The Triple Five v. Simon Case
Developing the Mall of America
The story of the Triple Five decisions begins with an idea to build the largest shopping mall in the United States—the Mall of America. The idea originated with four brothers: Raphael, Nader,Bahman, and Eskander Ghermezian. The brothers own Plaintiff Triple Five of Minnesota, Inc. (Triple Five). Previously, Triple Five developed the “largest indoor retail and entertainment complex in the world:” the West Edmonton Mall in Edmonton, Alberta, Canada. In 1986, Triple Five owned the right to develop the land upon which the Mall of America was later built. To develop the Mall of America, Triple Five sought business partners.
In 1987, the Teachers Insurance and Annuity Association (Teachers) brought substantial financing to the project in exchange for very favorable terms and a buy-sell right. At the same time, two brothers, the defendants Melvin and Herbert Simon, became involved in the project. The Simon brothers owned a number of real estate businesses, which were also named as defendants. The Simons also had a prominent and influential role within the Simon Property Group, Inc. (SPG), a publicly traded real estate investment trust, which was also a defendant.
The ownership of the mall involved a complex structure of business entities that can be summarized as follows. Teachers owned fifty-five percent in the Mall of America LP (MOAC LP). The remaining forty-five percent interest in MOAC LP was owned by the Mall of America Associates (MOAA), a partnership of which the Simon brothers and Triple Five each owned half. An entity owned by the Simon brothers was the managing general partner for MOAA.
Fiduciary Duty Limitation
The MOAA partnership agreement between the Simon brothers and Triple Five included a general limitation on fiduciary duties. It provided “that no partner shall be liable to any other partner except in the case of fraud or gross negligence.” This lawsuit arose out of circumstances surrounding Teachers’ sale of half of its ownership interest to SPG.
Selling Part-Ownership in the Mall of America
In March 1998, Teachers wrote in a letter to MOAA that Teachers would consider selling all or part of its interest in the Mall of America. Herbert Simon responded in a letter to Teachers, which was blind copied to Triple Five. In a forceful tone, the letter warned Teachers that the interests of the Simon brothers and Triple Five should be considered in such a sale; otherwise they would seek to enforce their rights to prevent a sale. According to Triple Five, this letter lulled them into thinking the Simon brothers were protecting their interests and were not seeking to buy Teachers’ interest. But at the same time, the Simon brothers were preparing to buy Teachers’ interest through their SPG entity. For the rest of the year, the Simon brothers kept Triple Five in the dark while preparing to buy Teachers’ interest.
In January 1999, SPG met with Teachers. After three months of negotiations with Teachers, Herbert Simon sent a letter to inform Triple Five that they were planning to purchase fifty percent of Teachers’ interest in the Mall of America through their SPG entity. The financing and terms were prepared so the deal could be finalized before Triple Five could obtain financing to participate in the deal.89 Moreover, the Simons did not invite Triple Five to participate. Based on these acts, Triple Five asserted that the Simon brothers had usurped a partnership opportunity.
Triple Five repeatedly requested information regarding the transaction from the Simon brothers.The defendants refused them the information and even denied having some of the requested information. Triple Five asserted that the Simon brothers violated the fiduciary duty of disclosure for failing to disclose information regarding the purchase.
The Triple Five v. Simon Trial Court Decision
In the Triple Five decisions, the district court and the Eighth Circuit considered a number of issues. For purposes of this article however, the discussion is focused primarily on the waiver of fiduciary duties.
Triple Five, the plaintiff, filed suit in federal district court against the defendants, brothers Melvin and Herbert Simon, their closely held businesses, and other parties in business with the Simons. The general question was whether the defendants violated fiduciary duties to Triple Five. This question raised three main issues. First, the court had to determine which parties owed fiduciary duties, which included determining whether the exculpatory clause limited the partners’ fiduciary duties. Second, the court evaluated whether the defendants breached their fiduciary duties. Third, the court sought to identify the proper remedies.
In determining which parties owed a fiduciary duty, the court considered a number of legal principles. The court stated that fiduciary duties may be imputed to officers and directors of a general partner, including corporate general partners.Moreover, standards of conduct for managing partners apply both to managing partners, such as the Simons, and to those persons or entities holding themselves out as having authority or as having the right to take action for the partnership (as the Simons did in holding themselves out as having the authority to act for TripleFive). Finally, the court noted that a partnership is liable for the wrongful acts or omissions of a partner. Based on this, the district court held that the defendants named in Count I owed fiduciary duties to Triple Five.
Count I notably excluded SPG, the publicly traded corporation in which the Simon family had a minority interest and management involvement. The court, however, declared that the defendants cannot hide behind corporate formalities. The court stated that the defendants did not differentiate among their various closely held Simon family entities, and the court would not do so either. Thus, the veil limiting liability between the Simons and their entities was pierced, and fiduciary duties were imposed on all. The Eighth Circuit affirmed by expressly holding that “all of the Simon Defendants, including SPG, [had] a fiduciary responsibility to Triple Five.”
Next, the court considered whether the defendants breached their fiduciary duties by their various acts and omissions involving the purchase of an ownership interest in the Mall of America.
The defendants pointed to a clause in the partnership agreement providing that “no partner shall be liable to any other partner except in the case of fraud or gross negligence.” The court found that the conduct alleged did not constitute “fraud or gross negligence.” Still, the court noted that although parties are free to vary many aspects of their relationship, they are not free to destroy its fiduciary character. Accordingly, the court held that despite the partners’ agreement, the defendants owed Triple Five various common law fiduciary duties for which they could be liable.
Breach of Fiduciary Duties
The court analyzed three aspects of common-law fiduciary duties: (1) the duty to disclose negotiations, (2) usurpation of partnership opportunity,120 and (3) conduct between partners.
The Duty to Disclose
The court noted that the duty to disclose involves “‘a duty to render [un]to any partner on demand true and full information as to all things affecting the partnership.’ 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 do so or not.” Here, the court found that the defendants concealed their negotiations from Triple Five, misled Triple Five into believing they were protecting their interest, and refused to disclose material details about the transaction, which are required in a timely manner. As fiduciaries, the defendants were obligated to provide Triple Five with all material information, regardless of whether Triple Five requested it. The failure to provide information constituted a breach of the defendants’ duty to disclose and harmed Triple Five by preventing Triple Five from participating in the transaction.
Usurpation of Partnership Opportunity
The court considered whether the defendants usurped a partnership opportunity in breach of their fiduciary duties when they purchased the additional ownership interest in the Mall of America, including placing their personal interest above that of the partnership. The court found that the offer to buy the interest was a partnership opportunity because Triple Five could afford the purchase, the seller, Teachers, never refused to deal with Triple Five, and the opportunity had a logical relationship to the partnership’s interests. The fact that SPG, a publicly traded corporation, was purchasing the interest in the mall did not deter the court from imposing the defendants’ fiduciary duties on SPG. Thus, the defendants’ usurpation of this partnership opportunity was a breach of their fiduciary duties, principally the duty of loyalty.
The court also held that SPG’s act of taking a transaction fee was wrongful and that the defendants’ failure to disclose this fee was a breach of their fiduciary duty.
In a related matter, the court found insufficient evidence to support Triple Five’s claim that the defendants breached their fiduciary duties by failing to distribute proceeds from an alleged $25 million capital account to Triple Five.
Conduct Between Parties
The court briefly considered whether the parties’ behavior, “behavior one might expect to see on a playground,” was consistent with the very high duties the law imposes on partners.The court held that the defendants’ “nefarious” behavior failed to rise to the high standard required by law, but the court added a caveat that Triple Five’s behavior was not blameless.
In response to the defendants’ breach of fiduciary duties, the court imposed a constructive trust on the purchased interest in the Mall of America, restored Triple Five’s opportunity to buy its share of the interest that SPG purchased from Teachers, ordered the Simons to disgorge Triple Five’s share of profits received from the Mall of America, and imposed other remedies. Most interestingly, the court amended the partnership agreements, changing the managing general partner from the defendants to Triple Five, which would take effect upon Triple Five’s payment for its share of the stocks that Teachers had sold to the Simons.
The Triple Five v. Simon Eighth Circuit Decision
The Eighth Circuit largely affirmed the district court. The court held that SPG owed Triple Five fiduciary duties, stating that SPG and the Simons were “too close for comfort.” The court affirmed that the defendants usurped a partnership opportunity and violated the duty to disclose.
As for the provision in the partnership agreement limiting the partners’ liability to each other in the absence of fraud or gross negligence, the court affirmed in one sentence that this would not limit fiduciary duties: “Finally, we agree with the district court’s conclusion that Minnesota partnership law prevents partners from contracting away their fiduciary obligations.”
The court also affirmed the decision to remove the partnership’s managing partner, replacing the Simons with Triple Five. The court reasoned that the Simons “did not conduct [themselves] in a manner befitting a managing partner.” Finally, the court reversed and remanded the calculation of remedies by requiring the Simons to pay half the Mall of America profits in question to Triple Five, noting that the district court had allocated too much to Triple Five.
This post is also part of a series of posts on Unenforceable Fiduciary Duty Limitations.