Real Estate Attorneys Must Keep In Mind Fairness and Fiduciary Duties

A recent Partnership lawsuit I was working on led me to research a particular issue of fairness in how a general partner treated his limited partners.  For all of the legal concepts that real estate lawyers work with, it is often the fundamental notion of fairness that gives a good indication of whether a partner has been treated properly or not.  As I did the legal research, I came across a case that did a good job of setting forth the nature of partnerships and the fiduciary obligations of the partners [Everest Investors 8 v. McNeil Partners (2003) 114 Cal.App.4th 411].  The case set forth some of the basic of partnership law that are helpful for any partner or attorney.

1. A Partnership Is A Separate Entity

A partnership is an entity separate and apart from the partners of which it is comprised, and it is the partnership entity which owns its assets, not the partners.  For example, a limited partner of a partnership has no property interest in the specific partnership assets.  The assets are owned by the partnership, not its partners.

California law treats a partnership as a ‘hybrid’ organization that is viewed as an aggregation of individuals for some purposes, and as an entity for others.  One of the primary areas in which a partnership is viewed as an entity is with respect to ownership of property.  California Corporations Code section 15008 specifically provides that a partnership may hold title to real property.

This makes a difference in how an attorney approaches a wronged partner versus a wronged co-owner.  I have written other articles about the difference between a partnership lawsuit and a partition lawsuit.  A partnership interest is a personal property interest and not a real property interest.  On the other hand a co-owner of property (who is actually on the deed) often has the right to partition of the real property itself.

2. A Partnership Is A Fiduciary Relationship

California law provides a partnership is a fiduciary relationship, and partners are held to the standards and duties of a trustee in their dealings with each other.  In proceedings connected with the conduct of a partnership, partners are bound to act in the highest good faith to their copartners and may not obtain any advantage over them in the partnership affairs by the slightest misrepresentation, concealment, threat or adverse pressure of any kind.

In other words, a partner must treat his fellow partners fairly.

A limited partnership is no different from a general partnership.  A general partner of a limited partnership is subject to the same restrictions and has the same liabilities to the partnership and to the other partners as in a general partnership.

Generally, in California the fiduciary obligations of a general partner with respect to matters fundamentally related to the partnership business cannot be waived or contracted away in the partnership agreement.  However, this is where you should engage an experienced partnership lawyer to assist you.  For example, Delaware’s partnership laws allow the partners to negotiate more freely the obligations and duties while California is stricter.

3. A Partner May Not Seek A Personal Business Advantage Over His Other Partners.

The Everest court opinion pointed out that “There is an obvious and essential unfairness in one partner’s attempted exploitation of a partnership opportunity for his own personal benefit and to the resulting detriment of his copartners.”  Thus, a partner who seeks a business advantage over another partner bears the burden of showing complete good faith and fairness to the other.  The fiduciary has the burden of justifying his conduct.

A partner’s fiduciary duty extends to the dissolution and liquidation of partnership affairs, as well as to the sale by one partner to another of an interest in the partnership.  A partner may not dissolve a partnership to gain the benefits of the business for himself, unless he fully compensates his copartner for his share of the prospective business opportunity.  Such a partnership opportunity may not be appropriated by one partner to the detriment of a copartner even after dissolution.

4. Partnership Duties Are Comparable To Corporate Duties.

A partner’s fiduciary duties are comparable to the fiduciary duties of a corporate director towards the shareholders.  Again, the overarching idea is fairness.  In the corporate context, directors breach their fiduciary duty to minority shareholders by using their control of the company to obtain an advantage not available to all stockholders to the detriment of the minority stockholders and without a compelling business purpose for the director’s conduct.

“Majority shareholders may not use their power to control corporate activities to benefit themselves along or in a manner detrimental to the minority.  Any use to which they put the corporation or their power to control the corporation must benefit all shareholders proportionately and must not conflict with the proper conduct of the corporation’s business.”

The Everest court cited a warning from a prior California Court of Appeals opinion:  “Self-dealing in whatever form it occurs should be handled with rough hands for what it is—dishonest dealing.  And while it is often difficult to discovery self-dealing in mergers, consolidations, sale of all the assets or dissolution and liquidation, the difficulty makes it even more imperative that the search be thorough and relentless.”

5. Practice Pointers For The Partnership Attorney And His Client

As partnership lawyers we often end up representing a partner who is accused of breaching his fiduciary duty.  In formulating a defense and analyzing the case, we get caught up in dissecting the facts and looking for technical legal arguments to justify our client’s behavior.  However, a jury and even a judge may first be asking themselves, “was this fair?”  All of the technical legal arguments you can muster may not overcome this feeling that the other party was treated unfairly.  A jury may not understand or simply ignore our intellectual discourse if their gut tells them that a partner was mistreated and was damaged by that mistreatment.  Don’t ignore your gut when determining whether a partner acted fairly or not.

Laine T. Wagenseller is a partnership litigation attorney in Los Angeles.  He is the founder of Wagenseller Law Firm in downtown Los Angeles.  The firm handles partnership and corporate lawsuits relating to breach of fiduciary duty and other causes of action.  For more information please call (213) 805-7445.

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