February 22, 2015
New Article: The Limited Liability Partnership in Bankruptcy
Posted by Christine Hurt

I hope everyone is having a great Oscar Sunday!  Scholastica and ExpressO tell me that I have successfully submitted my latest paper, but I think they mean that I have successfully uploaded my latest paper.  Anyway, months before it is published (if at all), you can get <i>The Limited Liability Partnership in Bankruptcy</i> here.  Here is the abstract:

Brobeck. Dewey. Howrey. Heller. Thelen. Coudert Brothers. These brand-name law firms had many things in common at one time, but today have one: bankruptcy. Individually, these firms expanded through hiring and mergers, took on expensive lease commitments, borrowed large sums of money, and then could not meet financial obligations once markets took a downturn and practice groups scattered to other firms. The firms also had an organizational structure in common: the limited liability partnership.
In business organizations classes, professors teach that if an LLP becomes insolvent, and has no assets to pay its obligations, the creditors of the LLP will not be able to enforce those obligations against the individual partners. In other words, partners in LLPs will not have to write a check from personal funds to make up a shortfall. Creditors doing business with an LLP, just as with a corporation, take this risk and have no expectation of satisfaction of claims by individual partners, absent an express guaranty. In bankruptcy terms, creditors look solely to the capital of the entity to satisfy claims. While bankruptcy proceedings involving general partnerships may have been uncommon, at least in theory, bankruptcy proceedings involving limited liability partnerships have recently become front-page news. The disintegration of large, complex LLPs, such as law firms, does not fit within the Restatement examples of small general partnerships that dissolve fairly swiftly and easily for at least two reasons. First, firm creditors, who have no recourse to individual partners’ wealth, wish to be satisfied in a bankruptcy proceeding. In this circumstance, federal bankruptcy law, not partnership law, will determine whether LLP partners will have to write a check from personal funds to satisfy obligations. Second, these mega-partnerships have numerous clients who require ongoing representation that can only be competently handled by the full attention of a solvent law firm. In these cases, the dissolved law firm has neither the staff nor the financial resources to handle sophisticated, long-term client needs such as complex litigation, acquisitions, or financings.  These prolonged, and lucrative, client matters cannot be simply “wound up” in the time frame that partnership law anticipates. The ongoing client relationship begins to look less like an obligation to be fulfilled and more like a valuable asset of the firm.
Partnership law would scrutinize the taking of firm business by former partners under duty of loyalty doctrines against usurping business opportunities and competing with one’s own partnership, both duties that terminate upon the dissolution of the general partnership or the dissociation of the partner. However, bankruptcy law is not as forgiving as the LLP statutes, and bankruptcy trustees view the situation very differently under the “unfinished business” doctrine. The bankruptcy trustee, representing the assets of the entity and attempting to salvage value for creditors, instead seeks to make sure that assets, including current client matters, remain in partnership solution unless exchanged for adequate consideration, even if the partners agree to let client matters stay with the exiting partners. This Article argues that the high-profile bankruptcies of Heller Ehrman LLP, Howrey LLP, Dewey & LeBeouf, LLP, and others show in stark relief the conflict between general partnership law and bankruptcy law. The emergence of the hybrid LLP creates an entity with general partnership characteristics, such as the right to co-manage and the imposition of fiduciary duties, but with limited liability for owner-partners. These characteristics co-exist peacefully until they do not, which seems to be at the point of dissolution. Then, the availability of limited liability changes partners’ incentives upon dissolution. Though bankruptcy law attempts to resolve this, it conflicts with partnership law to create more uncertainty.

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March 03, 2014
Call for Paper: AALS Section on Agency, Partnerships LLCs, and Unincorporated Associations
Posted by Gordon Smith

Bringing Numbers into Basic and Advanced Business Associations Courses: 

How and Why to Teach Accounting, Finance, and Tax

Business planners and transactional lawyers know just how much the “number-crunching” disciplines overlap with business law.   Even when the law does not require unincorporated business associations and closely held corporations to adopt generally accepted accounting principles, lawyers frequently deal with tax implications in choice of entity, the allocation of ownership interests, and the myriad other planning and dispute resolution circumstances in which accounting comes into play.  In practice, unincorporated business association law (as contrasted with corporate law) has tended to be the domain of lawyers with tax and accounting orientation.  Yet many law professors still struggle with the reality that their students (and sometimes the professors themselves) are not “numerate” enough to make these important connections.  While recognizing the importance of numeracy, the basic course cannot in itself be devoted wholly to primers in accounting, tax, and finance.

The Executive Committee will devote the 2015 annual Section meeting in Washington to the critically important, but much-neglected, topic of effectively incorporating accounting, tax, and finance into courses in the law of business associations.  In addition to featuring several invited speakers, we seek speakers (and papers) to address this subject.  Within the broad topic, we seek papers dealing with any aspect of incorporating accounting, tax, and finance into the pedagogy of basic or advanced business law courses.

Any full-time faculty member of an AALS member school who has written an unpublished paper, is working on a paper, or who is interested in writing a paper in this area is invited to submit a 1 or 2-page proposal by May 1, 2014 (preferably by April 15, 2014).  The Executive Committee will review all submissions and select two papers by May 15, 2014.  A very polished draft must be submitted by November 1, 2014.  The Executive Committee is exploring publication possibilities, but no commitment on that has been made.  All submissions and inquiries should be directed to Jeffrey M. Lipshaw, Associate Professor, Suffolk University Law School [email protected] (617-305-1657).

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February 16, 2012
Default Fiduciary Duties in Delaware LLCs
Posted by Gordon Smith

The Delaware Limited Liability Company Act provides:

(b) It is the policy of this chapter to give the maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements.

Del. Code Ann. tit. 6, §18-1101. 

With regard to fiduciary duties, the DLLCA allows for complete waiver. See, e.g., Gerber v. Enter. Prods. Holdings, LLC, 2012 WL 34442, at *13 (Del. Ch. Jan. 6, 2012) ("Alternate entity legislation reflects the Legislature's decision to allow such ventures to be governed without the traditional fiduciary duties, if that is what the ... governing document provides for, and allows conduct that, in a different context, would be sanctioned.").

But what if the participants in an LLC are silent about fiduciary duties? Should the courts impose fiduciary duties, even though the DLLCA does not expressly provide for them? 

In 2009 Chief Justice Myron Steele of the Delaware Supreme Court wrote a law review article arguing "that default fiduciary duties violate the strong policy favoring freedom of contract enunciated by Delaware's legislature" and that "the costs of default fiduciary duties outweigh the minimal benefits that they provide." Freedom of Contract and Default Contractual Duties in the Delaware Limited Partnerships and Limited Liability Companies, 46 Am. Bus. L.J. 221, 223-224 (2009). This prompted Larry Hamermesh to organize an online symposium on the topic of Default Fiduciary Duties in LLCs and LPs over at the The Institute of Delaware Corporate & Business Law.

In Auriga Capital Corp. v. Gatz Properties, LLC, Chancellor Strine confronts the issue of default fiduciary duties in a manager-managed LLC and reaches a different conclusion than Chief Justice Steele’s. Chancellor Strine's composed a section of the opinion under the heading "Default Fiduciary Duties Do Exist in the LLC Context," analogizing to fiduciary law in the corporate context. The text and history of the DLLCA provide some important clues, but Strine's analysis also depends heavily on the structure of the relationship between an LLC's manager and the LLC's members:

The manager of an LLC –- which is in plain words a limited liability “company” having many of the features of a corporation –- easily fits the definition of a fiduciary. The manager of an LLC has more than an arms-length, contractual relationship with the members of the LLC. Rather, the manager is vested with discretionary power to manage the business of the LLC.

While Professor Ann Conaway objects to Chancellor Strine's opinion on several grounds, I think Chancellor Strine is on solid ground. Professor Conaway purports to identify several "errors" in the opinion, none of which seems like an error to me, though, admittedly, each involves a contestable interpretation of the DLLCA. Facing uncertainty in the governing statute, Chancellor Strine analyzes the structure of the LLC and interprets the statute accordingly. He is taking the approach I advocated in The Critical Resource Theory of Fiduciary Duty:

The theory proposed here is animated by the view that fiduciary relationships form when one party (the "fiduciary") acts on behalf of another party (the "beneficiary") while exercising discretion with respect to a critical resource belonging to the beneficiary. The italicized typeface highlights the three core requirements of a fiduciary relationship. Each requirement plays an important role in distinguishing fiduciary from nonfiduciary relationships. When combined, these requirements show how the duty of loyalty that is the essence of fiduciary duty protects beneficiaries against opportunistic behavior by fiduciaries.

Note the last sentence of the passage from Chancellor Strine's opinion, quoted above (taking some liberty to imply the beneficiary): "the manager is vested with discretionary power to manage the business of the LLC [on behalf of the members]." Fiduciary duties serve a useful function in contexts like these. Participants in a Delaware LLC are permitted to waive the duties, but when they don't, courts should assume they apply ... just as they have done in similar relationships for hundreds of years.

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The Scholarship of Professor Larry Ribstein
Posted by Gordon Smith


AALS Section on Agency, Partnerships, LLCs, and Unincorporated Associations

The Scholarship of Professor Larry Ribstein

2013 AALS Annual Meeting

New Orleans, LA

Larry Ribstein was a friend to many and a colleague to all of us in the academy.  With his untimely passing, he leaves behind a pioneering and influential body of work across a vast range of subjects, including partnerships and limited liability companies, corporate and securities law, choice of law, financial regulation, white-collar crime, legal ethics, and the legal profession.

The AALS Section on Agency, Partnership, LLCs, and Unincorporated Associations seeks to honor Larry’s legacy by focusing on his work at the 2013 AALS Annual Meeting in New Orleans.  We are soliciting papers on a broad range of issues dealing with Larry’s partnership, LLC, and/or “uncorporation” scholarship.  Among the topics that might be addressed are:  

•      An evaluation of the impact of Larry’s scholarship in a particular area;

 •      A discussion of issues or positions that Larry changed his mind on over time, and how;

 •      An examination of how Larry’s work in other areas informed his work in the unincorporated sphere, and vice-versa;

 •      “Larry as blogger” and the influence of his web postings

Submission procedure: A draft paper or proposal may be submitted via email to Professor Douglas Moll at [email protected]

Deadline date for submission: April 1, 2012

Form and length of paper; submission eligibility: There is no requirement as to the form or length of proposals.  Faculty members of AALS member and fee-paid law schools are eligible to submit papers. 

Registration fee and expenses: Program participants will be responsible for paying their annual meeting registration fee and expenses.

How will papers be reviewed?: Papers and proposals will be selected after review by the Section’s Executive Committee.

Will the program be published?: The section plans to contact the law reviews at schools where Professor Ribstein taught in the hopes of publishing the papers submitted for the meeting as a symposium.  At this time, however, no guarantees of publication can be made.

Contact for submission and inquiries:     Professor Douglas Moll, University of Houston Law Center. 713-743-2172 or [email protected]

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October 28, 2007
Two Posts by Larry Ribstein
Posted by Gordon Smith

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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February 23, 2005
Settlement in the Brobeck Bankruptcy
Posted by Christine Hurt

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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March 26, 2004
LLCs: What We Really Need to Know
Posted by Gordon Smith

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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December 29, 2003
Professional Responsibility & Limited Liability
Posted by Gordon Smith

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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