Daily Development for Monday, April 21, 2003
by: Patrick A. Randolph, Jr.
Elmer F. Pierson Professor of Law
UMKC
School of Law
Of Counsel: Blackwell Sanders
Peper Martin
Kansas City, Missouri
dirt@umkc.edu
PARTNERSHIP; TERMINATION; "GOOD FAITH BELIEF:"
Right of termination of partnership agreement, which
required good faith
belief in irreconcilable
differences between partners, is measured by
subjective standard, not objective standard.
Crow Irvine #2 v Winthrop Cal. Investors L.P., 104 CA4th
996, 128
CR2d 644 (Cal. App. 2002)
In 1985, Winthrop and Crow entered a real estate
development limited
partnership that provided
for termination "if either partner believes in
good faith that irreconcilable differences between the Partners
prevent
the Partnership from achieving its
purposes. . . ." Over the years, the
partners
sued each other seven times over matters such as access to
partnership records and breach of fiduciary
duty.
In 2000, Winthrop attempted to invoke the termination
provision of the
partnership agreement which
used the "tendered buy out" approach. The
party seeking termination would offer a buy out price; the other
party
could elect to buy out or be bought out
for that price. Crow contended
that
Winthrop had no right to terminate, and Winthrop sued for
declaratory relief.
The trial court determined that Winthrop's "good faith
belief" that
irreconcilable differences were
preventing the partnership from achieving
its
purposes must be measured by an objective standard. On that
basis,
the court concluded that there were
insufficient grounds to conclude that
the
partnership was not realizing its purposes and refused to grant
relief.
The court of appeal reversed, holding that the "good faith
belief"
standard requires evaluation of a
party's subjective state of mind, without
regard to whether the belief is objectively reasonable. The
court
remanded for determination of whether the
surrounding circumstances
(e.g., Winthrop's own
conduct and the reasonableness of the purported
belief) indicated that Winthrop honestly believed what it professed.
The
court also found that the trial court had
erred in holding that the
partnership's
"purposes" had been achieved; the issue was whether
Winthrop believed, in good faith, that they had not been achieved.
The
court, therefore, also remanded for
determination of that issue.
Most of the opinion dealt with California cases in which the
term "good
faith belief" had been interpreted
in a wide variety of contexts, statutory
and
contractual, civil and criminal. It concluded that, although there
was
some disagreement and ambiguity in the
precedent, the best overall
interpretation of
the term was that it required only subjective belief. In
response to Crow's argument that this interpretation did
not give
meaning to both terms - "good faith"
and "belief" and that the term
"good faith" was
thus rendered superfluous, the court responded that
repetitive language was common and accepted in legal
documents,
referring to "every lawyer's
favorite" California Civil Code provision -
CC
Sec. 3537, which provides, in its entirety: "Superfluity does not
vitiate." To require in every case that every
word have independent
meaning, the court
suggested, would mean that a court would be required
to read the phrase "the striped zebra" to mean that "striped" really
meant
"spotted," since it had to mean something
other than the markings
appearing typically on
zebras.
Just before oral argument, the parties introduced the court
to Storek &
Storek, Inc. v Citicorp Real
Estate, Inc.100 CA4th 44, 122 CR2d 267
((Cal.
App. 2002), which held that where an acceleration clause set forth
a clear right to acceleration upon the occurrence of
certain conditions
there was no test governing
exercise of the right other than the existence
of those conditions. The court in Storek further commented that
in
general the regular maxim of "good faith and
fair dealing" requires that a
party's decisions
under a contract be "objectively reasonable," and that a
subjective test was appropriate only where discretion
involved a clear
exercise of taste or
judgment.
The court here concluded that Storek, although it
established an objective
test for apply the
concept of "good faith and fair dealing" in fact was not
inconsistent with its conclusion here that the term "good
faith belief"
required only a subjective
standard. The court concluded that the Storek
court differentiated between "reasonableness" and "good faith"
and
indicated that where the parties in an
agreement had set no other
standard, then
"reasonableness" was the ordinary test. Here, of course,
the parties did set a standard, and the court's function is
to give it
credence as the statement of a
subjective test.
Reporter's Comment: In commenting on Storek, last year
(25 CEB
RPLR 186 (Sept. 2002)), the Reporter
opined that, for a lender thinking
about
cutting off a borrower in default, objective reasonableness might
be a safer standard than subjective good faith, because the
mere existence
of the default almost
automatically satisfies a reasonableness standard,
whereas good faith might be breached by the fact that the lender
was
looking out only for its own interests
rather than the borrower's.
(Storeck, with the
editor's comments, is reported as the DIRT DD for
8/22/02 - on the DIRT website).
This case shows that, as far as partnerships, rather than
loans, are
concerned, a subjective standard may
be more appropriate. Dissolving a
floundering
partnership is not the same thing as calling a delinquent loan.
Under a reasonableness standard, a trial judge could
conceivably second
guess and reject Winthrop's
decision to terminate the partnership on the
ground that, in a similar position, he (the judge) would have stayed on
as
a partner; but, under a good faith test, the
question would be whether he
believed the
partner's testimony about its motives for terminating, rather
than reevaluating the wisdom of that decision.
Is good faith such a low standard that it could make the
agreement
illusory? There is no suggestion of
that in the opinion. Good faith may
seem
self-proving in dissolution cases - no one is going to say in bad
faith that he dislikes somebody that he really does like -
but one can
nevertheless think of situations
where a judge can disbelieve the
terminating
partner's testimony about its motive, e.g., where the
enterprise has done well and there has been no past bickering, but
the
partner has suddenly received an invitation
to go into a more attractive
venture
elsewhere.
Of course, to decide whether you
prefer a good faith or a reasonableness
standard requires you to be able to predict whether you will be the
one
trying to withdraw later on rather than the
one trying to stop the
withdrawal of the other.
Depending on your enthusiasm for the venture,
that may be foreseeable. But then, that may only push the issue back
a
step to whether you acted in bad faith in
bargaining for a clause that
allowed you to act
unreasonably, so long as you did so in good faith.
The Reporter for this case was Roger Bernhardt - reporting
in the
California CEB Real Property Law
Reporter - reprinted with permission.
The
editor has edited both the report and the comments.
Editor's Comment: This is an important case because it does
supply a
concrete meaning for what ought to be
a reliable term - "good faith
belief."
Once we have a clear case defining the meaning of the term,
subsequent cases, God willing, will follow this
interpretation, and we
won't be faced with
further contextual complexity. The parties have to
use some language to express their understanding, and
shouldn't be
required to retain philosophers to
perfectly express their views. The
editor
isn't saying that there wasn't room for argument prior to this case,
but let's hope that the issue is now resolved for the
future.
Note also the important qualification
that this case makes - it is not a
case of
"good faith and fair dealing." Here the parties set the
standard
and the court is simply applying
it.
Readers are encouraged to respond to or criticize this posting.
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