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COMPANY GOVERNANCE UNDER FLORIDA’S LIMITED LIABILITY COMPANY ACT - page 8 / 28

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FLORIDA STATE UNIVERSITY LAW REVIEW

[Vol. 30:53

RUPA attempts to limit judicial inventiveness by stating that there are only two fiduciary duties owed by partners to each other: the duty of loyalty and the duty of care.33 Those duties are exclusive; there are two, count them, two. The duties of disclosure and good faith have been demoted (or, for contractarians, appropriately con- fined) to mere “obligations,” of which more anon.

The duties of care and loyalty are both exclusive and exclusively defined. First, they are temporally limited to the “conduct and wind- ing up” of the partnership’s business and do not apply to the pre- formation negotiation period.34

Second, the duty of care is limited to refraining from grossly neg-

ligent conduct,35 reckless conduct (which seems superfluous),36 and intentional misconduct or knowing violation of law (which merely seems odd).37

David Millon, New Game Plan or Business as Usual? A Critique of the Team Production Model of Corporate Law, 86 VA. L. REV. 1001 (2000).

  • 33.

    R.U.P.A. § 404 (a) (1996) (amended 1997).

  • 34.

    Id. § 404(b)(1). Under the UPA, the duty to account extends to misconduct in con-

nection with the “formation” of a partnership. U.P.A. § 21 (1914). Under the UPA, there- fore, “pre-partners” have fiduciary duties to each other during the negotiation process that “pre-agents” generally do not have to potential principals, RESTATEMENT (SECOND) OF AGENCY § 390 (1958), and “pre-incorporators,” a.k.a. promoters, have only sometimes, and then only if the corporation is actually formed.

Courts have sometimes, but not invariably, used pre-formation duties to impose liability on partners who personally benefitted from information obtained in the negotiation process or failed to disclose something important, at least in hindsight, about contributed property. See, e.g., Corley v. Ott, 485 S.E.2d 97 (S.C. 1997). Thus, information that is voluntarily dis- closed during pre-partnership negotiations may be subject to a duty of confidentiality, even if the parties have not signed a confidentiality agreement. Conversely, disclosure may be compelled even when parties dealing at arm’s length would be free to remain silent.

Like almost everything else in RUPA’s treatment of fiduciary duties, the elimination of pre-formation duties has been both attacked and defended. For what it is worth, it has al- ways seemed a trifle odd to me that parties negotiating a deal may have fiduciary duties while negotiating (or not), depending on the business form ultimately chosen for that deal, which may itself be the subject of negotiation. Since, ex ante, the parties cannot know whether they are fiduciaries, it seems to me that any sensible business person would re- fuse to disclose valuable information without a confidentiality agreement in place. While demanding such an agreement may erode trust, it may also usefully prevent mistakes as to the existence of a legally enforceable trust relationship.

35. R.U.P.A. § 404(c). It is important to note that this section refers to the duty owed by partners to the partnership and to each other, not to the world at large. However, the duty of care as between partners is not the same thing as the duty of care owed by the di- rectors of a corporation. Corporate lawyers are accustomed to thinking of the duty of care as relating solely to firm management. Indeed, it is impossible to think of the duty of care in the corporate context without immediately thinking of the business judgment rule. On the other hand, directors-qua-directors are not agents and therefore do not expose the cor- poration to personal liability for their own torts, nor do they engage in the sort of hands-on interaction with corporate property which risks physically damaging it.

In contrast, RUPA’s duty of care is not limited to management and oversight, although partners do occasionally sue each other for negligent business management, and courts may then apply a partnership version of the business judgment rule. Bane v. Ferguson, 890 F.2d 11 (7th. Cir. 1989). But see Shinn v. Thrust IV, Inc., 786 P.2d 285 (Wash. Ct. App. 1990). Beyond poor management, however, the ordinary negligence of a partner may create

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