Good Faith and Fiduciary
Duties to Third Parties,
Principals and Partners
By Dean Donald J. Weidner
Florida State University College of Law
For the College of Advanced Judicial Studies
Naples, Florida, June 8, 2012
• The primary fiduciary duties are (a) care and (b)
loyalty, with loyalty being very powerful.
• Good faith is also sometimes discussed as a fiduciary
duty.
• There has never been a bright line between these
duties.
• Stone v. Ritter, 911 A.2d 362 (Del. 2006) discusses the ebb and
flow among the duties of care, loyalty and good faith.
• There are colliding judicial philosophies on fiduciary
duties.
• The statutes governing various business
organizations intervene significantly in this area.
Donald J. Weidner
Fiduciary Duties In General
2
• Quinn v. Phipps, 113 So. 419 (1927).
• Justice Terrell: “The Term ‘fiduciary or confidential
relation’ is a very broad one. It has been said that it
exists, and that relief is granted, in all cases in which
influence has been acquired and abused-in which
confidence has been reposed and betrayed. The
origin of the confidence is immaterial. The rule
embraces both technical fiduciary relations and
those informal relations which exist whenever one
man trusts in and relies upon another.”
Donald J. Weidner
The Grand Old Florida Case on
Fiduciary Duties
3
• More from Justice Terrell: “Stripped of all
embellishing verbiage, it may be confidently
asserted that every instance in which a confidential
or fiduciary relation in fact is shown to exist will be
interpreted as such. The relation and duties need
not be legal; they may be moral, social, domestic or
personal. If a relation of trust and confidence exists
between the parties (that is to say, where confidence
is reposed by one party and a trust accepted by the
other, or where confidence has been acquired and
abused), that is sufficient as a predicate for relief.
The origin of the confidence is immaterial.”
(emphasis added)
Donald J. Weidner
The Grand Old Florida Case (cont’d)
4
Others Reject Special Treatment of
Fiduciary Duties
“Fiduciary duties are not special duties; they have no
moral footing; they are the same sort of obligations,
derived and enforced in the same way, as other
contractual undertakings.” (emphasis added)
Donald J. Weidner
Contractarians Reject the Special Treatment of
Fiduciary Duties.
Frank H. Easterbrook and Daniel R. Fischel,
Contract and Fiduciary Duty, 31(1) J.L. & ECON.
425, 427 (1993).
5
Fiduciary Duties Not Special (cont’d)
“Scholars of non- or antieconomic bent have had trouble coming
up with a unifying approach to fiduciary duties because they
are looking for the wrong things. They are looking for
something special about fiduciary relations. There is nothing
special to find. There are only distinctive and independently
interesting questions about particular consensual (and thus
contractual) relations. . . . Searching for the right definition of a
fiduciary duty is not a special puzzle. In short, there is no
subject here, and efforts to unify it on a ground that presumes
its distinctiveness are doomed.” Id. at 438. (emphasis added)
Donald J. Weidner
More from Easterbrook and Fischel:
6
“But fiduciary relationships also have important features which
differ from those of loan transactions and agreements for the
purchase and sale of goods. Though fiduciary relationships
may, like marriage relationships, be part of the same genus,
they are, like marriage relationships, members of a different
species. They differ in doctrinal structure. They differ in
ethical basis. Some contractualist writing, going beyond
suggestions as to lexical definition, denies one or the other of
these two propositions. This Article aims to establish that both
are true.”
Scott FitzGibbon, Fiduciary Relationships Are Not Contracts, 82
MARQ. L. REV. 303, 305 (1999).
Donald J. Weidner
Others Insist that Fiduciary Duties
Are Special
7
Historical Treatment by Courts
“Traditionally, a contract embracing a fiduciary relationship is
treated specially. The law of agency states that agency ‘is both
a consensual and a fiduciary relation.’ Although the agency
relation normally involves a contract, ‘it is a special kind of
contract, since an agent is not merely a promisor or a promisee
but is also a fiduciary.’ This means that the agent's ‘duties are
similar to those of a testamentary trustee to the beneficiaries.’
Any ‘gaps’ in the contract are filled with this in mind, and
specific provisions are interpreted with this is mind. Doubts
are resolved against the fiduciary.”
Donald J. Weidner, Cadwalader, RUPA and Fiduciary Duty, 54
WASH. & LEE L. REV. 877, 901 (1997).
Donald J. Weidner
Contracts Embracing Fiduciary Relationships Have
Been Treated Specially.
8
• It is often easier to establish a breach of a fiduciary
duty than of a contractual duty
• Burdens are often shifted against those who are
classified as fiduciaries.
• There may be greater remedies for breach of a
fiduciary duty than of a contractual duty
• Tort remedies, and not merely contract remedies,
are often available for breach of fiduciary duties
• Including punitive damages.
Rest. 2d Torts § 874, Comment b (1979).
Donald J. Weidner
Historical Treatment by Courts (cont’d)
9
Historical Treatment by Courts (cont’d)
Fiduciaries Have Greater Burdens of Proof
transaction with the beneficiary, or affecting the beneficiary’s
rights, courts usually impose the burden of proof on
fiduciaries to prove they acted in good faith and fairly, with all
that implies. This burden frequently cannot be satisfied by a
preponderance of the evidence. Instead, the fiduciary may
satisfy his burden only if he produces clear and convincing
evidence of his probity and fair dealing. Fiduciaries may also
be burdened with other procedural disadvantages in trials
with their beneficiaries. Fiduciary status may also affect the
statute of limitations.”
Dan B. Dobbs, THE LAW OF TORTS § 696, at 747 (2000). (emphasis added)
Donald J. Weidner
“Once the beneficiary shows that the fiduciary engaged in a
10
Florida’s Leading “Bad Faith”
Insurance Case
• Plaintiff had his car insured. He let a friend drive it. The friend drove
drunk, crossed a center line and killed a mother and seriously injured
her daughter. Plaintiff’s insurance policy limits were $10,000 bodily
injury per person and $20,000 per accident.
• The deceased’s husband, though not appointed a personal
representative, made a time-limited offer to the Insurance Company
to settle within policy limits.
• Defendant Insurance Company did not pay the claim within the time
limit, the offer to settle was withdrawn and a $1.4 million judgment
was awarded against Plaintiff.
• Insurance Company had not notified Plaintiff until one month after
the expiration of the offer to settle “about the possibility of an excess
judgment and his right to retain independent counsel.”
• Plaintiff sued the Insurance Company for a bad faith refusal to settle
and for failing to advise Plaintiff of the settlement offer.
Donald J. Weidner
Berges v. Infinity Ins. Co., 896 So.2d 665 (Fla. 2004).
11
Berges v. Infinity Ins. Co. (cont’d)
Justice Pariente: Case Concerns Fiduciary Obligation
“This case concerns an insurer’s fiduciary obligation to protect its insured
from a judgment exceeding the limits of the insurance policy.”
Mostly Discussed in Terms of Good Faith
That At Least Requires Due Care
“An insurer, in handling the defense of claims against its insured, has a
duty to use the same degree of care and diligence as a person of
ordinary care and prudence should exercise in the management of his
own business.”
Donald J. Weidner
Most of Justice Pariente’s opinion discussed “the duty of good faith” and
the duty to act “fairly and honestly” toward the insured.
Imposed Because of Control over Another’s Affairs
“For when the insured has surrendered to the insurer all control over the
handling of the claim, including all decisions with regard to litigation
and settlement, then the insurer must assume a duty to exercise such
control and make such decisions in good faith and with due regard for
the interests of the insured.”
12
Berges v. Infinity Ins. Co. (cont’d)
An insurer’s duty of good faith specifically obligates it to:
• advise the insured of settlement opportunities,
• advise on the probable outcome of the litigation,
• warn of the possibility of an excess judgment, and
• advise the insured of any steps he might take to avoid same.
“The duty to inform the insured of the settlement opportunities is one
of the duties subsumed within the duty of good faith owed by an
insurer to an insured.”
“The failure to inform the insured of the settlement offer does not
automatically establish bad faith; it is simply one factor for the jury to
consider in determining whether the insurer acted in bad faith.”
Donald J. Weidner
Specific Aspects of the Duty of Good Faith:
13
• Justice Anstead, Concurring:
“Where the insurance company knows that the liability is
clear and the damages clearly in excess of the policy limits,
that obligation usually requires an insurance company to
seize upon any opportunity to settle within the policy
limits.” 896 So.2d at 685 (emphasis added)
Donald J. Weidner
Berges v. Infinity Ins. Co. (cont’d)
14
Berges v. Infinity Ins. Co. (cont’d)
“[T]here are strategies which have developed in the pursuit of insurance
claims which are employed to create bad faith claims against insurers
when, after an objective, advised view of the insurer’s claims, bad
faith did not occur. This is a strategy which consists of setting
artificial deadlines for claims payments and the withdrawal of
settlement offers when the artificial deadline is not met. The goal of
this strategy is to convert a policy purchased by the insured which
has low limits of insurance into unlimited insurance coverage.”
(emphasis added)
“Bad faith judgments against insurers drive up the premium costs for
all insured's, particularly for insured's who purchase low-limits
liability insurance policies. Liability insurance is a pool of money.
The pool is filled by premiums and drained by claims.”
“The decision in this case will have future impact on Florida citizens
who need to have this insurance at affordable rates.”
Donald J. Weidner
Justice Wells, Dissenting:
15
Berges v. Infinity Ins. Co. (cont’d)
“I do not believe that it is acceptable for the Court to merely say that
bad faith is a jury question. It is the Court’s responsibility to have
logical, objective standards for bad faith and not to avoid setting
definitive standards by declaring bad faith to be a jury question.”
“The Court should recognize that it has the responsibility to reserve bad
faith damages, which is limitless, court-created insurance, to
egregious circumstances of delay and bad faith acts. The Court
likewise has a responsibility to not allow contrived bad faith claims
that are the product of sophisticated legal strategies and not the
product of actual bad faith.” Id. (emphasis added)
Donald J. Weidner
Justice Wells, Dissenting (cont'd):
16
Berges v. Infinity Ins. Co. (cont’d)
“Presenting all bad faith cases to a jury does not provide for the
objective analysis required. What the jury knows in these cases is that
there is a tragically and grievously injured victim, that the insured
had very low limits of insurance, and that if the jury finds against the
insurer, then all of the victim’s damages will be paid by the insurer. It
is these very facts which are not allowed to be known by a jury in
liability cases because of the known prejudicial influence these facts
are known to have on jury verdicts.” (emphasis added)
“I conclude that what is needed are express guidelines which include
set time periods in which all insurers must presumptively make
decisions on claims and issue payments. The guidelines should set
out the conditions for payments such as for the appointment of
guardians. There is also a need for defined penalties for failure to
meet these time requirements rather than limitless insurance.”
(emphasis added)
Donald J. Weidner
Justice Wells, Dissenting (cont'd):
17
Berges v. Infinity Ins. Co. (cont’d)
Justice Cantero referred to the “fiduciary duty” of the insurer. 896 So.2d
at 687.
However, he would have held, as a matter of law, no breach of duty
here.
First set out the duty, citing Guiterrez: An “insurer must investigate the
facts, give fair consideration to a settlement offer that is not
unreasonable under the facts, and settle, if possible, where a reasonably
prudent person, faced with the prospect of paying the total recovery,
would do so.” Boston Old Colony Insurance Co. v. Gutierrez, 386
So.2d 783, 785 (Fl. 1980)(emphasis by Justice Cantero).
“To establish a breach of this duty, claimants must demonstrate more
than mere negligence; they must prove the insurer acted in bad
faith....that the insurer breached its fiduciary duty to the insured by
‘wrongfully refusing to settle the case within the policy limits, and
exposing its insured to a judgment which exceeds the coverage
provided by the policy.”
Donald J. Weidner
Justice Cantero, Dissenting:
18
Berges v. Infinity Ins. Co. (cont’d)
“An insurance company acts in bad faith in failing to
settle the claim against its insured within its policy
limits when under all the circumstances it could and
should have done so had it acted fairly and honestly
towards its insured and with due regard for his or
her interest.”
Donald J. Weidner
Justice Cantero, Dissenting (cont’d):
“Clearly mistakes and miscues do not meet this
standard.”
19
Doe v. Evans, 814 So.2d 370 (Fl. 2002).
Justice Pariente, for the majority, writes:
“[W]e hold that when a church, through its clergy, holds
itself out as qualified to engage in marital counseling and a
counseling relationship arises, that relationship between
the church and the counselee is one that may be
characterized as fiduciary in nature.”814 So.2d at 375.
“[I]t is a question for the jury to determine whether a
fiduciary relationship arose; the nature of that relationship;
and whether as a result of the Church Defendants’
conduct, there was a breach of the Church Defendants’
duty as fiduciaries to Doe.” Id.
Donald J. Weidner
Florida Case Holding Church
and Clergy Fiduciaries
20
Justice Wells, Dissenting:
“To accept the present allegations as stating a cause of
action results in there being an entirely unknown tort
cause of action. This presents many questions. For
example, what is the standard for the fiduciary duty?
How is the standard to be evaluated? If this were pled as a
malpractice action, the standard would be what a
reasonably prudent counselor would or would not do
under the circumstances. Of course, likely what is here
being avoided is that a malpractice standard could inject
church doctrine into the case which would result in the
First Amendment bar.” 814 So.2d at 381.
Donald J. Weidner
Doe v. Evans (cont’d)
21
Agents as Fiduciaries
“Agency is the fiduciary relationship that arises:
[a] when one person (a “principal”) manifests assent to another
person (an “agent”);
[b] that the agent shall act on the principal’s behalf and
[c] subject to the principal’s control, and
[d] the agent manifests assent or otherwise consents so to act.”
Donald J. Weidner
Restatement of the Law (Third) of Agency § 1.01 (2006):
Comment (e) to 1.01 states:
Fiduciary signifies that an agent must act loyally in the principal’s
interest, as well as on the principal’s behalf.
22
Agents as Fiduciaries
• “It is a legal conclusion whether a particular relationship
is one of agency.” Comment (a) to 1.01.
• “Whether a relationship is characterized as agency in an
agreement . . . is not controlling.” Rest. 3d Sec. 1.02.
• Returning to our basic question, why does it matter
whether you classify a duty as fiduciary:
• “Three types of consequences result from an agent’s
fiduciary duties to the principal. First, if an agent breaches
a fiduciary duty of loyalty, distinctive remedies are available
to the principal. Moreover, burdens of proof are often
allocated differently in cases alleging breach of fiduciary
obligation than in civil litigation generally. A different
limitation period may apply, and it may not begin to run
until the principal discovers the breach of the fiduciary
duty.” Comment (e) to Section 1.01.
23
Agents as Fiduciaries (cont’d)
Catchall:
One party to the relationship reposed trust and confidence
in the other consistently with the other’s invitation.
Most Agent Fiduciary Duty Questions Involve the
Agent’s
• Relationship to property owned by the principal
• Confidential information concerning the principal
• Undisclosed relationship with third parties who compete or
deal with the principal
• Undisclosed interest in transactions with the principal or
competitive activity.
Restatement of the Law (Third) of Agency § 1.01 (2006).
Donald J. Weidner
Restatement of the Law (Third) of Agency § 8 (2006).
24
Agents as Fiduciaries (cont’d)
• Act loyally for the principal’s benefit in all matters connected with the
agency relationship.
• Use care in acting on the principal’s behalf.
• Use reasonable efforts to provide material information to the
principal.
• Explain all transactions that the agent has undertaken on the
principal’s behalf to the principal.
• Refrain from acting as or on behalf of a competitor of the principal
during the agency relationship.
Restatement of the Law (Third) of Agency § 8 (2006).
Donald J. Weidner
Agent has the duty to the principal to:
25
Agents as Fiduciaries (cont’d)
• Refrain from competing with the principal.
• Refrain from misleading the principal about the agent’s intentions.
• Refrain from using the principal’s property for the agent’s own
purposes or those of a third party.
• Refrain from communicating confidential information of the principal
for the agent’s own purposes or those of a third party.
• Manage the principal’s property.
• Only use the property in his/her possession on the principal’s behalf,
unless the principal consents to such use.
Donald J. Weidner
Agent has a duty to the principal to (cont'd):
Restatement of the Law (Third) of Agency § 8 (2006).
26
Agents as Fiduciaries (cont'd)
• Not to deal with the principal’s property, so that it appears to be the
agent’s property.
• Not to mingle the principal’s property with someone else’s.
• Keep and render accounts to the principal of money or other property
received or paid out on the principal’s account.
• Act in accordance with the express and implied terms of any contract
between the agent and principal.
• Act reasonably and refrain from conduct that is likely to damage the
principal’s enterprise.
Donald J. Weidner
Agent has a duty to the principal to (cont'd):
Restatement of the Law (Third) of Agency § 8 (2006).
27
Agents as Fiduciaries (cont'd)
• Act with care, competence, and diligence normally exercised by
agents in similar circumstances.
• If the agent claims to possess special skills or knowledge, there is a
duty to act with care, competence, and diligence normally exercised
by agents with such skills or knowledge.
• Not to acquire a material benefit from a third party in connection
with transactions conducted or other actions taken on behalf of the
principal or otherwise through the agent’s use of the agent’s position.
Duties can vary depending on the parties agreement, scope of the
parties relationship, and the duration of the relationship.
Restatement of the Law (Third) of Agency § 8 (2006).
Donald J. Weidner
Agent has a duty to the principal to (cont'd):
28
Agents as Fiduciaries (cont'd)
During the agency relationship, an agent may take action, not wrongful,
to prepare for competition following the termination of the
relationship.
Restatement of the Law (Third) of Agency § 8 (2006).
Donald J. Weidner
Agent does not have a duty to the principal to disclose to the principal
that the agent plans to engage in competition once the agency
relationship has ended.
29
Agents as Fiduciaries (cont'd)
• Obtain the principal’s consent
• Act in good faith
• Disclose all material facts that the agent knows or has reason to know
or should know that would affect the principal’s judgment
• Deal fairly with the principal
Restatement of the Law (Third) of Agency § 8 (2006).
Donald J. Weidner
Avoiding a breach of fiduciary duty requires the agent to:
30
Rice v. First Federal Sav. & Loan Ass’n of Lake County
Donald J. Weidner
Florida Case: No Agency
and No Duty
Rice v. First Federal Sav. & Loan Ass’n of Lake County,
207 So.2d 22 (Fla. 2d DCA 1968)
Borrowers appealed from a judgment of foreclosure on
a mortgage they gave on a building.
B
Note for $12,000
Mortgage on bldg. to be constructed partly
with loan proceeds
CL charges B a fee for “inspection and
supervision”
[1% of loan proceeds]
Construction
Lender
CL
Building began to crumble (shortly after completion)
B
Defaulted on note
CL
B
Sued to foreclose
CL
B
Counterclaimed for damages for
negligent inspection
CL
[the building began to crumble because of
construction defects]
Donald J. Weidner
B
32
Rice v. First Federal (cont’d)
• If a Lender has a duty to its own shareholders to
behave a certain way, should that duty extend to
others who may suffer from its breach?
• Such as Borrowers
Donald J. Weidner
• Did Lender, “by undertaking the inspection of the
construction site and requiring [borrowers] to pay a
fee therefor, impliedly [contract] with [borrowers] to
make such inspection for their benefit?”
33
• Court: A construction lender “has an interest in the
progress and quality of the construction of its
security proportional to the amount of the money
invested and would reasonably be expected to
inspect the construction and be entitled to additional
compensation for its additional costs in making such
inspection.”
• Does this cut for or against imposing a duty on the
lender in favor of the borrower?
Donald J. Weidner
Rice v. First Federal (cont’d)
• Court’s apparent rationale
• It is not necessary to impose liability to induce the lender to
prevent losses because the lender is already under an economic
incentive to engage in loss-avoiding behavior.
• Here, the Lender’s agent did inspect the project.
34
• Court assumed that the Lender was not acting as
an agent of the Borrower.
Recall that under the Restatement Definition:
Agency is the fiduciary relationship that arises
when:
• Principal manifests assent to another
• That the other shall act on the principal’s behalf
• And subject to the principal’s control
• And the other manifests assent or consents so to
act.
Donald J. Weidner
Rice v. First Federal (cont’d)
35
Restatement (Second) of Torts § 874 (1979)
Lake Placid Holding, Co. v. Paparone
Donald J. Weidner
Tort Remedies and the
Fiduciary Relationship
Restatement (Second) of Torts
§ 874 (1979)
“One standing in a fiduciary relation with another is subject to liability
to the other for harm resulting from a breach of duty imposed by the
relation.”
Comment b:
“A fiduciary who commits a breach of his duty as a fiduciary is guilty of
tortious conduct to the person for whom he should act.” (emphasis
added)
“The liability is not dependent solely upon an agreement of contractual
relation between the fiduciary and the beneficiary but results from the
relation.” (emphasis added)
“The remedy of a principal against an agent is ordinarily at law.”
Donald J. Weidner
Violation of Fiduciary Duty Is Tortious Conduct
37
Florida Case on Punitive Damages
Lake Placid Holding, Co. v. Paparone,
508 So.2d 372 (Fla. 2d DCA 1987).
• Purchaser’s assignee appeared as if he was not going to fulfill his
obligation to develop and sell real estate.
• Vendor filed an action seeking damages, specific performance, and
foreclosure of vendor’s lien.
• Vendor reacquired the property pursuant to settlement in lieu of
foreclosure.
• Real estate broker intervened to request portion of damages from the
suit to cover her commission equal to a 50% undivided interest in the
property.
• Broker also claimed Vendor breached fiduciary duties and should pay
punitive damages.
Donald J. Weidner
Facts:
38
Lake Placid Holding, Co. v. Paparone
(cont'd)
“We will not sustain an award of punitive damages for the breach of a
contract save in the circumstance where the conduct producing the
breach is itself endowed with the characteristics of an independent,
actionable tort.”
Donald J. Weidner
Judge Frank vacated findings of fraud and breach of
fiduciary duty and reversed an award of punitive
damages, stating:
“Even a flagrant breach of contract will not support punitive damages.”
“The proof which must be developed in order to warrant the award of
punitive damages in the context of a breach of contract must rise to a
level revealing malice, moral turpitude, wantonness ‘conceived in the
spirit of mischief or criminal indifference to civil obligations.’”
39
Florida’s Enactment of the Revised Uniform Partnership Act
Jewel v. Boxer
Cadwalader, Wickersham & Taft v. Beasley
Donald J. Weidner
Fiduciary Duties In
Partnerships
Revised Uniform Partnership
Act §404
Florida’s Version West F.S.A.
§620.8404
(a) The only fiduciary duties a
partner owes to the
partnership and the other
partners are the duty of
loyalty and the duty of care
set forth in subsections (b)
and (c).
(b) A partner’s duty of loyalty to
the partnership and the other
partners is limited to the
following:
(1) The only fiduciary duties a
partner owes to the
partnership and the other
partners are the duty of
loyalty and the duty of care,
as set forth in subsections (2)
and (3).
(2) A partner’s duty of loyalty to
the partnership and the other
partners is limited to the
following:
Donald J. Weidner
General Standards of Partner’s
Conduct (exclusive list of fiduciary duties)
41
Revised Uniform Partnership
Act § 404
Florida’s Version West F.S.A.
§ 620.8404
(1) To account to the partnership
and hold as trustee for it any
property, profit, or benefit
derived by the partner in the
conduct and winding up of
the partnership business or
derived from a use by the
partner of partnership
property, including the
appropriation of a partnership
opportunity;
(a) To account to the partnership
and hold as trustee for the
partnership any property,
profit, or benefit derived by
the partner in the conduct and
winding up of the partnership
business or derived from a use
by the partner of partnership
property, including the
appropriation of a partnership
opportunity;
Donald J. Weidner
General Standards of Partner’s
Conduct (cont'd)
42
Revised Uniform Partnership
Act § 404
Florida’s Version West F.S.A.
§ 620.8404
(2) To refrain from dealing with
the partnership in the conduct
or winding up of the
partnership business as or on
behalf of a party having an
interest adverse to the
partnership; and
(3) To refrain from competing
with the partnership in the
conduct of the partnership
business before the dissolution
of the partnership.
(b) To refrain from dealing with
the partnership in the conduct
or winding up of the
partnership business as or on
behalf of a party having an
interest adverse to the
partnership; and
(c) To refrain from competing
with the partnership in the
conduct of the partnership
business before the dissolution
of the partnership.
Donald J. Weidner
General Standards of Partner’s
Conduct (cont'd)
43
Revised Uniform Partnership
Act § 404
Florida’s Version West F.S.A.
§620.8404
(c) A partner’s duty of care to the
partnership and the other
partners in the conduct and
winding up of the partnership
business is limited to refraining
from engaging in grossly
negligent or reckless conduct,
intentional misconduct, or a
knowing violation of law.
(d) A partner shall discharge the
duties to the partnership and the
other partners under this [Act]
or under the partnership
agreement and exercise and
rights consistently with the
obligation of good faith and fair
dealing.
(3) A partner’s duty of care to the
partnership and the other
partners in the conduct and
winding up of the partnership
business is limited to refraining
from engaging in grossly
negligent or reckless conduct,
intentional misconduct, or a
knowing violation of law.
(4) A partner shall discharge the
duties to the partnership and the
other partners under this act or
under the partnership
agreement and exercise any
rights consistently with the
obligation of good faith and fair
dealing.
Donald J. Weidner
General Standards of Partner’s
Conduct (cont'd)
44
Revised Uniform Partnership
Act § 404
Florida’s Version West F.S.A.
§620.8404
(e) A partner does not violate a
duty or obligation under this
[Act] or under the partnership
agreement merely because the
partner’s conduct furthers the
partner’s own interest.
(f)A partner may lend money to
and transact other business with
the partnership, and as to each
loan or transaction the rights
and obligations of the partner
are the same as those of a person
who is not a partner, subject to
other applicable law.
(5) A partner does not violate a
duty or obligation under this act
or under a partnership
agreement merely because the
partner’s conduct furthers the
partner’s own interest.
(6) A partner may lend money to
and transact other business with
the partnership, and as to each
loan or transaction, the rights
and obligations of the partner
are the same as those of a person
who is not a partner, subject to
other applicable law.
Donald J. Weidner
General Standards of Partner’s
Conduct (cont'd)
45
Revised Uniform Partnership
Act § 404
Florida’s Version West F.S.A.
§ 620.8404
(g) This section applies to a
person winding up the
partnership business as the
person or legal representative
of the last surviving partner as
if the person were a partner.
(7) This section applies to a
person winding up the
partnership business as the
person or legal representative
of the last surviving partner as
if the person were a partner.
Donald J. Weidner
General Standards of Partner’s
Conduct (cont'd)
See Donald J. Weidner, Cadwalader, RUPA and Fiduciary,
54 WASH. & LEE L. REV. 877 (1997).
See also generally, Robert W. Hillman, Allan W. Vestal and
Donald J. Weidner, THE REVISED UNIFORM PARTNERSHIP ACT
(2011).
46
Partner’s Rights and Duties With
Respect to Information
FRUPA § 620.8403 sets out the partnership and partners’ rights
and duties with respect to information. It is striking that these
(3) Each partner and the partnership shall furnish to a partner, and to
the legal representative of a deceased partner or partner under legal
disability:
(a) Without demand, any information concerning the partnership’s
business and affairs reasonably required for the proper exercise of
the partner’s rights and duties under the partnership agreement or
this act; and
(b) Upon demand, any other information concerning the partnership’s
business and affairs, except to the extent the demand or the
information demanded is unreasonable or otherwise improper
under the circumstances.
Donald J. Weidner
information duties are NOT fiduciary duties under the RUPA or
FRUPA. See § 620.8403 (3)(a),(b) (1995).
47
• Except for the mandatory rules listed in 620.8103(2), the
partnership agreement controls the relations among
partners and between the partnership and partner.
620.8103(1).
• 620.8103(2) says the partnership agreement may not:
• “unreasonably restrict the right of access to books and
records under s. 620.8403(2) or to information under s.
620.8403(3).”
• “unreasonably reduce the duty of care under s. 620.8404(3)
or s. 620.8603(2)(c)”
MANDATORY RULES CONTINUED ON NEXT SLIDE
Donald J. Weidner
Mandatory Fiduciary (and
related) Duties (information and care)
48
Mandatory Fiduciary (and
related) Duties (cont’d)(loyalty)
• However, the partnership agreement “may identify
specific types or categories of activities that do not violate
the duty of loyalty, if not manifestly unreasonable.” Also,
ratification is authorized if full disclosure. 620.8103(d)(1)
and (2).
Donald J. Weidner
• 620.8103(2)(d) says the partnership agreement may not:
“Eliminate the duty of loyalty under s. 620.8404(2) or s.
620.8603(2),”
• MANDATORY RULES CONTINUED ON NEXT SLIDE
49
Mandatory Fiduciary (and
related) Duties (cont’d)(good faith and fair dealing)
• but the partnership agreement “may prescribe the standards
by which the performance of the obligation is to be
measured if the standards are not manifestly unreasonable.”
• The prohibitions against unreasonable reduction and
elimination are softer than the do not “vary” limitation
on certain other rules. The hierarchy:
• May not vary
• May not unreasonably restrict or reduce
• May not eliminate
Donald J. Weidner
• 620.8103(2)(f) says the partnership agreement may not:
“Eliminate the obligation of good faith and fair dealing
under s. 620.8404(4),”
50
Supplemental Principles of Law
• FRUPA Section 620.8104(1): “Unless displaced by
particular provisions of this act, the principles of law and
equity supplement this act.”
• These supplemental principles “encompass not only the
law of agency and estoppel and the law merchant
mentioned in the UPA, but all of the other principles
listed in UCC Section 1-103: the law relative to capacity
to contract, fraud, misrepresentation, duress, coercion,
mistake, bankruptcy, and other common law validating
or invalidating causes, such as unconscionability. Official
Comments to RUPA Section 104.
51
Revised Uniform Partnership
Act § 603
Florida’s Version West F.S.A §
620.8603
(b) Upon a partner’s
dissociation:
(1) The partner’s right to
participate in the
management and conduct of
the partnership business
terminates, except as
otherwise provided in
Section 803;
(2) The partner’s duty of loyalty
under Section 404(b)(3)
terminates; and
(3) The partner’s duty of loyalty
under Section 404(b)(1) and
(2) and duty of care under
(2) Upon a partner’s dissociation:
(a) The partner’s right to
participate in the
management and conduct of
the partnership business
terminates, except as
otherwise provided in
Section 620.8803;
(b) The partner’s duty of loyalty
under Section 620.8404(2)(c)
terminates; and
(c) The partner’s duty of loyalty
under Section 620.8404(2)(a)
and (b) and duty of care
under Section 620.8404(3)
Donald J. Weidner
Effect of Partner’s Dissociation on
Fiduciary Duties
52
Revised Uniform Partnership
Act § 603
Florida’s Version West F.S.A.
§ 620.8603
(3) Section 404 (c) continue only
with regard to matters arising
and events occurring before
the partner’s dissociation,
unless the partner participates
in winding up the
partnership’s business
pursuant to Section 803.
(c) Continue only with regard to
matters arising and events
occurring before the partner’s
dissociation, unless the
partner participates in
winding up the partnership’s
business pursuant to Section
620.8803.
Donald J. Weidner
Effect of Partner’s Dissociation on
Fiduciary Duties (cont'd)
53
Effect of Partner’s Dissociation on
Fiduciary Duties (cont'd)
Subsections (b)(2) and (3) clarify a partner’s fiduciary duties upon
dissociation. No change from current law is intended. With respect
to the duty of loyalty, the Section 404(b)(3) duty not to compete
terminates upon dissociation, and the dissociated partner is free
immediately to engage in a competitive business, without any further
consent. With respect to the partner’s remaining loyalty duties under
Section 404(b) and duty of care under Section 404(c), a withdrawing
partner has a continuing duty after dissociation, but it is limited to
matters that arose or events that occurred before the partner
dissociated.”
Donald J. Weidner
Official Comments, Comment 2 (R.U.P.A. § 603 (2011);
and West F.S.A. § 620.8603 (1995).)
54
Effect of Partner’s Dissociation on
Fiduciary Duties (cont'd)
“For example, a partner who leaves a brokerage firm may immediately
compete with the firm for new clients, but must exercise care in
completing on-going client transactions and must account to the firm
for any fees received from the old clients on account of those
transactions. As the last clause makes clear, there is no contraction of
a dissociated partner’s duties under subsection (b)(3) if the partner
thereafter participates in the dissolution and winding up the
partnership’s business.”
Donald J. Weidner
Official Comment 2 (cont'd)
55
Revised Uniform Partnership
Act § 405
Florida’s Version
West F.S.A § 620.8405
(a) A partnership may maintain
an action against a partner
for breach of the partnership
agreement, or for the
violation of a duty to the
partnership, causing harm to
the partnership.
(b) A partner may maintain an
action against the
partnership or another
partner for legal or equitable
relief with or without an
accounting as to partnership
business, to:
(1) A partnership may maintain
an action against a partner
for a breach of the
partnership agreement, or for
the violation of a duty to the
partnership, causing harm to
the partnership.
(2) A partner may maintain an
action against the
partnership or another
partner for legal or equitable
relief, with or without an
accounting as to partnership
business to:
Donald J. Weidner
Actions to Enforce Duties and
Obligations (cont’d)
56
Revised Uniform Partnership
Act § 405
Florida’s Version West F.S.A.
§ 620.8405
(1) Enforce the partner’s rights
under the partnership
agreement;
(2) Enforce the partner’s rights
under this [Act]
(rest of this section omitted)
(c) The accrual of, and any time
limitation on, a right of action
for a remedy under this
section is governed by other
law. A right to an accounting
upon a dissolution and
winding up does not revive a
claim barred by law.
(a) Enforce such partner’s rights
under the partnership
agreement;
(b) Enforce such partner’s rights
under this act
(rest of this section omitted)
(3) The accrual of, and any time
limitation on, a right of action
for a remedy under this
section is governed by other
law. A right to an accounting
upon a dissolution and
winding up does not revive a
claim barred by law.
Donald J. Weidner
Actions to Enforce Duties and
Obligations (cont'd)
57
Actions to Enforce Duties and
Obligations (cont'd)
“Section 405(c) replaces UPA Section 43 and provides that other (i.e.,
non-partnership) law governs the accrual of a cause of action for
which subsection (b) provides a remedy. The statute of limitations on
such claims is also governed by other law, and claims barred by a
statute of limitations are not revived by reason of the partner’s right
to an accounting upon dissolution, as they were under the UPA. The
effect of those rules is to compel partners to litigate their claims
during the life of the partnership or risk losing them. Because an
accounting is an equitable proceeding, it may also be barred by laches
where there is an undue delay in bringing the action. Under general
law, the limitations periods may be tolled by a partner’s fraud.”
Donald J. Weidner
Official Comments, Comment 4 (R.U.P.A. § 405 (2011);
and West F.S.A. § 620.8405 (1995).)
58
Partnership Hypothetical #1
• HYPO #1: Attorneys Moe, Larry and Curley worked in
“Law Offices of Grand Old Man.” Those offices
primarily handled plaintiff’s personal injury litigation on
a contingent fee basis. Although they were not called
partners on firm stationery or accounts, Moe, Larry,
Curley and Old Man shared profits, occasionally referred
to one another as partners and filed partnership tax
returns. While Moe Larry and Curley were still in those
offices, an insurance company interfered with the firm’s
relationship with a client. Moe Larry and Curley
subsequently left the firm to serve on the bench. Grand
Old Man continued to practice and sued the insurance
company for the interference with the client
relationship. Years later, Grand Old Man received a $15
million judgment against the insurance company. May
Moe Larry and Curley claim a share of the award?
59
Partnership Hypothetical #2
• HYPO #2. Assume the same firm. Assume Moe had
been handling a very promising contingent fee case for
Client. Shortly before the case went to trial, Moe left the
firm, taking Client with him. Moe subsequently won a
huge judgment for Client, who paid Moe a 30%
contingency fee. Do Larry, Curley and Grand Old Man
have a claim against Moe for a share of a contingency
fee?
60
Partnership Hypothetical #3
• HYPO #3. Assume again the Moe, Larry, Curley and Old
man law firm except assume also that it registered as a
limited liability partnership. Assume again that Moe left,
took Client with him, won the same judgment for Client
and received the same 30% contingency fee. Assume
also that the firm is heavily in debt for the art collection
and other firm assets it acquired over the years. Do the
firm creditors have any claim against the contingency fee
paid to Moe?
61
Currently Controversial California
Breakup Case
• Four attorneys created a law firm partnership.
• There was neither a written partnership agreement nor a dissolution
agreement.
• The partners dissolved the law firm partnership and formed two new
law firms.
• Each partner contacted his own clients under the old partnership to
alert them of the dissolution and offer them “substitution of attorney”
forms. The old clients went with the new firms, which represented
the clients under the fee agreements entered into with the old firm.
• Plaintiffs, two of the partners, filed a complaint against the other two
partners for an accounting of fees from clients retained during the
former partnership.
Donald J. Weidner
Jewel v. Boxer,
156 Cal.App.3d.171, 203 Cal.Rptr. 13 (1984).
62
Jewel v. Boxer (cont’d)
“[I]n the absence of a partnership agreement, the Uniform Partnership
Act requires that attorneys’ fees received on cases in progress upon
dissolution of a law partnership are to be shared by the former
partners according to their right to fees in the former partnership,
regardless of which former partner provides legal services in the case
after the dissolution.”
“The fact that the client substitutes one of the former partners as
attorney of record in place of the former partnership does not affect
this result.”
Donald J. Weidner
Key Rules:
“Under the Uniform Partnership Act . . . , a dissolved partnership
continues until the winding up of unfinished partnership business.”
63
Jewel v. Boxer (cont'd)
The Right of a Client to Choose a New Attorney is Not in
Conflict.
“The right of a client to the attorney of one’s choice and the rights and
duties as between partners with respect to income from unfinished
business are distinct and do not offend one another.”
“Once the client’s fee is paid to an attorney, it is of no concern to the
client how that fee is allocated among the attorney and his or her
former partners.”
Donald J. Weidner
Income from Unfinished Business is a Firm Asset, Even
if the Departing Partner Finishes the Business.
64
Jewel v. Boxer (cont'd)
A Partner’s Fiduciary Duties Prevent the Partner from Diverting the
“The substitutions of attorneys here did not alter the character of the
cases as unfinished business of the old firm. To hold otherwise,
would permit a former partner of a dissolved partnership to breach
the fiduciary duty not to take any action with respect to unfinished
partnership business for personal gain.”
“A partner is entitled to the reasonable value of the services in
completing the partnership business. He may not seize for his own
account the business which was in existence during the terms of the
partnership.”
Donald J. Weidner
Partnership Business for Personal Gain.
65
Jewel v. Boxer (cont'd)
“[U]ndue hardship should be prevented by two basic fiduciary duties
owned between the former partners.”
“First, each former partner has a duty to wind up and complete the
unfinished business of the dissolved partnership. This would
prevent a partner from refusing to furnish any work and imposing
this obligation totally on the other partners, thus unfairly benefitting
from their efforts while putting forth none of his or her own.”
“Second, no former partner may take any action with respect to
unfinished business which leads to purely personal gain. . . . Thus
the former partners are obligated to ensure that a disproportionate
burden of completing unfinished business does not fall on one former
partner or one group of former partners, unless the former partners
agree otherwise.”
Donald J. Weidner
Partner Duties on Law Firm Breakup (cont'd)
66
Jewel v. Boxer (cont'd)
“The right of partners upon dissolution to have partnership property
applied to discharge its liabilities and the surplus applied to pay in
cash the net amount owing to the respective partners.” (See UPA § 38,
FRUPA Section 620.8807(1)).
RUPA has enhanced protection for post-dissolution service
provider:
NOTE: Because of the extensive services often provided in law firm
breakups, RUPA Section 401(h) changed the UPA’s “no
compensation” rule and now provides:
“A partner is not entitled to remuneration for services performed for the
partnership, except for reasonable compensation for services
rendered in winding up the business of the partnership.” See also
FRUPA Section 620.8401(h).
Donald J. Weidner
Dissolved Partners Have the Right to Be Paid in Cash for
Partnership Property (including unfinished business):
67
Florida Law Firm Breakup Case
• Cadwalader, Wickersham & Taft v. Beasley, 728 So.2d 253
(Fla. 4th DCA 1998).
• Applied New York Law to a case involving a Palm Beach
partner claiming “wrongful expulsion.”
• Punitive damages were appropriate even though there
were no compensatory damages: “Under New York law,
the nature of the conduct which justifies an award of
punitive damages is conduct having a high degree of
moral culpability, or, in other words, conduct which
shows a “conscious disregard of the rights of others or
conduct so reckless as to amount to such
disregard.’”(emphasis added)
Donald J. Weidner
(although applying New York law)
68
Kham & Nate’s Shoes No.2, Inc. v. First Bank of Whiting
Penthouse Intern., Ltd. v. Dominion Federal Sav. & Loan Ass’n
Donald J. Weidner
The Implied Obligation of
Good Faith and Its Limits
The Contractual Obligation of Good
Faith
• Stated somewhat differently, contractual
provisions must be carried out “in good faith”
• Which the U.C.C. § 1-201(19) (2003), defines most
generally as “honesty in fact”
• Except that, for a merchant, good faith requires
both:
• [a] honesty in fact and
• [b] the observance of reasonable commercial
standards of fair dealing in the trade.
Donald J. Weidner
• The overarching mandatory obligation in
contract is to act in “good faith.” U.C.C. § 1-201
(2003). RESTATEMENT (SECOND) of CONTRACTS §
205 (1981).
70
Kham & Nate’s Shoes No.2, Inc. v.
First Bank of Whiting, 908 F.2d 1351 (7th Cir. 1990).
• The parties signed a loan agreement on Jan. 23, 1984 stating, “nothing
provided herein shall constitute a waiver of the right of the Bank to
terminate financing at any time.”
• On Feb. 29, 1984, Defendant mailed the Plaintiff a letter stating that it
would make no additional advances after March 7, 1984, although the
Plaintiff’s customers and suppliers already drew on the credit.
Donald J. Weidner
Famous Statement by Judge Easterbrook on the limitations
of judicial use of the rubric of “good faith”
Facts Most Briefly
Bankruptcy Court Found “Unfair Advantage” Was Taken
• The Bankruptcy judge granted the Plaintiff’s reorganization plan and
found the Defendant had behaved inequitably in terminating the
line of credit and inducing Plaintiff’s suppliers to draw on the
letters of credit.
71
Kham & Nates Shoes (cont’d)
Judge Easterbrook’s Analysis:
Judge Easterbrook emphasized the rights of parties to rely on their
contracts: “contracts specify the duties of the parties to each other,
and each may exercise the privileges it obtained.” The parties are not
required to “do more.”
He also stated that “parties to a contract are not each other’s fiduciaries;
they are not bound to treat customers with the same consideration
reserved for their families.”
Donald J. Weidner
The parties dealt at arms length.
72
• Judge Easterbrook stated:
“Firms that have negotiated contracts are
entitled to enforce them to the letter, even to
the great discomfort of their trading
partners, without being mulcted for lack of
‘good faith.’ Although courts often refer to
the obligation of good faith that exists in every
contract . . . this is not an invitation to the court
to decide whether one party ought to have
exercised privileges expressly reserved in the
document.”
(emphasis added)
Donald J. Weidner
Kham & Nates Shoes (cont’d)
73
• Judge Easterbrook (cont'd):
“‘Good faith’ is a compact reference to an
implied undertaking not to take
opportunistic advantage in a way that could
not have been contemplated at the time of
drafting, and which therefore was not
resolved explicitly by the parties. When the
contract is silent, principles of good
faith…fill the gap. They do not block use of
terms that actually appear in the contract.”
Donald J. Weidner
Kham & Nates Shoes (cont’d)
(emphasis added)
74
Facts:
• In short, Penthouse sued an S & L and its
lawyer for failure to close a loan.
• S & L relied on a provision in its contract that
said its obligation would end if the loan was not
closed by a certain date.
• Negotiations went on past that date but
ultimately ended without a closing.
• Court below awarded $128,000,000 to
Penthouse against the S & L and its attorney
and his law firm, who were held jointly and
severally liable.
• The judgment included 10 years of lost
profits on a hotel and casino project.
Donald J. Weidner
Penthouse Intern., Ltd. v. Dominion Federal Sav.
& Loan Ass’n, 855 F.2d 963 (2d Cir. 1988).
75
• On appeal, the Second Circuit reversed, taking a
philosophically different approach than the
lower court. Judge Altimari wrote:
• In the guise of construing the terms of an
agreement, “court[s] will not make a
different or better contract than the parties
themselves have seen fit to enter into[.]”
• March 1 was the final closing date and was the
date on which the commitment expired.
• even though “the parties’ conduct in
continuing to negotiate after March 1st may
be consistent with an implied extension of
the expiration date.”
Donald J. Weidner
Penthouse (cont’d)
76
Penthouse (cont’d)
• “The parties bargained for a loan commitment that
remained open only for a stated duration and we
are not at liberty to construe that agreement in a
manner inconsistent with its clear language.”
Donald J. Weidner
The Second Circuit’s Reversal
77
Gottsacker v. Monnier
Executive Center III, LLC v. Meieran
Donald J. Weidner
Common Duties Among
Organizations?
Gottsacker v. Monnier,
281 Wis.2d. 361, 697 N.W.2d. 436 (Wis. 2005).
• Monnier formed New Jersey, LLC as a vehicle to own investment real
estate.
• Paul and Gregory Gottsacker became members of New Jersey, LLC,
with a total of 50% interest and 50% voting rights.
• After a strained relationship, Monnier and Paul started 2005 New
Jersey, LLC; transferred the remaining asset from New Jersey, LLC to
2005 New Jersey LLC, and sent Gregory a check representing his
interests in New Jersey, LLC.
• The trial court found that the transfer served no legitimate business
interest, and because Monnier and Paul both profited from it, the
property had to be returned to the former LLC.
• The court of appeals affirmed the trial court on different grounds,
finding it was not an arm’s length transaction.
Donald J. Weidner
Represents a More Usual View of Fiduciary Duties as
Modified by Statute
Facts:
79
Gottsacker v. Monnier (cont’d)
The court found a “material conflict of interest” in the conveyance of the
property, and that Monnier and Paul engaged in self-dealing, because
they increased their individual interests in the new LLC, which
received the property.
The court determined that “members with a material conflict of interest
[are prohibited] from acting in a manner that constitutes a willful
failure to deal fairly with the LLC or its other members.”
Donald J. Weidner
Wisconsin Supreme Court Analysis:
80
Gottsacker v. Monnier (cont’d)
“A limited liability company is a business entity created by statute
where those who hold an interest in the entity are known as
members.”
“The rights and obligations of a limited liability company to its
members, of the members to the limited liability company and to each
other are set by [Wisconsin’s limited liability company statute].”
Donald J. Weidner
Judge Patience Roggensack’s Concurring Opinion:
“Common law concepts such as the fiduciary duty of a major
shareholder of a corporation to a minority shareholder are replaced
by statutory obligations.” (emphasis added)
81
“The rights and obligations may be adjusted through a contract.”
Executive Center III, LLC v. Meieran,
2011 WL 4704274, E.D.Wis. 2011(Oct. 4, 2011).
Represents an Expansive View of Fiduciary Duties
Running to Third Parties and Apart from Statute
• BRIC Executive, LLC sold an interest in the LLC to Defendants.
• Plaintiffs bought an office building from BRIC and agreed to leaseback office space to BRIC for 3 years.
• BRIC became insolvent and paid the Defendants their interest owed
in the company, which was a transfer of assets in BRIC, and defaulted
on the lease with Plaintiffs.
• Plaintiffs filed suit claiming a breach of fiduciary duty owed to
plaintiff amongst other claims.
Donald J. Weidner
Facts:
82
Executive Center III, LLC v. Meieran
(cont’d)
The court found that common law duties do apply to Wisconsin LLCs
and distinguished the Gottsacker case.
“Justice Roggensack mentioned only common law duties regarding the
relations between interior members...she never definitively stated that
common law fiduciary duties regarding third parties have been
abrogated by statute.”
“Logic dictates that fiduciary duties exist to protect people who are
affected by the actions of people who control businesses.”
“The existence of LLC statutes does not necessarily mean that common
law fiduciary duties do not apply to LLCs.” (emphasis added)
“LLCs share much in common with corporations. Like LLCs,
corporations are creatures of statutes...Nonetheless, corporations are
considered to have common law fiduciary duties.
Donald J. Weidner
District Court’s Analysis:
83
Executive Center III, LLC v. Meieran
(cont’d)
“In fact, there is a growing consensus that common law fiduciary duties
should apply to the operations of LLCs....Logic dictates the same.
Fiduciary duties exist to protect people who are affected by the
actions of those who control businesses. Therefore, it would not
make any sense if the expectation for a business to act fairly were to
be different simply due to the business owners’ choice of form-an
LLC in this case. If that were so, every dishonest owner could simply
elect to operate its business as an LLC and claim that no fiduciary
duties applied to its actions....For these reasons, the Court finds that
common law fiduciary duties apply to LLCs.” (emphasis added)
Donald J. Weidner
District Court Analysis (cont’d):
84