Certification From the United States Court of Appeals for the Ninth Circuit in J&J Celcom et al., Appellants, v. AT&T Wireless Services Inc., Appellee, 162 Wash. 2d 102

¶1 C. Johnson, J. This case involves a certified question from the United States Court of Appeals for the Ninth Circuit. We are asked to determine whether, under the Revised Uniform Partnership Act (RUPA), a controlling partner violates the duty of loyalty where the controlling partner causes the partnership to sell its assets to an affiliated party. We answer the certified question in the negative.

FACTS AND PROCEDURAL HISTORY ¶2 While certain facts may remain disputed in the federal court proceedings, the Ninth Circuit provided the following description of the parties, their partnerships, and those facts we consider for our analysis. J&J Celcom and other former partners (minority partners) acquired their fractional interests in nine regional cellular telephone partnerships through a lottery. The key asset in each partnership included the right to own licenses for various cellular radio frequencies.

At the time of the asset sales at issue in this case, the minority partners owned less than five percent of each partnership, and AT&T Wireless Services (AWS) owned the remainder. AWS provided wireless service to the customers and all technical and administrative services related to the partnerships. ¶3 To eliminate the expense of the administrative services related to the partnerships, AWS invoked its majority interest in each partnership and voted to buy out the minority partners.

Initially, AWS offered to buy out the minority partners at a price slightly higher than the third party appraisal of four of the nine partnerships. AWS sent letters to the minority partners offering an opportunity to sell voluntarily. The letters stated that, if any minority partner declined the offer, AWS would vote to sell the assets of its partnership to an affiliated entity at the appraised value, dissolve the partnership, and pay the minority partners their pro rata share of the purchase price. Several minority partners accepted the offer but because some declined, AWS proceeded with the asset sales.

The Ninth Circuit ruled that the asset sale transactions at issue were based on prices that were fair as a matter of law. J&J Celcom v. AT&T Wireless Servs., Inc., 481 F.3d 1138 (9th Cir. 2007).

CERTIFIED QUESTION ¶4 Does a controlling partner violate the duty of loyalty to the partnership or to dissenting minority partners where the controlling partner causes the partnership to sell all its assets to an affiliated party at a price determined by a third party appraisal, when the appraisal and the parties to the transaction are disclosed and the partnership agreement allows for sale of assets upon majority or supermajority vote, but the partnership agreement is silent on the subject of sale to a related party?

Summary of Claims Dismissed ¶5 To put this question in the context of issues that have already been decided in the federal court proceedings, and to further narrow the answer we give in this case, we summarize those issues already resolved. The minority partners who opposed the asset sales filed suit in federal District Court for the Western District of Washington in Seattle. As the Ninth Circuit noted, these minority partners alleged:

(1) Breach of Contract

(2) Breach of Implied Covenant of Good Faith and Fair Dealing

(3) Breach of Fiduciary Duties

(4) Claims of Misrepresentation

(5) Tortious Interference

(6) Unjust Enrichment J&J Celcom, 481 F.3d at 1141. ¶6 After 15 months of discovery, AWS moved for

summary judgment. The minority partners cross-moved for partial

summary judgment on liability. The district court granted AWS’s motion and denied the minority partners’ motion. f 7 The minority partners appealed. The Ninth Circuit affirmed the federal district court’s grant of

summary judgment for AWS on all but one of the issues. Further, the Ninth Circuit held that the asset sale transactions did not breach either the partnership agreements or the implied covenant of good faith and fair dealing. The sole remaining issue — a claim for breach of the duty of loyalty — is the subject of the certified question now before us. ANALYSIS ¶8 The relevant portion of the Washington RUPA provides:

(1) The only fiduciary duties a partner owes to the partnership and the other partners are the duty of loyalty and the duty of care set forth in subsections (2) and (3) of this section.

(2) A partner’s duty of loyalty to the partnership and the other partners is limited to the following: (

a) To account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner in the conduct and winding up of the partnership business or derived from a use by the partner of partnership property, including the appropriation of a partnership opportunity; (

b) To refrain from dealing with the partnership in the conduct or winding up of the partnership business as or on behalf of a party having an interest adverse to the partnership; and (

c) To refrain from competing with the partnership in the conduct of the partnership business before the dissolution of the partnership.

(3) A partner’s duty of care to the partnership and the other partners in the conduct and winding up of the partnership business is limited to refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.

(4) A partner shall discharge the duties to the partnership and the other partners under this

chapter or under the partnership agreement and exercise any rights consistently with the obligation of good faith and fair dealing.

(5) A partner does not violate a duty or obligation under this

chapter or under the partnership agreement merely because the partner’s conduct furthers the partner’s own interest. RCW 25.05.165. ¶9 Here, as the federal district court held, the partnership agreement expressly allows for sale of partnership assets by majority vote. The federal district court and Ninth Circuit ruled that when AWS sold the partnership assets, it disclosed material information, paid fair consideration, and acted in good faith as a matter of law. Also, the minority partners have offered no proof of damages as a result of AWS’s sale of the partnership’s assets.

Therefore, we find nothing in Washington’s RUPA, when applied to the present case, that indicates that AWS violated the duty of loyalty to the partnership. ¶10 In addition to Washington’s RUPA, our finding is supported by Washington case law. We recognized in Karle v. Seder, 35 Wn.2d 542, 550, 214 P.2d 684 (1950) that a partner may lawfully purchase partnership assets from another partner, provided they act in good faith, pay fair consideration, and disclose material information. In Bassan v.

Investment Exchange Corp., 83 Wn.2d 922, 524 P.2d 233 (1974), we held that a partner has a duty to account for any benefit of profit held by the partner relating to any aspect of the partnership. ¶[11 It is of interest to note that the Ninth Circuit perceived our holdings in Karle and Bassan as pointing “in different directions.” J&J Celcom, 481 F.3d at 1142. However, we fail to see how the holdings conflict. The cases simply addressed different issues on completely different sets of facts.

Karle concerned the unlawful concealment of material information by a partner and Bassan concerned a partner’s lawful requirement to account for any profit derived from transactions on behalf of the partnership. Neither of these concerns are presented under the facts of the case before us. ¶12 In Karle, two partners decided to sell a tavern, which was their partnership asset. One partner accepted an offer without disclosing to the other partner the actual price or the material details of the sale.

We affirmed the trial court judgment that the partner committed fraud by failing to disclose his agreement to sell the tavern for $25,000 while representing to his partner that he sold the tavern for $20,000. No such fraud exists in the present case, which would implicate the holding of Karle. ¶[13 In Bassan, we reversed the trial court’s dismissal of an action for an accounting and dissolution of the partnership, and we determined that the general partner was accountable to the partnership for profits realized when it received a markup on land it sold to the partnership without the consent of the partners.

The partnership agreement was silent on whether consent was required. In the case before us, the federal district court has determined, as a matter of law, that the sale of partnership assets was made at a fair market value. ¶14 In the context of the certified question, the holdings of Karle and Bassan do not conflict. In this case, the partnership agreement does not preclude the sale of the assets; the price paid was fair at the time as a matter of law and no bad faith exists as a matter of law.

CONCLUSION ¶15 Based on the narrow issue posed by the certified question and the procedural posture underlying our analysis, we answer the certified question no. Alexander, C.J., and Sanders, Bridge, Chambers, Owens, Fairhurst, and J.M. Johnson, JJ., concur. We deny AWS’s motion passed to the merits to strike the appendix attached to J&J Celcom’s reply brief and to strike J&J Celcom’s constitutional argument from the reply brief.