Section 26 of New York’s Partnership Law provides that no partner of a limited liability partnership “is liable … for any debts, obligations or liabilities of … the limited liability partnership…”  (Paragraph 10(2)(b) of Ontario’s Partnership Act is to roughly the same effect – although the wording is slightly more vague.)

The New York Court of Appeals last week had to deal with an interesting argument involving this provision.  In Ederer, a lawyer was a partner in a limited liability partnership.  Surprisingly, the partnership did not have a written partnership agreement (… the cobler’s children going barefoot comes to mind …) and the subsequent dispute over distribution of the partnership’s assets and an accounting of profits as between the partners therefore fell to be decided under the general rules set out in the legislation.

The former partners argued that the wording of the legislation was broad enough to prevent the one partner from suing them personally since the partners were not liable for “any debts” of the limited liability partnership.  The five-judge majority of the Court disagreed with the former partners’ argument.  Since Section 26 is found in the section of the legislation for dealings between the partnership and third party creditors and not in the section setting out the relationship between the partners themselves (again, the same in the Ontario legislation), the limitation of liability only applied to claims of third party creditors.

Judge Read, with whom Chief Judge Kaye agreed, came to the opposite conclusion.  In Judge Read’s view, to follow the majority would be to create an unfair preference for partners.  If the partnership were to fail, for example, “ordinary” creditors of the limited liability partnership could only go after the assets of the partnership and not after the personal assets of the partners outside of the partnership (homes, cars, money, etc.).  However, in any dispute between the partners after the limited liability partnership failed, the partners would be able to look to all of the other partners’ assets whether in the partnership or outside.

The majority’s decision is certainly in keeping with the common view of lawyers in Canada and the U.S. that the provision only deals with relations between the partnership and outside creditors.  That said, an interesting point is raised by the minority and it would be just as interesting to see how the argument is dealt with by the Ontario courts when it is inevitably raised.

CALC

This entry was posted on Tuesday, January 1st, 2008 at 12:17 am and is filed under Commercial Law, Corporate Law. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.