Unincorporated Business Law Prof Blog

Texas Closes Door on Ederer Liability to Other Partners in LLPs

In Ederer v. Gursky, 9 N.Y.3d 514, 881 N.E.2d 204, 851 N.Y.S.2d 108, 2007 N.Y. Slip Op. 09960 (2007), the New York Court of Appeals interpreted the New York LLP shield to allow claims by partners for breach of obligations of other partners, or of the partnership.  See my earlier post, Liability of LLP partners To Each Other. 

Section 47 of Senate Bill 1442 amends Section 152.801(a) of the Texas Business Organizations Code to read as follows:

     (a) Except as provided by Subsection (b) or the partnership agreement, a partner in a limited liability partnership is not personally liable to any person, including a partner, directly or indirectly, by contribution, indemnity, or otherwise, for a debt or obligation of the partnership incurred while the partnership is a limited liability partnership.

Oddly, the Legislature chose to add "or the partnership agreement" to the introductory exception.  Like the RUPA, Texas has a central provision regarding partner autonomy and its limits.  TBOC § 152.002.  While the Legislature may have felt a "belt and suspenders" approach was necessary to catch the attention of the courts, it seems bad policy to start dropping in references to the partnership agreement.

posted by Gary Rosin

Contracting re Fiduciary Duties in Texas UBEs

Yet another way in which unincorporated business entities (UBEs) under the Texas Business organizations code ("TBOC") differ is the ability to contract as to fiduciary duties.

General Partnerships (Chapter 152).  Section 152.002(B)(2)-(4) are parallel to RUPA section 103(b)(3)-(5).  That is, no eliminations of the Section 152.204-.207 duties, but excluded specific activities or standards, so long as not manifestly unreasonable.

Limited Partnerships (Chapter 153).  Chapter 153 is a RULPA-type statute, so Section 153.003(a) generally incorporates Chapter 152, and a general partner has the same rights, powers and restrictions, and liabilities as a partner in a general partnership, § 153.152.

Limited Liability Companies (Chapter 101).  Section 101.401 is based on the early version of Delaware LLC 18-1101(c)(2):  the company agreement may "expand or restrict" duties, including fiduciary duties, and related liabilities.  As suggested by the Delaware Supreme Court in Gotham Partners, L.P. v. Hallwood Realty Partners, L.P.,817 A.2d 160, expanding or restricting probably does not include eliminating.  Id. at  166-68.  Such an interpretation would be consistent with Section 152.002(b)(2-(4), but without an express "manifestly unreasonable" limitation.  Would a "manifestly unreasonable" limitation be the equivalent of an elimination?

posted by Gary Rosin

More Texas & Creditors of Owners

We have already noted the preemption of Sections 9.406 & 9.408of the Texas UCC and the elimination of the right to foreclose a charging order on an ownership interest in a Texas LLC.  The rights of creditors of owners of interests in Texas unincorporated business entities (UBEs) under the Texas Business Organizations Code ("TBOC") vary widely, depending on the form of UBE:

• Ownership interests in all forms of Texas UBEs subject to TBOC--(general) partnerships, limited partnerships and LLCs--are excluded from 9.406 and 9.408 of the Texas Business & Commerce Code.  TBOC §§ 101.106(c) & 154.001(d) (added by Sections 39 and 57 of Senate Bill 1442) (TBOC Chapter 154 is one of two mini-hubs that apply to both (general) partnerships and limited partnerships).
• TBOC chapter 152, and its predece

ssor statute, deleted the concept of charging orders, as applied to interests in (general) partnerships.  Compare TBOC §§ 152.401-.406 with TBOC §§ 101.108-.112 and TBOC §§ 153.251-.257.  As a result, the traditional remedies--attachment, garnishment, etc.--are available to creditors of owners of interests in (general) partnerships.

A charging order is the exclusive remedy for a judgment creditor of an owner to reach an ownership interests in either a limited partnerships or an LLC.  TBOC §§ 101.112 (LLCs) & 153.256 (limited partnerships).

Senate Bill 1442 amended TBOC Section 101.112 by adding Subsection (c), which prohibits foreclosure of charging orders on ownership interests in LLCs.  SB 1442, § 40.  [Correction]  A similar change was made to TBOC Section 153.256 (charging orders against ownership interests in limited partnerships).  SB 1442 § 53. [Hat tip to Stephen Paine for reminding me of the dangers of posting when you are tiered!.

In part, these differences are a matter of path dependence (adoption of new statutes at different times).  I had hoped that the most-recent legislative session might harmonize creditor remedies.  Instead, they beefed up the limited partnership and LLC charging order provisions, and left general partnerships hanging. 

To paraphrase the old saw, when the legislature is session, you need to lock-up your spouses, children and pets!  That's why we only let them meet for five months every two years!

posted by Gary Rosin
(with edits 06/16/2009)