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ba archive 2008 – partnership/llc

WEEK 3: 1-5 September
This week we continue with the partnership material and I have asked you to read to page 117. We begin with the case we did not get to last week: Holmes v Lerner.

Be sure to read the Florida statutes on partnership fiduciary duties based on RUPA.

As we focus on fiduciary duties and partnerships, it’s worth noting the opinion of the Delaware Chancery Court in Venhill Limited Partnership v Hillman in June this year. The judgment, by Vice Chancellor Strine, is 73 pages long, and it begins:

This case underscores the reality that it is not only greed that can inspire disloyal behavior by a business fiduciary. In fact, when a business fiduciary lives a plush and comfortable life, derived from substantial distributions from family trusts, he can afford to place other considerations — such as the achievement of a personal dream, a desire to prove himself as an entrepreneur and to call himself a CEO, or a stubborn refusal to admit failure — ahead of the prudent pursuit of maximum profit, having a silk-sheeted safety net to fall back upon.

In relation to Hillman’s actions as general partner of a limited partnership in investing significant amounts of money in a failing company, Auto-trol, on terms which were not those of arm’s length transactions, the Vice Chancellor wrote:

The reason for Venhill’s provision of financing to Auto-Trol was singular: Howard Hillman’s personal sense of identity was bound up in Auto-Trol. He had served as its CEO since 1985, found its mission interesting, and fervently desired to make it a success, proving to himself and the world that he was capable of generating wealth as an entrepreneur and executive, and not simply by directing family funds into investments identified by another branch of his family, with which he had strained relations.
But Howard Hillman was not pursuing his Auto-Trol dream with his own funds. Instead, he was funding it with Venhill funds that did not belong to him. He was a fiduciary and expected to exercise a rational business judgment about how to invest Venhill’s funds. He was expected to make investments that would maximize the returns to Venhill, not that would maximize the personal value he placed on remaining as CEO of Auto-Trol and seeking to make it a success…
…Instead of exercising his authority as Venhill’s general partner for the best interests of Venhill, Hillman irrationally pursued his own agenda by imprudently investing tens of millions of dollars in an insolvent company with no rational plan for future success. He made those investments on terms that were grossly unfair to Venhill, and without any attempt to compare what Venhill would likely receive from investing in Auto-Trol to what it could receive for making other market investments. In fact, it is indisputable that no rational third-party would have invested in Auto-Trol on the terms Hillman caused Venhill to invest….
…This is a clear case of fiduciary disloyalty. Although Howard’s motives were not financial enrichment, they were personal. He preferred the continuation of his hobby and let a stubborn sense of pride and an unwillingness to admit error come ahead of his duties to Venhill. Howard knew he was injuring Venhill to benefit his personal interest in continuing Auto-Trol as a hobby. That is, Howard did not act in the good faith pursuit of Venhill’s best interests, as he was bound to do. Instead, he acted in bad faith by impoverishing Venhill in order to keep Auto-Trol afloat for personal reasons unrelated to Venhill’s own best interests. Given that he knew that he was investing Venhill’s funds in an imprudent and irrational manner, Howard also engaged in willful misconduct. Therefore, § 14.1, the exoneration clause of the Venhill Limited Partnership Agreement, does not insulate him from liability for his breaches of duty.
Section 14.1 does not aid Howard for another reason, which is that it is obvious that he acted in a grossly negligent manner. His decisions did not involve any rational consideration of relevant factors. He did not make any genuine effort to comply with the expected duty of care. No rational investor would have made the decisions Howard did, or in the manner he did….

WEEK 4: 8-12 September
Updated Sunday 7 September, 4.25 pm.

We don’t know yet what Ike will do to our week. But we do have class tomorrow. We will begin with the material we did not get to last week, as I said on Thursday. Here is the additional material I provided last week [extract omitted because set out above]….

We are seeing a number of different aspects of fiduciary duties relating to secret profits/opportunities, conflicting interest transactions, duties of confidentiality (and trade secrets) and the interlinkage of duties of care and the duty of loyalty reflected in the Venhill v Hillman case.

If we have 2 classes this week because of Ike we should be able to finish the partnership chapter (or at least get close to that point). If we have 3 classes we will start the LLC material and it would be a good idea to read up to page 166.

Update 10 September 2008, 9.00 pm. I’m going to begin tomorrow by reviewing the material on dissolution we discussed on Tuesday. I will be distributing this handout in class tomorrow.

WEEK 5: 15-19 September

I asked you to read the LLC chapter of the book for this week. LLCs seem to borrow some characteristics from partnerships and some from corporations – they are a hybrid business form. Does the borrowing mean that courts should interpret the rules which govern LLCs in the same way that they might interpret similar rules with respect to partnerships and corporations, or not? Does it make a difference whether the state legislature has expressed a view on this question?

SEPT 15: Florida Statutes § 608.701 Application of corporation case law to set aside limited liability.–In any case in which a party seeks to hold the members of a limited liability company personally responsible for the liabilities or alleged improper actions of the limited liability company, the court shall apply the case law which interprets the conditions and circumstances under which the corporate veil of a corporation may be pierced under the law of this state.

NOTE, SEPT16:Selected Florida LLC statutory provisions

I’m leaving the following note on this page for a few more days in case you missed it, as I put it up half way through last week:
Note on Agency, 10 September 2008: Via the Caterpillar website I saw a notice dated August 22, which states:

Over the past week, it has come to the attention of Caterpillar Inc. that false letters and fake checks have been sent to people in the mail. These letters and fake checks are part of a “scam” sweepstakes and should not be trusted. Specifically, several individuals have received a letter and check in the mail from “Caterpillar Financial Services and Consultants.” These letters were not sent by Caterpillar Inc., or on behalf of Caterpillar. Please recognize that the check is counterfeit, and the mailing is not related to Caterpillar Financial Services Corporation (CFSC). Caterpillar is not sponsoring any sweepstakes, lottery or giveaway of this kind. In addition, do not call the number listed, as charges could incur on your phone bill. If you wish, you may file a report about receiving this mailing with your local law enforcement agency.

The notice links to a copy of the letter which includes a logo which is very similar to that of Caterpillar – lending it a semblance of authenticity. Did Caterpillar need to publish the notice? What objective does publishing such a notice achieve?