The Fiduciary Duties of General Partners
| Publication year | 1988 |
| Pages | 1959 |
1988, October, Pg. 1959. The Fiduciary Duties of General Partners
Partnerships continue to be used frequently in lieu of corporations and other entities as vehicles for business enterprises. As a result of partners' disparate negotiating positions when a partnership is formed, partnership agreements tend to concentrate power and authority in one or two general partners at the expense of the rights of the other general and limited partners. One of the few constraints on managing partners' authority is their fiduciary duties to their partners. This article explores both the basic principles of general partners' fiduciary duties and the extent to which fiduciary duties may be modified or eliminated by agreement among partners.
The principles of fiduciary duty among partners were first described in England in reported cases from the 18th century. These principles were carried over into reported cases from the United States as early as the mid- to late-19th century. Although certain subsequently adopted statutes affect a partner's fiduciary duty, fiduciary duty continues to this day to be shaped primarily by common law.
The Uniform Partnership Act ("UPA")(fn1) was promulgated in 1914 and currently is law in every state except Georgia and Louisiana. The UPA applies to all general partnerships and also to limited partnerships except to the extent that the applicable limited partnership statute contravenes the UPA. The most important provision of the UPA relating to fiduciary duty is § 21(1), entitled "Accountable as a Fiduciary":
Every partner must account to the partnership for any benefit and hold as trustee for it any profits derived by him without the consent of the other partners from any transaction connected with the formation, conduct, or liquidation of the partnership or from any use by him of its property.(fn2)
According to its drafters, the UPA was intended to codify, not modify, the principles of fiduciary duty previously announced by the courts. Accordingly, cases on fiduciary duty decided prior to a state's enactment of the UPA continue to be relevant.
The Uniform Limited Partnership Act ("ULPA")(fn3) was promulgated in 1916 and currently is law in Colorado and approximately forty-two other states. In Colorado, the ULPA applies to all limited partnerships formed prior to November 1, 1981, which have not elected to be governed by the RULPA (see below). The key provision of the ULPA relevant to fiduciary duty is § 9, which applies to general partners of ULPA limited partnerships, the UPA and common law principles of fiduciary duty applicable to general partnerships.(fn4)
The Revised Uniform Limited Partnership Act ("RULPA")(fn5) was promulgated in 1976 and subsequently was adopted in Colorado and approximately thirty-two other states. The RULPA applies to all Colorado limited partnerships formed on or after November 1, 1981, and to older limited partnerships which have elected to be governed by the RULPA. The key provision of the RULPA relating to fiduciary duty is § 403 which, as with § 9 of the ULPA, applies to general partners of RULPA limited partnerships, the UPA and common law principles of fiduciary duty applicable to general partnerships.(fn6) Relatively few cases have been decided under the RULPA.
The word "fiduciary" is derived from the Latin word fides, meaning "faith" or "confidence." While definitions of fiduciary duty vary, because the application
The general principles on which the [lower] court proceeded admit of no question, it being well settled that one partner cannot, directly or indirectly, use partnership assets for his own benefit; that he cannot, in conducting the business of a partnership, take any profit clandestinely for himself; that he cannot carry on another business of the partnership for his private advantage; that he cannot carry on another business in competition or rivalry with that of the firm, thereby depriving it of the benefit of his time, skill, and fidelity without being accountable to his copartners for any profit that may accrue to him therefrom; that he cannot be permitted to secure for himself that which it is his duty to obtain, if at all, for the firm of which he is member; nor can he avail himself of knowledge or information, which may be properly regarded as the property of the partnership, in the same that it is available or useful to the firm for any purpose within the scope of the partnership business.
The fiduciary duty required among partners has been analogized to that owed to a shareholder by a corporate director,(fn8) that owed to beneficiaries of a trust by a trustee,(fn9) and that morally owed to a husband or wife by his or her spouse.(fn10) However, according to one court, "there is no relation of trust or confidence known to the law that requires a higher degree of good faith than a partnership."(fn11) In Meinhard v. Salmon, Judge Cardozo aptly described the courts' attitude towards fiduciary duty as follows:
. . . copartners owe to one another . . . 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. . . . 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 excepons. . . . 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.(fn12)
While some overlap is inevitable, fiduciary duty can be broken down into three specific elements: (1) the duty of loyalty, (2) the duty of good faith and fair dealing, and (3) the duty of full disclosure.
The duty of loyalty requires each partner in a partnership to "guard his copartners' interests equally with his own" with "undeviating devotion."(fn13)
The duty of loyalty requires first that, without his partners' consent, a partner may not have any business or other interests which directly compete with, conflict with or are adverse to the interests of the partnership.(fn14) However, a partner is free to maintain business interests outside of the scope of the partnership's business, without accounting to his partners for any profits therefrom.(fn15)
In particular, a partner may have outside interests in the same industry as the partnership, as long as the outside interests (1) do not directly compete with the partnership and (2) do not fall within the scope of the partnership's business.(fn16) Since a partner may have other business interests, it follows that a partner need not devote all of his time to the partnership business; however, he must devote such time, attention and resources as are necessary and advantageous to the partnership.(fn17)
A partner also breaches his duty of loyalty if he diverts to himself, without offering to the partnership, a business opportunity within the scope of the partnership's business.(fn18) In Fouchek v. Janicek,(fn19) the Oregon Supreme Court listed the following factors which, if all are present, determine that a breach of the partnership opportunity doctrine has occurred:
1) the alleged wrongdoer is a partner in a partnership;
2) the partnership legally is able to act on the opportunity in question;(fn20)
3) the opportunity is within the scope of the partnership's business;
4) the opportunity is of present or future potential value; and
5) the partner has acted upon the opportunity to his personal advantage without the consent of his partners.
The third element of the Fouchek test---whether an opportunity falls within the scope of a partnership's business---has proved to be the thorniest partnership opportunity issue. For example, in Dixon v. Trinity Joint Venture,(fn21) a limited partnership was formed to develop a shopping center. The partnership agreement expressly limited the purpose of the partnership to the development of that particular property. As a condition to allowing the development, the county required the partnership to build a road through the shopping center to give access to an adjacent, otherwise landlocked, undeveloped ten-acre parcel. During the early stages of development, one of the partnership's two general partners acquired an option to purchase the ten-acre parcel but, instead of offering it to the partnership, sold the option to a third party.
The partnership's limited partners sued the general partner for breach of fiduciary duty because, had the partnership acquired the ten-acre tract, the partnership could have saved the cost of the access road and received other benefits. In ruling in favor of the limited partners, the court held that, notwithstanding the provision in the partnership agreement which limited the direct scope of the partnership's business, the acquisition of the ten-acre parcel was a partnership opportunity because of the partnership's indirect "legitimate interest" therein.
In contrast, in Lipinski v. Lipinski,(fn22) a partnership operated a commercial fishing business...
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