Partner and director liability rules

RUPA’s Personal Exposure Line: Authority, Wrongful Acts, and Admission

Under RUPA, a general partner’s liability turns on two separate questions: whether the partnership is bound by the partner’s act and whether the partner is personally liable for the resulting obligation. Do not collapse those questions. A partner may bind the partnership even when the partner violated an internal restriction, and the partner may then share personal liability with the other general partners.

RUPA §301: authority to bind the partnership. An act of a partner apparently carrying on the ordinary course of the partnership business binds the partnership unless the partner had no authority to act for the partnership in that matter and the person dealing with the partner knew or had received a notification that the partner lacked authority. Thus, lack of actual authority alone is not enough to defeat the partnership’s liability. The third party must also have the required knowledge or notification.

An act not apparently carrying on the ordinary course of the partnership business binds the partnership only if authorized by the other partners. The distinction is the character of the act, not merely whether the partner internally exceeded a dollar limit. A partner’s purchase of ordinary inventory may be in the ordinary course even if the partnership agreement required advance approval for purchases above a stated amount. A sale of the partnership’s only major asset ordinarily is not.

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RUPA §305: partnership responsibility for a partner’s misconduct. The partnership is liable for loss or injury caused by a partner’s wrongful act or omission, or other actionable conduct, when the partner was acting in the ordinary course of the partnership business or with authority of the partnership. The partnership is also liable when, in the course of partnership business or while acting with authority of the partnership, a partner receives or causes the partnership to receive money or property of a person who is not a partner and misapplies it. The key question is the connection between the conduct and partnership business; the partnership need not have approved the wrongful conduct in advance.

RUPA §306: personal liability of general partners. All partners are jointly and severally liable for all obligations of the partnership unless the claimant and the partnership or partner agreed otherwise. That is the personal-liability consequence after identifying a partnership obligation. A partner’s failure to participate in the transaction does not by itself eliminate liability.

An incoming partner is not personally liable for an obligation incurred before admission as a partner. The incoming partner is liable for obligations incurred afterward under the ordinary rule. Also distinguish a general partnership from an LLP: an LLP partner is not personally liable for a partnership obligation solely because of partner status or because the person acted as a partner. That protection does not erase liability for the partner’s own direct contract, personal guarantee, or tort.

A judgment against the partnership is not automatically a judgment against an individual partner. Even when the partner is personally liable, a creditor generally must satisfy the applicable execution condition before levying on the partner’s assets, such as a judgment against the partnership left unsatisfied for 90 days, the partnership being a debtor in bankruptcy, the partner’s agreement that the creditor need not exhaust partnership assets, or court permission. This collection step does not change the underlying substantive rule in §306.

The closed-book instruction has practical force here: be able to state §301’s two-part notice limitation and §306’s personal-liability rule without reconstructing them from intuition.

The MBCA Damages Screen: Director and Officer Conduct

The MBCA separates a director’s or officer’s standard of conduct from the circumstances permitting a money-damages judgment. A poor result, an unwise decision, or even a breach of the ordinary-care standard does not automatically produce damages against the fiduciary.

Directors. Under MBCA §8.30, a director must discharge duties:

1. in good faith;
2. with the care an ordinarily prudent person in a like position would exercise under similar circumstances; and
3. in a manner the director reasonably believes to be in the best interests of the corporation.

The director’s belief must be reasonable, not merely sincerely held. A director who approves a transaction without reading readily available financial information may have violated the care requirement. But the plaintiff must still satisfy the separate damages rule.

Under MBCA §8.31, a corporation or shareholder seeking money damages must establish:

1. a violation of §8.30 that was the legal cause of the damages suffered; and
2. conduct constituting intentional misconduct or a knowing violation of law, an improper personal benefit from a transaction, or, in a proceeding by or in the right of the corporation, an unlawful distribution under the MBCA’s unlawful-distribution provision.

The improper-benefit category applies whether or not the benefit resulted from an action within the scope of the director’s office. Therefore, “the director was acting as a director” is not a defense to a personal benefit that was improperly obtained.

The unlawful-distribution rule is a specialized route. A director who votes for or assents to a distribution that exceeds what the corporation could lawfully distribute may be personally liable to the corporation for the excess when the director’s §8.30 duties were not performed. This is different from an ordinary bad investment: the fact that a decision lost money does not make it an unlawful distribution.

A director may rely on information, opinions, reports, and financial data prepared or presented by officers or employees whom the director reasonably believes competent and reliable, as well as by lawyers, public accountants, or board committees. MBCA §8.32 does not protect reliance when the director has knowledge making reliance unwarranted. A report from the chief financial officer can support reasonable reliance; a report the director knows to be fabricated cannot.

Officers. The officer’s conduct standard under MBCA §8.42 tracks the director’s three requirements: good faith, ordinarily prudent care in a like position under similar circumstances, and a reasonable belief that the conduct serves the corporation’s best interests. The officer’s authority and assigned duties come from the bylaws, the board, and authorized superior officers.

Under MBCA §8.43, the officer damages inquiry requires a violation of the officer’s conduct duties, that the violation was the legal cause of the damages suffered, and intentional misconduct or a knowing violation of law, or receipt of an improper personal benefit. An officer’s honest mistake is therefore not automatically a damages case. An officer who knowingly falsifies records to obtain financing presents a materially different case because the conduct is intentional and legally wrongful.

The director’s unlawful-distribution route is not an ordinary officer route. If the officer is also a director, however, the person may be liable in the director capacity under the director rules. Likewise, reliance protection is role-specific but parallel: an officer may rely on competent, reliable information unless the officer knows reliance is unwarranted.

These rules answer a claim by the corporation or shareholders for liability arising from office. They do not immunize a director or officer from personal liability for the person’s own tort, a personal guarantee, or a contract the person personally made. That is a different source of liability from the MBCA damages screen.

Recurring errors:

• A partner’s undisclosed lack of actual authority does not defeat an ordinary-course transaction when the third party lacked knowledge or notification.

• A partner’s ordinary-course authority question is separate from the later question whether every general partner is personally liable.

• A director’s careless process may breach §8.30, but damages still require the heightened category in §8.31.

• An officer’s status does not create the director-specific unlawful-distribution route unless the officer also serves as a director.

• Reliance fails when the fiduciary knew facts making the supposedly reliable report unworthy of reliance.

One Authority Fact Pattern: Notice Before Personal Liability

A and B are general partners in a business that routinely buys commercial equipment on credit.

The partnership agreement provides that A may not purchase equipment costing more than $50,000 without B’s approval.

A purchases a $90,000 machine from Vendor in the ordinary course of the business.

Vendor had never seen the partnership agreement and had not received any communication that A lacked authority.

The partnership does not pay Vendor.

Three Liability Drills: Separate the Trigger from the Consequence

High-Yield Points - ⚡ Biggest Takeaways

Under RUPA §301, ordinary-course authority fails only when no authority combines with third-party knowledge or notification. Under RUPA §306, general partners share personal liability for partnership obligations even without participating in the transaction. Under the MBCA, a director or officer needs both a duty violation and a heightened damages category. Reasonable reliance protects only until the fiduciary knows reliance is unwarranted.