Business Associations

Fact pattern

Ms. A is extremely good at giving her friends advice, so she decides to become a life coach. To that end, Ms. A partners with Mr. B and Mr. C to form You Aren’t So Bad, a limited liability partnership, in a state that has enacted the Revised Uniform Partnership Act (RUPA). The business of You Aren’t So Bad is to provide life coaching, self-help advice, and similar services using Ms. A’s expertise in that realm. The three partners truly respect each other, but they also value their freedom to pursue business ventures independently of You Aren’t So Bad. With all this in mind, they draft a partnership agreement that includes the following provision:

Paragraph 10. Fiduciary Duties. The partners do not owe You Aren’t So Bad the duty of care. The partners do owe You Aren’t So Bad the duty of loyalty. However, the partners are free to compete with You Aren’t So Bad as to any business opportunity and in any capacity. Further, partner action that is alleged to be a breach of the duty of loyalty may be ratified by the vote of one disinterested partner. 

You Aren’t So Bad is an immediate success. Shortly after the partnership’s one-year anniversary, Mr. B sends an email to his partners stating that Megasoftware, a large technology company, is interested in receiving proposals for someone to run a new in-house life coaching program it wants to establish for its employees. You Aren’t So Bad has one week to prepare a written proposal. Ms. A is excited, as this represents a tremendous opportunity. 

Ms. A’s best friend from college, Mrs. D, works at Megasoftware, so Ms. A goes to Megasoftware’s website to check out Mrs. D’s biography. Ms. A is shocked to see that Mrs. D was recently promoted to head of human resources. This means that Mrs. D will be the one to decide whom Megasoftware will hire to run its life-coaching program. 

So, Ms. A calls Mrs. D and asks her about the coaching program. Mrs. D responds, “It’s been really time-consuming, trying to find the right person. If you’re interested, I would like to hire you. You would coach five employees. It should be relatively easy. And Megasoftware pays a lot. Seriously.”  

Ms. A realizes that if she accepts the proposal on behalf of You Aren’t So Bad, she must share the profits with her partners, Mr. B and Mr. C, but the profit is entirely hers if she accepts the offer in her personal capacity. She accepts her friend’s offer, in her personal capacity, but does not tell anyone at the partnership about the engagement. 

A year goes by, and You’re Not So Bad is now experiencing some financial difficulty. One of its clients sued it, and the legal fees have been significant. The partnership needs $50,000 to pay off the legal fees and settle the suit. Ms. A agrees to loan the partnership $50,000, but demands an accelerated repayment schedule and an above-market interest rate. Mr. B wants to accept the terms of the loan, but Mr. C argues that the loan would constitute a breach of Ms. A’s duty of loyalty. He argues, “With this loan, Ms. A would hold an interest adverse to the partnership. It can’t be legal.”

Questions

1. Which provisions of paragraph 10 of the partnership agreement are enforceable under RUPA, and which are, or might be, unenforceable? Explain.
2. Has Ms. A violated the duty of loyalty by accepting the coaching engagement with Megasoftware? If so, could she rely on the business judgement rule as a defense? Explain.
3. Would Ms. A violate the duty of loyalty simply by lending the partnership $50,000? Explain.