- 50th Anniversary
- Online Edition
- Print Edition
- Donahue Lecture Series
This symposium on the Uniform Limited Partnership Act (2001) is dedicated to Martin I. Lubaroff, whose untimely death on January 1, 2001 after a year-long battle with leukemia was a great loss to the legal profession and especially to the many colleagues who worked closely with him on legislative drafting projects involving limited partnerships and other alternative business entities. A graduate of Harvard Law School, Marty, as he was called by everyone who knew him, joined the prominent Wilmington, Delaware law firm of Richards, Layton & Finger in 1966, became a partner in the firm in 1971, and at the time of his death was a senior partner and chair of the firm’s robust and highly respected alternative entity practice. . . .
”Linkage” of the law governing general partnerships to the law governing limited partnerships has received a good deal of attention in the last few years. The concept of filling the gaps in limited partnership law with the general partnership law, or ”linkage,” is embodied in provisions of the Uniform Partnership Act of 1914 (UPA), the Uniform Limited Partnership Act of 1916 (ULPA), and the Revised Uniform Limited Partnership Act of 1976 (RULPA). The promulgation of the revised Uniform Partnership Act in 1994 (RUPA) unsettled this long-standing tradition, as the drafters of RUPA made significant changes in the general partnership context and declined to address linkage in the Act. How well linkage of limited partnership law to the UPA has worked historically would be the subject of some debate. There is less disagreement between the two most vocal commentators in this area with regard to the results of linking limited partnership law to RUPA. Professor Ribstein states that linking RUPA to the limited partnership statutes will create ”possible interpretation problems,” and Dean Vestal predicts ”chaos.” Indeed, RUPA has been the catalyst for the recent thoughtful commentary in this area, and it certainly appears to have exacerbated the problems and uncertainties associated with the linkage of general and limited partnership law. . . .
The “shelf life” on uniform entity acts seems to be decreasing. The original Uniform Partnership Act (UPA) lasted eight decades, and the original Uniform Limited Partnership Act (ULPA (1916)) lasted six. In contrast, the 1976 Revised Uniform Limited Partnership Act (RULPA (1976)) warranted major revisions after just nine years (RULPA (1985)),2 and only sixteen years later NCCUSL recommended to the states that they adopt ULPA (2001) to replace RULPA in toto. NCCUSL’s Revised Uniform [General] Partnership Act—RUPA—was first approved in 1992 and went through five official versions in its first five years of existence. NCCUSL’s Uniform Limited Liability Company Act (ULLCA) was substantially amended just one year after its initial adoption, is less than a decade old, and is already subject to a NCCUSL drafting project that will propose a second generation, replacement LLC act.
The rapidity of change is not limited to unincorporated entities or to uniform acts. In the past twenty years, the ABA Corporate Law Committee has made numerous major revisions to the Model Business Corporations Act, addressing inter alia: distributions, conflict of interest transactions, limitation on director liability, derivative proceedings, closely held corporations, shareholder meetings and voting, standards of conduct and liability for directors, standards of conduct for officers, appraisal rights, fundamental changes, and domestication and conversion. . . .
The heart and soul of limited partnership law is that general partners are personally liable for partnership obligations but limited partners are not. Protecting limited partners from personal responsibility has not been as easy as this simple mission would suggest. The central focus of every promulgated uniform limited partnership act since 1916 has been to fortify the limited partner liability shield and make it more impervious to assault. So it was with the Uniform Limited Partnership Act of 1916 (ULPA 1916), the Revised Uniform Limited Partnership Act of 1976 (RULPA 1976), and the Revised Uniform Limited Partnership Act of 1985 (RULPA 1985). While each promulgated act attempted to strengthen the limited partner liability shield, various statutory expressions were retained to protect creditors who dealt with the limited partnership reasonably believing a limited partner was a general partner. . . .
In his article, The New Limited Partner Liability Shield, Professor Carter Bishop begins with a very useful history of the control rule, which ULPA (2001) has eliminated. He then suggests two sets of circumstances in which, despite the elimination of the control rule, a limited partner might face general-partner-like liability for the debts of a limited partnership. With all respect to my co-author, co-reporter, and friend, this proposition is far more interesting as a concept than substantial as a practical danger.
According to Professor Bishop, the limited partner’s danger has two aspects. The first is that a limited partner’s “participation in management and control” might cause the limited partner to be ”deemed” a general partner and thereby subject to general partner liability for all the debts of the limited partnership. In Professor Bishop’s view, this danger has two sources in the new Act. First, the new Act blurs the line between general and limited partners by permitting a person to become a general partner without being so designated in the limited partnership’s certificate of limited partnership and without having the written consent of the partners. Second, by eliminating the control rule, the new Act encourages or at least enables limited partners to participate so fulsomely in the management of the limited partnership as to appear to be general partners de facto through the partners’ implied consent. . . .
Over the past few years, the number of limited liability companies (LLCs) has grown prodigiously. As a result of the favorable tax treatment of organizations treated as partnerships, unincorporated business organizations in general—and LLCs in particular—are being used in many types of business formally served by corporations. While the tax benefits have been the factor drawing people toward the use of unincorporated business organizations, the ability of the owners to order their relationship by agreement has been an attractive characteristic of unincorporated businesses. The essence of an unincorporated business organization such as a general partnership, limited partnership, or LLC (collectively in this article, an “organization”) is that its internal structure can be established by the partners or members (collectively, ”owners”) as reflected in the partnership agreement or operating agreement (collectively, ”organic agreements”). . . .
Partnership law throughout most of the 20th century was centered upon the interrelated statutes of the Uniform Partnership Act and the Uniform Limited Partnership Act. Rules relating to general partners of general partnerships or of limited partnerships were contained in the former act. That is, the relationships among general partners in a limited partnership were governed by the Uniform Limited Partnership Act. In the promulgation of the Revised Uniform Partnership Act (RUPA) in the early 1990s, the National Conference of Commissioners on Uniform State Laws (NCCUSL) Drafting Committee responsible for that statute, with the concurrence of the American Bar Association advisors, elected to ”de-link” the “general” partnership act from the limited partnership act. Thus, the need for a self-contained limited partnership act was born. . . .
In a previous article, we stated that the drafters of unincorporated organization statutes, including the Uniform Limited Partnership Act (2001) (ULPA) and the Uniform Limited Liability Company Act (ULLCA), should proceed from a clearly articulated theory when structuring information access and disclosure provisions, and correlative fiduciary duties. One purpose of business organization law is to mediate the inherent conflict occurring when autonomous and self-interested individuals associate to carry on a collective business, and we identified three overarching theories that showed some promise in developing legal structures affecting participants in unincorporated business organizationsparty autonomy, communitarianism, and structuralism. In our view, the drafters of unincorporated business organization legislation should adopt what we termed the structural approach in defining owner and manager fiduciary duties and information disclosure rights. This approach would consider the actual relationships among the firms owners and would recognize that members can have different participation levels in the organization. Under the structural approach, when ownership and management authority converge the law should assume greater information disclosure rights and increased fiduciary duties, and when there is little or no convergence between ownership and management authority, the law should assume reduced information rights and reduced fiduciary duties. . . .
The analysis of ”entity proliferation” is complex, primarily because there are serious problems of definition and classification. It is often difficult to decide whether a modification or change in a specific business form should be viewed as the creation of a genuine
“new” business form or whether it is the same as or a “minor variation of” an older business form, perhaps with just a new wrinkle or two. If it is only “somewhat” different from an existing business form, should it be counted as a new business form at all and thus part of the process of “entity proliferation”?
A similar problem also arises under modern statutes—those involving both corporations and various types of modern unincorporated business forms. These modern business forms give considerable discretion to the organizers of a business to select the rights, powers, relationships, and limitations that the new business entity is to have. They also may have the power to resolve the fundamental question of how the income of the business entity should be taxed under the Internal Revenue Code. Consider, for example, the alternatives open to a newly-formed, plain-vanilla, closely held corporation: it may elect to be taxed as an S corporation, under which it is treated essentially as a partnership for tax purposes; or it may elect to be taxed as a C corporation, under which it is treated essentially as a corporation for income tax purposes. If we assume that there are two essentially identical closely held corporations, one of which has elected to be taxed under subchapter C and the other of which has elected to be taxed under subchapter S, should they be counted as two different business forms for purposes of “entity proliferation”? Essentially, the same issue might also arise in a limited liability company or in a limited partnership with a corporate general partner where similar elections exist. In a single person limited liability company, however, the choice is more limited: it may elect to be taxed as a corporation; or it may be treated as a nothing for tax purposes so that its income is reported on the members personal income tax return. There is no other intermediate choice. Each of these variations involving corporations or limited liability companies (LLCs) may be viewed as creating ’different” business forms; if that is accepted and extended over the entire economy and across all fifty states with their numerous variations, then we truly have ”entity proliferation” on a massive scale, and the number of “different” entities, while not infinite, would certainly be very large. . . .
Fiduciary duties of general and limited partners in limited partnerships have generated a significant number of recent cases. The most important issue has been the relationship between the partners’ default duties and detailed provisions of the partnership agreement relating to partner duties. The law has developed under the 1916, 1976 and 1985 versions of the Uniform Limited Partnership Act (ULPA), which, in turn, apply the general fiduciary duty provision of the Uniform Partnership Act (UPA). Many recent cases have been decided in Delaware under a statutory provision that explicitly makes the agreement controlling. . . .