Monday, April 16, 2012

Preserving Limited Liability in LLPs and LLLPs

Preserving Limited Liability in LLPs and LLLPs

The 2012 Kentucky General Assembly approved amendments to the limited liability provisions of KyRUPA and KyULPA that serve to preserve the expected rule even after the limited liability status has been, at least prospectively, forfeited.
           These changes respond to the ruling of the Fifth Circuit in Evanston Ins. Co. v. Dillard Department Stores, Inc.,  602 F.3d 610 (5th Cir. 2010). A law firm, organized as a limited liability partnership (“LLP”) in Texas, infringed on the trademark of the Dillard’s Department Stores.  Evanston, the firm’s malpractice carrier, intervened seeking a declaration that its policy did not provide coverage for Dillard’s claims.  While the litigation was pending the firm dissolved and the election of LLP status was allowed to expire.  Thereafter, judgment was extended in favor of Dillard’s against the firm.  When the judgment was not collected against the now defunct firm, Dillard’s filed a complaint seeking to hold the firm’s partners personally liable on the judgment.

The defendant partners, relying upon the liability shield provision of Texas partnership law (TRPA § 3.08(a); see also 602 F.3d at 614-15), asserted they were not personally liable on the partnership’s debts in that the grounds therefore, the trademark infringement, took place while their firm was registered as a LLP.  Ruling in favor of Dillard’s, the Court determined that the language of the statute looked to when the obligation, as contrasted with the predicate conduct, arose.  Under this analysis, as the judgment was entered when the partnership was not an LLP, the partners are personally liable on the judgment.
         With the amendments made to KRS §§ 362.1-306(3) and 362.2-404(3), the analysis will be upon whether the predicate conduct, as contrasted with the finding of liability, took place while the firm was an LLP.  2012 H.B. 341, §§ 115, 121.  It will now be a more streamlined process to dissolve an LLP, avoiding, for example, the need to keep the statement of qualification in place and effective.  It will also avoid the argument that registration as an LLP after the predicate conduct but before judgment is entered may be effective to avoid personal liability.

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