Over the weekend, Larry Ribstein posted two entries at Ideoblog that are well worth reading: first, he uses my "moral responsibility" post as a springboard to discuss corporate social responsibility, and second, he expands significantly on an older post of mine on Facebook, discussing "shelf LLCs," federal diversity jurisdiction, and choice of form. Over the past week, I have been updating my Business Organizations casebook, and in the process, I have had the chance to read several of Larry's articles on these latter subjects relating to LLCs. No one writes more meaningfully in the field, and if you don't have time to read the articles, at least do yourself the favor of reading the post.

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The bankruptcy of Brobeck, Phleger & Harrison LLP is a wacky symbol of how law firms are not immune from the vacillations of the market. After riding the wave of the technology boom, and opening new offices in new dot.com territories such as Austin, Texas, Brobeck declared bankruptcy in February 2003. Profits per partner plummeted from over $1M per partner in 2000 to $245k in 2002. After suing 200 partners for over $1M each in January, the bankruptcy trustee has announced that the vast majority of the partners have settled for $22 million total. The settlements range from $4,732 to over $500,000 per partner, but merely adds up to 8% of amounts claimed by creditors.

Where is the "L" in "LLP"? The legal theory that the trustee was using the clawback this money was not that the partners were liable for the partnership's debt as partners. The trustee claims that the law firm was insolvent for much of 2001 and 2002, but that the partners took distributions and bonuses during that time.

Not all partners have settled. The former chairman, Tower Snow, who left the sinking ship in 2002, has not settled. (He left and took a group of attorneys with him to Clifford, Chance, which has also settled with the bankruptcy trustee for $5.5M over a lawsuit concerning that defection.) However, Steve Zager, a former Houston attorney with Weil, Gotshal and huge rainmaker who went to Brobeck in Austin fairly near the end, has settled.

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Bainbridge. Hobbs. Ribstein. All blogging about limited liability companies. Not surprisingly, some of their thoughts are pretty provocative. Steve Bainbridge wants to abolish veil piercing in limited liability companies (and everywhere else!). Bill Hobbs is reporting increased usage of LLCs in Texas (and in many other states). His point in collecting this data: "The data from Texas gives further creedence to the notion that the federal government's monthly Employer Survey, which focuses on large corporations, is not providing an accurate picture of job growth in America today." And Larry Ribstein wonders "why are there still corporations?" While I value all of these commentators and their contributions to our understanding of LLCs, let me tell you the law professor's dirty little secret about the law governing LLCs: it's boring.

When I started teaching in the early 1990s, many of us were wondering whether LLCs would work a revolution in the law of business organizations. By and large, their effect on legal doctrine has been almost invisible. (This is known as an invitation to Larry Ribstein to prove me wrong.) As Bill is attempting to quantify and as Larry's comment implicitly acknowledges, the most important effect of LLCs is not doctrinal, but practical. People love this business form. What we really need to know about LLCs is how people are structuring their relationships. As I have suggested elsewhere, this sort of scholarship has been taken over by financial economists, and lawyers would do everyone a service by taking it back.

P.S. Message to Bill: How about a link for Venturpreneur on HobbsOnline? I know just the place: under "Business Blogs" with Business Pundit, Professor Bainbridge, Venture Blog, etc.

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The New York Times is reporting {ID=venturpreneur; password=blawg} that the Internal Revenue Service is cracking down on questionable tax opinion letters from attorneys and accountants, another legacy of Enron. Interestingly, policy makers are finally making the connection between the increased availability of limited liability and lower professional standards:

Another move would require legal and accounting firms to police their partners through high-level oversight committees. Mr. Everson said that a breakdown in professional integrity at some firms was a core problem for tax law enforcement.

This strategy is intended to counter the weakening of self-policing resulting from a shift in the legal form of most professional firms - from partnerships to limited liability partnerships - a change that has gone virtually unnoticed by Congress in its inquiries into the spread of tax cheating.

Under the old form, each partner was liable for all acts by all partners, a powerful incentive to enforce compliance with the law. Under the new form, the liability of each partner for misconduct by other partners is limited or even eliminated, provided that the partner remains unaware of the misconduct.

I told you so. (Thanks to Bill Whitford for the pointer.)

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