## Facts

- A group of investors formed a partnership to purchase an apartment house under construction as a tax-shelter investment.
- Stanley G. Harris, a real estate broker and promoter, organized the transaction and was also a partner in the purchasing partnership and president of International Realty, Ltd.
- The purchase was structured at a price of $1,010,000 and promoted on the basis that much of the down payment could be treated as prepaid interest for federal income tax purposes.
- The trial court found Harris failed to disclose material facts to the other partners, including:
  - that the property could have been acquired for $907,500 “net” to the seller rather than the higher structured price;
  - that a $100,000 commission and a $2,500 escrow fee would be paid to International Realty; and
  - that Harris had an agreement with the seller under which Harris or International would acquire the vendor’s interest in the land sale contract used for the partnership’s purchase.
- Plaintiffs contended they lacked information necessary to consent to Harris’s receipt of the commission and acquisition of the vendor’s interest while acting as a partner and fiduciary.
- Defendants argued the commission was not secret and that the investors were sophisticated and understood compensation would be paid in connection with the transaction.
- The trial court ordered Harris/International to account to the partnership for the commission (with limited credit) and imposed a trust on the vendor’s interest; defendants appealed and plaintiffs cross-appealed on remedy details.

## Issues

1. Whether a partner who is also the broker/promoter must account to the partnership for a commission paid to his corporation when material terms of the commission and related arrangements were not fully disclosed to, and consented to by, the other partners.
2. Whether the vendor’s interest in the land sale contract acquired by the partner (or his corporation) must be held in trust for the partnership due to breach of fiduciary duty.
3. What remedial adjustments were proper, including set-offs/credits and interest on amounts owed to the partnership.

## Decision

- The Oregon Supreme Court reviewed de novo and modified and affirmed the decree.
- The court held Harris/International had to account to the partnership for the $100,000 commission because it was obtained without full disclosure of material facts and therefore constituted an improper secret profit.
- The court held the vendor’s interest in the sale contract acquired by Harris/International had to be held in trust for the partnership because it was obtained in connection with partnership business without informed consent.
- The court rejected certain claimed set-offs/credits that would have reduced the amount to be repaid to the partnership.
- The court modified the decree to award interest on sums wrongfully withheld.

## Legal Principles

- Partners owe fiduciary duties of loyalty and full disclosure to one another regarding partnership business and opportunities.
- A partner must account to the partnership for benefits or profits derived from partnership transactions when obtained without full, frank disclosure and informed consent.
- General awareness that compensation will be paid is insufficient; informed consent requires disclosure of material facts, including the amount, recipient, and any adverse or side agreements connected to the transaction.
- Equity may impose a constructive trust on property or contract interests acquired through breach of partnership fiduciary duties to prevent retention of improperly obtained benefits.

## Conclusion

The court required a partner-broker/promoter to disgorge an undisclosed commission and to hold a vendor’s contract interest in trust for the partnership, reaffirming that full disclosure and informed consent are necessary when a partner has conflicting financial interests in a partnership transaction.


Starr v. Int’l Realty, Ltd., 271 Or. 396, 533 P.2d 165 (1975)