Chapter 2-10 Breach of Partnership Duty

• Jurisdiction: United States

2-10 Breach of Partnership Duty

2-10:1 Overview

General partners owe duties of loyalty and care and an obligation of good faith to both the partnership and other partners. These duties have historically been characterized as fiduciary duties. Despite the Texas Legislature's attempts to eliminate the fiduciary label of these duties and obligations, Texas courts still characterize them as fiduciary ones. Relatively recent legislation has allowed for partners to curtail or even eliminate their duties.

2-10:1.1 Related Causes of Action

Officer and Director Liability, Usurpation of Business Opportunity, Securities Litigation, Class Action Suits, Derivative Shareholder Suits, Dissolution of Partnership, Breach of Fiduciary Duty

MUST READ CASES

Huffington v. Upchurch, 532 S.W.2d 576 (Tex. 1976)

Dunnagan v. Watson, 204 S.W.3d 30 (Tex. App.—Fort Worth 2006, pet. denied)

2-10:2 Elements

(1) Duty

• General partners owe fiduciary duties to other partners and the partnership.²⁷¹
• Generally, limited partners do not owe each other a fiduciary duty.²⁷²
• The duty of loyalty includes:

• Accounting to and holding for the partnership property, profit or benefit derived by the partner:

• In the conduct and winding up of the partnership business; or
• From use by the partner of partnership property;

• Refraining from dealing with the partnership on behalf of a person who has an interest adverse to the partnership; and
• Refraining from competing or dealing with the partnership in a manner adverse to the partnership.²⁷³

• In regards to the duty of care:

• To act in the conduct and winding up of the partnership business with the care an ordinarily prudent person would exercise in similar circumstances.
• An error in judgment does not by itself constitute a breach of the duty of care.

• A partner is presumed to satisfy the duty of care if the partner acts on an informed basis, in good faith, and in a manner the partner reasonably believes is in the best interests of the partnership.²⁷⁴
• Essentially, partners must satisfy the "business judgment rule" to discharge their duty of care.²⁷⁵

• Obligation of good faith:

• A partner shall discharge the partner's duties to the partnership and the other partners under this code or under the partnership agreement and exercise any rights and powers in the conduct or winding up of the partnership business:

• In good faith; and
• In a manner the partner reasonably believes to be in the best interest of the partnership.²⁷⁶

• Partners may modify their duties and obligation of good faith. Partners may specify certain actions or conduct which do not violate their duties or obligation of good faith, so long as the actions or conduct are not manifestly unreasonable.²⁷⁷

(2) Breach

• The defendant breached a duty to the plaintiff.²⁷⁸
• Partners may specify certain actions or conduct which do not violate their duties or obligation of good faith, so long as the actions or conduct are not manifestly unreasonable.²⁷⁹

(3) Causation

• The defendant's breach resulted in harm to the partnership.²⁸⁰

(4) Damages/Harm

• "The defendant's breach resulted in either (a) an injury to the plaintiff; or (b) a benefit to the defendant."²⁸¹

2-10:3 Damages and Remedies

2-10:3.1 Actual Damages

A partner may pursue a claim for legal relief against another partner for breach of partnership duties.²⁸²

Legal damages are permitted.²⁸³

2-10:3.2 Interest

Post-judgment interest is available on money judgments.²⁸⁴

The default interest rate is governed by Texas Finance Code Annotated Section 302.002.²⁸⁵

2-10:3.3 Accounting

A partner may bring an action for an accounting to enforce partnership duties.²⁸⁶

2-10:3.4 Rescission

Rescission is an available equitable remedy.²⁸⁷

2-10:3.5 Restitution

Restitution is an available equitable remedy.²⁸⁸

2-10:3.6 Constructive Trust

A court may impose a constructive trust on property the breaching partner holds because of the breach.²⁸⁹

A constructive trust is proper when there is a:

• Breach of a special trust, fiduciary relationship, or actual fraud;
• Unjust enrichment of the wrongdoer; and
• Tracing to identifiable property.²⁹⁰

2-10:3.7 Forfeiture of Compensation

A partner may be ordered to forfeit compensation because of his breach of...