In most instances, absent a waiver or specific circumstances, both general partners and limited partners can owe fiduciary duties to their partnerships. While general partners owe fiduciary duties by default due to the nature of their involvement in the business, whether limited partners owe fiduciary duties depends, in part, on whether they hold any management responsibilities.
Understanding partners’ fiduciary duties—and enforcing them when necessary—is essential for partnerships of all sizes and in all fields. Fiduciary breaches can have both financial and reputational consequences; and, if left unchecked, they can cause significant—and in some cases irreparable—harm. With this in mind, partnerships should conduct an annual end-of-year fiduciary duty check focused on both: (i) assessing compliance; and, (ii) making informed decisions about how to address non-compliance, if necessary.
4 Key Questions for Assessing Fiduciary Duty Compliance in Partnerships
1. Do You Have Clear and Up-to-Date Documentation of Partners’ Fiduciary Duties?
All partnerships should have clear and up-to-date documentation of their partners’ fiduciary duties. While fiduciary duties exist by statute in Florida, partnerships can—and should—incorporate partners’ fiduciary duties into their partnership agreements. By doing so, partnerships can both:
- Outline the scope of partners’ fiduciary duties to a greater extent than the Florida Statutes; and,
- Establish specific remedies and means of resolution for partners’ fiduciary breaches.
With this in mind, when conducting their end-of-year fiduciary checks, partnerships should review their partnership agreements to ensure that they accurately reflect all partners’ fiduciary obligations. Among other things, this should involve:
- Ensuring that descriptions of partners’ fiduciary obligations reflect the current applicable standards under Florida law;
- Ensuring that descriptions of partners’ fiduciary obligations reflect the current nature and scope of the partnership’s business operations; and,
- Ensuring that the partnership agreement addresses all relevant partnership classes (i.e., if the partnership began accepting investments from limited partners during the year, additional documentation may be necessary).
While partnerships can rely on Florida law (including Sections 620.1304, 620.1408 and 620.8404 of the Florida Statutes) when necessary, having the ability to pursue contractual enforcement (and seek contractually prescribed remedies) can help streamline the dispute resolution process. As a result, ensuring that a partnership’s governance documentation adequately reflects partners’ fiduciary duties is essential—and is worth reconsideration on an annual basis.
2. Do All Partners Have a Clear Understanding of Their Fiduciary Duties?
It is also worth ensuring that all partners have a clear understanding of their fiduciary duties. While some fiduciary breaches are intentional, oftentimes, fiduciary breaches result from ignorance of the obligations and restrictions that apply. Even though situations involving unintentional breaches may be comparatively simple to resolve, they can still lead to costs that could (and should) be avoided.
With this in mind, ensuring that partners understand what it means to be a fiduciary of the partnership can be an effective risk-mitigation and cost-mitigation strategy. Under Section 620.8404 of the Florida Statutes, general partners’ fiduciary duties generally include:
Duty of Loyalty
- “To account to the partnership and hold as trustee for the partnership any property, profit, or benefit derived by the partner in the conduct and winding up of the partnership business or derived from a use by the partner of partnership property, including the appropriation of a partnership opportunity;”
- “To refrain from dealing with the partnership in the conduct or winding up of the partnership business as or on behalf of a party having an interest adverse to the partnership;” and,
- “To refrain from competing with the partnership in the conduct of the partnership business before the dissolution of the partnership.”
Duty of Care
- “A partner’s duty of care to the partnership and the other partners in the conduct and winding up of the partnership business is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.”
However, as noted above, partnerships can (and generally should) further detail partners’ fiduciary duties in their governance documentation. When conducting an end-of-year review of their governance documentation, partnerships can use this as an opportunity to push a reminder to their partners as well.
3. Have Any Partners Breached Their Fiduciary Duties During the Year?
Conducting an end-of-year fiduciary check should also involve assessing whether any partners may have breached their fiduciary duties in the past twelve months. What this entails will depend on the specific circumstances at hand, including any specific concerns related to transactions or other activities during the year. Some examples of potential breaches include:
- Misappropriating partnership assets for personal use
- Usurping business opportunities for personal gain
- Withholding material information or sharing confidential information
- Engaging in competitive business activities
- Engaging in other conflicts of interest
If a general partner or limited partner has breached any fiduciary duties owed to the partnership, then it will also be necessary to assess what remedial measures and/or enforcement efforts are necessary.
4. If So, What Remedial and/or Enforcement Action is Warranted?
Partnerships cannot afford to overlook or ignore breaches of partners’ fiduciary duties. Even if a breach appears to have been an isolated event, it will still generally be necessary to take remedial action in order to prevent similar breaches in the future and to document the partnership’s efforts to protect its legal and financial interests.
If a breach is not an isolated event—or if a breach is causing ongoing financial or reputational harm to the partnership—then immediate enforcement action may be necessary. In this scenario, it will be important to promptly identify all relevant causes of action and potential remedies, assess the partnership’s options for pursuing legal action under its partnership agreement and Florida law, and develop and execute a strategic plan for moving forward.
Speak with a Fort Lauderdale Partnership Attorney at Shaw Lewenz
At Shaw Lewenz, we work with partnerships of all sizes to help them document partners’ fiduciary duties, conduct investigations, and pursue enforcement actions when necessary. If you would like to know more about what we can do to help, we invite you to get in touch. Call 954-361-3633 or contact us online to schedule an appointment today.