Page 23 - Partnership Audit Rules - Drafting Partnership Agreements: The New Partnership Representative And The Outgoing Tax Matters Partner

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partnership representative is a fidu- ciary of both the partnership and the partners or merely of the partner- ship.62
The partnership representative has a duty to avoid conflicts of interest that might create divided loyalties. He should not profit from his posi- tion beyond his normal compensa- tion. An agent, as a fiduciary, is ob- ligated to act using reasonable care and diligence. This requires the partnership representative to act competently. The partnership repre- sentative should have adequate training and expertise to exercise his duties. The partnership representa- tive presumably has a duty of confi- dentiality, to preserve the confi- dences of the partnership.63 He also likely should have a duty of good conduct, to act reasonably, and to refrain from conduct that is likely to damage the partnership’ s enter- prise.64
“An agent has a duty to comply with all lawful instructions received from the principal and persons des- ignated by the principal concerning the agent’s actions on behalf of the principal.”65 It is not clear whether this limitation will apply to the part- nership representative.
Furthermore, “[a]n agent has a duty to use reasonable effort to pro- vide the principal with facts that the agent knows, has reason to know, or
62 Where the partnership representative is itself a partner or manager of an LLC, i.e., an en- tity partnership representative, it is clear that there is a fiduciary duty on the part of the entity partnership representative that is owed to the partners/members. See, e.g., Feely v. NHAOCG, LLC, 62 A.3d 649 (Del. 2012). See 4 A.L.R. 4th 1122, “Partner’s Breach of Fiduciary Duty on Sale of Partnership Inter- est to Another Partner”; Haynes, “Partners Owe to One Another A duty of the Finest Loyalty . . . or Do They?”, 37 Tex. Tech. L. Rev. 433 (Winter, 2005); Marks, “Piercing the Fiduciary Veil,” 19 Lewis & Clark L. Rev. 73 (2015). See Del. Cod Ann. Tit. 6, § 18-1101(c) (“To the extent that, at law or in equity, a member or manager or other person has duties (including fiduciary duties) to a
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should know when (1) subject to any manifestation by the principal, the agent knows or has reason to know that the principal would wish to have the facts or the facts are material to the agent’s duties to the principal; and (2) the facts can be provided to the principal without vi- olating a superior duty owed by the agent to another person.”66 This re- quirement may extend to the part- nership representative.
It is not clear to what extent the general law of agency is overridden by the partnership audit provisions. Under agency law:
(1) An agent has actual authority to take action designated or im- plied in the principal’s manifesta- tions to the agent and acts neces- sary or incidental to achieving the principal’ s objectives, as the agent reasonably understands the principal’ s manifestations and objectives when the agent deter- mines how to act.
(2) An agent’ s interpretation the principal’ s manifestations reasonable it reflects any meaning known by the agent to be ascribed by the principal and, in the absence of any meaning known to the agent, as a reasona- ble person in the agent’s position would interpret the manifestations in light of the context, including circumstances of which the agent
limited liability company or to another mem- ber or manager or to another person that is a party to or is otherwise bound by a limited li- ability company agreement, the member’s or manager’ s or other person’ s duties may be expanded or restricted or eliminated by provi- sions in the limited liability company agree- ment; provided, that the limited liability com- pany agreement may not eliminate the implied contractual covenant of good faith and fair dealing.”).
Some argue that a non-partner partnership representative is under no such obligation to act as a fiduciary with respect to the partnership or its partners for state law purposes. In many in- stances, a partnership representative will want to be protected not only by an errors and omis-
has notice and the agent’s fiduci- ary duty to the principal.
(3) An agent’ s understanding of the principal’ s objectives is rea- sonable if it accords with the principal’s manifestations and the inferences that a reasonable per- son in the agent’s position would draw from the circumstances cre- ating the agency.67
The partnership agreement should consider and detail the fiduciary du- ties of the partnership representa- tive. Many of the actions of the partnership representative could be questioned by the partners or the partnership as breaches of fiduciary duties. It may be advisable for the partnership agreement to modify the fiduciary duties. The partnership agreement appropriately could con- tain waivers of liability of the part- nership representative and indem- nifications of the partnership representative.
Under general agency law, an agent’s authority may be terminated by an agreement between the agent and the principal; the occurrence of circumstances on the basis of which the agent should reasonably con- clude that the principal no longer would assent to the agent’ s taking action on the principal’s behalf; or a manifestation of revocation by the principal to the agent or of renunci- ation by the agent to the principal.68
sions policy procured by the partnership for its or his benefit, but beheld harmless and indem- nified from any and all claims filed by the part- ners, former partners, or successor partners. See Ribstein, “Fiduciary Duties and Limited Part- nership Agreements:, 37 Suffolk U.L. Rev. 927 (2004); Guttenberg, “Waiving Farewell Without Saying Goodbye: The Waiver of Fiduciary Du- ties in Limited Liability Companies in Dela- ware, and the Call for Mandatory Disclosure,” 86 S. Cal. L. Rev. 869 (May, 2013).
63 Restatement (Third) of Agency § 8.05(2). 64 Restatement (Third) of Agency § 8.10. 65 Restatement (Third) of Agency § 8.09(1). 66 Restatement (Third) of Agency § 8.11. 67 Restatement (Third) of Agency § 2.02. 68 Restatement (Third) of Agency § 3.06.
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