Source: https://fredfranke.com/articles/5-maryland-d-c-experience/
Timestamp: 2020-01-19 02:16:26
Document Index: 315994310

Matched Legal Cases: ['§ 10', '§ 10', '§ 9', '§ 9', '§ 9', '§ 9', '§ 404']

Maryland/D.C. Experience | Estate Lawyers | Annapolis, MD
5. The Maryland/ D.C. Experience
Maryland adopted the Revised Uniform Partnership Act (“MRUPA”) with staggered effective dates. The new act generally applies to all partnerships formed on or after July 1, 1998. Partnerships created before that effective date are governed by the prior act until July 1, 2003 at which time all Maryland general partnerships are governed by MRUPA.[1]
Maryland has yet to adopt the latest revision of the uniform limited partnership act, but operates under the Revised Uniform Limited Partnership Act of 1982 (“MRULPA”). As opposed to ReRULPA, MRULPA generally cross-referenced to the uniform partnership act as a “gap-filler” if neither MRULPA or the partnership agreement covered an issue. Specifically, MRULPA § 10-403, coupled with § 10-108, provides that one is to look to the general partnership act to delineate the general partner’s duties to the limited partners in the partnership. Thus, since 2004 (and arguably since 2003), a general partner’s fiduciary duty is limited to those spelled out in the 1997 uniform partnership act (unless modified by the limited partnership agreement). ReRULPA, on the other hand, is self-contained and sets out the general partner’s duties and liabilities.[2]
In Della Ratta v. Larkin,[3] the Court of Appeals examined the conduct of a general partner who sought to satisfy the partnership debt through a capital call instead of refinancing the loan. The trial court had found that this maneuver was “to squeeze out some of the limited partners” who could not make the capital call. The general partner, in response to action by some of the limited partners, also moved up the date of the capital call. This was to block the limited partners from withdrawing from the partnership which would yield them a forced payout based on fair value. As opposed to a qualified withdrawal, a partner failing to make a capital call forfeited their interest in the partnership. The general partner was authorized by the partnership agreement to make the capital call. The court held that doing so under the circumstances of the case was a breach of his general fiduciary duty to the limited partners. Della Ratta addressed the Maryland structure before the new general partnership act had been fully phased-in and it was thus decided under the prior statutory framework. In dicta, Judge Harrell expressed doubts whether the result would be different under the newer law:
Although we have concluded that UPA, not RUPA, applies to the present case, we note without deciding that Della Ratta’s actions may have been unlawful under either Act. The Remaining Partners contend that RUPA lowers the standard to which a general partner must conform his conduct. Even if we were to accept that contention, under RUPA, general partners nonetheless must discharge their duties and “exercise any rights consistently with the obligation of good faith and fair dealing.” § 9A-404(d) (emphasis added). Although our analysis might differ under RUPA, we cannot say that the outcome would change.[4]
Clancy v. King,[5] involved a partnership agreement governed by the reference to MRUPA for the general partner’s duty to the other partners. In Clancy, the author of numerous techno-thriller novels (Tom Clancy) and his ex-wife (Ms. King) created a limited partnership for the purpose of developing and marketing a series of novels using Mr. Clancy’s name but ghost written by another writer picked for the job because of his skill “to affect a ‘Clancyesque’ style of writing.”[6] The partnership entered into a joint venture with a third party to effectuate the project and a series of 12 books were released – all best sellers. At that point, Mr. Clancy announced that he was going to withdraw permission for the joint venture to use his name on further books.
The partnership agreement had provisions authorizing Mr. Clancy to engage in other business ventures, even ventures competing with the partnership. The issue was whether an unambiguous contract provision preempted the fiduciary duty owed by Mr. Clancy to the partnership: “Clancy concedes that, contract laws aside, his pertinent actions, which animated King’s suit, would violate the fiduciary duty he owed to [the partnership].”[7] After examining various partnership provisions, Judge Harrell, writing for the majority, found that any general fiduciary duty not to compete or not to usurp partnership opportunities was trumped by the agreement itself. Judge Harrell said the only issue was whether Mr. Clancy violated his obligation of good faith dealings:
Even if the contract did not contain this general good faith term, Maryland contract law implies such an obligation. See, Maryland Code (1975, 2007 Repl. Vol.), Corporations & Associations Article, § 9A-103(b)(5) (noting that the partnership agreement may not “[e]liminate the obligation of good faith and fair dealing”; id. § 9A-404(d) (“A partner shall discharge the duties to the partnership and other partners under this title or under the partnership agreement and exercise any rights consistently with the obligation of good faith and fair dealing.”; Julian v. Christopher, 302 Md. 1, 9, 575 A.2d 735, 739 (1990) (” ‘[T]here exists an implied convent [in a contract] that each of the parties thereto will act in good faith and deal fairly with the others.'” (quoting Food Fair v. Blumberg, 234 Md. 521, 534, 200 A.2d 520, 524 (1993) (“Even when the parties are silent on the issue, the law will impose an implied promise of good faith.”); Automatic Laundry Serv., Inc. v. Demas, 216 Md. 544, 551, 141 A.2d 497, 501 (1958) (ho9lding that a poarty to a contract could not, in good faith, “render valueless” the contact by “permitting . . . destructive competition”); Chodos v. West Publ’g Co., 292 F.3d 992, 997 (9th Cir.2002) (“The covenant of good faith ‘finds particular application in situations where one party is invested with a discretionary power affecting the rights of another.'” (quoting Carma Developers (Cal.) v. Marathon Dev. Cal., Inc., 2 Cal.4th 342, 6 Cal.Reptr.2d 467, 826 P.2d 710, 726 (1992))); Gold, supra, at 126 (noting that the “contractual duty of good faith . . . is especially important” where partners have contracted away fiduciary duties).[8]
Thus, Mr. Clancy needed only to show that he acted in good faith with his business partner even if his actions were adverse to the partnership. If, on the other hand, he acted out of personal spite against his ex-wife, he would have breached his obligation of good faith dealings. Good faith/bad faith is a question of fact and the case was remanded to determine that point of fact.
Clancy was a split decision with a dissent by Judge Battaglia (joined by Judge Greene) that focused on the general fiduciary duty owed by reason of the partner’s status as a partner. The case demonstrates the importance of the good faith/fiduciary distinction. The dissent applied the fiduciary duty standard and it would have upheld the ruling against Mr. Clancy:
The fact that under the Partnership Agreement Mr. Clancy and Ms. King could each pursue independent business ventures similar to, or even in competition with, the business conducted by the Partnership, does not change the basic tenet of partnership law, which Mr. Clancy and Ms. King adopted in the JRLP Agreement (by a reference to the general fiduciary duty).[9]
Keeping with the mandate of the changed statute, the dissent looked to language in the partnership agreement to justify application of a general fiduciary duty. Having found such duty, however, this general duty would trump the other provisions of the agreement. Once again, Justice Cardozo’s “the punctilio of an honor the most sensitive” standard would come into play to enforce a general fiduciary duty on Mr. Clancy not to injure the business. This standard was applied by the dissent, however, only because the dissent found that the language of the partnership agreement wrote back in a general fiduciary duty.
The weakness of a good faith/bad faith analysis is that it may punish the forthright and reward the cunning. Judge Harrell uses an illustration from Jerry Seinfeld to highlight that the good faith/bad faith standard is a subjective definition based on a partner’s motive rather than an objective test based on the consequences of a partner’s overt acts:
Jerry Seinfeld, perhaps an unlikely legal illustrator, once epitomized the duty of good faith in contract. In an episode of his television show, Jerry’s character purchased a jacket at a men’s clothing shop. The terms of the contract permitted Jerry to return the item for a refund at his discretion. When Jerry attempted to return the jacket after an unrelated personal quarrel with the salesman, the following discussion took place.
“Jerry: Excuse me, I’d like to return this jacket.
Jerry: That’s ridiculous, I want to return it. What’s the difference what the reason is?
Clerk: Let me speak to the manager … excuse me … Bob!
Bob: Well you already said spite so….
Bob: No, you said spite. Too late.”
In attempting to exercise his contractual discretion out of “spite,” Jerry breached his duty to act in good faith towards the other party to the contract. Jerry would have been authorized to return the jacket if, in his good faith opinion, it did not fit or was not an attractive jacket. He may not return the jacket, however, for the sole purpose of denying to the other party the value of the contract. Jerry’s post hoc rationalization that he was returning the jacket because he did not “want it” was rejected properly by Bob as not credible.[10]
The Maryland Court of Special Appeals looked at a D.C. partnership (applying D.C. law) in Alloy v. Wills Family Trust[11]. That case is notable because the decision discusses the stripping out of the general fiduciary duty by the adoption of the revised partnership and revised limited partnership acts (D.C. adopted both). Alloy is a partnership opportunity case where the court found bad faith because the wayward partner failed to disclose the opportunity:
Collectively, this evidence was sufficient for the jury to conclude that, even if Alloy and Farshey were authorized to acquire and offer competing properties, they breached their fiduciary duties by doing so secretly. The trial court did not err in denying the defense motion for judgment on this ground. Indeed, the jury’s verdict on the Trust’s breach of fiduciary duty claim may reasonably be interpreted as a finding that Alloy and Farshey acted in bad faith when they acquired and leased competing properties without telling the Trust that they were doing so.[12]
It was the secret nature of the competition that the court found supported a bad faith breach of the partnership agreement.
Basing the relationship among partners on a contractarian model is a radical change from the historic roots of that relationship in the laws of partnerships. Hopefully the decision to “uncabin” the duty of loyalty in the latest version of the revised uniform limited liability company act represents the beginning of a corrective trend to the other uniform acts.
[1] § 9A-1204, Corps & Assoc. Art. Md. Cod Ann. (hereinafter § __ MRUPA”).
[2] ReRULPA § § 404 and 408.
[3] 382 Md. 553, 856 A.2d 643 (2004).
[4] Della Ratta at footnote 15.
[5] 405 Md. 541, 941 A.2d 1092 (2008).
[6] Mr. Clancy gave the series the benefit of his name and reputation but only “glanced at a few” of the books in the series never reading them.
[7] Clancy at 554.
[8] Clancy at 565-6.
[9] Clancy at 578.
[10] Clancy at footnote 27.
[11] 179 Md. App. 255, 944 A.2d 1234 (2008).
[12] Alloy at 292.