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Labovitz v. Dolan - 189 Ill. App. 3d 403, 136 Ill. Dec. 780, 545 N.E.2d 304 (1989)

Rule:

Copartners owe to one another 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.

Facts:

Plaintiff limited partners appealed a judgment by the Circuit Court of Cook County (Illinois), which dismissed their complaint against defendant general partners for the alleged use of economic coercion to cause them to sell their partnership interests at a bargain price. The limited partners charged that the general partner owed them a fiduciary duty to distribute available cash flow to them in 1983 through 1986, which duty he breached because he never intended to pay cash flow to the limited partners, thus forcing or squeezing his limited partners into accepting his below book value offer to buy out their interests, to their financial damage. In dismissing the complaint, the trial court reasoned that the partnership agreement granted one of the general partners the discretion to treat the limited partners as he did regardless of his intent. 

Issue:

Could the general partner rely on the written authority granted to him under the parties' limited partnership agreement to use economic coercion to cause his limited partner investors to sell their interests to him at a bargain price?

Answer:

No

Conclusion:

The court reversed the trial court's judgment and remanded the case for a new trial. The court held that the general partner's fiduciary responsibilities to his limited partners could not be written out of their contractual arrangements. Therefore, his intent behind not distributing the available cash flow was a relevant issue for trial. The general partner had the burden to prove that he acted fairly and not as his limited partners' business adversary. The courts were not bound to endow it as doctrine that where the general partner obtains an agreement from his limited partner investors that he is to be the sole arbiter with respect to the flow that the cash of the enterprise takes, and thereby creates conditions favorable to his decision that the business is too good for them and contrives to appropriate it to himself, the articles of partnership constitute an impervious armor against any attack on the transaction short of actual fraud. That is not and cannot be the law. 

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