Case Name: Morton E. Bassan et al., Appellants, M. L. Grout, Plaintiff, v. Investment Exchange Corporation et al., Respondents
Court: Washington Supreme Court
Jurisdiction: Washington
Decision Date: 1974-06-20
Citations: 83 Wash. 2d 922
Docket Number: No. 42921
Parties: Morton E. Bassan et al., Appellants, M. L. Grout, Plaintiff, v. Investment Exchange Corporation et al., Respondents.
Judges: 
Reporter: Washington Reports
Volume: 83
Pages: 922–937

Head Matter:
[No. 42921.
En Banc.
June 20, 1974.]
Morton E. Bassan et al., Appellants, M. L. Grout, Plaintiff, v. Investment Exchange Corporation et al., Respondents.
Schweppe, Doolittle, Krug, Tausend, Beezer & Beierle and Robert R. Beezer, for appellants.
Laurason T. Hunt and Robert Earl Smith, for respondents.

Opinion:
Utter, J.
The appellants are limited partners in Auburn West Associates, and the respondent Investment Exchange Corporation is the sole general partner. This action was brought for an accounting and dissolution upon the theory that the general partner had, in purchasing land and selling it to Auburn West Associates, derived profits without the consent of the limited partners in breach of its fiduciary relationship. The cause was tried to the court which dismissed the action after hearing the evidence.
The controlling issue in this case is whether the partners consented to the profit made by the general partner in the sale of the Murakami property to the partnership. We find an absence of such consent in the record and reverse the trial court.
In 1964 Investment Exchange Corporation, a Washington corporation, formed Auburn West Associates as a limited partnership. The purpose of the partnership as stated in the articles of partnership was
[t]o initially acquire, for investment, improve and hold for lease or resale, a tract of real property. The General Partner presently is the owner of interests in said real property. To additionally acquire from the General Partner such other adjacent and contiguous tracts as, in the sole determination of the General Partner, will enhance the Partnership properties and objectives.
The general partner was given broad discretion in the articles to manage the affairs of the partnership and they acknowledged the right of all partners, including the general partner, to engage in
and/or possess an interest in other business ventures of every nature, and description, independently or with others, including but not limited to the ownership, financing, leasing, operation, management, syndication, brokerage and/or development of real property; . . .
They also gave the general partner the right to have an interest in or be employed by another business which might deal with the partnership.
The articles provided that the general partner might devote such of its time as in its discretion it deemed necessary to the partnership affairs and business, and that it should be reimbursed by the partnership for all the costs and expenses which it incurred in connection therewith, in addition to its respective share of the profits of the partnership.
The partnership articles provided that 100 units of the partnership, consisting of 40 units as general partner and 60 units as limited partner totaling $100,000, should be given to the general partner as partial payment of the purchase price of the original piece of real property, the purchase price being $593,000. That price was greater than the acquisition cost to the general partner.
Each of the appellants owned one or more limited partnership units. The remaining 29 limited partners did not elect to join in the action.
The general partner annually mailed out a financial statement to the limited partners. These financial statements advised the limited partners' of the price the partnership paid for the real estate purchased from the general partner. The limited partners were represented at the partnership council meetings by plaintiff Milton Grout and others.
The last transaction upon which the appellants claimed a right to receive the benefit of the profit made by the general partner was the Murakami property. All claims by the limited partners except that one were held barred by the statute of limitations.
The general partner had formed a real estate subsidiary and informed the limited partnership it intended to utilize this corporation as sales and purchase agent for partnership property. The court found the articles of limited partnership and prospectus had authorized the real estate subsidiary to retain commissions on sales and purchases. This subsidiary received a $24,500 commission from Murakami in the sale of the property in addition to the markup of $167,500 by the general partner.
The court found that in the issuance of the prospectus, the publication of financial statements and in its dealings with the appellant and its conduct of partnership affairs, the general partner made no false or fraudulent representations and did not engage in any improper conduct. It found no breach in its fiduciary obligations to the limited partners inasmuch as the price charged for the Murakami parcel was fair and the amount of profit made by the general partner was reasonable. There is no substantial dispute regarding the facts in this case and all of the claims prior to the Murakami transaction are barred by the statute of limitations. The validity of this transaction is our only concern in this appeal.
Under the Washington Uniform Limited Partnership Act, the general partner has all the rights and powers, and is subject to all the restrictions and liabilities, of a partner in a partnership without limited partners. RCW 25.08.090. He is therefore accountable to the limited partners as a fiduciary. Homestake Mining Co. v. Mid-Continent Exploration Co., 282 F.2d 787 (10th Cir. 1960). The Washington Uniform Partnership Act requires every partner to "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 . . . conduct . of the partnership . . ." RCW 25.04.210(1).
The partnership agreement does not provide consent by the limited partners to the general partner for a profit on the sale of the Murakami property to the partnership. The articles contain no provision setting forth the price to be paid for this property nor any method for determining such a price. Partners may include in the partnership articles practically any agreement they wish and if the asserted self-dealing was actually contemplated and specifically authorized with a method for determining, in advance, the amount of the profit it would not, ipso facto, be impermissible and deemed wrongful. Riviera Congress Assoc. v. Yassky, 264 N.Y.S.2d 624, 48 Misc. 2d 282 (1966). Here, however, the partnership agreement is silent as to any formula to determine the general partner's profit.
The prospectus, from which it could be argued most earlier purchases by the partnership from the general partner were contemplated, does not mention the Murakami piece. It also fails to set forth a formula to determine the general partner's profit in either the anticipated purchases or in any future transactions by the general partner on behalf of the partnership. The articles of limited partnership merely state that five parcels, the Henack, Nelson, Coast No. 2, Belus and Coast No. 1 were to be acquired at a cost of $593,000 from the general partner. The prospectus disclosed that the general partner intended, as well, to acquire the Davis parcel for $50,000 but the articles and prospectus do not specifically describe any other anticipated acquisitions.
Neither the articles nor prospectus disclose the actual amount of the profit to be made by Investment Exchange Corporation in their resale of properties to the Auburn West Associates partnership. The only source of information to the limited partners on the profits by the general partner was an accounting footnote in the 1964 partnership financial statement issued after the limited partners had invested funds in the partnership, indicating that property acquired by Auburn West Associates for $642,342 had previously cost the general partner $459,000.
The only other report indicating the amount of profit to the general partner was found in a prospectus required by the Securities and Exchange Commission. This indicated that from May 1964 through December 1965, prior to the Murakami purchase, Auburn West Associates had acquired eight parcels of property from Investment Exchange Corporation for $749,250 which property had cost Investment Exchange Corporation $488,221.
An investigation of the separate transactions prior to the Murakami purchase showed no consistent percentage of profit taken by the general partner on these transactions. Of those parcels described in the prospectus to be acquired by the general partner, the highest profit received was $67,000 on a piece sold for $182,000 (the Henack parcel). The smallest was a $20,000 profit on a piece sold for $80,000 to the partnership (the Belus parcel). Of those properties not described in the prospectus, and purchased subsequent to those described in the prospectus, the highest profit was $80,000 on a piece sold for $108,750 to the partnership (the Layos parcel) and the lowest was $24,000 on a piece sold to the partnership for $50,000 (the Davis parcel).
The trial court found an understanding did exist that the general partner would acquire property and sell it to the partnership at a fair price and would realize a profit on the transaction. It did not and could not find that a formula existed or was agreed upon explicitly or inferentially that established a basis upon which the exact amount of this profit was to be determined. The limited partners, therefore, could only consent after the fact to whatever profit the general partner determined it should have as to a particular transaction. Because of this, although the limited partners may have consented after the fact to specific profits taken on previous transactions, this could not imply consent to the Murakami transaction because the limited partners could not know what the profit to Investment Exchange Corporation was until after the sale closed.
No consent may be implied from the conduct of the limited partners regarding Murakami after they were informed of the profit. The formal action of Investment Exchange Corporation adopting the $167,500 profit was on November 15, 1969, and suit was brought on November 26, 1969, by appellants.
Where consent is lacking, the general partner is held under RCW 25.04.210, as a trustee, to account to the partnership for any profits derived by it. That standard, by the terms of the statute, is not whether the general partner acted fairly and reasonably, but whether it acted as a fiduciary.
The benefit of this standard is nowhere more apparent than in a limited partnership of this nature. The articles give the general partner the authority to conduct "any and all of the business of the Partnership . . ." Once the limited partner has joined the partnership he has no effective voice in the decision-making process. He must, then, be able to rely on the highest standard of conduct from the general partner. Any deviation from this must be clearly stated in terms that would give the limited partner the option of deciding whether or not, in the first instance, to join the partnership.
The duty of loyalty resulting from a partner's fiduciary position is such that the severity of a partner's breach will not be questioned. The question is only whether there has been any breach at all. Meinhard v. Salmon, 249 N.Y. 458, 164 N.E. 545, 62 A.L.R. 1 (1928).
This is to be distinguished from questions related to the use of business judgment of a partner in partnership affairs. Here the degree of care required is one of reasonableness, or in some jurisdictions, of good faith. Bohrer v. Drake, 33 Minn. 408, 23 N.W. 840 (1885); cf. J.E. Crosbie, Inc. v. King, 192 Okla. 53, 133 P.2d 543 (1943); Note, Fiduciary Duties of Partner, 48 Iowa L. Rev. 902 (1963). This is the standard the trial court apparently applied.
This case does not involve the issue of whether the general partner is entitled to make a profit for use of its expertise. Compensation may be provided for the general partner by specific consent of the parties. There is also no issue about the general partner's right to be reimbursed for its expenses. Article 8, section 2 of the partnership articles provides that the general partner shall be reimbursed for all the costs and expenses it incurs in the devotion of its time to the partnership business.
Investment Exchange Corporation did not act in a fiduciary capacity regarding the profits it obtained in the Murakami transaction. Consent was not given by the appellants as to the profit taken in that transaction and Investment Exchange Corporation should be held accountable to the partnership for the profits it there realized.
This will result in the establishment of a common fund for the benefit of the partnership. The expense of legal services, including counsel fees, is a proper charge against the common fund so preserved or protected. Weiss v. Bruno, 83 Wn.2d 911, 523 P.2d 915 (1974); In re Estate of Wheeler, 71 Wn.2d 789, 797, 431 P.2d 608 (1967).
The judgment is reversed and remanded to the trial court to determine counsel fees.
Hale, C.J., and Finley, Stafford, Wright, and Brachtenbach, JJ., concur.