RECENT CASES INVOLVING LIMITED LIABILITY COMPANIES …

1 RECENT CASES INVOLVINGLIMITED LIABILITY COMPANIES ANDLIMITED LIABILITY PARTNERSHIPSE lizabeth S. MillerProfessor of LawBaylor UniversitySchool of LawWaco, TexasALI-ABA LIMITED LIABILITY Entities 2008 March 19, 2008 2008 Elizabeth S. Miller, All Rights ReservediiTable of LIABILITY LIABILITY of LIABILITY Jurisdiction Over Members and of to Se of of of LLC/Failure to Form Inducement to Form LIABILITY of LLC Members and Managers/Personal LIABILITY Under Agency or Veil of Members and of Property/Interest of Duties of Members and and Access to of Operating of Interest/Buy-Out of Contributions and Contribution of , Expulsion.

2 Or Termination of and Winding or Administrative LLC - Failure to Qualify to Do LLCs - Constitutionality of Fee or LLC Governing of s s and Local Law/Statutory Business Practices of , Merger, of Sole Member of Disregarded LLC for Employment Taxes .. Member LLC and Privilege Against Self LIABILITY , Client CASES INVOLVING LIMITED LIABILITY COMPANIES AND LIMITED LIABILITY PARTNERSHIPSBy Elizabeth S. MillerFebruary, 2008 This paper summarizes CASES that have appeared since the LIMITED LIABILITY Entities 2007 program. Acumulative survey of LLP and LLC CASES may be accessed at the Baylor Law School web site at LIABILITY JurisdictionThompson v.

3 Deloitte & Touche LLP, 503 1118 ( Iowa 2007). The court held that an LLP scitizenship is determined by the citizenship of all partners and that the presence of one stateless partner thus renderedthe partnership stateless and destroyed diversity jurisdiction. Further, even if the stateless partner were excluded fromconsideration, partners who were not United States citizens destroyed diversity jurisdiction because there were also alienplaintiffs in the case, and diversity jurisdiction cannot be maintained where aliens are on opposite sides of an LIABILITY of PartnersEderer v.

4 Gursky, __ __, 2007 WL 4438937 ( 2007). A withdrawn partner sued the partnershipand its partners for breach of contract and an accounting of funds owed the withdrawn partner under a withdrawalagreement between the partner and the partnership. The partners claimed that they did not have personal LIABILITY becausethe partnership was an LLP, but the court concluded that the New York LLP LIABILITY shield only applies to debts andliabilities to third parties and does not protect partners from LIABILITY for obligations of the partnership to other partnersnor eliminate the right to an accounting.

5 The New York LLP provisions state that [e]xcept as provided by subdivisions(c) and (d) of this section, no partner of a partnership which is a registered LIMITED LIABILITY partnership is liable oraccountable, directly or indirectly (including by way of indemnification, contribution or otherwise), for any debts,obligations or liabilities of, or chargeable to, the registered LIMITED LIABILITY partnership or each other, whether arisingin tort, contract or otherwise, which are incurred, created or assumed by such partnership while such partnership is aregistered LIMITED LIABILITY partnership, solely by reason of being such a partner.

6 Subdivision (c) excludes from theliability shield any negligent or wrongful act or misconduct committed by [a partner] or by any person under his or herdirect supervision and control while rendering professional services on behalf of the LLP. Subdivision (d) allowspartners to opt out of or limit the scope of the LIABILITY protection. The court reviewed the background and history of LLPlegislation and rejected the defendants argument that the statutory protection from LIABILITY for any debts applies todebts of the partnership to the partners as well as debts to third parties.

7 The court concluded that the LIABILITY protectionunder the LLP provisions is restricted to LIABILITY to third parties because the phrase any debts is part of a provisionthat has always governed only a partner s LIABILITY to third parties and is part of Article 3 of the New York UniformPartnership Act ( Relations of Partners to Persons Dealing with the Partnership ) rather than Article 4 ( Relations ofPartners to One Another ). The court also rejected the defendants two arguments reconciling the right to an accountingin a winding up with their interpretation of the LLP provisions.

8 The defendants argued that their fiduciary duty aspartners to account to one another is different from personal LIABILITY for debts disclosed by an accounting, and theyfurther argued that a partner is only personally liable for debts disclosed by an accounting that are attributable to thatpartner s own torts or wrongful conduct or supervisory lapses. The court responded that the right to an accounting isrestitutionary in nature and that it is not LIMITED in the manner argued by the defendants. The court pointed out that thestatute confers a right to an accounting absent an agreement to the contrary and stated that partners may thus limit theright to contribution or indemnity or eliminate it altogether, but the partners in this case had no written partnershipagreement and were governed by the default provisions of the statute as interpreted by the court.

9 The dissenting opinionpointed out that a former partner is a third party where a partnership is concerned and argued that there is no good reasonto treat him more favorably than any other third party. The dissenting opinion describes how the majority s approach2results in odd and perverse results where a withdrawn partner is able to hold remaining partners personally liable for hisshare when the business of a partnership goes badly after the partner withdraws and before the partner is paid his , Inc. v. Christensen, Miller, Fink, Jacobs, Glaser, Weil & Shapiro, LLP, 150 384 (Cal.)

10 Dist. 2007) (commenting that individual partners in LLP are not vicariously liable for partnership obligations that donot arise from their personal misconduct or guarantees).City of Bridgeport v. Fucci, Inc., No. X03CV065008250S, 2007 WL 1120537 (Conn. Super. March 28,2007) (stating that partner in LLP may be held liable for his or her own negligence but other partners may not be heldliable for that partner s negligence simply because they are both members of the partnership).Campbell v. Lichtenfels, No. CV44005066S, 2007 WL 447919 (Conn. Super. Jan. 26, 2007) (imposingpersonal LIABILITY on partner for malpractice claim against partnership in absence of proof that partnership filed certificateof LIMITED LIABILITY partnership with Secretary of State).