Partnerships: Fiduciary Duties
Agency & Partnership
Compared
Principal
Third Party
Hierarchy
Agent
Agency & Partnership
Compared
Principal
Partner
Third Party
Equality
Partner
Agent
Partner’s Duties
Partner
Partner
Partnership
Uniform Partnership Acts
• Uniform Partnership Act (1914)
–All states adopted except Louisiana
–Goal was uniformity … is that good?
–Simple, but internally inconsistent
• Revised Uniform Partnership Act
(1994)(1997)
–33 states . . . so far (Including FL – Ch. 620.8)
–Longer … but more coherent?
The Classic View of the Duty of
Loyalty (note: changed by RUPA):
Benjamin Cardozo
Cardozo: The Punctilio Paragraph
Joint venturers, like copartners, owe to one another, while the
enterprise continues, the duty of the finest loyalty. Many
forms of conduct permissible in a workaday world for those
acting at arm’s length, are forbidden to those bound by
fiduciary ties. A trustee is held to something stricter than the
morals of the market place. Not honesty alone, but the
punctilio of an honor the most sensitive, is then the
standard of behavior. As to this there has developed a
tradition that is unbending and inveterate. Uncompromising
rigidity has been the attitude of courts of equity when
petitioned to undermine the rule of undivided loyalty by the
“disintegrating erosion” of particular exceptions . . . Only thus
has the level of conduct for fiduciaries been kept at a level
higher than that trodden by the crowd. It will not consciously
be lowered by any judgment of this court.
Meinhard v. Salmon
Meinhard and Salmon are joint venturers. Meinhard takes a
20-year lease from Gerry (“Jerry”) to operate a hotel.
Salmon holds the lease in his name and runs the hotel;
Meinhard supplies half the capital and is a passive investor.
Salmon gets 60% of profits for first five years, then 50-50 for
the remaining fifteen. Losses are split equally.
When the first lease is about to run out, (different) Gerry
presents Salmon with a new opportunity: lease the whole
block for 80 years.
Salmon accepts for his corporation (Midpoint), without
consulting Meinhard; Meinhard now wants a piece of the
action.
Hotel Bristol (Circa 1920)
From: New York Public Library; archived
photographs.
Hotel Bristol (Circa 1920)
From: New York Public Library; archived
photographs.
Possible Venture Terms
Better
For
Meninhard
1. Same Term Option: Meinhard participates
in any new opportunity on the same terms
as in the 20-year joint venture. (This is
close to Cardozo’s remedy: Meinhard got a
50% participation in the new deal, just like
the old deal.)
2. Competition/Renegotiation: Salmon must
inform Meinhard, who is free to compete
for, or renegotiate over, any new
opportunity. (Cardozo suggests this is what
Salmon’s fiduciary duty required.)
Better
For
Salmon
3.
Salmon’s option: Salmon can keep the
new opportunity or offer a piece to
Meinhard, as he likes.
Loyalty: Agents v. Partners
Principal
“… duty to act
loyally for the
principal’s benefit”
(Restatement
Third)
Agent
Loyalty: Agents v. Partners
Partner
Partner
Partnership
“Partner does not violate a duty … merely because the
partner’s conduct furthers the partner’s own interest”
RUPA § 404(e)
RUPA Standards: Loyalty
• Loyalty three ways
–“anti-theft” – excludes “formation” and explicitly
includes “appropriation of partnership
opportunity”
–“self-dealing” – partner is on both sides of a
transaction
–“competition” – before dissolution
UPA Loyalty Standard
• “Self-dealing” standard
“to refrain from dealing . . . In the conduct or
winding up of the partnership business as or on
behalf of a party having an interest adverse to the
partnership.”
RUPA § 404(b)(2)
UPA Loyalty Standard
• “Anti-theft” standard
“to account to the partnership . . . for any . .
.benefit derived by the partner in the conduct . . .
of the partnership business or derived from a use .
. . Of partnership property, including the
appropriation of a partnership opportunity.”
RUPA § 404(b)(1)
UPA Loyalty Standard
• “Competition” standard
“to refrain from competing . . . before the
dissolution of the partnership.”
RUPA § 404(b)(3)
Contract & Fiduciary Duty
Partner
Contrac
t
Partner
Partnership
Loyalty: partners may specify acceptable activities “if not
manifestly unreasonable”
RUPA Standards: Care
• Duty of Care
–Limited to “engaging in grossly negligent or
reckless conduct, intentional misconduct, or a
knowing violation of law”
Contract & Fiduciary Duty
Partner
Contrac
t
Partner
Partnership
Care: partners may not “unreasonably reduce”
Bound by Partners Actions: Andersen
(2002)
As Andersen Sinks, Staffers Find Job Prospects Are Scarce
Wall Street Journal – June 18, 2002
. . . Mr. White headed up the "valuation" practice, part of a team of about
50 people who tabulate what companies, stocks and deals are worth. . . .
"How did I get dragged into this?" he asks. Besides a couple hours here
and there, he says he had nothing to do with Enron. In fact, he was bitter
about that. "A couple years ago, I had meetings, saying this company is a
huge client, why aren't you giving me any of the work? I think they were
arrogant enough to think they didn't need my input.”
Mr. White took out a second mortgage on his home as a "shock absorber."
He also borrowed money from elsewhere to start a consulting firm with a
partner, a deal he is still working out. He sold the convertible Mercedes he
bought his wife last year for Mother's Day. "We're leveraging our lives to
buy our freedom," he says. He anticipates a pay cut to about $300,000 a
year under the new arrangement.
It will still be enough to cover his $15,000-a-month living expenses,
including the mortgage on his 5,000-square-foot home with swimming pool
and game room with four TVs.
National Biscuit v. Stroud
Stroud and Freeman are partners in Stroud’s Food Center
(SFC).
Stroud tells Nabisco he “he personally would not be
responsible” for any bread delivered to SFC after Feb. 6th.
Nabisco nevertheless delivers bread after Feb. 6th, worth
$171.04, to SFC at the request of Freeman.
Partnership dissolves on Feb. 25th.
Court finds that Stroud is liable for the bread because
“Stroud, by himself, was not, and could not be, a majority of
the partners” and Freeman, therefore, could bind the
partnership on an “ordinary matter connected with the
partnership business.”
The Equally Divided Partnership
• Nabisco v. Stroud : Absent agreement
to the contrary, partnership decisions
are governed by a majority vote of the
partners. Since a majority didn’t vote to
end Freeman’s actual authority to buy
bread on credit from Nabisco, the
partnership is bound by Freeman’s
actions. If the partnership is liable, so is
Stroud.
Advice to Stroud
• Advice to Stroud: (1) He should have told Nabisco that
he was dissolving the partnership (RUPA 804(2)) or
disassociating from the partnership (RUPA 703(b)(2). (2)
At the time of forming the partnership, if Freeman would
have agreed, Stroud could have been granted a
controlling interest in the management of the
partnership, named a third-party as a tie-breaker, or
required unanimous partner consent to doing business
with any supplier. Then, Stroud could have informed
Nabisco that Freeman did not have actual authority to
contract (showing the partnership agreement to
Nabisco). (3) If Stroud’s sole concern was his personal
liability, he and Freeman could have formed a LLP, but
the assets of the LLP would still be exposed to Nabisco.
Cf: Summers v. Dooley
• Summers v. Dooley : Summers and Dooley
formed a trash-collection partnership. Summers
decided that they needed a third man, but
Dooley disagreed. Summers went ahead an
hired a third man anyway, and tried to bill the
partnership for the wages paid to the third
man. Held: Summer loses. Absent agreement
to contrary, partnership decisions are
governed by a majority vote of the partners
. Hiring a third man requires a majority vote and
Summers doesn’t control a majority.
Reconciling the 2 cases
• Reconciling cases: (1) Nabisco is suit by third
party. Summers is suit between partners; (2) Freeman
was acting in "in the ordinary course the partnership
business" and had actual "authority to act for the
partnership in the particular matter." (RUPA
301). Summers didn’t? According to the
court, Summers "changed the status quo." [but query if
3rd party had sued Dooley}. Rather than RUPA 301,
Summers gives effect to RUPA 401(f). (3) What makes
Nabisco troubling is that Stroud told Nabisco that he
would accept no liability. One might see this as an
application of the rule that statements of agents about
authority do not create (or in this case, eliminate)
authority. [ Contrast this with showing Nabisco the
partnership documents].