Dixon v. Trinity Joint Venture

Melvin, J., dissenting: Because I disagree with the result reached by the majority in this case, I respectfully dissent. ³⁹⁰ The graveman of the plaintiffs’ complaint against the defendant Dixon is that he breached his fiduciary duty to the limited partnership by "failing to inform Trinity [the limited partnership] that the ten acre tract was for sale and [by not] taking steps to purchase it for Trinity”, and that by purchasing the ten acre tract for his own account he wrongfully deprived Trinity of "a partnership opportunity.” In my view, the plaintiffs failed to prove these allegations for the following reasons: 1. The purchase of the ten acre tract was beyond the scope of the purpose for which the partnership was formed. The written partnership agreement entitled "Trinity Joint Venture Limited Partnership Agreement,” clearly sets forth that the purpose of the partnership was to "hold, operate, improve and lease” only the specific 33.93 acres of real estate mentioned in the agreement. That it may have been advantageous to Trinity to own the extra ten acre tract does not enlarge that purpose.

Thus, the availability of the ten acre tract was not a "partnership opportunity” within the meaning of that doctrine. It should be noted that Dixon did, acting in the best interests of the partnership, achieve the release of restrictions against the 33.93 acres of partnership property that had been imposed in favor of the ten acre tract. 2. Assuming that the availability of the ten acre tract presented a "partnership opportunity”, that availability was made known by Dixon to the only other general partner, Thomas I. Baldwin. Baldwin, who is not a named party to this action, testified in unequivocal terms that it would have been "ridiculous” for Trinity to have purchased the ten acres under the circumstances, citing the fact that the partnership was already in arrears on a $400,000 mortgage indebtedness, that the ten acre tract was not zoned for commercial development, and that to have acquired the ten acres and eliminated the road through the 33.93 acres would have required a substantial delay in the shopping center project.

Dixon was of the same opinion. The partnership agreement provided that as general partners, Dixon and Baldwin, were to be "the managing partners of the Limited Partnership for the purposes of handling all transactions, directions and ³⁹¹ instructions in connection with the development of the property” (emphasis added), and that, "no Limited Partner shall participate in the management of the Partnership business.” There are no allegations of fraud or collusion on the part of either of the general partners. Thus, we have a situation where both managing partners, although fully aware that the ten acre tract was for sale, exercised their business judgment not to avail themselves of the opportunity to attempt to buy the property for Trinity. That the limited partners may disagree with that judgment is, in the absence of fraud or bad faith, totally irrelevant to the issues in this case.

Under these circumstances, I do not agree that Dixon’s failure to notify the limited partners that the ten acres were for sale, or that the acquisition of the ten acres by another entity in which Dixon had a controlling interest, constituted a breach of his fiduciary duty to the Trinity limited partnership or the individual limited partners thereof. The majority’s reliance upon Meinhard v. Salmon, 164 N.E. 545 (N. Y. 1928) is misplaced. That case involved a dispute between general partners and not, as in this case, a dispute between limited partners and a general partner. I find nothing in Meinhard to support a holding that a general partner is guilty of breach of his fiduciary duty when he takes advantage of a partnership opportunity for his own account after the managing partners with knowledge of the opportunity decline for business reasons to take it for the partnership.

See W. Fletcher, Cyclopedia of the Law of Private Corporations § 862.1 (rev. perm. ed. 1975). Thompson, J., delivered the opinion of the Court. Melvin, J., dissents and files a dissenting opinion at page 389 infra. In this case we are concerned with the duty of a general partner to give notice to limited partners concerning a business opportunity.

I The Law Justice Benjamin N. Cardozo, while the Chief Judge of the Court of Appeals of New York set out the standard in his usually eloquent manner when he said in Meinhard v. Salmon, 164 N.E. 545, 546 (N.Y. 1928): "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. Wendt v. Fischer, 243 N.Y. 439, 444 , 154 N.E. 303 . 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.” The Supreme Court of Alaska drew a parallel between the relationship of partners to their partnership and the fidu ³⁸¹ ciary relationship of corporate officers and directors to their corporation in Mathis v. Meyeres, 574 P.2d 447, 448 (Alas. 1978): "The parties are not in disagreement concerning the law governing business opportunities among partners. They correctly acknowledge that what we said in Alvest, Inc. v. Superior Oil Corporation, 398 P.2d 213, 215 (Alaska 1965) regarding the fiduciary relationship of corporate officers and directors to their corporation applies to the parallel relationship between partners and their partnership: 'A corporate officer or director stands in a fiduciary relationship to his corporation. Out of this relationship arises the duty of reasonably protecting the interests of the corporation. It is inconsistent with and a breach of such duty for an officer or director to take advantage of a business opportunity for his own personal profit when, applying ethical standards of what is fair and equitable in a particular situation, the opportunity should belong to the corporation.

Where a business opportunity is one in which the corporation has a legitimate interest, the officer or director may not take the opportunity for himself. If he does, he will hold all resulting benefit and profit in his fiduciary capacity for the use and benefit of the corporation.’ ” At this point it may be well to look at the Maryland Code with reference to the duty of a general partner in an ordinary partnership, set out in Md. Corp. & Ass’ns. Code Ann. § 9-404 (a) as follows: "Every partner must account to the partnership for any benefit, and hold as trustee for it any profits derived by him without the consent of the other partners from any transaction connected with the formation, conduct, or liquidation of the partnership or from any use by him of its property.” ³⁸² The particular duty with reference to limited partnerships is contained in § 10-108: "A general partner shall have all the rights and powers and be subject to all the restrictions and liabilities of a partner in a partnership without limited partners,____” Maryland cases, although they do not address the precise question before the Court, approve the principles we have quoted. See, Herring v. Offutt, 266 Md. 593 , 295 A.2d 876 (1972), and Allen v. Steinberg, 244 Md. 119 , 223 A.2d 240 (1966), in which it was said that managing partners of a limited partnership owe a special duty: "A partner is a trustee to the extent that his duties bind him, a cestui que trust as far as the duties that rest on his copartners. 1 Rowley, Modern Law of Partnership, §§ 341-42; Restatement, Restitution §§ 166 comment d, 190 comment a; 68 C.J.S. Partnership § 76; 40 Am.

Jur. Partnership § 128; Hagan v. Dundore, 187 Md. 430 . These authorities which consider the matter also hold that generally the principle of utmost good faith covers not only dealings and transactions occurring during the partnership but also those taking place during the negotiations leading to the formation of the partnership. See also Knapp v. First National Bank and Trust Co. (10th Cir.), 154 F.2d 395, 398 ; Stephens v. Stephens (Ky.), 183 S.W.2d 822, 824 .

Managing partners particularly owe a ñduciary duty to inactive partners. Corr v. Hoffman (N.Y.), 176 N.E. 383 ; Einsweiler v. Einsweiler (Ill.), 61 N.E.2d 377 .” (Emphasis added). Id. at 128. The principles were reiterated in Impala Platinum v. Impala Sales, 283 Md. 296, 324 , 389 A.2d 887 (1978): "A fiduciary relationship 'carries with it the requirement of utmost good faith and loyalty and the obligations of [the fiduciary] to make full disclosure of all known information that is significant ³⁸³ and material to the affairs ... of [the fiduciary relationship] ...

"the principle of utmost good faith covers not only dealings and transactions occurring during the [fiduciary relationship] but also those taking place during the negotiations leading to the formation of the [fiduciary relationship].” Allen v. Steinberg, supra at 128’; Herring at 597 .” See also, Levin v. Levin, 43 Md. App. 380, 390 , 405 A.2d 770 (1979). In Faraclas v. City Vending Co., 232 Md. 457, 463-64 , 194 A.2d 298 (1963) the Court said: "This Court has long recognized as a corollary to the law of a corporate officer’s and director’s fiduciary duty, that, when presented with a business opportunity to fulfill a corporate purpose, he should take advantage of it, not for himself, but for the corporation. See Acker, Merrall & C. Co. v. McGaw, 106 Md. 536 ....” "Of course, a corporation, as such, has no interest in its outstanding stock or in dealings therein by its officers, directors or shareholders. If there is a struggle for control the corporation would normally occupy a neutral position.

But in the case at bar the Company had a direct interest in acquiring the assets of a solvent partnership in order to pay its creditors. The condition, to which everyone agreed, was that the Wilbur stock be redeemed so that the partners might not be required to share future profits with shareholders outside the family. When John purchased the Wilbur stock for his own account, he frustrated a valid corporate purpose that had been invalidly consummated. We agree with the Chancellor that this was a breach of his fiduciary duty under the circumstances.” II The Facts We adopt as our own the finding of facts made by the chancellor, all of which are supported by the evidence: ³⁸⁴ "The Plaintiffs, Trinity Joint Venture, et al, (Trinity), [appellees], filed a Bill of Complaint alleging that the Defendant, William E. Dixon, (Dixon), [appellant], breached his fiduciary duties by failing to inform Trinity that a certain ten (10) acre tract of land was for sale and by buying the said land for his own profit through entities which he owned and controlled.

As a means of redress, the Plaintiffs seek an accounting for all profits made by the Defendant, Dixon, together with damages. The Defendant, in his Answer to the Bill of Complaint, denies any breach of his fiduciary duties and prays that the Bill be dismissed. "The events leading up to this cause of action are as follows: At all pertinent times, the Plaintiff, Trinity, existed as a limited partnership of which the Defendant, Dixon, was a general and managing