The joys of partnership: Triple Five

For many years I’ve been toiling in what “corporate” law scholars seem to regard as the hinterland of partnership law. Although this area has been receiving increasing attention, it’s odd that it doesn’t get more. There are really interesting contractual issues, opportunities for lawyering, and tales of venality and treachery, and plenty of money, among other things.

Case in point: the huge Mall of America in Minnesota. The Eighth Circuit on April 21 issued an opinion in the appeal of Triple Five of Minnesota, Inc. v. Simon (district court opinion is 280 F. Supp. 2d 895 (D. Minn. 2003)).

The background is described as follows in my Unincorporated Business Entities book:

The Ghermazian brothers, through Triple Five, originated the Mall of America. The Mall is owned by MOAC, which in turn is owned by MOAC LP. MOAC LP initially was owned 55% by TIAA (Teacher’s), and 45% by MOAA. MOAA, in turn, was owned 50% by Si-Minn, LP (which had 80% of the management rights) and 50% by Triple Five (which had 20% of the management rights). Si-Minn LP was owned by the Simon family through various entities, including Si-Minn, Inc. and Melvin Simon & Associates. Teachers essentially was entitled to 100% of the income from MOAC LP, and was guaranteed to be repaid the money it put into the Mall if the Mall were ever sold or otherwise financed. Also, after 2002,Teachers could force MOAA either to buy the Mall at a price set by Teachers or to allow Teachers to sell the Mall at a price set by Teachers. This essentially allowed Teachers to buy the entire Mall by setting a sale price that MOAA could not meet and transferring the money from one pocket to another. This dispute arises out of the sale of half of Teacher’s interest to a company owned by the Simons (SPG).

There’s a powerpoint slide illustrating all this in this file.

As summarized in Bromberg & Ribstein on Partnership, Section 6.07, the court held:

--Plaintiffs did not fully disclose partnership opportunity in which they invested, and therefore did not discharge their duty by offering plaintiffs a chance to participate in the opportunity

--Officers of the general partner “both by virtue of their positions as officers of [the general partner] and by holding themselves out as having the authority to take action for MOAA, also owed Triple Five a fiduciary duty.”

--The duty was breached although the partnership opportunity was purchased through the defendants’ separate company because the defendants did not separate the various corporate entities through which they acted.

--Financial ability was taken into account regarding whether the transaction was a partnership opportunity, but the third party’s refusal to deal is an equitable defense.  Here, neither inability nor refusal was shown.

--A clause in the partnership agreement providing that a partner shall not be liable to the other partner except for fraud or gross negligence does not waive liability for failure to disclose and usurping partnership opportunity.  The court reasoned that, although such conduct is not fraud or gross negligence, a prohibition on contractual liability does not affect a common law fiduciary duty claim.

--The court imposed a constructive trust on defendant’s interest in the Mall of America and profits received in connection with that interest, removed the general partner and ordered reimbursement of plaintiff’s attorneys’ fees.

Some curious aspects of the case are noted in Bromberg & Ribstein and in Chapter 8 of my Unincorporated Business Entities book:

--Officers of the general partner were apparently liable merely because of the officers’ position in the general partner without any further showing supporting piercing of the veil of the entity that was the partner.

--Although the remedy for taking a partnership opportunity normally is awarded to the partnership, from which the opportunity was usurped, in Triple Five the remedy was given to the partner, Triple Five, rather than the partnership.

--The court’s interpretation of the provision in the agreement providing for no liability except for fraud or gross negligence curiously distinguished “contractual” liability and fiduciary liability. More importantly, the court did not discuss another provision of the agreement, Article XI (G):

Each Partner . . . may engage in, acquire and possess, without liability or account ability to the other Partner, . . . investments and interests of every nature and description, independently or with others, including but not limited to, any interests or investments similar to or in competition with the Partnership’s business except those which are involved in the development or operation of the Project or Property. No Partner shall be liable to another Partner for failing to offer to the Partnership or the other Partner, or for appropriating or profiting from, any business opportunity, except for those which involve utilization of the Real Estate or which are necessary to the Project.

The 8th circuit opinion dealt with some, but not all of these issues:

--SPG, the Simons’ public company that actually bought the TIAA interest, had a duty to Triple 5.  The court reasoned:

Even though SPG is a public company with an independent board of directors, its day-to-day decisions were being made by the same people who were decision-makers at Si-Minn. SPG officials used information gained in their capacities as Si-Minn directors (and MOAA operatives) to profit individually through SPG participation in this transaction. And, in the process they shirked their individual and partnership duties to Triple Five. Indeed, if SPG/Si-Minn had not used subterfuge to their substantial advantage, the deal with TIAA would not have been fully negotiated before it was communicated to Triple Five. Accordingly, we find that both Si-Minn and SPG owe a duty of integrity and good faith to Triple Five in this particular transaction.

--The court found "no clear error in the district court's conclusion that this was a partnership opportunity."

--The court held that the Simons’ breached their disclosure duty to Triple Five: The court said:

The record shows that Triple Five was interested, but was led to believe that its partner, and thus, the partnership, was unwilling to pursue the deal. In fact, its partner's goal was to take the opportunity for itself. The district court did not clearly err in finding that the Simon defendants, as partners of Triple Five, and especially as managing partner of MOAA, violated their fiduciary duty of disclosure with regard to the TIAA transaction.

--As for the fiduciary waiver issue, the court said only: "We agree with the district court's conclusion that Minnesota partnership law prevents partners from contracting away their fiduciary obligations."

--The court reversed the district court's decision to give the remedy to the individual partner.  The court said:

The difficulty with the district court's remedy is that it places Triple Five in the shoes of MOAA. But, it was the MOAA partnership, not simply Triple Five as a partner, that lost the opportunity to participate in the TIAA transaction. . . . Even though an aggrieved partner can sue on his own behalf, Minnesota law only allows a dissociating partner to recover the interest he would have received through the partnership. . . . Thus, we remand to the district court to correct this by imposing the constructive trust in favor of MOAA, and give MOAA the opportunity to purchase from SPG. If MOAA refuses to purchase the 27.5% interest from SPG, the district court may instead award Triple Five the opportunity to buy one half of SPG's interest . . .

--The court affirmed the district court's decision to remove Si-Minn as managing partner of MOAA, and replace it with Triple Five, though holding that the partnership distributions should not have been changed from 50-50 to 80-20 favoring Triple Five, other than the management fee distribution to reflect Si-Minn's removal.