Do partners in a general partnership owe a fiduciary duty of loyalty to one another?  “Of course!” you say.  “Everyone knows that.”  In one of the most famous passages in business organizations law, Justice Cardozo observed:

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.  As to this there has developed a tradition that is unbending and inveterate.  Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the ‘disintegrating erosion’ of particular exceptions.  Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd.  It will not consciously be lowered by any judgment of this court.

Meinhard v. Salmon, 164 N.E. 545, 546 (N.Y. 1928).

    On its face, RUPA § 404 (1997) seems consistent with Meinhard, as it indicates that “[t]he only fiduciary duties a partner owes to the partnership and the other partners are the duty of loyalty and the duty of care set forth in subsections (b) and (c).”  Even though this language acknowledges a partner-to-partner duty of loyalty, it explicitly blocks that duty from having any meaning.  Indeed, § 404(b) states that a “[a] partner’s duty of loyalty to the partnership and the other partners is limited to the following,” and the situations described all involve harm to the partnership itself—not harm to an individual partner:

(b)  A partner's duty of loyalty to the partnership and the other partners is limited to the following:

(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.

    What does it mean to set forth a duty that is owed to a partner, but that is defined solely by reference to harm to the partnership?  Take an extreme example:  assume that two partners gang up on a third partner and deny that third partner his share of partnership distributions.  Are we really saying that the third partner cannot sue for breach of the fiduciary duty of loyalty because the harm was to him personally and not the partnership?  Perhaps we don’t care because the third partner could surely sue for conversion or, perhaps, breach of the good faith and fair dealing obligation (see RUPA § 404(d)).  Yet the broader point remains—there are countless ways in which majority owners can gang up on minority owners and treat them unfairly.  If that happens in a partnership, and if there is no direct harm to the partnership itself, the duty of loyalty nominally owed to a partner is of no practical use.

    In the 2013 version of RUPA, this problem is squarely addressed.  RUPA § 409(a) (2013) eliminates the “only” fiduciary duties language, and § 409(b) eliminates the “limited to” language for the duty of loyalty.  The Official Comment squarely addresses the issue:

This section originated as UPA (1997) § 404. The 2011 and 2013 Harmonization amendments made one major substantive change; they “un-cabined” fiduciary duty. UPA (1997) § 404 had deviated substantially from UPA (1914) by purporting to codify all fiduciary duties owed by partners. This approach had a number of problems. Most notably, the exhaustive list of fiduciary duties left no room for the fiduciary duty owed by partners to each other – i.e., “the punctilio of an honor the most sensitive”). Meinhard v. Salmon, 164 N.E. 545, 546 (N.Y. 1928). Although UPA (1997) § 404(b) purported to state “[a] partner’s duty of loyalty to the partnership and the other partners” (emphasis added), the three listed duties each protected the partnership and not the partners.

Thus, under RUPA (2013), this problem disappears.  But the majority of jurisdictions still operate under RUPA (1997).  Unless those jurisdictions have eliminated the “cabining in” problem by deleting “only” and “limited to” in their versions of § 404, the problem persists.  And Cardozo would not be happy . . . .