What fiduciary duties does a general partner owe to a minority partner in a limited partnership?

It is well established that partners are charged with a fiduciary duty. See Fitz-Gerald v. Hull, 150 Tex. 39, 237 S.W.2d 256, 264-65 (1951); Bohatch v. Butler & Binion, 905 S.W.2d 597, 602 (Tex.App.--Houston [14th Dist.] 1995, writ denied). Managing partners owe their copartners the highest fiduciary duty recognized in the law. Huffington v. Upchurch, 532 S.W.2d 576, 579 (Tex.1976); Crenshaw v. Swenson, 611 S.W.2d 886, 890 (Tex.Civ.App.--Austin 1980, writ ref'd n.r.e.). Furthermore, in a limited partnership, the general partner stands in the same fiduciary capacity to the limited

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partners as a trustee stands to the beneficiaries of a trust. Crenshaw, 611 S.W.2d at 890 (citing Watson v. Limited Partners of WCKT, Ltd., 570 S.W.2d 179 (Tex.Civ.App.--Austin 1978, writ ref'd n.r.e.)). Based on this authority, it is clear St. David's, the general partner of East Campus, Ltd., owed the Hughes appellants, limited partners of East Campus, Ltd., a fiduciary duty.

St. David's contends, however, that even if it owed the Hughes appellants a fiduciary duty, it had no duty to notify them of the asset sale because they were limited partners in East Campus, Ltd., and their ownership interest in the operating partnerships was infinitesimal. While we agree that the Hughes appellants' ownership interest was small, we conclude that they were at least entitled to notice before the operating partnership assets were sold.

Among the duties that a partner owes its co-partners is the duty of "full disclosure of all matters affecting the partnership." Hawthorne v. Guenther, 917 S.W.2d 924, 934 (Tex.App.--Beaumont 1996, writ denied); Bohatch, 905 S.W.2d at 602. In a limited partnership, the general partner owes the same duty of full disclosure to the limited partners. Cf. Huie v. DeShazo, 922 S.W.2d 920, 923 (Tex.1996) ("Trustees and executors owe beneficiaries 'a fiduciary duty of full disclosure of all material facts known to them that might affect (the beneficiaries') rights.' ") (quoting Montgomery v. Kennedy, 669 S.W.2d 309, 313 (Tex.1984)). Accordingly, St. David's as general partner was required to disclose all material facts affecting East Campus, Ltd., to its limited partners, the Hughes appellants.

As noted above, the Hughes appellants' interest in the operating partnerships was similar to a royalty interest. We believe this analogy is significant because a limited partner holding a royalty interest is certainly entitled to notice before the general partner sells the underlying assets that generate the royalty interest.

We also believe that it is highly significant that the Hughes appellants were the only party involved in the sale and dissolutions that did not receive prior notice. Even the limited partners of the operating partnerships were given such notice. Further, all partnerships involved in the sale of operating partnership assets, including East Campus, Ltd., executed the sale documents. The Hughes appellants, however, did not sign any of these documents. St. David's argues that, as general partner, it was empowered to execute these documents on behalf of East Campus, Ltd. Unquestionably, St. David's did have this power. However, based upon the foregoing authority and discussion, we hold that the Hughes appellants were entitled to notice before St. David's exercised this power.

CONCLUSION

Because St. David's owed the Hughes appellants a fiduciary duty and because it breached that duty by failing to give them prior notice of the sale of the operating partnerships' assets, we reverse the trial court's summary judgment and remand the cause to the district court for a trial on the merits.

Appellants have brought forward twenty points of error which we perceive to present four basic complaints. These are that the trial court erred in failing to find: 1) Elizabeth Swenson breached her fiduciary duty; 2) Elizabeth Swenson commingled and converted partnership funds; 3) Elizabeth Swenson violated the Texas Real Estate License Act; and 4) the limited partnership was entitled to three times the admitted sum of damages relating to the construction of "Retreat."

Appellants contend that the trial court erred in failing to find that appellee, Elizabeth Swenson, breached her fiduciary duty of loyalty to the partnership and to the limited partners. In this regard, appellants assert that they are entitled to equitable restitution of their capital investment.

It is axiomatic that a managing partner in a general partnership, owes his co-partners the highest fiduciary duty recognized in the law. Huffington v. Upchurch, 532 S.W.2d 576 (Tex.1976). In a limited partnership, the general partner acting in complete control stands in the same fiduciary capacity to the limited partners as a trustee stands to the beneficiaries of the trust. Watson v. Limited Partners of WCKT, Ltd., 570 S.W.2d 179 (Tex.Civ.App. Austin 1978, writ ref'd n. r. e.). We must then, in deciding this case, do so under the laws applicable to trusts.

Included in the fiduciary duty which the trustee (general partner) owes to the beneficiaries (limited partners) is the duty of loyalty. Not only is it his duty to administer the partnership affairs solely for the benefit of the partnership, he is not permitted to place himself in a position where it would be for his own benefit to violate this duty. Scott, Trusts (3d Ed.) Sec. 170; Southern Trust & Mortgage Co. v. Daniel, 143 Tex. 321, 184 S.W.2d 465 (1944).

The finding of fact by the trial court that appellants suffered no harm as a result of Elizabeth Swenson conveying the partnership property to the Swenson Corporation fails to address the issue of appellants' complaint and is immaterial. In Harvey v. Casebeer, 531 S.W.2d 206 (Tex.Civ.App. Tyler 1975, no writ), the court said:

"A trustee shall not buy or sell, directly or indirectly, any property belonging to the trust estate, from or to itself. Tex.Rev.Civ.Stat.Ann. art. 7425b-12. Self-dealing transactions may be attacked by the beneficiary even though he has suffered no damages and even though the trustee has acted in good faith. Slay v. Burnett Trust, 143 Tex. 621, 187 S.W.2d 377, 389 (1945)."

Texas cases have treated a trustee guilty of self-dealing as a wrongdoer whether he was or not and have applied strict liability in such cases as a matter of law. Hamman v. Ritchie, 547 S.W.2d 698 (Tex.Civ.App. Fort Worth 1977, writ ref'd n. r. e.); Slay v. Burnett Trust, supra; Langford v. Shamburger, 417 S.W.2d 438 (Tex.Civ.App. Fort Worth 1967, writ ref'd n. r. e.).

Appellees urge that Tex. Rev. Civ. Stat. Ann. art. 6132a, Sec. 10, which states that a general partner may not possess partnership property "for other than partnership purposes," creates an exception in the present case. We disagree. Possession or the right to possess may often co-exist with legal title but, the terms in a legal sense, are never synonymous.

This is a suit in equity and in that realm, the conduct of parties is judged by refined standards. No rules can be prescribed and no attempt should be made to formulate rules for the measurement of conduct by courts of equity, but that such conduct must be measured by standards exacting the utmost fidelity from a general partner who is in complete control of assets and affairs of a limited partnership. MacDonald v. Follett, 142 Tex. 616, 180 S.W.2d 334 (1944).

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Courts of necessity must exact this high standard of fiduciary fidelity. Not only are the unequal positions of the parties inconsistent with any other standard, courts are ill-equipped to discern the extent a conflict of interest may have affected the outcome of any given transaction. See Bogert, Trusts and Trustees (2d Ed.) Sec. 543, p. 204. This problem was addressed in Nabours v. McCord, 97 Tex. 526, 80 S.W. 595, 598 (1904), which quotes Judge Wheeler who in Shannon v. Marmaduke, 14 Tex. 217 (1855), said:

"The rule is founded on the danger of imposition and the presumption of the existence of fraud inaccessible to the eye of the court. The policy of the rule is to shut the door against temptation, and which, in the cases in which such relationship exists, is deemed to be of itself sufficient to create the disqualification."

Applying these equitable principles, we have no difficulty in concluding that, under the facts of the present case, appellee, Elizabeth Swenson has breached her fiduciary duty to the limited partners as a matter of law and that appellants are entitled to equitable restitution to the extent of their respective partnership contribution.

By many points Johnson claims error in the court's charge and in the jury's answers to the special issues. Special issue one inquired whether Johnson acted in compliance with his fiduciary duty to Moore and Davis in the finish-out construction work on their offices. In connection with the special issue, the district court charged:

A "fiduciary duty" requires that persons engaged in a partnership, or who are about to assume such relationship, owe to each other the utmost good faith and the most scrupulous honesty in connection with partnership affairs.

In connection with this Special Issue, you are instructed that a fiduciary relationship existed, and still exists, between Ruben Johnson and the limited partners in the 15th Street Building Limited Partnership. A fiduciary must show that all aspects of the questioned transactions were fair, honest, and reasonable.

You are further instructed that each partner in a partnership business is a confidential agent of the other partners and each is required to make full disclosure of all material facts known to him with respect to partnership affairs.

The jury answered that Johnson did not act in compliance with the fiduciary duty he owed Moore and Davis.

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Johnson argues that he owed Moore and Davis no fiduciary duty because their relationship in the questioned transactions was one of landlord-tenant and not one of partnership. Johnson's claim is not meritorious. Whether Johnson and appellees Moore and Davis occupied a landlord-tenant status is immaterial; all were partners in owning the building, and transactions to operate the building are the subject of this suit.

Persons engaged in a partnership owe to one another a high duty, one of the highest duties recognized in law, the duty to deal with one another with the utmost good faith and most scrupulous honesty. Huffington v. Upchurch, 532 S.W.2d 576, 579 (Tex.1976); Johnson v. Peckham, 132 Tex. 148, 120 S.W.2d 786, 788 (1938). Having an additional landlord tenant relationship with one's partners does not diminish this duty. Johnson's attempt to recast this case in landlord-tenant terms would make the additional relationship a complete defense to the responsibilities that Johnson accepted in his initial and primary role as general partner of 15th Street. This he cannot do.

In furtherance of his own interests and without disclosure to his partners, appellees Moore and Davis, Johnson tacked a fifteen percent fee onto the cost of their finish-out jobs. This Court has no difficulty in concluding that the proof supports the finding that Johnson breached the fiduciary duty owed appellees.

In this connection it is important to note that the jury found that Conrad was the managing partner of the partnership. As such, he stood in a higher fiduciary relationship with the other partners than partners usually occupy. Smith v. Bolin, 153 Tex. 486, 271 S.W .2d 93, 97 (1954). The burden is upon the managing partner to dispel all doubts concerning his conduct toward the partnership or the other partners, and if he is unable to carry this burden all doubts will ordinarily be resolved against him. His duty is said to be analogous to that of a trustee. Cook v. Peacock, 154 S.W.2d 688, 690 (Tex.Civ.App., Eastland 1941, writ ref'd w.o.m.). He owes the duty to keep an accurate account of his transactions with or for the partnership, and, if he fails to keep such account, all doubts respecting particular items will ordinarily be resolved against him on an accounting. Doubt as to the validity of credits which he claims must be resolved against him. Cook v. Peacock, supra; 44 Tex .Jur.2d, Partnership, § 53, p. 380; Newman v. Newman, 195 S.W.2d 393, 397 (Tex.Civ.App., San Antonio 1946, affirmed 145 Tex. 433, 198 S.W.2d 91). Partners occupy a fiduciary relationship with each other and the partnership, and this is true, whether the enterprise be considered a partnership or merely a joint adventure. Johnson v. Peckham, 132 Tex. 148, 120 S.W.2d 786 (1938). All doubts, therefore, arising from the Lake Ranch transactions must be resolved against Conrad and his estate.

To prevail on a claim for breach of fiduciary duty, a plaintiff must prove the existence of the fiduciary relationship and a breach of that duty by the defendant, which caused damages to the plaintiff or benefit to the defendant. Jordan v. Lyles , 455 S.W.3d 785, 792 (Tex. App.—Tyler 2015, no pet.) (op. on reh'g). A power of attorney creates an agency relationship, which is a fiduciary relationship as a matter of law. Id . Further, a fiduciary relationship exists between a trustee and the trust beneficiary, and the trustee must not breach or violate this relationship. Herschbach v. City of Corpus Christi , 883 S.W.2d 720, 735 (Tex. App.—Corpus Christi 1994, writ denied). A fiduciary owes his principal a strict duty of good faith, fair dealing, honest performance, and strict accountability. In re Estate of Miller , 446 S.W.3d 445, 455 (Tex. App.—Tyler 2014, no pet.). A fiduciary may not use his position to self-deal. See

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Tex. Bank & Trust Co. v. Moore , 595 S.W.2d 502, 508-10 (Tex. 1980). We conduct our sufficiency review in light of the charge as given. Romero v. KPH Consolidation, Inc. , 166 S.W.3d 212, 220 (Tex. 2005).