“Joint adventures, like corporations, 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 operating 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”. — Benjamin Cardozo[1]
“When a man’s partner is killed, he’s supposed to do something about it. It doesn’t make any difference what you thought of him. He was your partner and you’re supposed to do something about it. And it happens we’re in the detective business. Well, when one of your organization gets killed, it’s bad for business to let the killer get away with it, bad all around, bad for every detective everywhere.” – Sam Spade[2]
Justice Cardozo and Sam Spade agreed that partners owed each other a special duty of loyalty – a fiduciary duty. This duty traditionally characterizes the partnership relationship.
Justice Cardozo’s pronouncement in Meinhard is oft cited by courts in cases involving disputes among partners. Many of these cases involve whether a partner may seize a business opportunity that arguably ought to belong to the partnership. In a Maryland case, for example, a general partner was held to violate his fiduciary duty to make known business opportunities related to the business of the partnership and not to simply take advantage of those opportunities for his own profit.[3] That case held that a general partner may not purchase developable land adjacent to the partnership’s land holding without first alerting the partnership of this opportunity. This fiduciary duty to alert the partnership and the other partners of “partnership opportunities” is a function of the relationship status. It does not mean that a court appointed receiver of a partner holding a charging order need be informed. A creditor holding a charging order is merely an assignee of the debtor/partner’s economic interest and, as such, is not entitled to any fundamental rights of a partner.[4]
The fiduciary duty exists independently, perhaps despite, the terms of the agreement. In Labovitz v. Dolan,[5] the limited partners claimed that the general partner “squeezed” them out by refusing to make sufficient distributions, to cover the taxes generated from the investment, then buying them out at discount. The partnership involved a private placement promoted only to “wealthy and sophisticated investors.” The agreement gave the general partner “sole discretion” as to partnership distributions. Nevertheless, the court held that the limited partners had a cause of action based on the general fiduciary duty owed by the general partner to the limited partners.
Similarly, Lach v. Man O’War, LLC,[6] a Kentucky case, the managing general partners engineered a transfer of the partnership to an LLC so that the majority of the general partners could substitute successor managers without the consent of all of the limited partners. Each step in the reorganization was authorized by either the partnership agreement or state statute. Nevertheless, the court found that the general partners breached their general fiduciary duty to the dissenting limited partners.
Indeed, this is the primary role of fiduciary duty in the partnership relationship: it enforces fairness beyond the letter of the written “deal”:
The rules (governing business relationships) are consistent, however with a concept of persons as a society and with the notion that economic and political competitions are played out not in an environment of pre-Leviathan lawlessness, but on the basis of a set of ground rules. In the laws of business organizations, fiduciary obligations traditionally have provided one of those ground rules. It may be that fiduciary doctrine is not crystal clear, in the sense of a rule requiring traffic to stop at red lights. But the argument from certainty can be overblown. Dean Weidner suggests that a principle motivation behind the “reformation” of fiduciary rules was the desire of lawyers to be certain that their negotiated agreements would be upheld. For lawyers to argue that fiduciary duty creates significant uncertainty is specious.
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We should move away from rhetoric and confront reality. The call to self-abnegation in fiduciary case law has never quite been the reality. No judge, not even Cardozo, appears to have expected partners to cast aside their worldly longings. What the language conveys is an attitude, a way of thinking about the relationship, which is not at all ambiguous for the language in which it is couched. It is the attitude of the impartial spectator, of the person who desires the approbation of his peers, as well as his own self-respect. It is an attitude that expresses the ideal that some kinds of competition and some forms of risk taking are quite appropriate in some circumstances and not in others. It is an attitude well expressed in Labovitz v. Dolan. In Labovitz, one of the partners stated: “The risk we took was that the business would not succeed. We did not take the risk that the business would succeed so well that the general partner would squeeze us out and take the investment for himself.”[7]
Partners, traditionally have been governed by a fiduciary duty in their relationship with one another. This was the law until the revision of the Uniform Partnership Act in 1997. Justice Cardozo’s pronouncement was (and is) alive and well: “The ‘punctilio of an honor’ precept is as enduring as any expression of partnership or corporate law and continues to guide courts in defining the duties business partners owe one another.”[8]
