Chapter 4 - § 4.5 • DUTIES, RIGHTS, WAIVER, AND THE CONTRACTUAL OBLIGATION OF GOOD FAITH AND FAIR DEALING — CUPL PARTNERSHIPS

• Jurisdiction: Colorado

§ 4.5 • DUTIES, RIGHTS, WAIVER, AND THE CONTRACTUAL OBLIGATION OF GOOD FAITH AND FAIR DEALING — CUPL PARTNERSHIPS

§ 4.5.1—Duties of Partners Under CUPL

Why Do We Have This Section?

Partnerships may no longer be formed under CUPL. However, an attorney may be asked to amend the partnership agreement of a CUPL partnership that has not elected to be subject to CUPA. In addition, as discussed in § 4.6.1, "Introduction," there are many limited partnerships that remain subject to CUPL for issues not covered by CULPL or CULPA. In fact, until August 10, 2016, for partnerships formed under CULPA, C.R.S. § 7-62-1104 provided that the default general partnership statute was CUPL, even though general partnerships could not be formed under CUPL since January 1, 1998. Moreover, these authors believe it likely that courts may consider the cases discussed in this section in cases involving CUPA partnerships and LLCs. For example, there is no reason why the reasoning of Judge Cardozo in Meinhard v. Salmon would be limited to a CUPL partnership. See "Meinhard v. Salmon" in this § 4.5.1.

General Discussion of Duties Under CUPL

Unlike the LLC Act and CUPA, CUPL does not contain a section setting out the duties of partners. Some provisions of CUPL do suggest duties by implication:

• § 7-60-113 suggests a duty of care:

Where, by any wrongful act or omission of any partner acting in the ordinary course of the business of the partnership or with the authority of the other partners, loss or injury is caused to any person, not being a partner in the partnership, or any penalty is incurred, the partnership is liable therefor to the same intent as the partner so acting or omitting to act.

• § 7-60-114 suggests a duty perhaps of good faith and fair dealing:

(1) The partnership is bound to make good the loss: (a) Where one partner acting within the scope of such partner's apparent authority receives money or property of a third person and misapplies it; and
(b) Where the partnership in the course of its business receives money or property of a third person and the money or property so received is misapplied by any partner while it is in the custody of the partnership.

• § 7-60-121 makes a partner a fiduciary in certain circumstances:

(1) Every partner shall account to the partnership for any benefit and hold as trustee for it any profits derived by such partner 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 such partner of its property.
(2) This section applies also to the representatives of a deceased partner engaged in the liquidation of the affairs of the partnership as the personal representatives of the last surviving partner.¹⁶³

CUPL does permit the partnership agreement to vary certain of the rules in CUPL, but does not provide standards for the variations.¹⁶⁴ Sections 7-60-113 ("Partner's wrongful acts - liability"), 7-60-114 ("Partner's breach of trust - liability"), and 7-60-121 ("Accountable as a fiduciary") are not among the rules that CUPL expressly states may be varied. However, the many provisions of CUPL that may be varied suggest that a partnership agreement under CUPL should be viewed like one under CUPA — as a contract among the partners and between the partners and the partnership.¹⁶⁵

The absence of a statement of duties in CUPL does not mean that partners of CUPL partnerships do not have duties comparable to those under CUPA. As under CUPA, each partner of a CUPL partnership is an agent of the partnership for the purposes of the partnership's business.¹⁶⁶ As discussed in § 4.2, "Agency Law — A Common Source of Duties in LLCs and Partnerships," agency law imposes duties of care and loyalty. Commentator Gerald C. Martin observed: "Historically, the law of partnership has been dominated by the law of agency, to the extent that the two are 'interwoven.'"¹⁶⁷

Martin's article reports that his analysis of case law shows that courts apply a bifurcated duty of care under the Uniform Partnership Act (UPA), with a standard imposing a business-judgment-like rule for managerial decisions and a simple negligence standard for other decisions.¹⁶⁸

Colorado Cases Pre-CUPA

Decisions of Colorado courts with respect to the duties of partners in pre-CUPA partnerships indicate that such partners have duties beyond the duty of care under agency law, including duties that are very similar to those imposed by statute in CUPA. For example, in Hooper v. Yoder,¹⁶⁹ the Colorado Supreme Court considered claims arising out of an agreement between Steven Hooper and David Yoder. After a series of meetings, Hooper and Yoder agreed to develop and market frozen yogurt bars. Yoder had experience working in the dairy products industry; Hooper had no experience in the dairy products industry but had business experience that Yoder did not have. They agreed to share equally the financial risks, the work load, and any profits. After a few months, when the product was ready to market, the two men decided to incorporate their business with each to receive one-half of the new corporation's stock. Hooper moved to California and it began to be difficult for Yoder to contact him. Without the consent or knowledge of Yoder, Hooper caused the corporation to issue all of its stock 95 percent to Hooper and 5 percent to a third party, and to begin paying Hooper a salary. Yoder sued and prevailed at the district court and court of appeals. The supreme court held that the original agreement between Hooper and Yoder formed a partnership, that the partnership was dissolved upon the incorporation of the business, but that the partnership did not terminate but continued for the purpose of winding up.¹⁷⁰

The court then noted that ordinarily when partners decide to incorporate their business, "the winding up of the partnership includes the transfer of the partnership assets to the corporation in exchange for corporate stock."¹⁷¹ Here, because stock had not been issued pursuant to Hooper and Yoder's agreement to incorporate, the court concluded that winding up had not been completed. The court then observed that the duties owed by partners continued during winding up¹⁷² and stated:

Partners in a business enterprise owe to one another the highest duty of loyalty; they stand in a relationship of trust and confidence to each other and are bound by standards of good conduct and square dealing. Each partner has

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