McBride Law Blog

When a Business Partnership Turns Out To Be a Bait-and-Switch (Part I)

McBride Law Blog

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Here at The R. Shawn McBride Law Firm, PLLC, we write frequently about partnership, LLC, and multi-owner entities.  In most, if not all, cases or situations we discuss, business partners start out on friendly terms, in a spirit of collaboration and genuine partnership, only to see their relationship deteriorate over time due to disagreements over management, ownership, or other matters.  But what if there is no intent to be business partners in the first place?  AerReach Aero Space Solutions, LLC v. Stanford is a recent Texas case involving an allegedly fraudulent scheme aimed at exploiting the business contacts and expertise of a former executive of a high-profile aerospace service company.[1]

In AerReach Aero Space Solutions, LLC v. Stanford, Hogan was a senior executive at Pratt & Whitney (“Pratt”), a leading aircraft engine designer, manufacturer, and aviation service provider, for 27 years.  While at Pratt, Hogan met Stanford, Vice President and General Counsel of Principal Aviation Group, LLC (“PAG”), through business, and formed a close relationship.  According to the complaint, in 2011, Hogan, Stanford, and Stanford’s business acquaintance Glassman began entertaining the possibility of a joint enterprise among themselves.  It is alleged that, when Hogan retired and founded an aviation consulting company called AerReach Aero Space Solutions, LLC, in 2012, Stanford asked Hogan to be included as an owner/partner, but Hogan declined because of Stanford’s conflict of interest due to his position at PAG.  Subsequently, Stanford and Glassman formed a Delaware limited liability company called Turbine Asset Holdings, LLC (“TAH”), whose business consisted of dealing with aircraft parts.  Stanford and Glassman also formed another entity called Turbine Asset Holdings Group, LLC (“TAHG”), to continue TAH’s business and to receive 100% of TAH income.

Meanwhile, Stanford, Glassman, and Hogan continued to explore the idea of working together.  The negotiation resulted in a one-page amendment to TAH’s LLC agreement in 2015, which gave Hogan a 1/3 interest and required him to transfer AerReach’s assets into the company over an unspecified period of time.  AerReach, Hogan, and TAH also agreed not to compete with one another.  The complaint alleges that Stanford and Glassman did not disclose to him that TAH was merely a shell company that could never earn a profit because it had pledged 100% of all income to TAHG and, thus, his 1/3 ownership interest in TAH was a ruse to exploit his valuable business contacts.

This post was the first of a two-part series on AerReach Aero Space Solutions, LLC v. Stanford, a recent Texas case involving an alleged business partnership.  In our next post, we will discuss how the “partnership” turned out.

This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein.  This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances.  This article should not be treated as legal advice to any person or entity.

Steps have been taken to verify the contents of this article prior to publication.  However, readers should not, and may not, rely on this article.  Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.

[1] See generally AerReach Aero Space Solutions, LLC v. Stanford, No. DC-16-07714 (D. C. Tex. [44th Dist.] June 27, 2016).  Unless otherwise noted, all references to the case are to this citation.

Posted In: Business Management, Disagreement, Uncategorized

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