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You have agreed to go on the Board of a corporation that will be the general partner of a limited partnership. You know that the corporation, as general partner, owes fiduciary duties to the limited partnership and its partners.   You also know that you, as a director, owe fiduciary duties to the corporation. You do not, however, owe fiduciary duties to the limited partners of the partnership, right? Wrong! Or, at least, maybe wrong.

In 1991, corporate and partnership lawyers and businesspersons were stunned by the Delaware case of In re USACafes, L.P. Litigation, 600 A.2d 43 (Del. Ch. 1991) which held that directors of a corporation serving as the general partner of a limited partnership owe fiduciary duties to the limited partnership and its limited partners.

Wait a minute! We just said that as directors you owe fiduciary duties to the corporation. How can you also owe such duties to the limited partnership?  The USA Cafes court suggested that since the corporate directors in that case controlled the property of the partnership they owed fiduciary duties to the partnership.

Some commentators were not surprised by USA Cafes. Their view was that the result was only fair, since most corporate general partners were likely to be shell companies with no assets to back up any claims by the limited partners. To that, others said, “So what?” The notion that you should start examining a corporation’s assets to determine whether you can pierce the corporate veil is no longer part of the law. You have to show fraud or some notion of a “paramount equity,” whatever that is. Controlling the other company’s property is not enough.

So where do we stand today? There is no Maryland case comparable to USACafes. In general, other Delaware cases have accepted the USACafes principle, although these cases have indicated that the duties of directors in this context may not include the full panoply of fiduciary duties owed by a corporate director, and may be limited to those instances most nearly resembling the USACafes scenario, which involved control over partnership property.

So if you are on the Board of a corporate general partner, what should you do? In the absence of authority to the contrary, it is better to be safe than sorry. Expect that your fiduciary duties do apply to the limited partnership and its partners.

And what about being on the Board of a Managing Member of a limited liability company?

Stay tuned!