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

As the Vice Chancellor noted at summary judgment, a general partner owes the traditional fiduciary duties of loyalty and care to the limited partnership and its partners,³² but DRULPA § 17-1101(d)(2) "expressly authorizes the ... modification, or enhancement of these fiduciary duties in the written agreement governing the limited partnership."³³ Indeed, we have recognized that, by statute, the parties to a Delaware limited partnership have the power and discretion to form and operate a limited partnership "in an environment of private ordering" according to the provisions in the limited partnership agreement.³⁴ We have noted that DRULPA embodies "the policy of freedom of contract"³⁵ and "maximum flexibility."³⁶ DRULPA's "basic approach is to permit partners to have the broadest possible discretion in drafting their partnership agreements and to furnish answers only in situations where the partners have not expressly made provisions in their partnership agreement"³⁷ or "where the agreement is inconsistent with mandatory statutory provisions."³⁸ In those situations, a court will "look for guidance from the statutory default rules, traditional notions of fiduciary duties, or other extrinsic evidence."³⁹ But, if the limited partnership agreement unambiguously provides for fiduciary duties, any claim of a breach of a fiduciary duty must be analyzed generally in terms of the

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partnership agreement.⁴⁰

§ 17-1101. Construction and application of chapter and partnership agreement

[...]

(d) To the extent that, at law or in equity, a partner or other person has duties (including fiduciary duties) to a limited partnership or to another partner or to another person that is a party to or is otherwise bound by a partnership agreement, the partner's or other person's duties may be expanded or restricted or eliminated by provisions in the partnership agreement; provided that the partnership agreement may not eliminate the implied contractual covenant of good faith and fair dealing.

"Delaware's limited partnership jurisprudence begins with the basic premise that, unless limited by the partnership agreement, the general partner

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has the fiduciary duty to manage the partnership in its interest and in the interests of the limited partners."¹⁷⁰ Delaware law presumes general partners owe these fiduciary duties unless they are explicitly and unambiguously disclaimed.¹⁷¹ And Delaware courts presume general partners act on an informed basis and in the honest belief that they acted in the best interest of the partnership and the limited partners.¹⁷²

A partnership is fundamentally a creature of agency: the limited partners appoint the general partner as their agent only for the purpose they all set for the partnership.¹⁷⁴ That appointment is also the source of the general partner's fiduciary duties: a general partner owes fiduciary duties to the partnership and the limited partners because it is their agent.¹⁷⁵ Because a limited partner links arms with a general partner for a specific purpose, the general partner only has the authority to act as the limited partner's agent in pursuit of that purpose, and so only owes the limited partner fiduciary duties to act in pursuit of that purpose. A limited partnership's purpose circumscribes the authority, and therefore the duties, of its general partner.

The Delaware Uniform Partnership Law makes plain that a partnership's purpose delineates a general partnership's grant of agency authority. It states that "[e]ach partner is an agent of the partnership for the purpose of its business,

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purposes or activities."¹⁷⁶ "[A] partner has authority to bind the partnership only with respect to acts the partner performs within the ordinary course of the partnership business."¹⁷⁷ "[A]n act of a partner which is not apparently for the carrying on of the business of the partnership in the usual way does not bind the partnership unless authorized by the other partners."¹⁷⁸ Because "the general partner's powers are the same as those of [ ] partners of a general partnership ..., the general partner may not bind the partnership to a transaction ‘which is not apparently for the carrying on of the business of the partnership in the usual way ....’ "¹⁷⁹ For contractarian alternative entities, like limited partnerships, the ultra vires doctrine remains a meaningful limitation on agent authority.¹⁸⁰

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Because partnerships are creatures of contract, the partnership agreement's purpose clause can offer particularized boundaries on the general partner's authority.¹⁸¹ "A Delaware limited partnership is permitted to carry on any lawful business, purpose or activity, whether or not for profit."¹⁸² But a partnership agreement "[t]ypically ... has a description of the purposes of the limited partnership, the powers of the limited partnership and the restrictions on particular limited partnership activity."¹⁸³ The partnership agreement may also specifically enumerate the rights, powers, and restrictions of the general partner.¹⁸⁴ "Thus, in determining if a particular Delaware limited partnership has the partnership power to engage in a particular business activity, ... an analysis must be made of the partnership agreement of such limited partnership.¹⁸⁵ "A purpose clause that places limits on what an entity can do deprives the entity of the authority to engage in activities that otherwise would be permissible under default principles of law."¹⁸⁶ "The stated purpose

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of the limited partnership is significant because if the proposed transaction is itself within the purpose of the partnership th[e]n, of course, the general partner may lawfully authorize and effectuate the transaction."¹⁸⁷

The purpose clause is not the only available evidence of the partnership's purpose. In addition, "the Court may consider the partnership's stated purposes, the precedent set by the partnership's prior ‘custom or course of dealing’ and ‘the general custom’ of analogous partnerships."¹⁸⁸ "A sensible interpretation of precedent is that the purpose clause is of primary importance, but other evidence of purpose may be helpful as long as the Court is not asked to engage in speculation."¹⁸⁹

The partnership's purpose limits the general partner's authority and therefore circumscribes its fiduciary duties. "An agent has a duty to take action only within the scope of the agent's actual authority."¹⁹³ Because a general partner only has

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the authority to act in furtherance of the partnership's purpose, it cannot owe a duty inconsistent with that purpose.¹⁹⁴ Where a partnership agreement sets forth a specific purpose for the partnership, and grants the general partner powers in furtherance of that purpose, the general partner has no authority to take an act contrary to that purpose, and so failure to take that act cannot be a breach of fiduciary duty.¹⁹⁵

In addition to being circumscribed by the partnership's purpose, a general partner's fiduciary duties may be expressly modified by the limited partnership agreement. DRULPA Section 17–1101(d) permits parties to "expand[ ] or restrict[ ] or eliminate[ ]" a general partner's fiduciary duties "by provisions in the partnership agreement."²³⁸ The exercise of determining the nature and scope of a general partner's fiduciary duties is a contractual exercise, requiring the Court to consider "the reasonable shared expectations of the parties at the time they contracted."²³⁹ Where a limited partnership agreement does not clearly and unequivocally eliminate or limit fiduciary duties, the general partner owes default fiduciary duties.²⁴⁰ "[A]greements’ drafters must [expand, restrict, or eliminate fiduciary duties] clearly, and should not be incentivized to obfuscate or surprise investors by ambiguously stripping away the protections investors would ordinarily receive."²⁴¹ An expanded or restricted " ‘contractual fiduciary duty’ is a fiduciary duty (1) the scope of which is established by contract; or (2) compliance with which is measured by a contractual standard."²⁴²

The Fund LPA contractually restricts the scope of Fund GP's fiduciary duties. It enumerates a particular fiduciary duty, and expressly and repeatedly states that only that duty is owed. Section 6.4F provides:

The General Partner shall have fiduciary responsibility for the safekeeping and use of all funds and assets of the Fund, whether or not in its immediate possession or control. The General Partner shall not employ, or permit another to employ, such funds or assets in any manner except for the exclusive benefit of the Fund.²⁴³

The Fund LPA does not enumerate any other fiduciary duties. Section 6.4J confirms that the duty in Section 6.4F replaces default fiduciary duties:

To the extent that, at law or in equity, the General Partner or its Affiliates has duties (including fiduciary duties) and liabilities relating thereto to the Fund or to the Partners, the General Partner and its Affiliates acting in connection with the Fund's business or affairs shall not be liable to the Fund or to any Partner for its good faith reliance on the provisions of this Agreement except to

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the extent of their gross negligence, willful misconduct or breach of fiduciary duty. The provisions of this Agreement are agreed by the Partners to replace such other duties and liabilities of such Person .²⁴⁴

With this, Fund GP owes only the fiduciary duties expressly provided in Section 6.4F.²⁴⁵

Other provisions in the Fund LPA acknowledge this limitation of Fund GP's fiduciary duties. Several sections describe Fund GP's fiduciary duties merely as those "set forth in this Agreement," including the provision governing removal of the general partner for "[a]ny breach of fiduciary duty in the performance of its duties and obligations as General Partner under this Agreement."²⁴⁶ Otherwise, subject to limited partners’ consent rights and express limitations on authority, "the General Partner [has] the full, complete and exclusive discretion and authority to manage and control the business of the Fund."²⁴⁷ Fund GP is authorized, "without limitation," "to cause the Fund ... to perform and fulfill its obligations under each Property Partnership Agreement of each Property Partnership ...."²⁴⁸

And so, under the Fund LPA, Fund GP owes only a fiduciary duty toward the "safekeeping and use of all funds and assets of the Fund .... for the exclusive benefit of the Fund."²⁴⁹ The Fund LPA clearly and unambiguously modifies Fund GP's default fiduciary duties as general partner of the Fund.²⁵⁰ Fund GP does not owe the default duties of loyalty and care.

The DRULPA permits the LPA drafter to disclaim fiduciary duties, and replace them with contractual duties.²⁵ The drafter cannot, however, disclaim the implied covenant of good faith and fair dealing.²⁶ If fiduciary duties have been validly disclaimed, the limited partners cannot rely on traditional fiduciary principles to regulate the general partner's conduct. Instead, they must look exclusively to the

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LPA's complex provisions to understand their rights and remedies.²⁷ Further, when trying to square existing precedent with the language of different LPAs, we have observed that:

Although the limited partnership agreements in all of these cases contain troublesome language, each decision was based upon significant nuanced substantive differences among each of the specific limited partnership agreements at issue. That is not surprising, because the Delaware Revised Uniform Limited Partnership Act is intended to give "maximum effect to the principle of freedom of contract." Accordingly, our analysis here must focus on, and examine, the precise language of the LPA that is at issue in this case.²⁸

Before Goodman made the First Investment and became a limited partner in the Fund, securities laws and the common law of fraud regulated solicitation of investments in the Fund. After Goodman made the First Investment and became a limited partner, the Fund's limited partnership agreement imposed new requirements. Because the agreement did not disclaim the fiduciary duty of loyalty,¹⁵ the general partner assumed contractual and fiduciary duties.¹⁶ As a fiduciary, and absent contractual modification, a general partner's duties to limited partners and the partnership parallel those exercised by directors of Delaware corporations.¹⁷

¹⁶ Gotham Partners, L.P. v. Hallwood Realty Partners, L.P., 817 A.2d 160, 170 (Del. 2002) ("[A] general partner owes the traditional fiduciary duties of loyalty and care to the limited partnership and its partners ....").

¹⁷ See id.; Feeley, 62 A.3d at 661 ("[T]here has never been any serious doubt that the general partner of a Delaware limited partnership owes fiduciary duties."); Boxer v. Husky Oil Co., 429 A.2d 995, 997 (Del. Ch. 1981) ("[I]t is clear that the general partner in a limited partnership owes a fiduciary duty to the limited partners.").

The arguments presented again place this court in the position of making a less-than-scientific judgment about the interplay between the contractual and fiduciary duties of general partners of limited partnerships. Determinations of whether the provisions of a limited partnership agreement are inconsistent with the application of default fiduciary duties are necessarily imprecise and often require close judgment calls. While demanding that the parties to a limited partnership agreement make their intentions to displace fiduciary duties "plain,"²⁶ the cases have erred on the side of flexibility regarding the type of evidence sufficient to support a judicial finding that such an intention existed. Resisting the temptation to resolve hairsplitting questions by reference to maxims of interpretation, our courts have thus far adhered as a general matter to a close examination of whether the application of default fiduciary duties can be reconciled with the practical and efficient operation of the terms of the limited partnership agreement. Where such a reconciliation is possible, the court will apply default fiduciary duties in the absence of clear contractual language disclaiming their applicability. But where the use of default fiduciary duties would intrude upon the contractual rights or expectations of the general partner or be insensible in view of the contractual mechanisms governing the transaction under consideration, the court will eschew fiduciary concepts and focus on a purely contractual analysis of the dispute.²⁷ Put

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somewhat differently, the irreconcilability of fiduciary duty principles with the operation of the partnership agreement can itself be evidence of the clear intention of the parties to preempt fiduciary principles.