Thursday, January 25, 2018

To "Cabin In" or Not to "Cabin In": The Curious Case of California

        As many of this blog’s readers know, RUPA § 404 (1997) “cabins in” the duty of loyalty by stating that “[a] partner’s duty of loyalty to the partnership and the other partners is limited to the following.” The situations then described all involve harm to the partnership itself—not harm to an individual partner.  Setting forth a duty that is owed to a partner, but that is defined solely by reference to harm to the partnership, is peculiar.

        In the 2013 version of RUPA, this problem was squarely addressed.  RUPA § 409(b) (2013) eliminates the “limited to” language and instead states that the duty of loyalty simply “includes” the standard partnership-harm situations. The Official Comment explains:

This section originated as UPA (1997) § 404. The 2011 and 2013 Harmonization amendments made one major substantive change; they “un-cabined” fiduciary duty. UPA (1997) § 404 had deviated substantially from UPA (1914) by purporting to codify all fiduciary duties owed by partners. This approach had a number of problems. Most notably, the exhaustive list of fiduciary duties left no room for the fiduciary duty owed by partners to each other – i.e., “the punctilio of an honor the most sensitive”). Meinhard v. Salmon, 164 N.E. 545, 546 (N.Y. 1928). Although UPA (1997) § 404(b) purported to state “[a] partner’s duty of loyalty to the partnership and the other partners” (emphasis added), the three listed duties each protected the partnership and not the partners.

        Even before the 2013 RUPA, however, a number of states had deviated from RUPA (1997) by omitting the “limited to” language which restricted the duty of loyalty.  California’s partnership statute, for example, simply states that “[a] partner’s duty of loyalty to the partnership and the other partners includes all of the following . . . .”  Cal. Corp. Code § 16404(b).  Thus, California appears to be a state that believes, as does RUPA (2013), that the “limited to” language associated with the duty of loyalty is too restrictive.

        But . . . wait a minute.  In the 2013 version of the Uniform LLC Act, the duty of loyalty is again described without the restrictive “limited to” language.  Section 409(b) simply states that the duty of loyalty “includes the duties . . . .”  California has adopted the revised Act, but it alters the language of § 409(b) to add back the “limited to” language when describing the duty of loyalty.  Cal. Corp. Code § 17704.09.

        What am I missing?  Why does California reject the “cabining in” of the duty of loyalty for the general partnership, but it adds that language back for the LLC?  Is this a legislative goof, a purposeful change, or something else?  Thoughts from those steeped in California law?

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LLCs are formed with intention and usually legal guidance that seeks to minimize liability and will do it with custom provisions if the narrow standard is not the default. General partnerships are largely accidents arising by operation of law, and a wide standard of duty in that unintentional context that will not be written away with a planned legal agreement is preferred then.

Posted by: ohwilleke | Jan 30, 2018 9:09:42 PM

Thanks for your comment. Along the same lines, it was pointed out to me that California's limited partnership statute also includes "cabining in" language with respect to the duty of loyalty. See Cal. Corp. Code 15904.08.

Posted by: Douglas Moll | Jan 31, 2018 6:59:26 AM

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