General Partner Fiduciary Duty

A pension plan trustee with no professional investment background genuinely does his best, spends considerable personal time researching a DPP sponsor, and honestly believes the investment is sound before committing a large portion of plan assets to it. Is his good-faith personal effort sufficient to satisfy his fiduciary duty of prudence?

1. A.Yes -- a trustee who acts in good faith and does his personal best has satisfied the duty of prudence regardless of his expertise.Wrong. The prudent-expert standard is objective and measured against professional-level care and skill, not against the trustee's personal sincerity or effort.
2. B.No -- the duty of prudence is measured against the standard of a prudent expert familiar with such matters, which good-faith personal effort alone does not satisfy.Correct. A trustee lacking relevant expertise must acquire it or obtain it from a qualified expert; the standard is objective, not a measure of sincere personal effort.
3. C.Yes, provided he documents the hours he spent researching the sponsor before making the decision.Wrong. Documenting time spent does not establish that the decision met the objective prudent-expert standard.
4. D.No, but only because pension plans specifically require professional investment credentials for anyone serving as trustee.Wrong. There is no categorical credentialing requirement to serve as trustee; the issue is that the decision itself must meet the prudent-expert standard, however that expertise is obtained.

Why: ERISA measures a fiduciary's conduct against the standard of a prudent expert familiar with such matters, not against the trustee's own personal effort or sincerity. A trustee who lacks the relevant expertise is expected to either acquire it or obtain it from a qualified expert before making the decision; good-faith diligence from someone without the relevant background does not, by itself, satisfy a standard that is measured against what a knowledgeable professional would have done.

A partner in a general partnership secretly diverts a lucrative business opportunity that arose through the partnership's normal operations to a separate company the partner owns personally, without disclosing the opportunity to the other partners. Has this partner violated a duty owed to the partnership?

1. A.No, because partners are free to pursue any personal business opportunities separately from the partnership at any timeWrong. This opportunity arose through the partnership itself, which the duty of loyalty specifically addresses.
2. B.Yes, this is a breach of the fiduciary duty of loyalty partners owe each other, since the partner diverted a partnership opportunity for personal gain without disclosureCorrect. Secretly diverting a partnership opportunity for personal benefit breaches the fiduciary duty of loyalty partners owe each other.
3. C.No, because only a partnership's designated managing partner owes a fiduciary duty to the other partnersWrong. Fiduciary duties among general partners generally run to and from all partners, not only a designated manager.
4. D.Yes, but only because the partner's separate company happens to compete directly with the partnership's businessWrong. Direct competition is not a required element; diverting a partnership opportunity without disclosure is itself the breach.

Why: Yes. Partners in a general partnership owe each other a fiduciary duty, including a duty of loyalty, because each partner acts on behalf of, and can bind, the partnership and its co-partners. Diverting a business opportunity that arose through the partnership to a separate entity the partner personally owns, without disclosure, is a breach of that duty of loyalty, since the partner used the partnership relationship for personal gain at the partnership's expense. This is different from an arm's-length business relationship, where each party is generally free to pursue its own separate opportunities without owing the other side this kind of loyalty.

A general partner breaches its fiduciary duty to a limited partnership by diverting a partnership business opportunity for personal gain. The limited partners ask the general partner to pursue a claim against itself to recover the loss to the partnership, and the general partner, unsurprisingly, declines to act. Do the limited partners have any way to pursue a claim on the partnership's behalf?

1. A.No, limited partners have no recourse beyond the three enumerated voting matters under any circumstancesWrong. This overstates the limits on limited partner remedies; a derivative action exists specifically for a breaching, non-acting general partner.
2. B.Yes, but only by voting to dissolve the partnership entirely, since that is their only available remedyWrong. Dissolution is a separate, more drastic step and is not the mechanism for pursuing this specific breach-of-duty claim.
3. C.No, only a regulator can bring a claim against a general partner for breach of fiduciary dutyWrong. Limited partners themselves may pursue a derivative claim; it is not an exclusively regulatory remedy.
4. D.Yes, the limited partners generally may bring a derivative action on the partnership's behalf when the general partner breaches a duty and refuses to actCorrect. A derivative action exists precisely for this situation, where the general partner is the wrongdoer and will not sue itself.

Why: Yes. Limited partners generally may bring a derivative action on behalf of the partnership when the general partner has breached a duty owed to the partnership and has failed or refused to pursue a claim to remedy it. This exists precisely because a general partner in this position, the party at fault, cannot be relied upon to sue itself, and without a derivative action right, a wrongdoing general partner could simply block any claim by refusing to bring it. A derivative action is brought on behalf of, and any recovery generally belongs to, the partnership itself, rather than being a personal claim by the individual limited partners.