Thursday, February 25, 2016

On Describing The Limited Liability Partnership . . . .

Our Kentucky "brother," Tom Rutledge, sent me a link to a super blog post yesterday on Mortgage Grader Inc. v. Ward & Olivo, a limited liability partnership case currently before the New Jersey Supreme Court.  Tom's focus in his post was the limited liability aspect of the case, which is fascinating--and more than a bit unsettling for those practicing in jurisdictions like New Jersey and Kentucky that require law firms organizing limited liability partnerships to maintain malpractice insurance.  The question before the court: whether, in the absence of an express provision in the partnership statute, the failure of a law firm organized as a limited liability partnership to maintain required malpractice insurance results in the loss of the partnership's limited liability status.  The trial court ruled that the lapse of malpractice insurance caused a loss of limited liability status; the appeals court reversed.

But Tom also mentions another aspect of the case in his post that I want to call out here.  Specifically, he notes references in the appellate court opinion to the conversion of a partnership to a limited liability partnership.  Here's what he says on that point:

One potentially disturbing aspect of the language used by the Court of Appeals and in the oral argument is the notion that the loss of LLP status and the treatment of the firm as a general partnership is some sort of conversion. But it isn’t. An LLP is a general partnership that has elected into a special status – it is still a general partnership but for the rule of partner limited liability. . . .

This comment reminded me of co-blogger Josh Fershee's super-helpful obsession (maybe too strong a word?) with "limited liability corporation" as an incorrect judicial (and other) descriptor of the limited liability company business form.  (See, e.g., his December 2015 post here.)  And far be it from me to disagree with either of these guys in making their respective points about these labeling inaccuracies!  

As a separate point, I want to call out the fact that this area of partnership law can be important both for bar examinations (thinking of all those folks suffering through that test this week . . .) and IRL.  In fact, I was asked a question recently about the Tennessee provision on limited liability elections by a BARBRI student.  (Little-known fact: I teach the Tennessee BARBRI segments on agency, unincorporated entities, and personal property.)  The student's question did not inappropriately refer to a conversion of a partnership into a limited liability partnership, but it did point out several differences in Tennessee law in this area that I want to mention.

Here are the generalities of the BARBRI student question:

A three-partner law firm organized as a general partnership is considering registering the firm as a limited liability partnership. Two of the partners discuss the matter and file to register the firm as a limited liability partnership in Tennessee while the third partner is out of the country for a month on hiatus--unreachable.  The two partners on U.S. terra firma assume that the third partner would also desire this change.  The registration filing is made.

Of course, hilarity ensues, and somebody sues them all. Is the registration of limited liability status effective, or must all the partners agree and sign? There is no other partnership agreement, rule, or anything else mentioned in the question about partnership voting requirements.

The answer?

Unlike the rule under the Revised Uniform Partnership Act ("RUPA") generally, Tennessee's version of the RUPA allows for a majority vote for limited liability partnership registration by default:

The registration of a general partnership or limited partnership as a registered limited liability partnership must be approved in the case of a general partnership by a majority of the partners or as otherwise provided in the partnership agreement . . .

Tenn. Code Ann. § 61-1-1001 (West).

So, I note two quick things here about Tennessee law in this area.  First, Tennessee law does not provide for the qualification of partnerships as limited liability partnerships--the term used in Section 1001 0f the RUPA.  The appropriate term for that process under Tennessee law is registration.  Second, Tennessee law provides for a majority vote in support of the limited liability election by default, not unanimity or "the vote necessary to amend the partnership agreement except, in the case of a partnership agreement that expressly considers obligations to contribute to the partnership, the vote necessary to amend those provisions" (as provided in Section 1001(b) of the RUPA).  But any way you slice it, Tom is right that there is no conversion here.  

Why is all this significant?  These kinds of issue underscore a number of important themes that intersect with the teaching of business associations law--among them:  the utility of reading statutes closely, the peril of relying on a uniform act provision when there is "real law" involved, and the value in appreciating the differences in terminology when advising clients or addressing the judiciary, the legislature, and other audiences.  Finding the right legal rule to apply is crucial.  Also, words matter! And we, as business law instructors, can help drive those points home.

http://lawprofessors.typepad.com/business_law/2016/02/on-describing-the-limited-liability-partnership-.html

Business Associations, Joan Heminway, Joshua P. Fershee, Partnership, Teaching | Permalink

Comments

Thanks so much for covering this. I've not spent a lot of time dealing with LLP. Does the registration subject the partnership to Tennessee franchise and excise tax similar to other limited liability entities?

Posted by: Tom N. | Feb 25, 2016 7:35:05 AM

Thanks for the great question, Tom N. The answer is yes. The most recent F&E tax guide notes this on page 7:

"Any person doing business in Tennessee is liable for the franchise and excise tax. In this regard, “person” or “taxpayer” means every corporation, subchapter S corporation, Limited Liability Company, professional limited liability company, registered limited liability partnership, professional registered limited liability partnership, limited partnership, cooperative, joint-stock association, business trust, regulated investment company, real estate investment trust, state-chartered or national bank, or state-chartered or federally chartered savings and loan association. [Tenn. Code Ann. Section 67-4-2004]"

The guide can be found at https://www.tn.gov/assets/entities/revenue/attachments/feguide.pdf.

Posted by: joanheminway | Feb 25, 2016 9:07:57 AM

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