bonus checks, transferred business funds to personal accounts, charged personal expenses to the business credit card, or “borrowed” from business accounts without authorization or repayment.

More subtle financial misappropriation involves diverting business opportunities that belong to the partnership. If a client approaches the partnership for a new project and a departing partner steers that project to their new venture instead, that’s misappropriation of a corporate opportunity. The opportunity belonged to the partnership, and the partner had a fiduciary duty to pursue it for the partnership’s benefit, not divert it for personal gain.

Revenue diversion is particularly problematic. I’ve seen partners continue collecting payments from partnership clients after departure but keep the money for themselves rather than remitting it to the partnership. Or they’ll delay finalizing partnership projects until after they leave, then complete the work through their new entity and keep the revenue, even though the work was substantially performed while they were still partners.

Diversion of business opportunities can happen before departure too. A partner learns about a valuable project opportunity but keeps it secret, stalls partnership involvement, and plans to pursue the opportunity once they leave. This violates the duty to disclose material information to co-partners and the duty not to divert partnership opportunities for personal benefit.

Equipment, Supplies, and Physical Assets

Physical asset misappropriation is the most obvious form of wrongdoing but still happens regularly. Departing partners take computers, cameras, equipment, furniture, vehicles, inventory, or supplies that belong to the partnership. Sometimes they claim confusion about what was partnership property versus personal property. Other times they just figure the other partners won’t notice or won’t make an issue of it.

The distinction between personal and partnership property matters. If a partner brought equipment into the partnership and it remained their personal property (documented in the operating agreement or through receipts and records), they can take it when they leave. But equipment purchased with partnership funds, even if primarily used by one partner, belongs to the partnership.

I’ve seen partners clean out the office on a weekend, taking everything from computers to coffee machines. I’ve seen them transfer domain registrations to personal accounts, cancel partnership software subscriptions and sign up for new accounts in their own name using the same vendor relationships, and even redirect business mail to their new address. All of this constitutes misappropriation of partnership assets or interference with partnership business.

Employee and Contractor Solicitation

While employees and contractors aren’t “property” that can be owned, improper solicitation of them by a departing partner constitutes actionable wrongdoing. The issue isn’t whether partners can hire employees after they leave – generally they can, absent non-solicitation agreements. The issue is when and how they do it.

Soliciting employees while still a partner, using partnership time and resources to recruit them away, or using confidential information about compensation and performance to target specific individuals all constitute breaches of fiduciary duty. The partnership has invested in recruiting, training, and retaining these employees. A departing partner who systematically recruits them away is appropriating the value of the partnership’s human capital investment.

The damage from employee solicitation extends beyond just losing the workers. When key employees leave simultaneously, it disrupts operations, damages client relationships, and can destroy team morale. Clients may leave because the employees they worked with are gone. Remaining partners are forced to hire and train replacements while simultaneously managing the departure crisis.

Some operating agreements include non-solicitation provisions prohibiting partners from hiring partnership employees for a specified period after departure. These provisions are generally enforceable in California if reasonable in scope and duration. But even without contractual non-solicitation provisions, recruiting employees while still a partner violates fiduciary duties.

Detecting Asset Misappropriation Early

The earlier you detect misappropriation, the better your chances of preventing ongoing harm and recovering assets. Many partners miss warning signs because they trust their co-partner or because the misappropriation is subtle. Understanding what to watch for helps you identify problems before they become catastrophic.

Watch for changes in behavior and attitude. A partner who suddenly becomes secretive about their work, starts arriving late and leaving early, shows declining engagement in partnership matters, or becomes evasive when asked about client projects may be preparing to leave and diverting attention to their future venture. These behavioral changes don’t prove wrongdoing, but they should trigger increased vigilance.

Monitor access to sensitive information and systems. Check server logs to see if a partner is downloading unusual amounts of data, accessing files outside their normal work pattern, or copying information to external drives or cloud storage. Modern businesses leave digital footprints, and those footprints can reveal misappropriation in progress.

Pay attention to client interactions. If clients mention that your partner has talked to them about “their new venture” or if you notice unusual contact patterns where a partner is having off-hours meetings or communications with clients, that’s a red flag. Clients sometimes inadvertently reveal that a partner is already competing or preparing to compete.

Financial irregularities often signal misappropriation. Unexplained transfers, missing funds, unauthorized expenses, or changes to banking access and authorization should trigger immediate investigation. Partners who are preparing to leave sometimes start siphoning money to build capital for their new venture.

Changes to business systems and accounts can indicate preparation for departure. If a partner changes passwords, transfers domain registrations, modifies software subscriptions, or updates business registrations without explanation, they may be positioning themselves to take control of business assets. Regular monitoring of who has access to what systems and periodic review of account ownership prevents surprises.

Physical inventory and equipment should be tracked. Periodic verification that partnership property is where it should be helps detect physical asset misappropriation. I’ve had clients discover that expensive equipment has been missing for months because nobody was systematically checking.

The key to early detection is maintaining appropriate oversight and controls even in trusted partnerships. Many partners operate on pure trust with no checks or balances, making misappropriation easy and detection difficult. Basic business controls – financial oversight, system access monitoring, client relationship documentation, and asset tracking – aren’t signs of distrust; they’re prudent business management that protects everyone’s interests.

Immediate Response When You Discover Misappropriation

The first 24-72 hours after discovering asset misappropriation are critical. Quick, strategic action can prevent ongoing damage and preserve evidence. Slow or reactive responses allow the situation to deteriorate and reduce your leverage for recovery.

Your first priority is securing remaining assets and systems. Change passwords on all business accounts immediately. Revoke the departing partner’s access to servers, cloud storage, banking systems, client databases, and any other sensitive systems. They no longer need access if they’re leaving, and continued access creates opportunity for further misappropriation or evidence destruction.

Document everything you can about the misappropriation. Take screenshots of file access logs, download financial transaction records, save communications that reference the missing assets, photograph missing equipment, and preserve any evidence of wrongdoing. Evidence has a way of disappearing in partnership disputes, so securing it immediately is essential.

Contact your IT personnel or service providers to conduct a forensic review of data access and downloads. Professional IT forensics can reveal what files were accessed, copied, or deleted and when. This evidence is powerful in demonstrating misappropriation and establishing damages. The longer you wait, the harder reconstruction becomes.

Notify key stakeholders appropriately. Contact your bank to alert them about potential unauthorized transactions and to confirm signing authority. Notify software and service vendors that the departing partner no longer has authority to make changes to accounts. Alert your insurance broker about the potential dispute to understand what coverage might be available. Contact your CPA to ensure partnership financial records are secure and to begin assessing financial impact.

Consider whether immediate legal action is necessary. In cases involving ongoing misappropriation, destruction of evidence, or risk of irreparable harm, you may need to seek emergency court intervention through a temporary restraining order. California courts can issue TROs within hours when there’s evidence of immediate threatened harm. A TRO can prohibit continued use of misappropriated assets, prevent further employee solicitation, preserve evidence, and maintain the status quo while the dispute is resolved.

Consult with legal counsel immediately. Asset misappropriation cases are complex, fast-moving, and high-stakes. Having experienced counsel involved early helps you avoid mistakes that could damage your legal position. Many actions that seem appropriate emotionally can create legal problems. For example, accessing the departing partner’s email or computer systems without clear legal authority could expose you to privacy violation claims, even if you’re trying to investigate misappropriation.

One common mistake is confronting the departing partner directly before securing assets and evidence. The natural impulse is to call them and demand explanations or return of assets. But this tips them off that you’re aware of the problem and gives them time to destroy evidence, transfer additional assets, or position themselves defensively. Better to secure everything first, gather evidence, consult counsel, and then make a strategic approach – whether through a demand letter, formal complaint, or other mechanism – from a position of strength.

Strategic Demand Letters for Asset Misappropriation

Demand letters in partner misappropriation cases serve multiple purposes: they formally notify the departing partner of your claims, create a record of your attempt to resolve the matter without litigation, preserve evidence, and often prompt settlement. But they require careful crafting because the legal and factual landscape is more complex than in typical business disputes.

Establishing the Partnership Relationship and Duties

Begin by clearly establishing the legal relationship that gave rise to fiduciary duties. Reference the partnership agreement or operating agreement if one exists, including the specific provisions dealing with partner duties, departure, and asset ownership. If there’s no written agreement, state the factual basis for the partnership relationship – the parties’ conduct, profit sharing, joint decision-making, and other indicia of partnership.

Explicitly state the fiduciary duties the departing partner owed and continue to owe during the wind-up period. Quote relevant provisions of California law defining these duties. Make clear that announcing an intention to leave doesn’t terminate fiduciary obligations. This legal foundation is essential because many departing partners genuinely believe they’re free to compete and take assets once they’ve announced their departure.

Identify the specific duration of the partnership and the circumstances of departure. When did the partner announce their intention to leave? What notice did they provide? Are they still technically a partner or has the relationship been formally terminated? The precise timing matters because certain conduct that would be permissible after termination constitutes breach of fiduciary duty if done while still a partner.

Detailed Specification of Misappropriated Assets

Provide a detailed, specific inventory of what was taken or misappropriated. Vague allegations like “you took partnership property” don’t create accountability. Specific allegations like “On March 15, 2024, you copied the entire client database containing 347 client records, including names, contact information, project histories, and pricing data” force the departing partner to respond to concrete claims.

For each category of misappropriated assets, include:

The specific asset taken (with identifying information like serial numbers, file names, account numbers, or detailed descriptions), the date and manner of misappropriation if known, the evidence showing the asset belongs to the partnership (receipts, emails, working papers, creation dates), the current value or replacement cost, and the harm caused by the misappropriation.

Break down intellectual property specifically. If they took design work, list the specific projects and files. If they copied code, identify the repositories and programs. If they took strategic frameworks, describe them. The more specific you are, the harder it is for them to deny or minimize the wrongdoing.

For client and opportunity diversions, identify specific clients or projects. Name which clients have been contacted or redirected, which business opportunities were diverted, and what revenue has been lost or is at risk. Quantify the financial impact as precisely as possible: “Client X represented $45,000 in annual revenue to the partnership. You contacted them on March 20 to announce your new venture and they have since terminated the partnership relationship and moved to your new firm.”

Legal Claims and Remedies Demanded

After laying out the factual allegations, connect them to specific legal claims. Typical claims in asset misappropriation cases include:

Breach of fiduciary duty for failing to act with loyalty and care toward the partnership, using partnership assets for personal benefit, and competing while still a partner. Conversion for wrongfully exercising control over partnership property as if it were personal property. Misappropriation of trade secrets for taking confidential business information protected under California’s Uniform Trade Secrets Act. Breach of contract for violating specific provisions of the partnership or operating agreement dealing with departures, asset ownership, or competition. Accounting for a formal judicial determination of partnership assets, liabilities, and each partner’s entitlement. Unjust enrichment for retaining benefits that in equity and good conscience belong to the partnership.

For each claim, briefly state the elements and how the departing partner’s conduct satisfies them. You don’t need to write a brief, but showing that you understand the legal framework signals that you’re prepared to litigate if necessary.

State your specific demands clearly. What do you want the departing partner to do? Typical demands include:

Immediate return of all partnership property, including physical assets, electronic files, client lists, IP, and financial assets. Cessation of all use of partnership confidential information, trade secrets, and intellectual property. Accounting of all partnership assets in their possession or control. Payment of damages for converted property, lost business, and breached fiduciary duties. Entry into a stipulated order or agreement prohibiting future misuse of partnership assets and information. Reimbursement of attorney fees and costs incurred in pursuing recovery.

Set a deadline for response and compliance. Ten to fourteen days is typical, though you might give less time if ongoing harm is occurring. State the consequences of non-compliance: “If I do not receive satisfactory response by [date], I will immediately pursue all available remedies, including emergency court intervention to prevent further misappropriation and damage to the partnership.”

Tone and Positioning

Asset misappropriation demands need a different tone than typical business demands. These aren’t simple breach of contract disputes where both sides arguably have merit. Asset misappropriation is serious wrongdoing that may border on theft. Your letter should reflect that seriousness without being hyperbolic or emotional.

Frame the conduct as breach of trust and violation of legal duties, not just a business disagreement. Partners owe each other the highest duties recognized by law. Violating those duties is a serious matter with serious consequences. Use language that emphasizes the gravity: “Your conduct constitutes fundamental breach of the fiduciary duties you owe to the partnership and your co-partners under California law.”

However, avoid personal attacks or moral judgments about the individual. Stick to the legal framework and factual allegations. Don’t say “you’re a thief and a liar.” Do say “your conduct constitutes conversion of partnership property and possible violations of California’s trade secrets laws.”

Consider offering a face-saving resolution path if appropriate. Sometimes partners misappropriate assets because they genuinely don’t understand their legal obligations or because they’re angry about partnership disputes and acting impulsively. If you’re willing to let them save face while still getting the assets back and preventing future harm, the demand letter can offer that opportunity: “If you immediately return all partnership property and cease use of confidential information, and if you agree to a formal settlement addressing these issues, we can resolve this matter without the expense and publicity of litigation.”

But don’t be weak or tentative. If the conduct is serious and egregious, the letter should reflect your determination to pursue all remedies. Empty threats are counterproductive, but clear statements of intent to seek injunctive relief, pursue damages, and litigate vigorously if necessary send an appropriate message.

Legal Remedies and Strategic Litigation

When demand letters don’t produce satisfactory resolution, litigation becomes necessary. Understanding the available remedies and strategic considerations helps you decide whether to pursue legal action and what outcomes are realistic.

Preliminary Injunctions and Temporary Restraining Orders

When ongoing misappropriation is occurring or there’s risk of irreparable harm, immediate court intervention through temporary restraining orders and preliminary injunctions is often essential. California courts can issue TROs on an emergency basis, sometimes within hours, and preliminary injunctions after brief hearings.

The standard for emergency relief requires showing: likelihood of success on the merits of your claims, irreparable injury if relief isn’t granted, balance of hardships favors granting relief, and the public interest supports the injunction. In asset misappropriation cases, these elements are often easily met. Breach of fiduciary duty and conversion claims have strong legal foundations when facts support them. Irreparable injury is clear when confidential information is being misused, clients are being actively solicited, or assets are at risk of being dissipated. The balance of hardships favors protecting partnership assets over allowing continued misappropriation.

Injunctive relief can prohibit continued use of trade secrets and confidential information, require return of partnership property and documents, prevent contact with partnership clients or employees, preserve evidence and prohibit destruction of records, and maintain the status quo pending full trial.

The strategic value of injunctions extends beyond the immediate relief. Filing for injunctive relief forces an immediate court hearing, which creates time pressure on the other side and makes the dispute real in a way demand letters don’t. It also allows you to get the departing partner under oath through declarations and potentially testimony, creating opportunities to lock in positions and discover additional facts.

Accounting Actions

In California, partners have a statutory right to an accounting of partnership affairs. Accounting actions are equitable proceedings where the court examines partnership books, determines what assets and liabilities exist, values those assets, and determines each partner’s entitlement to partnership property and distributions.

Accounting actions are particularly valuable when asset misappropriation makes it impossible to determine what assets exist and where they are. The departing partner has superior knowledge of what they took and what happened to it. An accounting forces them to disclose this information under oath, subject to court supervision.

The court can order production of documents, conduct evidentiary hearings, appoint forensic accountants to trace assets, and ultimately issue a judgment determining each party’s rights to partnership property. If the accounting reveals that one partner wrongfully took more than their share, the court can order reimbursement plus interest.

Accounting actions also have strategic value in resolving the entire partnership dissolution, not just the asset misappropriation. Rather than just fighting about the stolen client list, you can address all partnership assets, liabilities, and each partner’s entitlement in one proceeding. This comprehensive approach sometimes leads to global settlements because both sides want to end the partnership relationship cleanly.

Damage Claims

Beyond injunctive relief and accounting, you can pursue monetary damages for losses caused by asset misappropriation. Damage claims can include the value of converted property, lost profits from diverted clients and opportunities, costs incurred investigating and responding to the misappropriation, diminution in value of the partnership business, and potentially punitive damages for egregious breaches of fiduciary duty.

Quantifying damages in asset misappropriation cases requires careful analysis. You need expert testimony to establish the value of trade secrets, the impact of client diversions, and the harm to business value. Forensic accountants can trace financial misappropriations and calculate lost profits. Business valuation experts can opine on how the misappropriation affected overall partnership value.

California law allows recovery of attorney fees in some asset misappropriation cases. If your partnership agreement includes a fee-shifting provision, the prevailing party can recover attorney fees. Even without a contractual provision, California’s trade secrets law allows fee recovery for trade secret misappropriation. Some courts also award fees in breach of fiduciary duty cases involving serious wrongdoing, though this is more uncertain.

The possibility of recovering attorney fees significantly changes the economics of litigation. Knowing that the losing party will pay both sides’ fees creates settlement pressure because each side faces potential liability for six-figure legal bills in addition to damages.

Strategic Considerations in Litigation

Litigation strategy in asset misappropriation cases requires balancing several competing objectives. You want to recover assets and prevent ongoing harm, but you may also want to preserve business relationships with clients who are caught in the middle. You want to achieve justice, but you also want to minimize costs and disruption to ongoing business operations.

Speed matters. The longer misappropriated assets remain in the wrong hands, the more damage occurs and the harder recovery becomes. Aggressive early litigation strategies – emergency applications, expedited discovery, preliminary injunctions – serve the dual purpose of obtaining early relief and putting maximum pressure on the other side.

But aggressive litigation is expensive. Early emergency applications can cost $20,000-$50,000 in attorney fees just to get through the preliminary injunction phase. Full litigation of complex asset misappropriation cases can easily run into six figures. You need to make strategic decisions about how much you’re willing to spend relative to potential recovery.

Public litigation creates reputational issues for both sides. Clients may not want to do business with a company embroiled in public partner disputes. Employees may become nervous and start looking for other opportunities. Competitors may take advantage of the distraction. Sometimes keeping disputes confidential through settlement or arbitration better serves business interests than public litigation.

Consider whether arbitration is required or advisable. Many partnership agreements include arbitration clauses. Arbitration provides confidentiality and sometimes faster resolution, but it also limits discovery, eliminates certain procedural advantages, and can be expensive if the arbitration fees are substantial. Evaluate whether arbitration or court litigation better serves your strategic objectives.

Prevention: Protecting Assets Before Partnership Problems Arise

The time to protect against asset misappropriation is when forming the partnership, not when someone announces they’re leaving. Well-drafted agreements, appropriate business practices, and systematic controls can prevent most misappropriation or at least make it easier to detect and remedy.

Essential Agreement Provisions

Partnership agreements and LLC operating agreements should explicitly address ownership of partnership assets and what happens upon departure. Don’t leave these critical issues to default law or future negotiation when emotions are running high.

Clearly define what constitutes partnership property versus personal property. If partners contribute equipment, IP, or other assets, document whether those remain personal property or become partnership property. For assets created during the partnership, specify that they belong to the partnership regardless of who did the creative work.

Include detailed departure provisions specifying what notice is required, what assets the departing partner can take (typically just their ownership interest and personal property), what restrictions apply during transition periods, and what compensation the departing partner receives for their interest. The more specific these provisions are, the less room for dispute about what someone is entitled to take.

Non-solicitation and non-competition provisions provide additional protection. While California is generally hostile to non-compete agreements, protections against solicitation of clients and employees during defined transition periods are often enforceable if reasonable. The key is narrowly tailoring the restrictions to protect legitimate business interests without unreasonably restraining a former partner’s ability to earn a living.

Confidentiality provisions should explicitly define what information is confidential, restrict use and disclosure of confidential information, require return of confidential materials upon departure, and survive termination of the partnership relationship. Make clear that client lists, pricing information, strategic plans, financial data, and proprietary methodologies are confidential partnership property.

Include indemnification provisions making partners liable for damages caused by breach of the agreement or violation of fiduciary duties. Specify that the partnership can recover attorney fees and costs incurred enforcing its rights. These provisions create financial disincentives for misconduct and make litigation more economically viable.

Consider including dispute resolution provisions requiring mediation before litigation and potentially arbitration for certain disputes. While these don’t prevent misappropriation, they can facilitate faster, less expensive resolution when problems arise.

Operational Controls and Monitoring

Beyond contract provisions, implement business practices that make misappropriation harder to accomplish and easier to detect. These aren’t signs of distrust; they’re basic business hygiene that protects everyone’s interests.

Maintain segregated access to different business systems based on role and need. Not every partner needs access to all financial accounts, client databases, and IP repositories. Appropriate access controls limit what any single person can misappropriate.

Implement logging and monitoring for sensitive data systems. Track who accesses what files, when, and what they do with them. Modern systems make this easy, and the logs create valuable evidence if misappropriation occurs.

Conduct periodic reconciliation of physical assets and inventory. Knowing what equipment, supplies, and materials the partnership owns and where they’re located helps detect physical asset misappropriation quickly.

Use multi-party authorization for financial transactions above defined thresholds. Requiring two partners to approve large transfers, checks, or credit card charges creates checks and balances that prevent unilateral misappropriation.

Maintain orderly partnership records showing decision-making, asset acquisitions, client development, and financial transactions. Good records make it much easier to prove what belongs to the partnership and what was taken improperly.

Regular partnership meetings with documented decisions create a paper trail showing collective ownership and management of partnership assets. These meeting minutes become evidence that certain assets were partnership property managed collectively, not one partner’s personal property.

Building Exit Strategies Into Partnership Formation

Smart partners discuss exit scenarios when forming the business, not when someone wants to leave. Include buyout formulas in your operating agreement specifying how a departing partner’s interest will be valued and on what terms it will be purchased. Having pre-agreed valuation methods and payment terms eliminates huge sources of conflict during departures.

Consider creating formal IP assignment agreements where partners explicitly assign ownership of work product to the partnership. While default rules typically make work product partnership property anyway, explicit written assignments eliminate ambiguity.

For client-dependent businesses, clarify in the operating agreement which clients belong to the partnership versus which might be considered personal to individual partners. If certain partners brought existing client relationships into the partnership and maintained those as separate from collective partnership efforts, document that distinction clearly.

Address what happens to partnership opportunities in the pipeline when someone leaves. Is a departing partner entitled to pursue opportunities they worked on while a partner but that haven’t yet closed? Or do those opportunities remain partnership property? Having clear answers prevents disputes.

The goal of all these preventive measures is to eliminate ambiguity about who owns what and what partners can and cannot do upon departure. The clearer the rules, the less likely misappropriation will occur and the easier it is to remedy when it does.

My Experience with Asset Misappropriation Cases

Over thirteen years of practice, I’ve handled dozens of partner misappropriation disputes across various industries. I’ve represented both partners claiming misappropriation and departing partners accused of wrongdoing. This dual perspective has given me insight into how these cases develop, where the real disputes lie, and what strategies lead to resolution.

What strikes me most consistently is how preventable most of these disputes are. The vast majority arise from poorly drafted partnership agreements (or no written agreement at all) combined with inadequate business controls. Partners trust each other during the good times and don’t think about what happens when the relationship ends. Then when someone leaves, there’s genuine disagreement about what they’re entitled to take because it was never clearly defined.

The emotional intensity of these cases also stands out. Partners who were once close friends or family members become bitter adversaries, often spending more on litigation than the disputed assets are worth. The betrayal element makes rational settlement difficult. People want vindication and punishment, not just recovery of assets. Managing client expectations about realistic outcomes versus emotional desires for justice is one of the harder aspects of these representations.

I’ve also learned that early aggressive action usually produces better results than wait-and-see approaches. Clients who immediately secure systems, document evidence, and pursue emergency court intervention recover more assets and prevent more damage than clients who spend weeks trying to negotiate or hoping the situation will resolve itself. Departing partners who face immediate consequences and realize they’re dealing with someone serious about enforcement are much more likely to settle reasonably.

The cases that settle most efficiently are those where the facts are clear, the evidence is strong, and both sides have competent counsel who can objectively evaluate the strengths and weaknesses of their positions. When everyone can see that the partnership clearly owned certain assets and the departing partner clearly took them, settlement becomes a negotiation over damages and remedies rather than a binary fight about whether wrongdoing occurred.

If you’re facing a partnership dissolution or have discovered asset misappropriation, early consultation with experienced counsel can help you understand your rights, evaluate your options, and develop strategy. I offer consultations to assess specific situations and discuss whether demand letters, negotiation, or immediate litigation makes most sense for your circumstances. You can schedule a consultation at terms.law/call/.

Frequently Asked Questions

Can I use recordings or screenshots of my partner’s communications as evidence of asset misappropriation?

This depends heavily on how the evidence was obtained and what specific communications you’re recording or capturing. In California, you can record conversations you’re a party to without the other person’s consent under Penal Code Section 632, but recording conversations you’re not a party to is illegal. If you secretly recorded a phone call between your partner and a client discussing stolen assets, that recording is inadmissible and you could face criminal liability for making it. However, if your partner sent an email to you or through partnership email systems discussing the misappropriated assets, that email is partnership business record and perfectly admissible. Screenshots of your partner’s social media posts announcing their new venture and showing partnership assets are generally admissible as statements against interest. Text messages you received directly are admissible. The key distinction is whether you obtained the evidence through legitimate means (being a party to communications, accessing partnership business records you have authority to access, viewing publicly available information) versus illegitimate means (hacking accounts, intercepting communications you’re not party to, accessing password-protected systems without authorization). Before using any evidence that might have been obtained through questionable means, consult with counsel about admissibility and potential liability for how it was obtained.

If my partner took the client list but the clients chose to follow them because of personal relationships, is that still misappropriation?

Yes, the misappropriation is taking the client list and using confidential partnership information to contact clients, not whether the clients ultimately chose to follow the partner. Your partner’s fiduciary duty prohibited them from using partnership property (the compiled client list with contact information, project histories, and relationship details) to compete while still a partner. Even if every client would have freely chosen to follow your partner based on personal relationships, your partner couldn’t use the partnership’s compiled information to facilitate that transition. The proper approach would have been to leave first, then contact clients using publicly available information or personal knowledge, without reference to confidential partnership data. The fact that clients ultimately chose to move their business based on relationship preference doesn’t cure the initial misappropriation. That said, the damages calculation may be affected by whether clients moved primarily because of personal relationships versus being induced by misuse of confidential business information. If your partner can show that all the relevant clients would have followed them regardless of whether they used the partnership list, damages might be limited to the value of the list itself rather than lost client revenue. But they still breached their fiduciary duty by taking and using partnership property.

We don’t have a written partnership agreement. Does that mean my partner can take whatever they want?

Absolutely not. The absence of a written agreement doesn’t eliminate fiduciary duties or partnership property rights – it just means default California partnership law applies rather than customized contract terms. Under California’s Revised Uniform Partnership Act, partners owe each other fiduciary duties of loyalty and care regardless of whether there’s written agreement. Partnership property belongs to the partnership, not individual partners, and those property rights exist whether documented or not. What the lack of written agreement does is make disputes harder to resolve because there’s no clear documentation of what was agreed regarding ownership, valuation, departure terms, or restrictions. You’ll need to prove through circumstantial evidence what assets belonged to the partnership, how the partnership operated, what understanding existed among partners, and what conduct violated duties. This is more difficult than pointing to specific contract provisions, but it’s not impossible. Business records showing collective ownership and use of assets, communications showing partnership decision-making, tax returns treating assets as partnership property, and testimony about how the partnership functioned all help establish what belonged to the partnership. The lack of written agreement also means no contractual non-solicitation or confidentiality provisions beyond what’s implied by fiduciary duties and trade secrets law. This might give your partner more freedom to compete than if you had restrictive agreements. But the core prohibition on misappropriating partnership assets exists with or without written agreements.

My partner claims they’re entitled to take certain assets because they paid for them with personal funds. How do I prove the assets actually belonged to the partnership?

This comes down to evidence showing the intent and understanding regarding asset ownership. Look for several categories of proof: First, check whether the partnership’s tax returns or financial statements listed the assets as partnership property and claimed depreciation or other tax benefits. Tax treatment is strong evidence of ownership because it reflects contemporaneous understanding. Second, examine how the assets were used. If equipment was used exclusively for partnership business, kept at partnership premises, available for use by multiple partners, or maintained with partnership funds, that suggests partnership ownership even if one partner initially paid for it. Third, review communications and records showing discussions about the assets. Emails referring to “our equipment” or “partnership computers” show collective ownership understanding. Fourth, look at whether the partner was reimbursed or compensated for the purchase through partnership distributions, expense reimbursements, or allocation of partnership income. If they were made whole through the partnership, they can’t claim continuing personal ownership. Fifth, consider whether any written agreements or policies addressed equipment and asset ownership. Even absent a formal partnership agreement, you might have email exchanges or meeting minutes discussing asset purchases and ownership. Finally, examine industry practice and reasonableness. In most professional partnerships, equipment purchased for business use and used in partnership operations becomes partnership property, and courts will apply that presumption absent clear evidence of different intent. If your partner wants to claim personal ownership of assets used in partnership business, the burden should be on them to prove that exception to the general rule.

Can I prevent my former partner from using skills and general knowledge they gained during our partnership?

No, and attempting to do so would be problematic. California law strongly protects individuals’ rights to use their general skills, knowledge, and experience even when gained through employment or partnership with others. What you can protect is confidential specific information, trade secrets, and partnership property – not general expertise and capabilities. Your former partner can use general knowledge about your industry, business approaches they learned, skills they developed, and broad strategic thinking refined during the partnership. They can apply lessons learned from successes and failures. They can use their professional judgment and expertise enhanced by partnership experience. What they cannot do is use specific confidential information like client lists with contact details and buying patterns, proprietary methodologies or processes that constitute trade secrets, specific pricing information and financial data, work product and IP created using partnership resources, or strategic plans and competitive information not generally known in the industry. The distinction is between general knowledge (broadly applicable, could be learned from multiple sources, represents personal development) versus specific confidential information (tied to your particular business, not generally known, developed through partnership time and resources). Courts recognize this distinction because allowing businesses to restrict former partners’ general knowledge and skills would essentially prevent them from working in their field, which California public policy strongly disfavors. Focus your demands on specific misuse of specific confidential information, not on broad restrictions against using knowledge and expertise.

What if my partner misappropriated assets but the partnership was actually losing money and they contributed more capital than they withdrew?

This is a complex situation that requires careful analysis of partnership accounts and each partner’s capital contributions versus distributions. The fact that a partner contributed more than they withdrew doesn’t give them license to unilaterally appropriate partnership assets without following proper dissolution procedures. Partnership interests are determined through formal accounting showing capital contributions, distributions, allocation of profits and losses, and each partner’s ownership percentage. Even if one partner has a larger capital account than others, they can’t just take assets they believe equal their capital contribution. The proper procedure is partnership dissolution with formal accounting, valuation of assets, payment of partnership debts, and distribution to partners according to their entitlements. Unilateral appropriation of assets bypasses this process and violates fiduciary duties even if the partner ultimately has a valid claim to those assets’ value. However, the damages picture becomes more complex. If your partner took assets worth $50,000 but their capital account shows they’re owed $75,000 from the partnership, you may have limited actual damages even though they breached their duty. They took something they were arguably entitled to, just through improper means. In this situation, your demand letter should still insist on return of the assets or proper accounting and dissolution procedures, but you should realistically assess what damages you actually suffered. The partner’s excess capital contribution might offset or eliminate damages from the misappropriation, leaving you with claims for breach of duty and improper procedure but limited monetary recovery. Sometimes the strategic value of addressing the misconduct through demand letters or litigation is establishing proper procedures and preventing further misappropriation, even if net damages are small.

How long do I have to bring claims for asset misappropriation after discovering my partner took partnership property?

California statutes of limitation for common asset misappropriation claims are: four years for breach of fiduciary duty from the date of breach or discovery of facts giving rise to the cause of action; three years for conversion and statutory theft from the date of wrongful taking; three years for trade secret misappropriation under the Uniform Trade Secrets Act from when the misappropriation was discovered or reasonably should have been discovered; four years for most contract breaches including breach of partnership agreements; and three years for general fraud claims. However, several complications affect these time limits. First, the discovery rule may extend limitation periods when misappropriation was concealed or not reasonably discoverable. If your partner secretly copied the client database and you didn’t discover it until a year later, the statute might not begin running until discovery. Second, continuing violations doctrine applies when misappropriation is ongoing. Each day of continued misuse of trade secrets or confidential information may constitute a separate violation, keeping claims viable even for initially older conduct. Third, equitable tolling may extend limitation periods when one party’s misconduct prevented earlier discovery of the claims. If your partner actively concealed their wrongdoing or destroyed evidence, courts may excuse delayed filing. Fourth, some claims like accounting actions may have longer periods or different triggers. The practical takeaway is that you should act quickly once you discover misappropriation rather than waiting to see how it plays out. Delay weakens your position even if you’re technically within limitation periods, because evidence becomes stale, witnesses’ memories fade, and ongoing damages accumulate. If you know or suspect misappropriation occurred, consult counsel immediately to preserve your rights regardless of whether you’re ready to pursue claims.

Can I recover attorney fees for pursuing my asset misappropriation claims against my former partner?

Possibly, depending on whether your partnership agreement includes a fee-shifting provision and what specific claims you’re pursuing. Many partnership and LLC operating agreements include provisions stating that the prevailing party in any dispute is entitled to recover reasonable attorney fees and costs. If your agreement has this language, you can potentially recover fees if you prevail on your claims. This significantly changes the economics of litigation because your former partner faces liability for both sides’ legal bills if they lose. California’s trade secrets law (Civil Code Section 3426.4) allows recovery of attorney fees in trade secret misappropriation cases if the misappropriation was willful and malicious or if the claim was brought in bad faith. This requires showing more than just that misappropriation occurred – you need evidence of intentional wrongdoing with knowledge it was improper, or reckless disregard for partnership rights. Some courts also award attorney fees in breach of fiduciary duty cases involving particularly egregious conduct or bad faith, though this is less certain than contractual fee-shifting or statutory fee awards. The court has discretion to award fees when the breach involved fraud, oppression, or malice. Even without contractual or statutory fee recovery, the possibility of substantial attorney fees creates settlement pressure. Many cases settle specifically because both sides realize that continued litigation will generate six-figure legal bills regardless of who ultimately prevails. The risk of paying both sides’ fees motivates reasonable settlement. When evaluating whether to pursue asset misappropriation claims, discuss fee recovery potential with your attorney. If fee recovery is unlikely and litigation will cost more than potential damages, that affects whether litigation makes economic sense. But if you have strong fee-shifting provisions or statutory fee claims, aggressive litigation becomes more viable because you can potentially be made whole for legal expenses.