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Washington Lawyer

Legal Spectator: A Note About Such Things as Fiduciary, UPA, and RUPA

From Washington Lawyer, April 2011

By Jacob A. Stein

Partnerships often finish in quarrels; but I was happy in this, that mine were all carried on and ended amicably, owing, I think, a good deal to the precaution of having very explicitly settled, in our articles, every thing to be done by or expected from each partner, so that there was nothing to dispute, which precaution I would therefore recommend to all who enter into partnerships; for, whatever esteem partners may have for, and confidence in each other at the time of the contract, little jealousies and disgusts may arise, with ideas of inequality in the care and burden of the business, etc., which are attended often with breach of friendship and of the connection, perhaps with lawsuits and other disagreeable consequences.

—The Autobiography
of Benjamin Franklin
, p. 171

There are things to be learned watching others perform in motions court. The case ahead of mine was such a case. I gathered, from what was being said, that a partner in a firm was denied the bonus he claimed he should have gotten. Furthermore, the members of the compensation committee took more than their share.

The plaintiff’s lawyer repeated the words “fiduciary” and “breach of fiduciary.” Each time he spoke those words, he redefined them, and each time with indignation and emotion.

The defense lawyer also used the word fiduciary, also redefining it, but in a calm, professional way. Both lawyers, off and on, referred to UPA and RUPA. When they did, the judge had a puzzled look.

The judge was a patient man. He asked few questions. One of them was, “This UPA and RUPA, just what does that have to do with the case?”

The response he got from the lawyers, by the look on his face, was unsatisfactory. When the judge thought he had heard enough, he asked the lawyers to submit, in five days, a brief memorandum defining fiduciary and where this UPA and RUPA fit in.

As I walked back to my office, I thought to myself that I have fumbled trying to define fiduciary and the significance of UPA and RUPA.

When I got back to the office, I opened Black’s Law Dictionary and located the word fiduciary. The definition had no sparkle or emotion. It was too restrained. A plaintiff’s lawyer would want more.

I knew there must be breach of fiduciary cases that give a plaintiff’s lawyer what he needs in closing argument. I found what I was looking for in Judge Benjamin Cardozo’s Meinhard opinion. It had everything.

Joint adventurers, like copartners, owe to one another, while the enterprise continues, the duty of the finest loyalty. Many forms of conduct permissible in a workaday world for those acting at arm’s length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior. Meinhard v. Salmon, 164 N.E. 545 (N.Y. 1928).

Some years later, Justice Felix Frankfurter tried to outdo Justice Cardozo:

[T]o say that a man is a fiduciary only begins analysis; it gives direction to further inquiry. To whom is he a fiduciary? What obligations does he owe as a fiduciary? In what respect has he failed to discharge those obligations? SEC v. Chenery Corp., 318 U.S. 80 (1943).

Partnership law commenced with the Romans who put the Justinian Code in their partnership law. The English took large sections from the Roman codification, and in 1890, England did its own codification of partnership law.

We, in 1914, codified ours. It was drafted by the National Conference of Commissioners on Uniform State Laws (NCCUSL) and promulgated as the Uniform Partnership Act, UPA, for each state to adopt.

UPA said that partners are fiduciaries, but it said little more. UPA left it to the courts to define. The courts, case by case, developed stringent requirements, as we see in the Cardozo and Frankfurter opinions.

In 1997 the NCCUSL published the Revised Uniform Partnership Act, RUPA. It narrowed the fiduciary obligations among partners. RUPA gave the partners the right to agree on things that, under UPA, would be branded as questionable. Justice Cardozo’s and Justice Frankfurter’s definitions were put aside.

The partners in a law firm can define fiduciary in their own terms so there will be no lawsuits among the partners. That is why the partnership agreement runs into 50 pages or more, with a three-page arbitration clause.

My morning in motions court was just what I needed to send me back to the books. I am now prepared to take the plaintiff’s side in a law firm dispute, speaking with most of the words of Justices Cardozo and Frankfurter, with great emotion.

Somewhere I read that partners in a law firm, in the main, do try to behave themselves. Nevertheless, there are partners who are bad, partners who are greedy beyond the dreams of avarice, and partners who are honorable and respectful of the obligations of the profession. Unfortunately, when partners fall out, each knows the other too well. Each knows that when they were dealing with adversaries, they had their own clever ways. Now, as bitter enemies, each believes this cleverness will be used against the other. And so they litigate.

Jacob A. Stein has written a new book, Eulogy of Lawyers. Reach the publisher at [email protected].