By Rob Harris, Editor, Golf Dispute Resolution
Recent publicity disclosed that Johnny Miller and two of his partners in Napa Valley, California’s Silverado Resort have been sued by a fourth partner. The legal complaint makes allegations of mismanagement and “outright willful and wanton misconduct and gross negligent” by the defendant partners, together with a “‘hostile attempt'” to take over the resort, while purposefully mismanaging the company to depress the value of the resort ‘so they could eventually purchase it on the cheap.” Miller and his partners, through an attorney, have denied the allegations, asserting that the lawsuit is in furtherance of the plaintiff’s “opportunistic and prolonged campaign to intimidate, threaten and bully his partners out of the business.”
The litigation is emblematic of what can happen when partners become disenchanted with a business relationship, and it provides a cautionary tale for anyone who owns, or seeks to own, a golf course with others. Marriages typically have a bright future on the wedding day, but the best of partners may face adversity in the months and years ahead. And while sometimes blame is clear, often the breakdown of a relationship has many factors and shades of gray.
The potential for conflict does not mean that a young man or woman should remain single. Nor does it mean that an aspiring golf course owner can’t have partners. Obviously, it goes without saying that one should choose partners wisely.
In selecting partners, it is crucial to perform due diligence, even if your partners-to-be are friends of many years. Have your partners had previous business failures? Lawsuits? Regulatory or legal issues? Have they been fired from jobs? Do they have substantial liabilities, alimony or child support obligations? Have they had previous partnership relationships? How did they work out? Are there ongoing business ventures that may distract them from their time commitments to you?
Picture the golf course venture going through a rough patch. Are the partners you have identified ones you will want in the foxhole next to you? If the answer is not an unqualified yes, then find different partners. And if you are being invited to participate in their opportunity, politely pass. A wise and experienced businessman once told me that the best deals for him were the ones to which he said “no”.
Assuming you have found a promising golf course acquisition opportunity with partners who survive rigorous due diligence. What next?
It is time to formalize the relationship. While many first marriages may be sealed with a kiss, it is essential for golf course owners to go full pre-nup. You need a written agreement. The agreement obviously should set forth the economic terms of the arrangement. It also should specify each partner’s performance obligations.
Perhaps most important, the agreement should address what will happen in the event of adversity or conflict. Contracting for a worst case scenario puts in place ground rules at a time when your relationship with your partners is solid. Once problems develop, you cannot be sure the parties will agree on an approach to address them. Thus, partners are well-advised to address these matters in their agreement at the onset of the relationship.
Your attorney should be able to provide specific guidance based on the particulars of the transaction. General issues to keep in mind include:
- What happens if an influx of cash is needed, either for general operations or a capital expenditure or repair? Your agreement should specify the partners’ respective obligations regarding funding cash needs, especially if third party financing is not available.
- What happens if a partner, out of necessity or desire, expresses an intention to exit the partnership? Have you made provision in your agreement for a mechanism to acquire a partner’s interest?
- What if disputes arise? Instead of litigation, with all of its expense, delay and publicity, would the parties prefer to address their dispute in a private arbitration, which is promoted to be simpler, more cost effective and confidential? The partners should discuss arbitration as an alternative to litigation, and, if desired, they should make sure their partnership agreement provides for it.
- Before embarking on litigation or arbitration, would the partners prefer to submit their dispute to mediation, which is an informal process where a neutral mediator attempts to facilitate an agreed upon resolution to the dispute? Many agreements provide for mediation as a pre-litigation or pre-arbitration process.
- And if there is to be litigation, do the parties wish to limit the category of damages that a party can seek? Sometimes, agreements provide that a party may seek only damages resulting directly from the harm, but not damages for more indirect or consequential results, such as lost profits.
- In the event of litigation or arbitration, should each party be responsible for its attorneys’ fees? Or should the party that prevails in the dispute be entitled to recover from the losing parties the attorneys’ fees incurred in pursuing the matter? Again, this is something that a well-crafted partnership agreement will address.
Suppose you already have an interest in a partnership that owns a golf course. It is not too late to put into place protections. Read your partnership agreement. Does it address these topics of importance? If not, consider an amendment to the agreement. It will put the partnership on a more solid footing to withstand conflicts that may develop over time.
Against this background, it will be interesting to monitor the Silverado litigation brought by one of the partners against Johnny Miller and the other two. Disclosures made in the litigation filings may provide insights as to how this partnership came into being and whether there were indications that it was a recipe for controversy.
The litigation filings and court decisions also will shed light on provisions contained and not contained in the partnership agreement. For example, if the agreement provides for arbitration of disputes, the defendant partners likely will file a motion to have the litigation dismissed or stayed, pending arbitration.
Even if the case proves to be unmeritorious, what is certain is that the partners will incur substantial legal fees in its prosecution and defense. It also is possible that the reputation of Silverado will be harmed, with adverse effects to its revenue stream.
The takeaway is that the potential for internal disharmony is something that those exploring a golf partnership arrangement should tackle before embarking upon the venture. Choosing partners wisely and negotiating and executing an agreement that minimizes the risks and consequences of litigation is exceedingly important.
Rob Harris is Deputy General Counsel to Radian Group Inc. He also provides services as an arbitrator and mediator, and authors two websites/blogs: Golf Dispute Resolution (www.golfdisputeresolution.com), which focuses on the intersection of golf and law, and Positively Neutral (www.positivelyneutral.com), which provides arbitration and mediation news to attorneys and their clients.