Monday, April 4, 2022
It's been one week since I announced and started posting in this virtual symposium on the NextGen Bar Exam. Thanks to Josh, Ben, and John for joining me in commenting on the proposed content scope outline relating to Business Associations and Relationships. You can find their posts here, here, and here, respectively.
We have raised issues about terminology. And there are a few areas that are lacking in clarity or specificity. In addition, two important overarching points have emerged to date in our posts. One is that it is important to indicate the source of the law being tested, since the default rules operative in various areas of LLC and corporate law are not the same in the dominant national statutory frameworks. (I offer another example of how this may matter in the discussion of corporate director and officer fiduciary duties, below.) The other is that the default rules in business associations law tell only part of the story. Constitutional issues, authorized private ordering, and decisional law that both supplements and interprets state legislative enactments can all play roles.
In this post, I offer a few more points that illustrate or add to these observations.
The outline notes that distinctions between or among partnerships (denominated "general partnerships" in the outline), limited liability partnerships, and limited partnerships will be tested. That seems appropriate. But the next few prompt all refer to "general partners." Neither partnerships nor limited liability partnerships have general partners. They just have partners. Only limited partnerships distinguish general partners from limited partners.
Only the duty of loyalty between and among partners and the partnership is proposed to be tested as a matter of partnership fiduciary duties. Why not care? And what about the obligation of good faith and fair dealing? These governance rules are all equally important. And duties of care and loyalty exist in agency law, unincorporated business associations law, and corporate law.
Moreover, the outline notes under "Duty of loyalty": "This topic includes the consequences of a partner acting outside the scope of the partner’s authority to bind the partnership." This annotation is perplexing to me. I have two principal substantive comments about it.
First, a partner's authority to bind the partnership is a matter of agency authority--the authority to transact with third parties. A partner's fiduciary duties are a matter of internal governance (as the relevant outline topic, "Rights of . . . partners among themselves" indicates). Two separate parts of the Revised Uniform Partnership Act (the "RUPA") address relations with third parties and internal governance--Articles 3 and 4, respectively. So, the annotation introduces an apples-and-oranges problem--the illumination of an internal governance rule by reference to a third-party relations rule.
Second, the duty of loyalty of partners in a RUPA partnership is relatively specific. It consists of three exclusive components:
(1) to account to the partnership and hold as trustee for it 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;
(2) 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
(3) to refrain from competing with the partnership in the conduct of the partnership business before the dissolution of the partnership.
It is hard for me to see how a partner acting outside of their agency authority would implicate any of the three components of the duty of loyalty. That conduct does not, of itself, result in the partner: deriving or taking any property, profit, or benefit of or belonging to the partnership; having conflicting interests, or competing with the partnership.
Corporations and LLCs, Generally
I agree with John that LLCs and corporations should each have their own category. The doctrinal rules (structure, governance, and finance) are simply too different. The general categories under each (and under partnerships, for that matter)--formation, management and control, fiduciary duties, agency, third-party liability, etc.--can be almost exactly the same. Topics like veil piercing, pre-organizational contracting, and shareholder/member litigation that apply to both corporations and LLCs in similar ways can be noted in the outline for each with a cross-reference to the other or can be called out separately in the outline (with any unique corporate or LLC nuances addressed in that broader context).
Corporate Director (and Officer) Fiduciary Duties
While Josh and Ben have focused some pointed and valuable comments on jurisdictional differences in limited liability company fiduciary duties (comments that I endorse), I am at least as troubled by jurisdictional differences in corporate fiduciary duties. I have written in the past in this space (here, here, and here) about the challenges in teaching corporate fiduciary duty law. Delaware's classification of Caremark oversight duties as good faith questions actionable as breaches of the duty of loyalty runs counter to decisional law in other jurisdictions that characterizes oversight failures as breaches of the duty of care. In sum, the relative narrowness of the fiduciary duty of care in Delaware, the capaciousness of Delaware's duty of loyalty, and the Delaware judiciary's reinterpretation of a director's obligation of good faith as a component of the duty of loyalty distinguish the law of director fiduciary duties in Delaware from the law of fiduciary duties elsewhere.
Like others, I have doubts about the fairness and efficacy of bar exams as meaningful gatekeepers for the profession. But I assume good faith in constructing the NextGen Bar Exam. With that in mind, any bar exam should assess the law that licensed practitioners should know. And it should use normative terms in signaling the law to be tested and recognize the use of normative terms in evaluating performance. In this regard, it is important to note that there are parallel types of legal rules in agency, unincorporated business associations law, and corporate law. There are recognized, well-worn labels for describing these component legal rules in agency and business associations law. Why reinvent the wheel? If parallel legal doctrine from business associations and relationships laws is to be tested, the content scope outline should use the acknowledged customary descriptors for those rules.
These comments round out my thoughts on the "Business Associations and Relationships" portion of the proposed Content Scope Outlines for the NextGen Bar Exam of the Future. I welcome additional posts and any responses here on the BLPB, and as I noted in my initial post, comments can be filed with the National Conference of Bar Examiners here. The comment period closes on April 18, 2022.