LIMITED PARTNERSHIPS

3 Questions for the Exam;

When is limited partner liable?

What is the scope of his liability?

What happens when you make a corporation the general partner of the LP?

A limited PS has two different kinds of partners:

1) General partners generally liable for all the debts and obligations of the PS

2) Limited partners liability limited to the amount of capital they contributed

  • Unless: The limited partner participates in the control of the business
  • A limited partner does not participate in control of the business, solely by doing one or more of the following:
  • (ULPA §303 Safe Harbors—nonexclusive list—things a limited partner can do without being considered a general partner)
  • Being a contractor, agent, employee of a general or limited partner
  • Being an officer director, shareholder or a general partner that is a corporation
  • Consulting with & advising a general partner
  • Acting as a surety, or guaranteeing or assuming debt or specific obligations of the LP
  • Pursuing a derivative action
  • Requesting or attending a meeting of partners
  • Proposing, approving, or disapproving—by voting or otherwise, one or more of the following matters:
  • Dissolution & winding up
  • Sale, lease/ transfer of partnership assets
  • Incurrence Debt other than in the ordinary course of business
  • Change in the nature of the business
  • Admission/ removal of partner
  • Transactions involving conflicts of interest between any partner and LP
  • Amendment to PS agreement
  • Most courts said that in a limited partnership context, that the mere right to control was not enough- they had to actually participate in control- that is cutting the limited partner a lot of slack (ZOSO case old ULPA—pre laundry list)
  • A limited partner who knowingly permits his name to be used in the name of the LP is liable to creditors
  • RELIANCE TEST ULPA §303A:
  • If a limited partner is determined to have “participated in the control of the business”3rd party can recover from that limited partner only if:
  • That particular creditor relied on the belief that the limited partner was a general partner

1)Court examine this on a creditor by creditor basis

  • Only if that particular creditor relied

2)Court examine this on a limited partner by limited partner basis

  • Only the limited partner that the creditor relied on is liable (not all the other limited partners)

POLICY: This hurts third parties

1)laundry list of things limited partner can do without exercising control (trumping a lot of cases where individual lialbity was imposed on a limited partner for taking control)

2)a limited partner that takes control is not automatically subject to General partner liability- the 3rd party (creditor) must rely, they must believe that the limited partner was a general partner

Pre Filing liability

What do we do if someone thinks they are limited partner, but in fact the LP has not been formed at all when the person enters into a K with a 3rd party?

§ ULPA 304 If a person erroneously but in good faith believes themself to be a limited partner, in order to avoid general partner liability, they must upon discovering the mistake:

  • File with the sec of state immeditately; OR
  • Withdraw from the partnership, filing a declaration of withdraw
  • BUTfiling/ withdraw does not apply retroactivelyThe partner will still be held generally liable for liability incurred before filing/ withdraw

Corporation as General Partner

What happens when you make a corporation the general partner of the LP?

This raises 3 issues:

1)Both sides of the equation: The corp acting as the general partner and is controlled by officers directors—these same officers and directors may also be limited partners

  1. Do limited partners exercise a degree of control to be considered general partners when they exercise that control while wearing their corporate general partner officers and directors hats
  2. Can they be on both sides of the equation (SOKIE)
  3. Texas Supreme Court Said NO!
  4. Quickly overturned by the Texas Leg
  5. RULPA- explicitly permits this situation by including its list of safe harbors§303b1

2)Changes in ControlControl of the corporate general partner can easily change- therefore changing control of the limited partnership itself without actually changing the GP itself

  1. (normally you have to amend the articles or have a majority vote etc—so the limited partners may get screwed here by having a Corp for the sole General Partner)

3)There may be a conflict of interest between the Corp general partner and the limited partnership

  1. Do officers and directors owe a fiduciary duty not only to their corporation but to the limited partners as well?
  2. Majority of Jurisdictions YES
  3. Minority NO

Most courts have imposed a fid duty on the corporate officers/ controllers of the General partner to the limited partners themselves