On Christmas morning, the eyes of two young brothers glistened with excitement as they unwrapped matching gifts: two sets of boxing gloves. Within moments, they cleared the furniture and Round 1 began. The fun ended with the first blow to the face. “You can’t do that!” shouted the recipient of the punch. To even things out, he sent a blow into his brother’s stomach. Competition turned to rage, and punches were replaced by kicking and screaming.
Like some partners, these boys joined their endeavor with the understanding they could compete and need not disclose their moves to the other. But when one party thought the other went too far, he cried “foul,” and a referee was needed to resolve the dispute. Many partners agree to compete and agree to limit what they must disclose to each other. But when a fight ensues, courts decide whether the partners properly limited their fiduciary duties.
Under partnership law, partners may limit some of the fiduciary duties they owe to each other by drafting certain provisions into their partnership agreement. After Triple Five of Minnesota, Inc. v. Simon, 404 F.3d 1088 (8th Cir. 2005) (Triple Five), however, partners may have difficulty knowing whether they can effectively limit their duty to disclose information material to the partnership and their duty not to usurp a partnership opportunity.
In Triple Five, the Eighth Circuit held that a partnership agreement provision limiting fiduciary duties would not be given effect. The partnership agreement provided that “no partner shall be liable to any other partner except in the case of fraud or gross negligence.” Although the district court found no fraud or gross negligence, the district court and the Eighth Circuit held that enforcing this provision would have destroyed the fiduciary character of the partnership. higher fiduciary standard than they had written into their partnership agreement. agreement, the defendants owed Triple Five various common-law fiduciary duties. violation of the duty to disclose and the duty not to usurp a partnership opportunity. As a result, the defendants lost managing control of the largest mall in America, along with millions in profits generated by the mall. Thus, the parties were held to a higher fiduciary standard than they had written into their partnership agreement. Despite the limitations in the partnership agreement, the defendants owed Triple Five various common-law fiduciary duties. Specifically, the defendants were found in violation of the duty to disclose and the duty not to usurp a partnership opportunity. As a result, the defendants lost managing control of the largest mall in America, along with millions in profits generated by the mall.
The holding in this case raises a question for all partners and potentially all parties in business together:12 to what extent may parties in business together limit their fiduciary duties without risking that the limitations will be held unenforceable?
This note first examines the uniform acts applicable to partners’ fiduciary duties and partners’ ability to limit fiduciary duties, particularly the duty to disclose information and the duty not to usurp a partnership opportunity not to usurp a partnership opportunity. Next is a summary of the facts of the Triple Five decision, the procedural history of the case, and the courts’ analysis of the case. In light of the Triple Five decisions, this note examines related cases in Minnesota and other jurisdictions. This note then considers criticisms regarding fiduciary duty limitations and the Triple Five decisions. The note concludes with concerns over the ambiguous state of the law after Triple Five, offering advice for parties seeking to draft partnership agreements that limit fiduciary duties.
This post is also part of a series of posts on Unenforceable Fiduciary Duty Limitations.