The New Limited Partner Liability Shield: Has the Vanquished Control Rule Unwittingly Resurrected Lingering Limited Partner Estoppel Liability as Well as Full General Partner Liability?

Abstract

For nearly 100 years, limited partnership law has made a limited partner personally liable for part or all of the partnership's obligations only if that partner participates in the management and control of the partnership's business (control rule). Management and control are normally statutorily reserved for general partners who are personally liable for partnership obligations. Nonetheless, the partnership agreement may authorize such limited partner participation but only at the risk that the limited partner will incur personal liability. In an attempt to fortify the limited partner liability shield, the Uniform Limited Partnership Act of 2001 made it easier for a limited partner to participate in the partnership's business as a limited partner but eliminated the venerable control rule. At the same time the Act made other important changes, which make it easier for a limited partner to actually become a general partner through the implied consent of the other partners. Notably, unlike in prior Acts, a limited partner may become a general partner without the written consent of the remaining partners. Because of these sweeping changes that allow and encourage a *668 limited partner to participate in partnership business either as a limited or implied general partner, this Article argues that, notwithstanding the elimination of the control rule, a limited partner may become personally liable for partnership obligations in two ways--both related to the fact that a limited partnership is the only entity some of whose owners have a full liability shield (limited partners) and some of whose owners have no liability shield (general partners). The control rule itself is a mere byproduct of this fact and not the central cause for limited partner personal liability. Part IV(A) of this Article postulates that a limited partner may become liable for all the partnership obligations by becoming a silent general partner and that broad and full participation in management is evidence of the consent of the remaining partners to make the limited partner also a general partner. Creditor reliance is irrelevant to this determination, which focuses upon the consent and intent of the remaining partners. Part IV(B) argues that participation short of that mentioned may also create a justified and reasonable (although mistaken) belief on the part of a creditor that the limited partner is a general partner. In these cases, common law and general partnership estoppel liability will make the limited partner personally liable to those creditors who relied upon that participation to extend credit upon its belief. Thus stated, the elimination of the control rule is a hollow promise vacant of the liability protection it presupposes and further operates to encourage the very participation that may result in personal liability. Fortunately, the simple fix is for the partnership to become a limited liability limited partnership (LLLP) and eliminate the dual-track owner liability pattern responsible for liability. In such a case, a limited partner would have no personal liability even if s/he becomes a general partner. Further, detrimental creditor reliance for estoppel liability would no longer be possible. Given these possible if not probable outcomes and the likely fact that all limited partnerships will become LLLPs, the only surprising fact is that the Act did not simply make the LLLP the default liability structure. By failing to do so, it may eventually create unintended liability to those small limited partnerships least able and likely to be advised by sophisticated lawyers. If true, history will repeat itself yet again by eventually and predictably generating yet another revision of the Act to further fortify the limited partner liability shield.

Keywords: Limited Partner, Limited Partnership, Control Rule, Limited Partnership Act, Limited Liability

JEL Classification: K10, K19, K20, K29