Monday, December 19, 2011
Improper Personal Benefit - Two Models
Improper Personal Benefit: Is Benefit Dependent on the Presence of a Loss?
Recent newspaper stories with the respect to the activities of an official of a California stadium authority serve as an interesting backdrop for a consideration of the distinction that exists between the law of corporations and the law of partnerships as to deriving personal benefit from venture assets.
According to the various stories, a stadium official, when the stadium was otherwise engaged in an upgrade, made orders for high-end sound equipment, charging them to his personal credit card. In turn, he was reimbursed by the stadium authority. There is no suggestion that the ultimate price paid by the stadium authority was any higher than it would have been had the vendor been paid directly with the authority’s check. What did happen, however, is that the stadium official racked up significant bonus credits on his personal credit card, sufficient, by one newspaper’s calculation, to pay for several days at the Ritz-Carlton or several first class international plane tickets.
Even as the stadium authority was in no worse position than it otherwise would have been, there has been a public uproar at the fact that the stadium official personally benefitted from these transactions. Apparently, the view of those detractors is that, even though the authority was in no worse position, it was inappropriate for the official to come out in a better position.
This story got me thinking about the distinction that exists between the laws of corporations and partnerships as to the personal benefit derived from the use of venture assets.
In the context of a business corporation, it would seem that the stadium official’s conduct would not be subject to sanction. In that paradigm, the utilization of corporate assets for personal benefit is permitted so long as the terms of the transaction are “fair to the corporation.” KRS § 271B.8-330(1)(c). Where, as is apparently the case with respect to the purchases of the high-end sound system equipment for the stadium, the venture has neither lost nor been deprived of anything it could have otherwise had, the terms are fair to the corporation (assuming, of course, that the corporation has neither a credit card nor an interest in flying first class or staying at the Ritz-Carlton) and there exists no injury.
In contrast, the law of partnerships looks not to whether the transaction was “fair” to the partnership, but looks simply to whether a partner, utilizing partnership assets, personally benefitted. See, e.g., UPA § 21(1); KRS § 362.250(1). Thereunder, a partner who utilizes partnership assets and in so doing derives a benefit is obligated to hold that benefit in trust for the partnership. It matters not whether the partnership in any manner lost anything on the transaction, but only whether the individual partner realized a gain. For that reason, the fact that the transaction was “fair” to the partnership, i.e., that at minimum, the partnership was not worse off than it otherwise would have been, is not a defense to the charge of having derived an improper personal benefit.
These different mechanisms for assessing personal benefit cases are simply different from one another; neither, on an objective basis, is more “correct” than is the other. What is important is that the distinctions between them be appreciated in a particular application and insuring that the appropriate test is applied.