Chapter 32
LIMITED PARTNERSHIPS & LIMITED LIABILITY COMPANIES
A. Limited Partnerships
1. Definition
2. Formation
a. Filing of Certificate
b. Name
c. Contributions
d. Defective Formation
e. Foreign Limited
Partnerships
3. Rights
a. Control
e. Voting Rights
b. Choice of Associates
c. Withdrawal
c. Contribution
d. Operating Agreement
e. Foreign Limited Liability
Companies
2. Rights of Members
a. Profit and Loss Sharing
b. Distributions
c. Withdrawal
d. Management
e. Voting
f. Information
g. Derivative Actions
h. Assignment of LLC Interest
3. Duties
Cases in This Chapter
Alzado v. Blinder, Robinson and
Co., Inc.
Wyler v. Feuer
Taghipour v. Jerez
Estate of Countryman v. Farmers
Coop. Ass’n
In the Matter of 1545 Ocean Ave, LLC
Chapter Outcomes
After reading and studying this chapter, the student should be able to:
Distinguish between a general partnership and a limited partnership.
Identify those activities in which a limited partner may engage without
forfeiting limited liability.
Distinguish between a limited partnership and a limited liability
company.
TEACHING NOTES
*** Chapter Outcome ***
Distinguish between a general partnership and a limited partnership.
A. LIMITED PARTNERSHIPS
The limited partnership has been a very appealing investment vehicle
because it confers limited liability and tax advantages. But unlike general
partnerships, limited partnerships are statutory creations. Before 1976, the
governing statute in all States except Louisiana was the Uniform Limited
Partnership Act (ULPA), which was promulgated in 1916. The National
Conference of Commissioners on Uniform State Laws developed a Revised
Uniform Limited Partnership Act (RULPA), which was promulgated in 1976.
According to its preface, the RULPA is “intended to modernize the prior
uniform law while retaining the special character of limited partnerships as
compared with corporations.”
In 1985, the National Conference revised the RULPA “for the purpose of more
effectively modernizing, improving and establishing uniformity in the law of
limited partnerships.” The 1985 Act is substantially similar to the 1976
Definition
A limited partnership is a partnership that has one or more general partners
and one or more limited partners and is formed in compliance with the laws
of a state. Limited partnerships differ from general partnerships in three
basic ways:
(1) A statute providing for the formation of limited partnerships must be in
e3ect.
(2) The limited partnership must substantially comply with the requirements
of that statute.
Formation
Formation of a limited partnership requires compliance with the applicable
statute, in contrast to the simple procedure for forming a general
partnership.
Filing of Certi%cate — The partners must swear to and sign a certi=cate
which must then be =led with the appropriate public o>cial.
Name — A limited partner’s surname may not be used in the name of the
partnership (unless a general partner has the same name.) The partnership
name must contain the words “limited partnership.”
Contributions — The RULPA provides that partners may contribute to the
firm cash, property or services, or a promissory note or other obligation to
contribute cash or property or to perform services.
*** Chapter Outcome ***
Identify those activities in which a limited partner may engage without forfeiting
limited liability.
Rights
Control — Limited partners cannot participate in the management of the
business, and they do so at the risk of losing their limited liability. The
RULPA, have, however, allowed limited partners to advise and consult the
general partners about the business as long as they do not participate in the
day-to-day management of the partnership. The RULPA also provides a
listing of other activities a limited partner may participate in without losing
limited liability.
CASE 32-1
ALZADO v. BLINDER, ROBINSON & CO., INC.
Supreme Court of Colorado, 1988
752 P.2d 544
http://scholar.google.com/scholar_case?
q=752+P.2d+544&hl=en&as_sdt=2,34&case=5412987996095530695&scilh=0
Kirshbaum, J.
[In 1979, Lyle Alzado, a former professional football player, and two business associates formed
Combat Promotions, Inc., to promote an eight-round exhibition boxing match in Denver, Colorado,
between Alzado and Muhammad Ali, a former world champion boxer.] Ali had agreed to engage in
the match on the condition that prior to the event his attorneys would receive an irrevocable letter of
credit guaranteeing payment of $250,000 to Ali.
Combat Promotions, Inc. initially encountered difficulties in obtaining the letter of credit.
Ultimately, however, Meyer Blinder (Blinder), President of Blinder-Robinson, expressed an interest
in the event. Blinder anticipated that his company’s participation would result in a positive public
the partnership agreement provided expressly that the letter of credit was to be paid off as a
partnership expense.
On the same day, June 25, 1979, Alzado executed a separate guaranty agreement with
Blinder-Robinson. This agreement provided that if Ali drew the letter of credit, Alzado personally
would reimburse Blinder-Robinson for any amount Blinder-Robinson was unable to recover from
Combat Associates under the terms of the limited partnership agreement. As security for his
agreement, Alzado placed a general warranty deed to his residence, an assignment of an investment
Approximately one week before the date of the match, Alzado announced that he might not
participate because he feared he might lose the assets he had pledged as security for the guaranty
agreement. Alzado informed Blinder of this concern, and the two met the next day in
Blinder-Robinson’s Denver office. Tinter, Kauffman and Ali’s representative, Greg Campbell, were
also present. Subsequently, on July 14, 1979, the event occurred as scheduled.
Few tickets were sold, and the match proved to be a financial debacle. Ali drew the letter of
credit and collected the $250,000 to which he was entitled. Combat Associates paid
Blinder-Robinson only $65,000; it did not pay anything to Alzado or, apparently, to other creditors.
In January of 1980, Blinder–Robinson filed this civil action seeking $185,000 in damages plus
costs and attorney fees from Alzado pursuant to the terms of the June 25, 1979, guaranty agreement.
Alzado denied any liability to Blinder-Robinson and * * * also filed two counterclaims against
* * *
Alzado next contends that the Court of Appeals erred in concluding that Blinder-Robinson’s
conduct in promoting the match did not constitute sufficient control of Combat Associates to justify
the conclusion that the company must be deemed a general rather than a limited partner. We disagree.
A limited partner may become liable to partnership creditors as a general partner if the limited
* * *
* * * Any determination of whether a limited partner’s conduct amounts to control over the
business affairs of the partnership must be determined by consideration of several factors, including
the purpose of the partnership, the administrative activities undertaken, the manner in which the
entity actually functioned, and the nature and frequency of the limited partner’s purported activities.
* * * The record here reflects that Blinder–Robinson used its Denver office as a ticket outlet,
gave two parties to promote the exhibition match and provided a meeting room for many of Combat
Associates’ meetings. Blinder personally appeared on a television talk show and gave television
* * *
We * * * affirm the judgment of the Court of Appeals insofar as it reverses the judgments
entered at trial in favor of Alzado on his first counterclaim against Blinder-Robinson.
Voting Rights — The partnership agreement may grant voting rights to
limited partners, but this may jeopardize the limited partner’s limited liability
if the rights exceed the RULPA’s safe harbor provision.
Choice of Associates — Addition of a new partner, general or limited,
requires the unanimous agreement of all partners, and the partnership
records must be amended to reffect this change.
Withdrawal — A general partner may withdraw at any time, with written
notice. A limited partner may withdraw only in accordance with the
partnership agreement, or if the agreement does not provide, upon 6
months’ written notice
Assignment Of Partnership Interest — Limited and general partners may
assign their partnership interest, however, the assignee will become a
substituted limited partner only if all other partners agree or the certi=cate
provides for this right.
condition of the limited partnership.
Derivative Actions — A limited partner may bring an action to recover a
judgment on behalf of the limited partnership if the general partners refuse
to do so.
CASE 32-2
WYLER v. FEUER
California Court of Appeal, Second District, Division 2, 1978
85 Cal.App.3d 392, 149 Cal.Rptr. 626
http://scholar.google.com/scholar_case?q=149+Cal.Rptr.
+626&hl=en&as_sdt=2,34&case=9054451800672347003&scilh=0
Fleming, J.
Defendants Cy Feuer and Ernest Martin, associated as Feuer and Martin Productions, Inc. (FMPI),
have been successful producers of Broadway musical comedies since 1948. Their first motion
picture, “Cabaret,” produced by Feuer in conjunction with Allied Artists and American Broadcasting
Company, received eight Academy Awards in 1973. Plaintiff Wyler is president and largest
shareholder of Tool Research and Engineering Corporation, a New York Stock Exchange Company
based in Beverly Hills. Prior to 1972 Wyler had had no experience in the entertainment industry.
[In 1972, FMPI bought the motion picture and television rights to Simone Berteaut’s best-selling
books about her life with her half-sister Edith Piaf. To finance a movie based on this novel, FMPI
sought a substantial private investment from Wyler. In July 1973, Wyler signed a final limited
partnership agreement with FMPI. The agreement stated that Wyler would provide, interest free, 100
percent financing for the proposed $1.6 million project, in return for a certain portion of the profits,
Early in October, Feuer met Wyler in Paris and requested an extension of the deadline for
production financing to December 30, so that defendants could take advantage of distributor
negotiations in process and recoup their profit percentage and their producer’s fee. Wyler said he had
already financed the picture and refused to extend the deadline, thereby maintaining his profit
percentage at 50 percent.
[A year after its release in 1974, the motion picture proved less than an overwhelming success—
costing $1.5 million but making only $478,000 in total receipts. From the receipts, Wyler received
$313,500 for his investment. FMPI had failed to obtain an amount even close to the $850,000
required for production financing. Wyler then sued i Feuer, Martin, and FMPI for mismanagement of
These characteristics—limited investor liability, delegation of authority to management, and
fiduciary duty owed by management to investors—are similar to those existing in corporate
investment, where it has long been the rule that directors are not liable to stockholders for mistakes
made in the exercise of honest business judgment [citations], or for losses incurred in the good faith
performance of their duties when they have used such care as an ordinarily prudent person would
use. [Citation.] By this standard a general partner may not be held liable for mistakes made or losses
incurred in the good faith exercise of reasonable business judgment.
According all due inferences to plaintiff’s evidence, as we do on review of a nonsuit, we agree
with the trial court that plaintiff did not produce sufficient evidence to hold defendants liable for bad
business management. Plaintiff’s evidence showed that the Piaf picture did not make money, was not
Liabilities — Limited liability means that a limited partner is not liable for
partnership losses beyond the amount of her contribution, assuming that the
partnership was established correctly and that the limited partner has not
participated in the management of the business.
The general partners of a limited partnership have unlimited external
liability, unless the limited partnership is a limited liability limited partnership
(LLLP).
NOTE: See Figures 32-2 and 32-1: Comparison of General and Limited Partners
and Liability of Limited Partners.
Dissolution
Extinguishing a limited partnership involves three steps: dissolution, winding
up, and termination.
Causes — The death, withdrawal, or bankruptcy of a limited partner will not
dissolve a limited partnership. The RULPA speci=es what events will e3ect a
dissolution: lapse of a stated time period, happening of stated events,
unanimous written consent of all partners, withdrawal of a general partner
(assuming all remaining partners do not agree to continue), and judicial
decree.
*** Chapter Outcome ***
Distinguish between a limited partnership and a limited liability company.
B. LIMITED LIABILITY COMPANIES
Limited liability companies (LLC) are another form of unincorporated
business association. Prior to 1990 only two states had statutes permitting
LLCs. Now, all states have done so.
Prior to 1995 there was no uniform statute for states to base their LLC
legislation; (and few states has adopted the uniform statute). Therefore, the
enabling legislation varies from state to state. Nevertheless, the LLC
statutes generally have some common characteristics.
A limited liability company is a non-corporate form of business organization
Formation
Almost all of the States permit an LLC to have only one member. Once
formed, an LLC is a separate legal entity that is distinct from its members,
who are normally not liable for its debts and obligations.
Filing — LLCs are formed by a central =ling of articles of organization in a
designated State o>ce.
Name — Generally, must include the words “limited liability company” or the
abbreviation “LLC.” A number of States also permit the use of the name
limited company and the abbreviation LC.
Rights of Members
Includes financial interests (distributions) and management interests (all
other rights granted by the operating agreement and statute).
profit and Loss Sharing — Determined by the operating agreement or
allocated on the basis of the members’ contributions. Absent an agreement,
the default is to share profit equally.
Distributions — Of cash or other assets; determined by the operating
agreement or allocated on the basis of the members’ contributions.
Withdrawal — Under most statutes, a member may withdraw and demand
payment of her interest upon giving the notice specified in the statute or the
LCC’s operating agreement.
CASE 32-3
TAGHIPOUR v. JEREZ
Supreme Court of Utah, 2002
2002 UT 74, 52 P.3d 1252
http://scholar.google.com/scholar_case?
q=52+p.3d+1252&hl=en&as_sdt=2,34&case=12865993038128465710&scilh=0
Russon, J.
Namvar Taghipour, Danesh Rahemi, and Edgar Jerez (“Jerez”) formed a limited liability company
known as Jerez, Taghipour and Associates, LLC (the “LLC”), on August 30, 1994, to purchase and
develop a particular parcel of real estate pursuant to a joint venture agreement. The LLC’s articles of
organization designated Jerez as the LLC’s manager. In addition, the operating agreement between
the members of the LLC provided: “No loans may be contracted on behalf of the [LLC] * * * unless
authorized by a resolution of the members.”
On August 31, 1994, the LLC acquired the intended real estate. Then, on January 10, 1997,
Jerez, unbeknownst to the LLC’s other members or managers, entered into a loan agreement on
behalf of the LLC with Mt. Olympus. According to the agreement, Mt. Olympus lent the LLC
$25,000 and, as security for the loan, Jerez executed and delivered a trust deed that conveyed the
After Mt. Olympus dispersed the funds pursuant to the agreement, Jerez apparently
misappropriated and absconded with the $20,000. Jerez never remitted a payment on the loan, and
because the other members of the LLC were unaware of the loan, no loan payments were ever made
by anyone, and consequently, the LLC defaulted. Therefore, Mt. Olympus foreclosed on the LLC’s
property. The members of the LLC, other than Jerez, were never notified of the default or pending
foreclosure sale.
On June 18, 1999, Namvar Taghipour, Danesh Rahemi, and the LLC (collectively, “Taghipour”)
filed suit against Mt. Olympus and Jerez. Taghipour [sought] against Mt. Olympus [a] declaratory
judgment that the loan agreement and subsequent foreclosure on the LLC’s property were invalid
because Jerez lacked the authority to bind the LLC under the operating agreement. * * * Mt.
Olympus moved to dismiss * * * asserting that pursuant to Utah Code Section 48–2b–127(2), the
loan agreement documents are valid and binding on the LLC since they were signed by the LLC’s
manager. This section provides:
[Citation.] The trial court granted Mt. Olympus’ motion and dismissed Taghipour’s claims
against Mt. Olympus, * * *.
Taghipour appealed to the Utah Court of Appeals. Taghipour argued that the trial court’s
interpretation of Section 48–2b–127(2) was in error, inasmuch as it failed to read it in conjunction
with Utah Code Section 48–2b–125(2)(b), which provides that a manager’s authority to bind a
limited liability company can be limited by the operating agreement. * * *
[Citation.] The Utah Court of Appeals affirmed the trial court, concluding that the plain language
* * *
To determine whether the loan agreement in this case is valid and binding on the LLC, it must
first be determined whether this case is governed by Section 48–2b–127(2), which makes certain
kinds of documents binding on a limited liability company when executed by a manager, or Section
48–2b–125(2)(b), which provides that a manager’s authority to bind a limited liability company can
be limited or eliminated by an operating agreement.
* * * “[W]hen two statutory provisions conflict in their operation, the provision more specific in
application governs over the more general provision.” [Citations.]
* * *
Section 48–2b–127(2) is the more specific statute because it applies only to documents explicitly
enumerated in the statute, i.e., the section expressly addresses “instruments and documents” that
provide “for the acquisition, mortgage, or disposition of property of the limited liability company.”
* * *
In this case * * * Jerez was designated as the LLC’s manager in the articles of organization.
Jerez, acting in his capacity as manager, executed loan agreement documents, e.g., the trust deed and
trust deed note, on behalf of the LLC that are specifically covered by the above statute. [Citation.] As
such, these documents are valid and binding on the LLC. * * *
* * * Accordingly, we affirm.
Voting — Most of the LLC statutes specify the voting rights of members,
subject to a contrary provision in an LLC’s operating agreement. In some
States the default rule for voting follows a partnership approach (each
member has equal voting rights) while the other States take a corporate
approach (voting is based on the financial interests of members).