A general partner pockets a $120,000 vendor kickback. A director approves a merger after skimming the deck on the elevator ride up. Each scenario triggers a different fiduciary doctrine, and the exam tests which one, again and again.
Owners and managers do not get a blank check. Fiduciary duties sit on top of contract and survive most attempts to waive them.
HIGH-FREQUENCY: A "fiduciary duty" is a legal obligation to act in another party's interest, not your own. Breach exposes the breaching party to disgorgement, damages, and rescission.
Every partner owes the partnership loyalty, care, and good faith and fair dealing.
The duty of loyalty under §404(b) has three components: account for any profit or benefit derived from partnership activity as a trustee; do not deal with the partnership as an adverse party; do not compete before dissolution. The kickback in the opener is a textbook violation: disgorge the $120,000 plus traceable gains.
The duty of care under §404(c) is narrower than the corporate version. A partner is liable only for grossly negligent or reckless conduct, intentional misconduct, or knowing violations.
Common mistakes
- Applying the corporate care standard to partners. Partners are liable only for gross negligence. Trap answer: "the partner breached care by failing to use ordinary prudence." Wrong, the partner standard is more protective.
- Treating a self-dealing contract as automatically void. Conflicted transactions are voidable, not void. Trap: "the contract is void because the director was conflicted."
- Confusing direct and derivative suits. Unpaid declared dividends → direct. Officer self-dealing that drained the treasury → derivative. Trap: "derivative recovery goes to the shareholder." Recovery goes to the corporation.
Bottom line
- Partners owe duties of loyalty (no self-dealing, no competing, no usurping corporate opportunities) and care (gross-negligence standard, not ordinary)
- Directors owe care (ordinary prudence) and loyalty; the business judgment rule shields informed, good-faith, rational decisions but not self-dealing or uninformed action
- A conflicted transaction is voidable (not void) unless disinterested directors approve, shareholders approve, or it is proven entirely fair
- Cumulative voting lets minority shareholders concentrate votes on one director but applies only when authorized in the articles; straight voting is one-share-one-vote per seat
Exam shortcut
For director conflicts, run the §8.61 checklist: disinterested-director approval, shareholder approval, entire fairness. If any one is met, the transaction stands. For BJR questions, check process before substance, informed, good faith, rational? If yes, the loss is irrelevant. For derivative vs. direct, ask who was injured: corporation = derivative, shareholder = direct. For piercing the veil, look for specific abuse facts (commingling, no formalities, undercapitalization, fraud).
The full lesson (about 3,084 words, 21 min read) adds 2 worked examples, all 7 common mistakes, a self-check, free in the app.
Learning objectives
- II.E2
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