Opinion ID: 2344727
Heading Depth: 3
Heading Rank: 2

Heading: Breach of partners' fiduciary duty

Text: Under Kentucky law, partners owe the utmost good faith to each and every other partner. See Axton v. Kentucky Bottlers Supply Co., 159 Ky. 51, 166 S.W. 776, 778 (1914). The scope of the fiduciary duty has been variously defined as one requiring utter good faith or honesty, loyalty or obedience, as well as candor, due care, and fair dealing. Anthony v. Padmar, Inc., 320 S.C. 436, 465 S.E.2d 745, 752 (App.1995). Indeed, it has often been said, there is no relation of trust or confidence known to law that requires of the parties a higher degree of good faith than that of a partnership. Van Hooser v. Keenon, 271 S.W.2d 270, 273 (Ky.1954). Thus, the doing of an act proscribed by [law] is a breach of that duty. Gundelach v. Gollehon, 42 Colo.App. 437, 598 P.2d 521, 523 (1979) (internal citations omitted). Gundelach involved a sale of all a limited partnership's assets under a statutory scheme and circumstances similar to the case at hand. The Colorado statute therein interpreted provided, in pertinent part: (W)ithout the written consent or ratification of the specific act by All the limited partners, a general partner or all of the general partners have no authority to: (b) Do any act which would make it impossible to carry on the ordinary business of the partnership. Id. at 523. Finding that all of the limited partners did not approve of the transfer of the limited partnership's assets and noting the dissolution of the limited partnership after the transfer, the Court in Gundelach concluded, that upon transfer of the sole asset of the limited partnership, it was no longer possible for the partnership to carry on its ordinary business within the meaning of [the statute]. Id. Newburger, Loeb & Co., Inc. v. Gross, 563 F.2d 1057, 1074-1075 (2nd Cir.1977), also involved circumstances similar to the case at hand. Therein, the general partners and most of the limited partners desired to change the business from a limited partnership to that of a corporation. Over the objection of three of the limited partners, they transferred all the limited partnership's property to the corporation and resumed the partnership's business within the corporate structure. Both the Federal District Court for the Southern District of New York and the Second Circuit Court of Appeals held that, the transfer of the Partnership assets without the consent of [the dissenting limited partners] was a violation of section 98 of New York Partnership Law. Id. at 1074. Section 98(1)(b) provides that general partners may not, without the consent of all the limited partners, do any act which would make it impossible to carry on the ordinary business of the partnership. Id. at 1067. The court further noted, [t]he February 11 transfer effectively terminated the Partnership and tunneled its assets into a new entity. It is difficult to conceive of an act that would make it more `impossible to carry on the ordinary business of the partnership.' Id. at 1074. KRS 362.490 provides, in pertinent part: A general partner shall have all the rights and powers and be subject to all the restrictions and liabilities of a partner in a partnership without limited partners, except that without the written consent or ratification of the specific act by all the limited partners, a general partner or all the general partners have no authority to    (2) do any act which would make it impossible to carry on the ordinary business of the partnership. [2] Our statute thus mirrors the Colorado and New York statutes analyzed in Gundelach, supra , and Newburger, Loeb & Co., Inc., supra . The Appellees, however, argue that Miller and Wiseman had the authority to perform all the acts constituting the restructuring without Lach's consent because they did not make it impossible to carry on the business of the partnership. They assert, it was the only act which made it possible to carry on the business of the partnership; suggesting that Lach would, by virtue of her right of rejection, have destroyed the partnership's business, something she hadn't done for the previous sixteen years. [3] Moreover, the fact that a limited partner with significant ownership interests in a limited partnership would object to a transaction which would deprive her of her say in who might be able to successfully manage her business interest as a general partner, in return for a minority voting, or for that fact, a non-voting interest, in a limited liability company controlled by a majority vote, is not evidence that such limited partner has an interest in destroying the business, including the value of her interest therein. They further argue that under the certificate of partnership and partnership agreement, the general partners had the absolute right to (1) terminate the partnership, (2) execute documents agreements, contracts, leases, etc., on behalf of the partnership, and (3) to manage the partnership business in all aspects, which should include, but should not be limited to . . . take such other action, execute and deliver such other documents, and perform such other acts as the general partners may deem necessary, appropriate, or incidental to carrying out the business and affairs of the partnership. In this regard, they seek to distinguish Gundelach, supra , and Newburger, Loeb & Co., Inc., supra , through Mist Properties, Inc. v. Fitzsimmons Realty Co., 228 N.Y.S.2d 406, 410 (Sup.Ct.1962), in which the court approved the general partner's transfer of title to property owned by the limited partnership as against the claim of the receiver, because the limited partnership agreement allowed the general partners to do so. Mist Properties, Inc., supra , however, had a partnership agreement that gave the general partners the specific power to sell all of the partnership's property, subject to written approval of sixty-five percent of the limited partners. There clearly appears to have been no violation of the statute since the conveyance was not without the written consent of the limited partners but was specifically contemplated and provided for by the agreement. Id. at 410. As the court recognized therein, the agreement the partners had made with themselves through their partnership agreement controlled. There is no intervening public policy which prevents persons dealing at arm's length from entering into an agreement such as set forth above. It has been repeatedly held that where a limited partnership agreement has been entered into the partners cannot, inter se, set up that their rights are not governed thereby. . . . Id. at 410. Simply put, we find that the general partners' rights under the partnership agreement to (1) terminate the partnership at any time upon agreement of the general partners, and (2) to act upon behalf of the Partnership in matters that are necessary, appropriate, or incidental to carry out its business, can be not construed to allow them the power to transform the partnership into a limited liability company, in order to favor a majority of the partners in their selection, or substitution, of the general partners/managers of the business, [4] without the approval of all the limited partners. The obligations to do justice rest upon all persons, natural and artificial; if one obtains the money or property of others without authority, the law, independently of its expressed contract, will compel restitution or compensation. Marshall's Adm'r v. Webster, 287 Ky. 692, 155 S.W.2d 13, 18 (1941). The law regards substance rather than form; the spirit and essence of a thing rather than the dry law. One may not do by indirection what he cannot do directly. Id. at 19. We therefore conclude that the transfer of the partnership assets to the LLC was in violation of KRS 362.490 and thus a breach of the general partners' fiduciary duty to the non-consenting limited partner. Therefore, for the reasons as stated previously, the act of restructuring the business form from the Partnership to the LLC without the consent of all the limited partners was a breach of the general partners' fiduciary duty to the non-consenting limited partner. As the trial court has yet to determine the remedy, or remedies for such breaches, we will not address same. In so concluding, we are not unmindful of Van Hooser v. Keenon, 271 S.W.2d 270 (Ky.1954), Axton v. Kentucky Bottlers Supply Co., 159 Ky. 51, 166 S.W. 776, 778 (1914), or Anthony v. Padmar, Inc., 320 S.C. 436, 465 S.E.2d 745 (App.1995), cited to the contrary by Justice Abramson in her dissent, yet we note that the transfer here does not involve the rights of innocent third party purchasers as occurred in the cases cited.