American Bar Association Section of Real Property, Probate and Trust Law 750 North Lake Shore Drive Chicago, Illinois 60611 TO: Executive Council Members, Supervisory Council Members and LLC/Partnership Task Force Members FROM: Tom Geu and Sandy Liebschutz DATE: November 30, 1995 RE: SUMMARY REPORT TO ABA REAL PROPERTY PROBATE AND TRUST SECTION ON ULLPA DRAFTING COMMITTEE SESSION November 3-5, 1995 The initial meeting for the drafting of a Uniform Limited Liability Partnership Act by the National Conference of Commissioners on Uniform State Laws (NCCUSL) was held November 3- 5, 1995, in Chicago. Harry Haynsworth (Dean and President, William Mitchell College of Law) is Chair of the Committee and Carter Bishop (Suffolk University Law School) is Reporter. Dean Haynsworth was an active member of the ULLCA Drafting Committee and Professor Bishop was reporter for ULLCA. The Committee consists of nine commissioners. There are also five invited advisors and fourteen invited observers/liaisons. The five invited advisors are Elizabeth G. Hester, Richmond, Virginia (ABA); Lou Conti, Orlando, Florida (ABA Business Law Section); Steven G. Frost, Chicago, Illinois (ABA Tax Law Section); and the Real Property, Probate and Trust Law Section advisors, Tom Geu, Vermillion, South Dakota (USD School of Law); (tele. 605-677-6347; fax 605-677-5417; e-mail GEU@JURIST.LAW.USD.EDU) and, Sanford J. "Sandy" Liebschutz, Rochester, New York (tele. 716-232-3730; fax 716-232-3882). Sandy is also serving as liaison advisor for The American College of Real Estate Lawyers (ACREL). The Drafting Committee is charged to have an act completed and in proper form for consideration at NCCUSL's Annual Meeting in July 1996. The next Drafting Committee meeting is scheduled for January 26-28 in Dallas. If necessary another meeting will be held March 22-24 in Chicago. The initial meeting was devoted to the discussion and resolution of a variety of major issues. Based upon the decisions made at the initial meeting, Carter Bishop is drafting an initial discussion draft for distribution and Harry Haynesworth will appoint subcommittees consisting of both commissioners and advisors to review both the substance and language of specific sections of that draft before the January meeting. Current state LLP acts and the Business Section's Prototype LLP Act were touchstones for the discussion. The Committee tentatively resolved the following issues: (1) The Act will be "RUPA based" but with the goal of making the Act as "freestanding" as reasonably possible in order for states that have not adopted RUPA to modify it for use with UPA. (This issue was discussed at length). (2) The Act will provide a full "corporate-like" liability shield. The issue discussed were whether the shield should apply to all liabilities, whether it should be a more limited shield that would modify joint and several liability under general partnership law or whether the shield should apply only to vicarious tort liability, but not contract liability. There was also discussion of eliminating all joint and several liability for general partnerships. Ultimately it was decided such a modification was outside the scope of the Drafting Committee's charge. (3) The Act will be available for use by all businesses. That is, unlike some present state statutes, the Act will not be limited for use by professional service firms. (4) The Act will not mandate insurance requirements for LLPs. The discussion focused on two notions. First, professional service firms are governed by law and regulation outside the LLP statute which may impose insurance requirements and, second, general insurance requirements raise complicated coverage, policy type, and cost issues that outweigh the benefits of requiring such insurance, in part, because they are difficult to police. (5) The limited liability provided by the Act may be waived. This is consistent with RUPA in that the partners may opt-out of the default rules by agreement. Reasons for such waiver may include credit negotiation, tax and other regulatory matters. (6) The Act will include language similar to that found in ULLCA concerning "shield piercing." ULLCA states that failure to "observe the usual company formalities or requirements relating to the exercise of its company powers or management of its business is not a ground for imposing personal liability . . . ." Discussion indicated there were two primary reasons for this decision. First, any material difference between ULLCA and ULLPA in this regard could invite courts to interpret the use of "formalities" differently in the two very similar contexts. Second, unlike corporations which require more formality, ULLPA is based on general partnership law which does not specify formality. (7) The Act will allocate liability for claims between and among periods of LLP and non-LLP status. This issue was discussed at length. It is similar to issues arising in the context of insurance coverage. That is, when does a "claim" arise in the context of an LLP which was first doing business as a partnership? For torts it was decided that the time of the conduct leading to liability should be used to determine whether the LLP liability shield provides protection. Thus, if an individual partner engaged in tortious conduct before the partnership became a LLP the liability of the other partners would not be protected by the shield even if the tort was not discovered until after the partnership attained LLP status. If there were a continuous tort spanning time periods in which the LLP was once a partnership some judicial allocation would be required. For contracts the Committee decided to identify the relevant time as the date the contract was first entered. Continuing contracts spanning partnership and LLP time periods would be governed by organizational status at the time of the effective date unless the contracting parties otherwise agree. This is consistent with the approach taken in the Minnesota and New York LLP Acts. (8) The Act will identify and prohibit "unlawful distributions." The Committee noted that every other limited liability entity, including ULLCA and RULPA, contained corporate- type distribution restrictions. There was genuine political concern about not including the same kind of restrictions for LLPs. The Prototype is silent on this matter. Geu argued that the Uniform Fraudulent Transfers Act should take care of the problem and voiced concern about adding operational complexity to what was agreed to be, at base, a general partnership. After the Committee vote, he was invited to try to raise the issue at another meeting if time allows. (9) The Act will require certain formalities to become a LLP. There are a number of related issues in the general category of "formalities." First, the Act will require the filing of the registration statement which will include (a) the name of the LLP; (b) the address of the chief executive office of the LLP (either within or outside the state of organization); and (c) optional information concerning a delayed effective date for the filing. There was discussion concerning whether the registration statement could include other information. It seems that other information, for example a statement limiting the agency authority of an individual partner, should be filed under the authority of Section 105 of RUPA which would keep the registration statement "uncluttered" and possibly avoid confusion. Nonetheless nothing in the Act will prohibit additional information. Second, the registration statement itself is a "statement" under Section 105. This was a central decision to much of the discussion. It means that the perjury language concerning the filing of false documents applies to the filing of the registration statement. It also means that at least two partners must sign the statement. The two-signature requirement was actually a later amendment of an original resolution which allowed one signature for the registration statement. The "change" was, to a small extent, to keep requirements consistent for all filings but, mostly, it was to guard against possible mischief by a rogue partner filing a registration statement that might have the effect of changing specifically negotiated and agreed contribution and indemnification provisions under an existing partnership agreement (see the portion of this Report discussing unresolved issues). Third, and again in part to guard against the rogue partner, the Act will require that a copy of the registration statement be mailed to all partners. Note that the limited liability afforded by the filing itself would not be effected by failure to send the copies to other partners (but it would give a cause of action inter se). Indeed the filing of the registration statement, absent administrative or voluntary cancellation, will always be effective as to third parties (unless otherwise agreed). Fourth, the Committee decided that, similar to general partnerships, a domestic LLP would not be required to have a registered agent. This issue directly interrelates to annual/biannual report filing requirement (discussed infra) and the information contained in the report. Fifth, the Act will require majority vote of the partners (unless otherwise agreed) to authorize the filing of the registration statement. Discussion included whether filing the registration statement was in the ordinary course of the business. It is a compromise between what hypothetically could be detrimental for a few partners and what would be very advantageous to most partners in most partnerships (again, see the discussion of contribution and indemnification provisions, infra). Sixth, cancellation of LLP status has a different cost- benefit analysis than does the filing of the registration statement. As a result, unanimous consent of all partners will be required to cancel LLP status (unless otherwise agreed). Seventh, formalities concerning deceptively similar or confusingly similar names were discussed. The consensus of the Committee was that Offices of Secretaries of States might oppose any requirement for them to make judgments on names. It was noted that trade name statutes have been adequate in the past for the name registration of general partnerships. Therefore the Act will not contain provisions addressing deceptive or confusingly similar names. (10) The Act will require periodic filings. The Committee decided that filings every year (or every two years at the election of the various state legislatures) were necessary (a) as a mechanism to provide for administrative cancellation of defunct LLPs (with notice and a two year retroactive reinstatement process in which the LLP would retain limited liability) and (b) to provide the type of information contained in the registration statement without the necessity of continual amendment of the registration statement. Relatedly, the comments to the registration statement section will caution that putting additional information in the registration statement may increase the frequency of necessary amendments thereto. The report would require the name of the LLP, the address of the chief executive office, and the LLPs state of organization. It can be signed by a single partner but the signing partner's address must also be disclosed. The name and address requirement addresses both due diligence and service of process concerns. The Committee also decided to include a definition for "doing business within the state "for purposes of foreign registration. The filing requirements would be the same for domestic and foreign LLPs. (11) The Act will not expressly provide for Limited Liability Limited Partnerships. Nonetheless, because RULPA is expressly linked to RUPA and because ULLPA provides limited liability for general partners under RUPA a comment will expressly state that LLP status is available for general partners in a limited partnership and, therefore, that LLPs are contemplated by ULLPA. Two other major issues that were discussed but which were unresolved were whether the statute would pre-empt indemnification and contribution rights in pre-existing partnership agreements and whether the "internal affairs rule" should also govern the extent of limited liability in a state in which an LLP is doing business but not where the LLP is organized. The gravamen of the prior indemnification and contribution agreement issue is illustrated by the following hypothetical which was discussed. Assume that the managing partner (or a rainmaker) has specifically negotiated a special indemnification or contribution clause in the existing partnership agreement in return for her service in that capacity. Now assume that an LLP registration statement is filed upon the majority vote of the existing partners. Ms. Managing Partner dissents. What should be the result concerning the indemnification and contribution provisions previously negotiated? Now assume that the contribution provisions of the pre-existing agreement remain valid. Should a third-party creditor be able to choose to sue Ms. Managing Partner rather than other partners in order to circumvent the liability protection which would otherwise be available to the other partners of the LLP (by invoking Ms. Managing Partner's pre-existing contractual contribution rights against her partners)? The "internal affairs" issue was discussed, but only briefly. The question is whether the Act (which is adopted in state "A") should contain a provision that provides that the liability protection of state B's LLP Act will govern tort and contract actions in state A (if greater protection is provided by state B) for those LLPs organized under state B's laws. A final issue that both Sandy and Tom think is significant that was mentioned but not discussed concerns the LLC-type supervisory liability provisions that are present in many existing LLP statutes (e.g. Delaware, Florida, Illinois, Michigan, New York for professionals only). It seems that this provision is really just statutory assurance that the tort of negligent supervision remains in existence or that the "partner signing-off" on a matter has personal liability. General tort law and other existing law provides that individuals cannot avail themselves to a liability shield for protection against their own torts (whether in corporations or, it would seem, LLPs). Any additional statutory language seems to add ambiguity and invite possible mischievous statutory interpretation. Both Tom and Sandy welcome any advice, comments or suggestions any of you might be kind enough to share on any of the above issues. If your state LLP act contains any different or unusual approach to any of these issues which you think is more satisfactory, please send it along. To be most helpful please send to addresses in the second paragraph of this memo to arrive prior to January 15, 1996. Happy Holidays! cc: Executive Council Members Supervisory Council Members -- John DeBruyn, Denver, Colorado, The Mile High City, USA (jdebruyn@usa.net) ---> LNET-LLC home page URL: http://www.stcl.edu/lnet-llc/lnet-llc.html