{Excerpt from Minnesota bill amending LLP statute to provide mechanical rule for arise/accrue questions relating to contract claims} {the bill has passed both the state Senate and House; awaiting signature from governor} . . . . {other sections of the bill, omitted} Section 7. Minnesota Statutes, section 323.14, is amended by adding a subdivision to read: Subd. 6. When debts and obligations arise and accrue. For the purposes of this section and section 323.16 {UPA section 17}: (a) All partnership debts and obligations under or relating to a note, contract or other agreement arise and accrue when the note, contract or other agreement is entered into. (b) An amendment, modification, extension or renewal of a note, contract or other agreement does not affect the time at which a partnership debt or obligation under or relating to that note, contract or other agreement arises and accrues, even as to a claim that relates to the subject matter of the amendment, modification, extension or renewal. This subdivision does not affect any law, rule or period pertaining to any statute of limitations or statute of repose. . . . . {other sections of the bill, omitted} Sec. 10. [EFFECTIVE DATE; APPLICATION] Section 7 is effective the day following final enactment applies retroactively to all notes, contracts, other agreements, amendments, modifications, extensions and renewals entered into before, on and after the effective date. ---------------------------------------------------------- Reporters' Notes to Minn. Stat. o 323.14, Subdivision 6 (1995 Amendment) by Professor Daniel S. Kleinberger, Co-Reporter and Professor Carter G. Bishop, Co-Reporter To determine whether an LLP shield applies to a particular partnership debt or obligation, it is necessary to know: (1) when the debt or obligation "arose or accrued," and (2) whether, as of that "arise/accrue" date, the partnership had an LLP registration in effect. Answering the second question is a simple matter of checking records in the Secretary of State's office. Answering the first question can be quite complicated, especially since the statute has not defined the phrase "arose or accrued," there is no case law directly on point and the case law interpreting the phrase as used elsewhere in the Uniform Partnership Act is self-contradictory. See e.g. Citizens Bank of Massachusetts v. Parham-Woodman Medical Associates, 1995 WL 21600 (E.D.Va.) (applying the UPA version of Minn.Stat. o 323.16 and holding that all obligations under a loan agreement arose when the partnership entered into the agreement) and Conklin Farm v. Leibowitz, 644 A.2d 687 (N.J. Super.), cert. granted 649 A.2d 1288 (N.J. 1994) (holding that interest payments due under a loan agreement arise as they become due). Subdivision 6 provides a mechanical rule for answering the "arise/accrue" question for "partnership debts and obligations under or relating to a note, contract or other agreement." The rule, stated in paragraph (a), is a mechanical one: such debts and obligations "arise and accrue when the note, contract or other agreement is entered into." As stated in paragraph (b), no "amendment, modification, extension, or renewal" of an agreement can reset the arise/accrue date, "even as to a claim that relates to the subject matter of the amendment, modification, extension, or renewal." Paragraph (a) reflects two policies. First, the rule for determining the arise/accrue date for contract claims should be as mechanical as possible, thereby making outcomes more predictable and litigation on the issue less likely and less expensive. Second, the rule should reflect the probable expectations of most parties who will be subject to the rule (i.e. general partnerships who file LLP registrations, partners of those partnerships, third parties who enter into contracts with those partnerships). As to the latter policy, to the extent the parties involved actually consider partners' personal liability status, they most likely: (i) assume that that status is fixed for any particular contract when the contract is entered into, and (ii) do not expect that one party's unilateral act or omission (i.e. filing a LLP registration or allowing the registration to lapse) will fundamentally alter that liability status. Paragraph (a) respects those expectations and assumptions by equating the arise/accrue date to the moment of contract formation. Paragraph (b) rests on similar concerns. First, predictability militates for a simple and mechanical rule, applicable to all contract changes that stop short of novation. Second, respecting parties' reasonable expectations means that the rule cannot allow contract changes to reset the arise/accrue date. Otherwise, an amendment that contemplates a myriad of provisions in minute detail and says nothing about partners' personal liability status could nonetheless reverse that status sub silentio. Indeed, even the most trivial change order could do so. Paragraph (b) therefore contains a "no reset" rule. Paragraph (b) does not, however, deny all leeway to parties to an existing contract. If parties wish to reset the arise/accrue date, they may subsume their old contract into a new one, thereby triggering paragraph (a) anew and obtaining a new arise/accrue date. Or, they may amend their existing contract by directly addressing the issue of partner personal liability. If, for example, the contract was entered into while a registration was in effect (and therefore the shield applies to any claim "arising under or related to" the contract), an amendment might include the personal guarantees of some or all of the partners. Or, if the contract was entered into while no registration was in effect (and therefore the partners have no shield from contract claims), an amendment might declare the partnership's obligations to be non-recourse. In neither instance would paragraph (b) apply, since that paragraph concerns itself exclusively with the arise/accrue date of partnership obligations. Subdivision 6 affects only claims "under or relating to a note, contract, or other agreement." Tort claims raise quite different questions of policy (and politics) and are simply beyond the scope of this subdivision. The phrase "or relating to" is included to catch all contract-related claims and is not intended to encompass tort claims that exist independently of an alleged or actual contract. For example, paragraph (a) covers a claim asserting fraud in the inducement and seeking rescission of a contract but does not cover a claim alleging negligent or intentional misrepresentation and seeking damages in tort. Similarly, paragraph (a) covers the contract-law aspect of a claim for legal malpractice but not the tort-law aspect. (This anomaly is inevitable, given the limited scope of subdivision 6 and the way Minnesota courts conceptualize legal malpractice. See e.g. Togstad v. Vesely, Otto, Miller & Keefe, 291 N.W.2d 686 (Minn. 1980) (holding that a legal malpractice claim sounds both in tort and in contract).) The 1994 Reporters' Notes to this section contain six Examples discussing the arise/accrue issue. Under subdivision 6, Examples 1,3, 4 and 5 are easily resolved. Any claim relating to the contract will arise and accrue when the contract is entered into. Subdivision 6 does not address Example 2, and Example 6 remains problematic. For the sake of consistency, subdivision 6 applies also to section 323.16 (liability of incoming partner). Accrual of claims is also a pivotal concept in that section, and subdivision 2 borrowed its arise/accrue concept from section 323.16. Subdivision 6 does not apply and should not be considered in matters relating to statutes of limitations and statutes of repose. Those statutes involve policy concerns which were never considered in the development of subdivision 6. --------{end of bill excerpt and Reporters' Notes} Prof. Daniel S. Kleinberger dkleinberger@wmitchell.edu William Mitchell College of Law St. Paul, MN USA (612) 290-6387