978-1285770178 Lecture Note BL ComLaw 1e IM-Ch02 Part 2

CHAPTER 2: PARTNERSHIPS AND LIMITED LIABIITY PARTNERSHIPS 11

case to avoid similar disputes include the significance of careful drafting of the terms of a partnership

agreement and the importance of following those terms.

On the death of partner Clyde Webster, the failure of the surviving partners James Theis and Larry

Thomas to either vote to continue the business of the firm or to dissolve the partnership, according to the

partnership agreement, led to the complaint by Webster’s estate, seeking the liquidation and distribution of

the firm’s assets. The continuing failure of the surviving partners to take a vote or to dissolve the firm

according to the terms of the agreement, and those partners’ failure to act on a court’s order to dissolve the

firm, led to a trial, which resulted in a second court order to dissolve the firm and pay the plaintiff’s attorney

fees.

whole or in part.

Clyde Webster, James Theis, and Larry Thomas, who formed T&T Agri-Partners Company to own and farm

January 31, 2010 unless it was dissolved, and the death of any partner would dissolve the partnership.

Partners owning at least 120 “Partnership units” could, by “written consent,” or by vote in the case of a

partner’s death, continue the partnership. In the event of a partner’s death, the vote had to occur within 120

On the dissolution of the firm, the partnership assets were to be “liquidated and distributed.”

2. What conduct by which parties triggered this litigation? There were a number of events that led to

partnership.

The failure of the surviving partners James Theis and Larry Thomas to either vote to continue the

12 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS

whole or in part.

have averted the dispute and avoided the litigation. Alternatively, the surviving partners could have liquidated

the partnership assets and distributed the proceeds. In the facts of the case, of course, the partners did

neither, which prompted Webster’s estate to file a complaint against the other partners and the firm to

liquidate and distribute its assets.

V. Limited Liability Partnerships

Family businesses and professional services often use the limited liability partnership (LLP) form.

A. FORMATION OF AN LLP

not their own). The UPA exempts partners from personal liability for any partnership obligation, “whether

arising in contract, tort, or otherwise” [UPA 306(c)].

1. Liability from State to State

In states outside the state of an LLP’s formation, most states will probably apply, to questions of

negligence of the partners.

C. FAMILY LIMITED LIABILITY PARTNERSHIPS

A family limited liability partnership is a limited liability partnership (LLP) in which the majority of the

partners are persons related to each other. All of the partners must be natural persons or persons acting

partners.

ADDITIONAL BACKGROUND—

A History of Limited Partnerships

Limited partnerships were first used in Pisa and Florence, Italy, in the twelfth century, as a method for

parties—usually priests and nobles—to invest their money anonymously. The limited partnership spread to

whole or in part.

France and was brought to America by French explorers and settlers in Louisiana and Florida. Known as

société en commandite, the French limited partnership served as the idea for the drafters of the original

statutes in the United States. The first Limited Partnership Act was adopted by New York in 1822. By 1850,

most of the other states had adopted similar statutes. Since the introduction of these early statutes, an

important question has been the degree to which a limited partner can participate in the conduct of the

business without becoming liable, beyond the extent of his or her investment, for its obligations.

14 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS

whole or in part.

A. FORMATION OF A LIMITED PARTNERSHIP

Formation of a limited partnership is a public, formal proceeding: there must be two or more partners (at

least one of whom must be a general partner), and a certificate of limited partnership must be signed and

filed with a designated state official.

ENHANCING YOUR LECTURE—

 JURISDICTION ISSUES IN LIMITED PARTNERSHIPS



Numerous business and investment opportunities are organized as limited partnerships. Often, especially

when the business involves the Internet and technology, the limited partners live in different states and have

little contact with each another. In this situation, significant jurisdiction issues can arise. Which court has

jurisdiction in the event of a dispute? Do the courts of the state in which a limited partnership is organized

have jurisdiction over all members of the partnership, regardless of they live?

THE WERNER CASE

The question of jurisdiction over limited partners came before the court in Werner v. Miller Technology

Management, L.P.a A New York resident, Marc Werner, invested $250,000 as a limited partner in Interprise

Technology Partners (ITP), a Delaware limited partnership. ITP was formed in 1999 to invest in information

technology companies (companies engaged in creating, storing, and exchanging information on computers).

Under the partnership agreement, the general partner, Miller Technology Management (MTM), was to

manage the business with the advice and assistance of an advisory board that consisted of five of ITP’s

limited partners.

In 2002, Werner sued MTM and ITP’s advisory board, claiming a pattern of self-dealing in breach of their

fiduciary duties of care, disclosure, and loyalty. As it turned out, in three years of operation, ITP had invested

over $45 million in companies that were affiliated with its general partner (MTM) and the limited partners on

ITP’s advisory board. For example, ITP paid over $17.5 million for consulting services from a company called

Answerthink, Inc., which was founded and controlled by the five members of ITP’s advisory board. In fact, four

of the individuals on ITP’s advisory board held top positions in Answerthink for which they were paid salaries

of over $500,000 per year. These conflicts of interest were never disclosed to Werner or to any of the other

limited partners in ITP.

“MINIMUM CONTACTS” REQUIRED

Werner contended that the defendants used their positions of control and influence over ITP to engage in

transactions that benefited them personally but were detrimental to ITP. Although the self-dealing nature of

these transactions seems apparent, the court first had to determine whether Delaware had jurisdiction over

the defendants. The advisory board defendants claimed that they did not have “minimum contacts” with

Delaware because they were not residents and did not transact any business in that state. Werner argued

that because the advisory board was created to participate in the management of a Delaware limited

partnership, Delaware had jurisdiction.

Ultimately, the court held that Delaware did not have jurisdiction over the limited partners on ITP’s

advisory board. Limited partners are not legally entitled to participate in management. Even if ITP’s advisory

CHAPTER 2: PARTNERSHIPS AND LIMITED LIABIITY PARTNERSHIPS 15

board had done more than advise MTM, the court held that Werner had not shown that these defendants had

any business contacts with Delaware, such as entering contracts or attending meetings. Thus, the court

dismissed the case against the limited partners on ITP’s advisory board, but it allowed the plaintiff’s claim

against the general partner (MTM).

FOR CRITICAL ANALYSIS

Given that the general partner and the limited partners on the advisory board engaged in the same

pattern of self-dealing and nondisclosure, why did the court have jurisdiction only over the general

partner? What policy considerations underlie the court’s decision?

a. 831 A.2d 318 (Del. 2003).

B. LIABILITIES OF PARTNERS IN A LIMITED PARTNERSHIP

The liability of a limited partner for the firm’s obligations is limited to the capital that the partner

contributes to the firm [RULPA 502]. A limited partner who participates in the management of the firm will

be as liable as a general partner, however [RULPA 303]. If the sole general partner is a corporation, no

one is personally liable for the firm’s obligations.

1. Events That Cause Dissolution

The dissociation, bankruptcy, death, retirement, or mental incompetence of a general partner will

lead to the dissolution of the firm unless the other partners agree to continue the business [RULPA

702, 704, 705]. In the case of a limited partner, none of these occurrences will dissolve the firm. A

3. Valuation of Assets

Disputes commonly arise about how the partnerships assets should be valued and distributed and

whether the business should be sold.

E. LIMITED LIABILITY LIMITED PARTNERSHIPS

16 INSTRUCTOR’S MANUAL FOR BUSINESS LAW: COMMERCIAL LAW FOR ACCOUNTANTS

1. Obtain copies of several partnership agreements and distribute them to students. Ask the students to indi-

cate which passages reflect the fiduciary duties owed by each of the partners to the other partners.

2. In the absence of a written partnership agreement, ask students what factors they would look for in decid-

ing whether a group of individuals engaged in a common enterprise should be classified as partners. Is there

any single factor that would be enough to justify classifying an enterprise as a partnership or must

there be several factors that together have the “look and feel” of a partnership?

3. A court has the power to order the dissolution of a partnership when it believes that such an action is war-

ranted. Ask students to discuss some of the situations in which a court might order that a partnership be ter-

minated. Do adequate guidelines exist to help courts make informed decisions in such matters? What

are some of the problems that might arise when deciding whether a partnership should be dissolved?

4. Explain that creditors are often reluctant to permit a debtor such as a partnership to contract out of

personal liability due to the fact that a partnership’s assets following dissolution may be insufficient to satisfy

all of its creditors’ claims (or difficult to reach). Many lenders, for example, insist that partners personally

guarantee loans to the partnership so that the lender will have recourse to the personal assets of the partners.

5. There are two important points that might be emphasized regarding the formation of a partnership. First,

one of the essential elements is that a partnership must be carried on for a profit. Nonprofit entities do not

qualify. Second, the sharing of profits is prima facie evidence of a partnership, whether or not the parties

intended to form a partnership. Students should be reminded, however, that simply sharing profits is not

enough. There needs to some shared control over the business.

6. Ask students whether the roles played by general partners and limited partners in a limited partnership

are truly distinct or instead merely arbitrary designations. Is it reasonable to assume that limited partners

at least indirectly “manage” the business of a limited partnership by funding the partnership and

paying the salary of the general partner? Would it be more useful to make all limited partners

personally liable on partnership debts and thus avoid arbitrary court decisions about what forms of

conduct do or do not constitute managerial activities? If so, what effect would this have on the

investment world?

7. Tell students that to remember the distinction between general partners and limited partners, they might

find it helpful to think of a general partner’s management and control rights as general and a limited partner’s

participation rights as limited. Similarly, a general partner’s liability can be described as general and the

limited partner’s liability as limited.

Cyberlaw Link

What are the legal and policy issues for the design, development, and operation of a partnership’s

Web site? Should online businesses adopt a limited liability form of business organization? Why or

why not?

DISCUSSION QUESTIONS