(Corporate Officers & Directors Liability Litigation Reporter, Volume 19, Issue 5, Published 9/22/2003)
Partner Duty: Triple Five of Minn. v. Simon Andrews Number 50.6.5.1
Court Installs New Managing Partner of Mall of America
The managing general partner in a business partnership owes a fiduciary duty to refrain from secret, self-dealing transactions, a Minnesota federal judge held in a ruling that put a new general partner at the helm of the Mall of America, the nation's largest shopping mall. The judge found that officers of the Simon Property Group lied to the Ghermezian family, the mall's developers, about its plan to acquire an additional 27 percent of the mall. Triple Five of Minnesota Inc. v. Simon et al., No. 99-1894 (D. Minn., 9/10/2003)
If it stands, the ruling could be significant for companies involved in partnerships and joint ventures. Where before the recent spate of Enron Corp.-style corporate scandals the duties of the partners were largely defined by the partnership agreement, the court is now imposing additional standards of fiduciary duty.
U.S. District Judge Paul Magnuson of the District of Minnesota held that a state law imposes on partners "the highest standard of integrity and good faith in their dealings" with other partners. He pointed to a "standard of conduct" for managing partners and for those individuals who "both by virtue of their positions as officers and by holding themselves out as having authority to take action also owed a fiduciary duty."
Creighton Magid, a partner of Dorsey & Whitney in Washington, D.C., represented plaintiff Triple Five of Minnesota Inc., one of the founding entities of the massive mall project.
Magid said, "In this era of corporate scandals, which have hurt both Americans' financial well-being and their trust of business, commercial dealings are being scrutinized more closely, both by regulators and by the courts.
"Even more significantly, the Simons have been stripped of their role as managing partner of the partnerships that control the mall, including control over the development of the mall's second phase, which will add millions of additional square feet and turn America's largest mall into the world's largest mall," Magid continued.
The Mall of America currently is smaller than a mall outside Edmonton, Canada, which was also developed by the four Ghermezian brothers.
Attorneys representing the defendants were not available for comment.
The Ghermezian brothers, through their company Triple Five, were the original developers of the mall in 1986, but they entered into a partnership with defendants Melvin and Herbert Simon one year later in order to secure additional funding and anchor stores. The Teachers Insurance and Annuity Association entered the partnership with $650 million in construction financing.
The litigation arose from a deal in which real estate investment trust Simon Property Group, as the managing partner of Mall of America Company Associates, secretly negotiated with TIAA to acquire for itself a significant part of TIAA's interest in Mall of America Company Associates.
Triple Five sued Simon, several related companies, and some of its officers and directors for breach of fiduciary duty and failure to disclose. Triple Five alleged that the Simon defendants maintained that they were not in negotiations with TIAA when in fact, they were, and that as managing partners, the defendants were obligated to present this business opportunity to their fellow partners.
In his opinion, Judge Magnuson said the officers and directors of the managing general partner company, an entity of Simon Property Group, owed Triple Five a fiduciary duty.
Moreover, the judge found that any Simon entity that Herbert and Melvin Simon acted on behalf of was also liable because the Simons had played fast and loose with a variety of interlocking business entities during and after the negotiations with TIAA.
"Each partner has a duty to render to any partner on demand true and full information as to all things affecting the partnership," the judge wrote. "Partners may not alter this duty by contract; moreover a partner has a broad common-law duty to disclose all material facts, whether requested to or not."
By the time the Simon defendants notified Triple Five of the TIAA deal it was too late for Triple Five to obtain the financing it would need to participate so, in effect, it has no real notice, the judge said.
The fact that TIAA said it did not want to deal with Triple Five is immaterial, because it did not make that decision about Triple Five until after it began negotiations with the Simon defendants, the court wrote.
The appropriate remedy for the duplicity the court found was to turn the managing partner position over to Triple Five and to offer the TIAA deal to Triple Five, the judge said.
"The court, and to a large extent the general public, grows weary of corporations and the individuals who run them conducting their business affairs as if business expediency is the only consideration," the judge said in ordering the defendants to pay Triple Five's attorney fees. "Business people cannot and must not ignore ethics, fairness and sound judgment when ordering their affairs."
Judge Magnuson had said in a previous ruling that once the issues of equity were decided he would empanel a jury that would decide what money damages should be awarded.
In addition to Magid, Triple Five is represented by Roger Magnuson, Christopher Shaheen, Mitchell Granberg and Todd Trumpold of the Minneapolis office of Dorsey & Whitney.
Various defendants are represented by Gregory Karpenko of Fredrikson & Byron and John Sheran and Lawrence Field of Leonard Street and Dienard, both in Minneapolis, and Richard Posen, Steven Reisberg and Tarig Mundiyaof Willkie Farr & Gallagher in New York.