Steve Bainbridge, discussing the termination of partners by Chicago law firm Mayer, Brown, Rowe & Maw (see Law Blog and Tribune), wonders what would happen if the firm's agreement had no termination without cause provision. Specifically, he proposes the following exam question:
Would terminating or demoting partners for the sole purpose of making the firm more profitable be a breach of the duty of loyalty partners owe one another? Recall that in Meinhard v. Salmon * * * Judge Cardozo wrote that: "Joint adventurers, like copartners, owe to one another, while the enterprise continues, the duty of the finest loyalty. Many forms of conduct permissible in a workaday world for those acting at arm's length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior." Did Mayer, Brown comport itself with "the punctilio of an honor the most sensitive"? Is that really the relevant standard? Discuss.
Well, I have discussed. See Law Partner Expulsion (abstract and citation), Are Partners Fiduciaries?, Unincorporated Business Entities at 298-311, and Bromberg & Ribstein on Partnership, section 7.02(f).
The bottom line is that the expulsion may be a breach of contract if, as Steve hypothesizes, there's no expulsion provision or the expulsion isn't otherwise permitted under the partnership statute. But this situation doesn't involve an abuse of open-ended fiduciary discretion, and therefore is inappropriate for a Meinhard-type fiduciary analysis, as I explain at length in Are Partners Fiduciaries?
Even if the contract and statute include an expulsion power, the expulsion may be in bad faith under the circumstances. But, again, bad faith here is usually a matter of discerning the parties' intent under the contract rather than applying a default fiduciary duty. Only in a rare case might the expulsion involve an abuse of fiduciary discretion by a managing partner.
For a taste of my analysis, see Are Partners Fiduciaries? at 133-34 (footnotes omitted):
[E]ven partners who have controlling voting power are not fiduciaries solely by virtue of that power. This follows from co-partners’ significant default exit right, information rights and the availability of other contractual constraints on partners’ voting power. This issue normally arises when partners exercise a contractual expulsion power, where the expelled partner’s default exit and information rights are often inadequate protection. The courts generally do not apply a fiduciary analysis in this situation. Although expulsion almost always redistributes firm value to the expelling partners, and therefore would be inconsistent with a strict duty of unselfishness, courts generally have permitted expulsion in accordance with the agreement. Courts sometimes suggest that partners must have a business purpose for the expulsion rather than exercising it solely for personal gain. But this simply questions whether partners have acted in bad faith by using the expulsion power in a way that the parties never intended. A court might, alternatively, impose liability where the expulsion was triggered by the self-interested exercise of management power, which would be a breach of fiduciary duty under this article’s analysis.
Any questions?
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