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J & J CELCOM v. AT & T Wireless Services Inc.

Washington Supreme Court
169 P.3d 823 (2007)
ELI5:

Rule of Law:

Under Washington's Revised Uniform Partnership Act (RUPA), a controlling partner does not breach the duty of loyalty by causing the partnership to sell its assets to an affiliated entity if the partnership agreement authorizes the sale by majority vote, the partner makes full disclosure of the transaction, and the price paid for the assets is fair.


Facts:

  • J & J Celcom and other minority partners owned fractional interests of less than five percent in nine regional cellular telephone partnerships.
  • AT & T Wireless Services (AWS) owned the remaining majority interest in each partnership and provided all technical and administrative services.
  • To eliminate administrative costs, AWS decided to buy out the minority partners and invoked its majority interest.
  • AWS offered to buy the minority interests voluntarily, stating in its offer letters that if any partner declined, AWS would use its majority vote to sell the partnership's assets to an AWS-affiliated entity at an appraised value.
  • Some minority partners declined the voluntary buyout offer.
  • Consequently, AWS used its majority vote to cause the partnerships to sell all of their assets to an entity affiliated with AWS.
  • The sale price for the assets was based on a third-party appraisal.

Procedural Posture:

  • J & J Celcom and other minority partners sued AWS in the U.S. District Court for the Western District of Washington.
  • The district court granted summary judgment in favor of AWS on all claims.
  • J & J Celcom, as appellants, appealed the district court's decision to the U.S. Court of Appeals for the Ninth Circuit.
  • The Ninth Circuit affirmed summary judgment for AWS on all claims except for the alleged breach of the duty of loyalty.
  • The Ninth Circuit certified a question of Washington state law regarding the duty of loyalty to the Supreme Court of Washington for resolution.

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Issue:

Does a controlling partner violate the duty of loyalty under Washington's Revised Uniform Partnership Act (RUPA) by causing the partnership to sell all its assets to an affiliated party, when the sale is approved by a majority vote as allowed by the partnership agreement, the price is based on a fair third-party appraisal, and all material facts are disclosed?


Opinions:

Majority - Justice C. Johnson

No. A controlling partner does not violate the duty of loyalty under these circumstances. Under Washington's Revised Uniform Partnership Act (RUPA), a partner does not violate a duty merely because their conduct furthers their own interest. Here, the federal courts have already established that the partnership agreement permitted the asset sale by majority vote, AWS paid fair consideration, made full disclosure, and acted in good faith as a matter of law. Precedent like Karle v. Seder supports the principle that a partner may purchase partnership assets if they act in good faith, pay a fair price, and disclose material information, all of which occurred here. The facts of this case are distinct from Bassan v. Investment Exchange Corp., which involved a partner taking an undisclosed profit, something not present in this transaction.


Concurring - Justice Madsen

No. A controlling partner does not violate the duty of loyalty, and the reasoning should emphasize the significant changes introduced by RUPA. RUPA represents a major shift from a fiduciary-centric model under the old Uniform Partnership Act (UPA) to a more contractarian view, which expressly limits fiduciary duties and allows partners to pursue their self-interest. The partnership agreement's authorization of a sale by majority vote, combined with full disclosure and a fair price, satisfies RUPA's requirements. Under RUPA, such a provision effectively serves as the partners' consent to this type of self-dealing transaction, provided it is not 'manifestly unreasonable,' and a transaction at fair market value is not.



Analysis:

This decision clarifies the scope of the duty of loyalty under Washington's RUPA, firmly embracing a modern, contractarian approach to partnership law. It establishes that a procedurally and substantively fair self-dealing transaction, if authorized by the partnership agreement, will not constitute a per se breach of fiduciary duty. This provides greater certainty for controlling partners seeking to execute corporate restructurings or buyouts, prioritizing the terms of the partnership agreement and objective fairness over a strict prohibition on self-interested conduct. The ruling lessens the litigation risk for majority partners in such transactions, provided they ensure full disclosure and a fair price.

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