In any limited partnership, the general partners owe the limited partners a fiduciary duty that is probably the highest duty of all. Awareness of what encompasses such duty will not only keep the partnership well managed and keep the limited partners satisfied, but it will also help all general partners to navigate through the legal landmines of having fiduciary duties to the limited partners.
Limited partnership is often utilized by a group of investors who want to combine their financial resources to acquire high value real estate, such as commercial properties. In the most likely scenario, the partnership often holds the title to the property.
Depending on the experience of the investors, the partners who put together the transaction and have the experience to manage the property are selected as the general partners, and those who only wish to put up the money as silent partners are selected as the limited partners. The limited partners generally don’t want to get involved with the day to day management of the partnership assets. Most of them just want to collect some returns on their investment and rely on the general partners to manage the partnership assets.
Because limited partnerships often put up their money and trust the general partnerships to properly manage the property, general partners owe a fiduciary duty to the limited partners. I have published an article titled “What Are the Fiduciary Duties of General Partners in a Limited Partnership?” For more information, please click on the link at the JD Supra website.
Generally, the fiduciary duties consist of two broad categories: Duty of Due Care and Duty of Loyalty. To put it in layman’s terms, general partners must manage the partnership assets to the best of their ability and within the boundary of common sense business judgment. In addition, general partners will not take any steps that could lead to the harming or dissipating of the partnership assets for their own benefit.
In addition, general partners are required to disclose fully all information pertaining to the partnership or its assets even if the general partners are getting some benefits from the partnership or its assets as required by the fiduciary duties. Such disclosures may include but may not be limited to contributions made by each partner, business opportunities in which each partner may be interested, accounting details, and the valuation of shares of each partner in the partnership.
Please also keep in mind that such obligation is continuous. In other words, such duty is owed to limited partners until the partnership is dissolved and the partnership business is completely settled among the partners. Each partner is expected to act in good faith relating to all transactions of the partnership even when the relationships of the partners are strained.
These fiduciary duties need to be very well versed by the general partners so that they understand what they can or cannot do as general partners while managing the partnership and its assets to avoid misunderstanding or even lawsuits. Generally speaking, I always advise clients to keep a good accounting by an independent accountant, and keep the limited partners informed about the finances of the partnership. In addition, the limited partners should always be kept informed about what general partners have done, are doing, and will do in the future regarding the management of the partnership assets.
Over the years, we have represented many clients pursuing or defending lawsuits among shareholders and partners. If you want to know about your rights or remedies as limited or general partners, please call the Law Offices of Tony T. Liu, an Orange County business litigation and trial firm at (714) 415-2007 to schedule an appointment.