Ederer v. Gursky

Brief Fact Summary.

Ederer (Plaintiff), a partner in a limited liability partnership (LLP), brought suit against the LLP and its partners (Defendant) for breach of a partnership withdrawal agreement and for funds owed under it; the partners (Defendant) moved to dismiss, arguing that the state’s LLP statute shielded them from personal liability for the LLP’s obligations.

Synopsis of Rule of Law.

A general partner of a limited liability partnership is not shielded from personal liability for breaches of the partnership’s or partners’ obligations to one another.

Facts.

Ederer (Plaintiff), a partner in a limited liability partnership (LLP), brought suit against the LLP and its partners (Defendant) for breach of a partnership withdrawal agreement and for funds owed under it.  However, no partnership agreement was in place.  The individual partners (Defendant) moved to dismiss, arguing that the state’s LLP statute (Partnership Law § 26(b)) shielded them from personal liability for the LLP’s obligations.  The lower courts denied the motion.

Issue.

Is a general partner of a limited liability partnership shielded from personal liability for breaches of the partnership’s or partners’ obligations to one another? 

Held.

(Read, J.)  No.  A general partner of a limited liability partnership is not shielded from personal liability for breaches of the partnership’s or partners’ obligations to one another.  Statutory construction rules the matter.  Section 26 as originally enacted, and its prototype, section 15 of the Uniform Partnership Act (UPA), made general partners jointly and severally liable to non-partner creditors for all wrongful acts and breaches of trust committed by their partners in carrying out business on behalf of the partnership and jointly liable for all other debts to third parties.  As in many states, this state’s legislature enacted limited liability partnership legislation, which removed such vicarious liability of general partners to non-partner creditors.  This provision is found in Section 26(b).  Section 26(c) excludes from § 26(b)’s liability shield “any negligent or wrongful act or misconduct committed by [a partner] or by any person under his or her direct supervision and control while rendering professional services on behalf of [the] registered limited liability partnership.â€Â  The partners (Defendant) argue that because § 26(b) eliminates “any debts†without distinguishing between debts owed to a third party or to the partnership or each other, debts to Ederer (Plaintiff ) are covered and they are shielded from the debts.  However, this argument ignores that the phrase “any debts†is part of a provision of S 26 that has always governed only a partner’s liability to third parties.  Therefore, without very clear legislative intent otherwise, “any debts†refers to debts owed to third parties, but not to other partners or the partnership.  Although it is true, as argued by the partners (Plaintiff), that the LLP form in this state offers, as intended, limited liability partners the same protections that shareholders in professional corporations and members of limited liability companies are offered, this protection comes in the form of greater protection from vicarious liability to third parties.  It has never been suggested that the LLP in this state, or any other state, was ever intended to shield partners from their obligations to the partnership or other partners.  Because there was no written partnership agreement in this case, the LLP law governs.  Affirmed.

Dissent.

(Smith, J.)  The language of § 26(b) is clear, providing that “no partnership which is a registered limited liability partnership is liable . . . for ay debts, obligations or liabilities of . . . the registered limited liability partnership . . . whether arising in tort, contract or otherwise.â€Â  The only exceptions are contained in § 26(c) and the court should not create exceptions that the legislature has not already created.  While the majority draws a distinction between liability to third parties and liabilities to former partners, it is a false distinction because former partners are third parties where the partnership is concerned, and under the statute there is no good reason to treat such former partner third parties more favorably than any other third party.  This does not mean that partners have any exemption from their fiduciary obligations, but if a former partner claims his partnership share, he should be able to reach the personal assets of partners who are no more to blame than he is, and have been no more unjustly enriched than he has.  Where, as in this case, the partnership’s business has gone bad through no fault of any partner, there is no reason why a former partner should be allowed to collect his debt when other third-party creditors may not.  If the partnership’s business has gone bad due to an insolvent partner, it would be even more perverse to enable him to proceed against the other innocent partners.  If the partnership in this case had remained a professional corporation, there would be no question that the individual shareholders would not be liable for the corporation’s obligation to a former shareholder; therefore, there is no reason that the partners of an LLP should have an obligation that the shareholders of a PC do not.

Discussion.

As pointed out by the court itself, the LLP law provides default rules that the partners can in many instances, contract away.  For example, partners could agree to limit the right of contribution or indemnification, or rather exclude it altogether.