Opinion ID: 1117163
Heading Depth: 1
Heading Rank: 10

Heading: Fiduciary Duties of Partners

Text: K.S.A. 56a-404, with the corresponding Official Comments quoted immediately below, provides in relevant part: (a) The only fiduciary duties a partner owes to the partnership and the other partners are the duty of loyalty and the duty of care set forth in subsections (b) and (c). K.S.A. 56a-404(a). Section 404 continues the term `fiduciary' from UPA Section 21, which is entitled `Partner Accountable as a Fiduciary.' Arguably, the term `fiduciary' is inappropriate when used to describe the duties of a partner because a partner may legitimately pursue self-interest (see Section 404 [e]) and not solely the interest of the partnership and the other partners, as must a true trustee. Nevertheless, partners have long been characterized as fiduciaries. [Citation omitted.] RUPA § 404, cmt. 1, 6 (Pt. 1) U.L.A. at 144. (b) A partner's duty of loyalty to the partnership and the other partners is limited to the following: (1) to account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner in the conduct and winding up of the partnership business or derived from a use by the partner of partnership property, including the appropriation of a partnership opportunity. K.S.A. 56a-404(b)(1). Subsection (b)(l) is based on UPA Section 21(1) and continues the rule that partnership property usurped by a partner, including the misappropriation of a partnership opportunity, is held in trust for the partnership. The express reference to the appropriation of a partnership opportunity is new, but merely codifies case law on the point. [Citation omitted.] RUPA § 404, cmt. 2, 6 (Pt. 1) U.L.A. at 144. (2) to refrain from dealing with the partnership in the conduct or winding up of the partnership business as or on behalf of a party having an interest adverse to the partnership. K.S.A. 56a-404(b)(2). Subsection (b)(2) provides that a partner must refrain from dealing with the partnership as or on behalf of a party having an interest adverse to the partnership. This rule is derived from Sections 389 and 391 of the Restatement (Second) of Agency. Comment c to Section 389 explains that the rule is not based upon the harm caused to the principal, but upon avoiding a conflict of opposing interests in the mind of an agent whose duty is to act for the benefit of his principal. RUPA § 404, cmt. 2, 6 (Pt. 1) U.L.A. at 144. (3) to refrain from competing with the partnership in the conduct of the partnership business before the dissolution of the partnership. K.S.A. 56a-404(b)(3). . . . . (d) A partner shall discharge the duties to the partnership and the other partners under this act or under the partnership agreement and exercise any rights consistently with the obligation of good faith and fair dealing. K.S.A. 56a-404(d). The obligation of good faith and fair dealing is a contract concept, imposed on the partners because of the consensual nature of a partnership. See Restatement (Second) of Contracts § 205 (1981). It is not characterized, in RUPA, as a fiduciary duty arising out of the partners' special relationship. . . . It is an ancillary obligation that applies whenever a partner discharges a duty or exercises a right under the partnership agreement or the Act. RUPA § 404, cmt. 4, 6 (Pt. 1) U.L.A. at 145. (e) A partner does not violate a duty or obligation under this act or under the partnership agreement merely because the partner's conduct furthers the partner's own interest. K.S.A. 56a-404(e). Subsection (e) is new and deals expressly with a very basic issue on which the UPA is silent. A partner as such is not a trustee and is not held to the same standards as a trustee. Subsection (e) makes clear that a partner's conduct is not deemed to be improper merely because it serves the partner's own individual interest. That admonition has particular application to the duty of loyalty and the obligation of good faith and fair dealing. It underscores the partner's rights as an owner and principal in the enterprise, which must always be balanced against his duties and obligations as an agent and fiduciary. For example, a partner who, with consent, owns a shopping center may, under subsection (e), legitimately vote against a proposal by the partnership to open a competing shopping center. RUPA § 404, cmt. 5, 6 (Pt. 1) U.L.A. at 146. Before addressing plaintiffs' arguments, we first note that K.S.A. 56a-404(a) begins by identifying the only fiduciary duties a partner owes to the partnership and the other partners are the duty of loyalty and the duty of care set forth in subsections (b) and (c). This provision is somewhat misleading in its use of the term fiduciary duties. Fiduciary duty is defined as a duty to act for someone else's benefit, while subordinating one's personal interests to that of the other person, Black's Law Dictionary 625 (6th ed. 1990), while the provisions of subsection (e) expressly provides that a partner does not violate a duty or obligation under KUPA or under the partnership agreement merely because the partner's conduct furthers the partner's own interest. K.S.A. 56a-404(e). Thus, the use of the term fiduciary is inappropriate because a partner may legitimately pursue self-interest instead of solely the interest of the partnership and the other partners as must a true trustee. The contentions of the plaintiffs must be considered in this light. The plaintiffs contend that the defendants violated the duty of loyalty under K.S.A. 56a-404(b)(1) and (b)(2) by appropriating the benefits of the partnership business for themselves and for others of their choosing in the merger and by dealing with the partnership as or on behalf of a party, namely MRI, LLC, having an adverse interest to the partnership, in violation of K.S.A. 56a-404(b)(2). They contend that the defendants' course of conduct overall falls significantly short of the duties of loyalty and good faith and fair dealing under K.S.A. 56a-404(d). In support of their contention, the plaintiffs argue that Via Christi secretly planned the merger for a year and created a shell company, MRI, LLC, to effect its own self-interest in replacing the plaintiffs with other investors of its own choosing. Via Christi set up the merger in such a manner that the transaction could be performed without a unanimous vote by the plaintiffs and by denying the plaintiffs a statutory right to a court determination of the buyout price determined by Via Christi's appraiser. As the majority owner of both entities prior to the merger, Via Christi was acting as and on behalf of a party having an adverse interest to both the limited partnership and to the plaintiffs, who obtained no benefit from the merger. In contrast, Via Christi remained the sole general partner and majority limited partner of MR Imaging, L.P., retained all of its arrangements to receive fees for management services and payments for the use of Via Christi facilities, and replaced the plaintiffs with investors of its choosing. As such, the plaintiffs contend the defendants violated their duties of loyalty and good faith and fair dealing. The defendants respond that Via Christi was well within its rights to amend the partnership agreement and accomplish the merger pursuant to K.S.A. 2005 Supp. 17-7701(d) and additional notice to the plaintiffs would not have altered this fact. They contend that Via Christi did not appropriate the financial returns and benefits of the plaintiffs' interests to itself; rather, its interest in the surviving entity was actually reduced from a 71% owner of the limited partnership to a 64.2% owner of the MRI, LLC. Defendants further note that the independent appraisal performed by Paragon placed the same value on both the plaintiffs' and the defendants' interests. According to the defendants, the plaintiffs erroneously focus on whether their individual interests were in conflict with or adverse to the defendants, when the statute sets forth specific fiduciary duties to the partnership rather than to the individual partners. See K.S.A. 56a-404(b)(1), (2), and (3). They argue that no evidence was presented that MRI, LLC, competed with or held any interest adverse to MR Imaging Center, L.P., prior to the merger; that no evidence was presented that the partnership lost anything or was harmed in any way as a result of the merger; and that no evidence was presented that any opportunity of the partnership was misappropriated or that Via Christi's interests were at any time adverse to the partnership. Our examination of the plaintiffs' contentions begins with the partnership agreement. MR Imaging Center. L.P., was formed by agreement of the plaintiffs and Via Christi on September 17, 1985, with Via Christi owning approximately 71% of the partnership, the plaintiffs with ownership of approximately 14% of the limited partnership, and the remaining 15% owned by parties not involved in the plaintiffs' action. Initially, the agreement did not permit merger on less than a unanimous vote. However, under the terms of the agreement, Via Christi possessed the power, as 71% owner, to modify the merger section as well as other sections of the partnership agreement. This is mentioned to emphasize the consensual nature of the agreement, the parties' understanding that modification through merger was possible, and that a provision against such modification could have been made part of the partnership agreement. Nevertheless, the partnership continued for a period of approximately 18 years until the merger effected by the general partner on July 31, 2003. With these facts in mind, we conclude that the defendants' argument has merit. First, the fact that Via Christi's actions were motivated by self-interest does not per se establish a breach of a fiduciary duty under K.S.A. 56a-404(d). Second, as discussed above, the terms of the agreement granted Via Christi the majority power to modify the partnership agreement as to the merger provisions as well as other provisions. Under the terms of their agreement and Kansas law, Via Christi had the authority to orchestrate the merger. As such, disclosure of plans to the plaintiffs would not have affected the transaction in this case, distinguishing this case from Sampson, where information regarding the value of the stock may have affected the sale. Finally, by analogy, we have approved freeze-out mergers under certain circumstances in the corporate context in Arnaud, Achey, and Hesston. We conclude that nothing in the process by which Via Christi secured the merger establishes a per se breach of the fiduciary duties of loyalty and good faith and fair dealing. The plaintiffs also fail to establish how Via Christi has appropriated partnership opportunities or benefits to itself and its new partners under Supp. 56a-404(b)(1). It is true that while Via Christi's interest in the limited partnership was bought out, it still retained the majority of its interest in the limited partnership and the plaintiff limited partners were replaced with new limited partners. While this may be considered an appropriation of the profits and opportunities expected to be shared by the plaintiffs as limited partners, no evidence was presented that the limited partnership itself (which was subsequently converted into an LLC) suffered any loss of business or new opportunities by virtue of the merger. Via Christi was conducting business on behalf of and for the benefit of the limited partnership, and while the transaction served Via Christi's self-interest, that is not sufficient to establish a breach of the fiduciary duty of loyalty in the absence of evidence of the misappropriation of a partnership opportunity under K.S.A. 56a-404(b)(1). Similarly under K.S.A. 56a-404(b)(2), no question exists that the interests of the plaintiff limited partners were adverse to both Via Christi and the new investors of MRI, LLC. However, the defendants rightly point out that the question is whether Via Christi acted as or on behalf of a party with an adverse interest to the partnership under this statutory provision. Although Via Christi, as the majority owner of both entities, represented both sides of the transaction, no evidence was presented that Via Christi itself possessed adverse interests to the limited partnership, nor was there evidence that its presence on both sides of the transaction actually harmed the limited partnership in any way. K.S.A. 56a-404(b)(2). As noted in the Official Comment to § 401(b)(2), this rule is derived from Sections 389 and 391 of the Restatement (Second) of Agency. Comment c to Section 389 explains that the rule is not based upon the harm caused to the principal, but upon avoiding a conflict of opposing interests in the mind of an agent whose duty is to act for the benefit of his principal. RUPA § 404, cmt. 2, 6 (Pt. 1) U.L.A. at 144. Moreover, the simple fact that MRI, LLC was merging with the limited partnership does not per se establish that its interests were adverse in the absence of any evidence of adversity. MRI, LLC was only in existence for 2 weeks before it was merged into the limited partnership. The plaintiffs offered no evidence that MRI, LLC was in competition with the limited partnership or was appropriating business from the limited partnership during that time. As the plaintiffs did not establish that Via Christi was acting as or on behalf of an adverse party or that its actions harmed the partnership, the district court properly concluded that the plaintiffs had not established a breach of its fiduciary duty of loyalty under K.S.A. 56a-404(b)(2).