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Abstract:
The core fiduciary duties of care and loyalty have long been the most important and controversial theories of director liability in corporate law. The Delaware response to exploding director care liability has been a robust business judgment rule eroding the duty of care itself coupled later with statutory complete exculpation for duty of care liability. Shareholder efforts to circumvent those director protections have placed increasing pressure on the express exceptions to statutory exculpation in general and good faith in particular. The anti-exculpatory role of good faith arguably expanded by a narrow self benefit conceptualization of the duty of loyalty. That pressure is most recently expressed in the 2006 release of In re The Walt Disney Company Derivative Litigation, a nearly ten-year saga testing the conceptual limits of good faith while concluding Disney directors were not liable. While the Disney directors were arguably negligent, the shareholder plaintiffs failed to prove the directors acted in bad faith and thus absent actionable personal benefit, the directors' decisional conduct was protected by the business judgment rule as well as statutory exculpation. In this Article, Professor Bishop canvases the modern contours of the core corporate fiduciary duties of care and loyalty to challenge conventional wisdom and demonstrate that the peripheral duty of good faith is a distinct concept but not a separately actionable fiduciary duty. Delaware statutory exculpation and indemnification law as well as its business judgment rule lean heavily on a requirement of conceptual good faith as the minimum price of protected director conduct. Professor Bishop argues, properly conceived, bad faith operates to deconstruct those protections, a more proper and limited role for a duty extremely difficult to define and prove. Moreover, confining good faith to this role allows it to serve a justified policy goal designed to increase liability for unjustifiable behavior bordering on intentional misconduct. By stripping away exculpation, indemnification and business judgment rule protections, bad faith reinvigorates the core duty of care to an ordinary negligence standard requiring only proof of a breach of the ordinary negligence duty, corporate harm, and causation. Professor Bishop argues that the good faith reinvigoration of duty of care liability requires further re-examination of the 1993 Delaware Supreme Court opinion in Cede II, a case that conflated liability standards for a breach of the fiduciary duties of care and loyalty by allowing directors to escape care liability, like loyalty liability, by showing that the director conduct was "entirely fair" to the corporation and its shareholders. The "entire fairness standard" more appropriately addresses the fairness of director personal benefit and conflict of interest transactions. While statutory exculpation makes this error irrelevant in most cases, statutory exculpation is not available upon proof of bad faith thus mandating judicial correction of Cede II to avoid using an irrelevant entire fairness test to shield care liability. Given these corporate fiduciary duty missteps and the trend to adopt statutes approving ex ante contractual elimination of the duties of care and loyalty in unincorporated business organizations including limited liability companies, Professor Bishop concludes that careful attention is required to prevent these corporate errors from invading unincorporated law, particularly in Delaware.

fiduciary duty, good faith, limited liability company, corporation, partnership, business judgment rule, duty of care, duty of loyalty, entire fairness test, Disney

Abstract:
In July, 2006, the National Conference of Commissioners on Uniform State Laws approved Re-ULLCA - the Revised Uniform Limited Liability Company Act. The product of a three-year drafting process, heavily influenced by 13 advisors appointed by the ABA, the new Act brings major innovations to the law of limited liability companies. This article, written by the two co-reporters for the drafting committee: (i) explains why the Conference decided to draft a new LLC statute, reviews the process through which the Conference produced and approved the new Act, and describes the Act's basic architecture; (ii) highlights the Act's major innovations; and (iii) provides a roadmap through the Act's intricate and all-important provisions concerning the operating agreement.

The following specific topics are addressed: the operating agreement; the decision to deviate from RUPA and un-cabin fiduciary duty; returning good faith and fair dealing to the concept's contract law moorings; the question of an owner's legitimate self-interest; reformulating the duty of care; the question of the shelf LLC; statutory apparent authority (de-codifying apparent authority by position); statements of authority by position; templates for management structure; charging orders; a remedy for oppressive conduct; derivative claims and special litigation committees; organic transactions - mergers, conversions, and domestications; the decision to eschew the series LLC; and the lot of mere transferees.

limited liability company, LLC, operating agreement, uniform law, charging order, shelf, law reform, NCCUSL, apparent authority, closely held, oppression, derivative, special litigation committee

Abstract:
All states permit a limited liability company (SMLLC) to be formed with only one member and asset protectionists seek shelter for clients under its protective liability umbrella to shield assets from the obligations of its only member. Surprisingly, member creditor access to the assets of the SMLLC depends upon the context of the obligation. A secured creditor of a member can protect itself by obtaining the member's advance consent to admit the creditor as a substituted member should the creditor foreclose and purchase the interest. The substituted member may then liquidate the SMLLC. Since federal bankruptcy laws trump both state LLC law and operating agreement, creditors of a member filing bankruptcy will have access to the assets of the SMLLC but at the expense of sharing asset values with other creditors. Federal tax liens have a superior but often dubious status achieved by assuming the SMLLC assets are in some cases the property of the only member. However, rules outside secured creditor, federal bankruptcy and tax rules are not as favorable. A transfer of the membership interest to an unsecured creditor who purchases at a foreclosure sale generally allows the creditor to assume ownership of only the right to receive future distribution when and if made. Unfortunately, unless the transferor debtor consents to admit the transferee as the substitute member, the transferor generally continues as the only member with control over the timing of the distributions. Thus, while the debtor member no longer owns a financial interest in the SMLLC, that member nevertheless guards the entity holding the assets and is in a position to favor its own economic interests over those of the creditor owner of the entire economic interest. While fraudulent transfer and conveyance laws are generally ineffective, the reverse piercing doctrine offers limited protection. This Article traces the plight of the creditor in these unique circumstances and suggests statutory clarifications.

Abstract:
Given the diverse charitable mission and high rate of unpaid donor and volunteer service to the charitable nonprofit board of directors, few would seriously suggest that a nonprofit corporate director's fiduciary "duty" of care to oversee management should exceed that of a for-profit corporate director counterpart. Most for-profit corporate directors duty of care breaches are protected by the business judgment rule and statutory exculpation clauses. However, systemic abdication of directorial duties can result in ruinous unprotected "liability" to for-profit directors through shareholder derivative suits. Unfortunately, abdication and dereliction are far more common on volunteer nonprofit charitable boards. Except in the largest charitable nonprofit corporations, directors often view their role as advisory rather than supervisory. Consequently, one might expect parallel duties of care to have even more ruinous effects in the charitable nonprofit corporate sector. In fact, this is not true because most charitable nonprofit corporations do not have shareholders, donors lack standing to bring fiduciary duty suits, and while state attorney general offices have standing, they lack resources and interest to enforce the duty of care. So, while for-profit director abdication is far more common, it is far less likely to result in director liability.

So, what is the significance of a charitable nonprofit director fiduciary "duty" of care if it does not result in any liability consequences? First and foremost, the duty properly explained, is eventually internalized tending to create aspirational care behavior in spite of a lack of breach liability. Secondly, every charitable nonprofit corporation is classified either as a private foundation or a public charity for federal tax purposes. These classifications attach monetary liability significance to management engaged self-dealing and excess benefit transactions that become monstrous if uncorrected after detection. Moreover, these self-dealing and excess benefit transactions create potential monetary liability to charitable nonprofit directors who "knowingly participate" in such transactions. Specifically, even though charitable nonprofit directors are not directly involved in the culpable manager's behavior, the charitable directors will incur monetary penalties if they had a "duty" to act. The failure must be due to deliberate inattention but the intent may be inferred from the fact that knowledge of the improper behavior would have likely developed had the director not been systematically absent from regular directors meetings.

The 2008 revision draft of the Model Nonprofit Corporation Act creates fiduciary duties of care for charitable nonprofit corporate directors comparable to those in for-profit corporations. The 2008 draft of the American Law Institute Principles of the Law of Nonprofit Organizations adopts a similar approach. While neither drafting project offers compelling reasons for creating and imposing largely symbolic fiduciary "duties" of care, this Article suggests that philosophical, moral and legal liability bases do exist and indeed depend upon the existence of such a duty. Absent the duty, not only would charitable nonprofit corporate director management oversight behavior likely deteriorate, scandalous management behavior would also likely expand unchecked. The unique combination of state law duty with federal liability detection and liability appears the most efficient and best model as it seldom embroils the finances of the nonprofit corporation for enforcement such as shareholder derivative suits.

An assorted array of other solutions to charitable directorial abdication are in process as well but all have critical defects examined in the context of the charitable nonprofit corporation. Following the Enron-era scandals, the federal Sarbanes-Oxley Act was enacted in 2002 to increase publicly traded for-profit corporate director independence from management, management accountability to the board, and information transparency regarding director management oversight. These measures add superficial luster to the state law fiduciary duties by making objectionable management activity and lax board oversight more apparent to shareholders and the public. But those provisions do not apply to charitable nonprofit corporations without members or shareholders, the primary target of this Article and the largest group of nonprofit organizations. While a few states have adopted similar provisions and a few large national charitable nonprofit corporations have voluntarily elected to comply with Sarbanes-Oxley, the enforcement paradox continues to plague directorial accountability for lax charitable management oversight.

Notwithstanding federal charitable director liability, the system could be vastly improved, particularly at the management level. While the same federal tax law creates even more monstrous liability against participating managers for uncorrected self-dealing and excess benefit transactions, the initial penalty is low and lacks deterrence effect because of low detection rates. Higher initial penalties would discourage transactional misbehavior even if not detected. Finally, managers are flatly prohibited from self-dealing transactions in the context of private foundations but only prohibited from "excess benefit" transactions in the context of public charities. Given the scandalous behavior in several notorious charitable management abuse cases, the absolute prohibition applicable to private foundations ought to be extended to public charities. Finally, greater public information transparency would mobilize the press to examine readily accessible documents for violations. News stories can alert the IRS to otherwise undetected violations. So both private foundations and public charities of an identified minimum size should be required to post charitable exemption applications and annual IRS filings on their own websites.

Abstract:
Until the release of Revenue Ruling 88-76, only two states adopted limited liability company legislation, Wyoming in 1977 and Florida in 1982. In 1975, Alaska rejected adoption of the first limited liability company legislation based on concerns regarding the tax classification of a limited liability company. When those concerns were resolved in Revenue Ruling 88-76, all fifty states and the District of Columbia adopted legislation by 1996, only eight years later. However, Revenue Ruling 88-76 did not resolve whether a single member limited liability company should be classified as a sole proprietorship or a corporation. That matter was not resolved until 1997 with the release of the check-the-box regulations. Again, within a few years all states had amended their limited liability company legislation to permit a single member limited liability company. Further still, while Delaware adopted series limited liability company legislation in 1996, the check-the-box regulations did not address the classification of a series within a limited liability company. Since 1996 only six other states have followed suit. The 2008 release of Private Letter Ruling 200803004 classifying a series in the same manner as any other business entity under the check-the-box regulations signals a potential amendment of those regulations to embrace the series. If so, once again, all remaining states might be expected to provide for a series. These enormous events raise important transparency questions regarding where disregarded entities exist for state law purposes. Stated another way, what is the state of member status liability in these forms. As this Article explores, the tax classification and state statutory amendments have given rise to a proliferation of these forms while failing to address fundamental state law liability concerns that separate owners from the obligations in these forms.

Abstract:
The Massachusetts Limited Liability Company Act (LLC Act) and Registered Limited Liability Partnership Act (LLP Act) link Massachusetts to a national movement proliferating new unincorporated business entities with corporate-styled liability shields. Limited liability companies (LLCs) and limited liability partnerships (LLPs) offer business owners a unique combination of business entity features not available in any other business entity - a corporate-styled liability shield and partnership tax status in which profits are passed through the entity and taxed directly to the business owners.

The availability of these new business organizations in Massachusetts generates several new and important issues. For example, most existing corporations will not convert from their corporate form to one of these new forms because of the tax cost associated with liquidating a corporation. These new forms are not practical for businesses with publicly-traded ownership interests. Because more states have adopted LLCs than LLPs and limited liability limited partnerships (LLLPs), firms with interstate business activity may prefer the LLC form.

Each new business form generates a host of drafting considerations unique to that particular business form. LLCs, LLPs, and LLLPs with at least two owners may be formed by filing a simple LLC certificate or LLP registration with the state secretary. Although simple to create, these new business forms are taxed like partnerships because they resemble partnerships rather than corporations. However, just as a partnership should never be formed without a written partnership agreement setting forth the terms of the business arrangement among the partners, these new business organizations should not be created without a similar agreement.

Limited liability company, limited liability partnership, LLC, LLP, Massachusetts

Abstract:
History has a way of repeating itself. The Delaware Supreme Court stated in 1963 in Graham v. Allis-Chalmers Manufacturing Company that a director owes the corporation the duty of care of an ordinarily careful and prudent person in similar circumstances. In an important 1984 clarification, the court articulated in Aronson v. Lewis the important business judgment rule limitation that it is presumed that in making a business decision, the directors of a corporation acted on an informed basis, in good faith, and in the honest belief that the action taken was in the best interests of the company. However, soon thereafter in its 1985 Smith v. Van Gorkom decision, the Delaware Supreme Court imposed supposedly ruinous liability on directors for a duty of care violation involving a failure to properly investigate and determine a fair merger price of their public company. The Delaware legislature swiftly enacted permissive legislation in 1986, essentially permitting the articles to eliminate monetary damages for directorial duty of care violations. The Delaware business judgment rule had been inadequate to protect the directors, placing the future of directors, and therefore corporate governance, in serious doubt. Who would serve facing catastrophic personal liability? But statutory exculpation provided theoretical limits rooted in the exculpatory language itself. Rather than directly eliminating liability for duty of care violations, the statute stated a general rule of no liability subject to important exceptions.

First, monetary liability for duty of loyalty violations could not be eliminated, that not being the object of the statute. But director loyalty seemingly caused little difficulty in most cases, at least where the directors had no significant personal interest in the outcome of a particular transaction. Since the 1939 Guth v. Loft, Inc. case, Delaware loyalty infractions almost always involved improper personal pecuniary gain. Second, acts or omissions not in good faith could also not be eliminated.

A director must act or fail to act with a pure heart in the best interests of the corporation. But a pure heart may not be realistic when coupled with an empty mind. Matters seemed manageable until the Delaware Supreme Court suggested in 1993, in Cede & Co. v. Technicolor, that a fiduciary duty "triad" existed, including care, loyalty, and good faith. While the business judgment rule "presumed" good faith, adequate allegations of bad faith could overcome both the business judgment rule and statutory exoneration, as well as provide an independent basis of liability.

In 1996, matters remained under control when the Delaware Supreme Court decided In re Caremark International, Inc. Derivative Litigation, articulating that only "systemic" failures to exercise oversight responsibility in the face of known problems establish a prerequisite lack of good faith. Troubled waters lie ahead. The reason? As a duty independent of care and loyalty, good faith was at once both inarticulate and difficult to apply. In its 2001 decision in Emerald Partners v. Berlin, the Delaware Supreme Court attempted to reconcile the pretrial implications of the interaction of the Aronson business judgment rule, statutory exculpation, and the triad by requiring an entire fairness hearing on cases overcoming the Aronson business judgment rule before considering the resulting further effects of statutory exculpation. However, a 1996 derivative suit litigation filed by Brehm, a shareholder of the Walt Disney Corporation, was beginning its tortuous journey through the Delaware Chancery and Supreme Courts. The case alleged that the Disney directors had breached their fiduciary duties in approving both a lucrative employment agreement with Michael Ovitz and a later no-fault termination of his employment. Some fourteen disappointing months later, Ovitz parted company with Disney, with approximately $140 million. Mercifully, the case ended in 2006 with a shareholder loss in In re Walt Disney Company Co. Derivative Litigation.

The Delaware Supreme Court valiantly attempted to make sense of the role of good faith in the triad. Acknowledging the Chancery Court‘s connection between bad faith and loyalty, Justice Jacobs articulated three potential categories of bad faith in the post-exculpatory world: (i) actionable subjective bad faith involving a subjective intent to harm the corporation; (ii) nonactionable duty of care involving only gross negligence; and (iii) actionable intentional dereliction of duty or conscious disregard for duty (abdication). Soon after Disney, the Delaware Supreme Court closed the door on the "abdication" role for good faith near the end of 2006 in Stone v. Ritter. In an en banc decision, the Delaware Supreme Court finally conflated the "triad" and stated that good faith in abdication cases in the Disney and Caremark sense is a "subsidiary element" of the duty of loyalty. While good faith may be doctrinally described as part of a triad of duties articulated in the exculpatory statute, it is not a basis of independent duty. At the same time, the court acknowledged that the duty of loyalty is no longer confined to cases involving a personal financial interest. By freeing loyalty to assume a more natural role, including those involving bad faith, this Article suggests that the Delaware Supreme Court has simplified the law while making it more predictable.

Abstract:
The fiduciary duty impact theory developed by the United States Supreme Court in its 1972 Byrum opinion has been one of the most important and controversial developments in estate taxation involving transfers to family controlled entities. In 2003, the Tax Court Strangi III opinion sent shock waves throughout the estate planning community when it became the first case to reject the family limited partnership estate planning technique by expanding the reach of IRC Section 2036. The expansion was largely achieved by rejecting the 1972 Byrum fiduciary duty impact theory that had been utilized, with IRS sanction, to negate the application of Section 2036. Faced with mounting failures on other theories, the Service reversed course and turned to Section 2036 with an attempt to factually distinguish Byrum. In many ways, Strangi III presented government friendly facts. Albert Strangi made a deathbed transfer of 97% of his personal and investment assets to a family limited partnership formed and managed by his son-in-law under a power of attorney. In this highly charged set of facts, the constraining fiduciary duty feature of Byrum was not well served. There was no transfer of an operating business with a substantial unrelated minority ownership interest to add substance and real meaning to the fiduciary duties. No matter how strenuously argued, fiduciary duties owed in a friendly family limited partnership are simply too rarely enforced to add meaning. Unfortunately, armed with its Strangi III victory, the Service ramped up the Byrum-slayer theory and applied it to totally different facts in Bongard and was rewarded with an unwarranted victory. Unlike the deathbed investment asset transfers in Strangi III, the Bongard transfers were by a healthy businessman of his ownership in a successful operating business with a very substantial cadre of unrelated Japanese corporations. In this Article, Professor Bishop analyzes the origins and legacy of the theory to challenge conventional Bongard-styled wisdom. Professor Bishop chronicles the statutory development of IRC § 2036 and the fiduciary duty impact theory to demonstrate that the theory arose to deal with specific instances of control over property transferred to family members rather than transfers to a family entity controlled by the transferor. For this reason, the theory was not initially utilized to attack transfers to controlled entities. The theory's recent deployment arose because of the failure of other theories and not because of its logical force. As a result Bongard and its likely progeny are aberrations and not a proper basis for extending the theory to contravene a valid and existing Supreme Court Byrum opinion. As in 1976 when it enacted Section 2036(b) to negate Byrum in the context of transfers of voting stock while retaining the vote, Congress and not the Courts must remedy the alleged estate tax abuse in the form of family limited partnerships.

family limited partner, FLP, estate tax, estate planning, fiduciary duty, Byrum, Bongard

Abstract:
Last year, an article published in this magazine focused on the charging order as "the Exclusive Remedy Against a Partnership Interest" and announced the "[s]hocking [r]evelation" that ULPA (2001)--the new Uniform Limited Partnership Act--undermines the "exclusive remedy" limitation on charging orders. The authors asserted categorically that, "from an asset protection perspective, the 2001 Act is considerably less protective of a partner's partnership interest than the 1976 Act." Elizabeth M. Schurig & Amy P. Jetel, A Charging Order Is the Exclusive Remedy Against a Partnership Interest: Fact or Fiction?, Prob. & Prop. 57, 58 (Nov./Dec. 2003).

As this article will show, the rumors of disaster are unfounded, and ULPA (2001)'s provisions on charging orders are nothing to be feared. To support this calming assertion, this article will explain: (1) the history and purpose of the charging order remedy, (2) the consequences of charging order foreclosure (including the possibility of redemption), and, most importantly from a practical perspective, (3) the current state of the law governing charging orders, foreclosure, and limited partnerships. Like the November/December article, this article leaves aside the separate issues that arise when secured creditors exercise rights and remedies under UCC Article 9.

charging order, limited liability company, LLC, partnership, corporation, taxation

Abstract:
The National Conference of Commissioners on Uniform State Laws (Conference) adopted the Uniform Limited Liability Company Act (ULLCA) in 1994. To coordinate with subsequent developments in federal tax guidelines regarding manager-managed limited liability companies (LLCs), the Conference adopted minor changes to ULLCA's dissolution provisions in 1995. More recently, the Internal Revenue Service (IRS) announced a proposal to release all unincorporated business organizations from the burden of complying with its federal tax classification regulations distinguishing partnerships from corporations. Because state LLC laws were drafted to comply with the soon to be anachronistic classification regulations, every state will eventually consider whether to amend its laws to accommodate this new flexibility. Given the obvious advantages of uniform state laws governing interstate business activities of LLCs, the ULLCA will receive important consideration during this review process. This Article is intended only as a summary of the ULLCA's primary provisions.

limited liability company, ULLCA, uniform limited liability company act, national conference of commissioners on uniform state laws, NCCUSL

Abstract:
Since 1990, dissatisfaction with corporate tax and business laws, and Subchapter S tax restrictions, has fueled an unprecedented explosion of state laws. Those laws provide business owners important options to form partnership organizations combining corporate-styled limited liability with partnership tax characteristics. Every state has adopted a limited liability company (LLC) act. Every state but Vermont and Wyoming has adopted a limited liability partnership (LLP) act providing some form of liability shield to the partners of a general partnership electing to have one. Those LLC and LLP acts, however, are far from uniform. The LLC acts are a confusing and inconsistent amalgam of corporate, general, and limited partnership law. The LLP acts generally amend the Uniform Partnership Act of 1914 (UPA), rather than the Uniform Partnership Act (1994) (UPA 1994), and vary widely in liability shield adoption procedures and the scope and durability of the shield.

LLCs and LLPs are relatively new business forms. With time, practitioners will become more comfortable with their advantages and particularities. These forms also will become more prevalent as other laws recognize their structure. For example, only recently has the Internal Revenue Service (IRS) released rules which automatically classify LLCs and LLPs formed after January 1, 1997 as partnerships. These rules eliminate a lingering concern that these entities could be considered associations taxable as corporations for federal tax purposes. Adding to the growing body of law, the IRS also has released rules to determine when LLC and LLP business owners may avoid self-employment taxes on their distributive share of income, and how they may select a tax matters agent to represent the business entity in a tax audit.

In an important effort to provide more uniformity, in 1996 the National Conference of Commissioners on Uniform State Laws adopted the Uniform Limited Liability Partnership Amendments (ULLPA) to the UPA 1994. By extending elective corporate-styled limited liability into the UPA 1994, the ULLPA followed the approach of the Uniform Limited Liability Company Act (ULLCA). Both the ULLPA and the ULLCA provide business owners the opportunity to obtain both corporate-styled liability and partnership tax status where profits are passed through the entity, and taxed only once, at the owner's level.

For all purposes other than the specially created partner liability shield, an LLP is a general partnership. Therefore, a discussion of the ULLPA's main features can be organized readily around the principal UPA 1994 amendment areas: elective creation and annual report provisions; partner liability shield provisions; and provisions to recognize LLPs formed under foreign law.

general partnership, revised uniform partnership act, RUPA, limited liability partnership, LLP

Abstract:
Is an LLC more like a corporation or a partnership?

In the early days of the modern U.S. limited liability company, lawyers and judges often had to examine that question. Although the question has different answers in different legal contexts, for most contexts, it is now settled.

Nowhere is the question more emphatically settled than in the context of federal diversity jurisdiction, whose purpose is to protect out-of-state parties from potential prejudice in local courts. In Belleville Catering Co. v. Champaign Marketplace, LLC, 350 F.3d 691, 692 (7th Cir. 2003), a case involving an Illinois corporation and a Delaware LLC, the Seventh Circuit bluntly chastised the lawyers for both parties for a jurisdictional statement that was transparently incomplete and incorrect and for an insouciance toward the requirements of federal jurisdiction [which] has caused a waste of time and money.

Vacating the district court judgment (which had followed a jury trial) and remanding with instructions to dismiss ... for want of subject-matter jurisdiction, the court also admonished the lawyers that:

The costs of a doomed foray into federal court should fall on the lawyers who failed to do their homework, not on the hapless clients.... The best way for counsel to make the litigants whole is to perform, without additional fees, any further services that are necessary to bring this suit to a conclusion in state court, or via settlement. That way the clients will pay just once for the litigation. This is intended not as a sanction, but simply to ensure that clients need not pay for lawyers' time that has been wasted for reasons beyond the clients' control.

Diversity, jurisdiction, limited liability company, LLC, federal

Abstract:
A recent article in this journal raised the spectre that a judgment creditor of a member of a limited liability company (LLC) might apply for and obtain a charging order; then or later persuade the court to order foreclosure on the membership interest subject to the charging order before the charging order is redeemed; be the successful bidder at the foreclosure sale; thereby become a transferee; thereafter petition for involuntary judicial dissolution of the LLC; and finally persuade the court that involuntary dissolution (with its attendant consequences to a potentially successful business, its other members, employees, and creditors) is warranted. If successful, the judicial dissolution threat would either force a sale of the entity's assets or require the other members to purchase the interest from the foreclosure and purchasing creditor at an inflated price elevated by the dissolution threat. Either event would be highly disruptive to the successful continuation of the LLC's business and, if realistic, represent a serious impediment to the use of the LLC entity form. Moreover, the eventuality of judicial dissolution would represent a serious threat to "asset protection" goals of using an entity's separate existence to insulate personal assets from the reach of that member's creditors.

limited liability company, LLC, dissolution, foreclosure, charging order

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.

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

Abstract:
Continuing an international trend, Wyoming initiated a national movement in 1977 by adopting the first limited liability company act in the United States. The movement began slowly, as the Internal Revenue Service (Service) took more than ten years to announce that a Wyoming limited liability company would be taxed like a partnership. [FN4] Since that time, a total of forty-seven states and the District of Columbia adopted limited liability company legislation and the National Conference of Commissioners on Uniform State Laws (Conference) adopted the Uniform Limited Liability Company Act (ULLCA).

The allure of the limited liability company is a unique statutory structure that combines the two most critical features of all of the other business organizations in a single business organization -- a corporate-styled liability shield and the pass-through tax benefits of a partnership. General and limited partnerships do not extend their partners a corporate-styled liability shield. Corporations, including those having made a Subchapter S election, do not provide their shareholders all the pass-through tax benefits of a partnership. All state limited liability company acts contain provisions to assure the presence of a corporate-like liability shield and partnership tax status. Generally, a limited liability company will be taxed like a partnership unless it possesses three or more of the four corporate characteristics including continuity of life, centralized management, limited liability, and free transferability of interests. Since most limited liability companies possess limited liability, they are classified as partnerships because they lack at least two of the remaining three characteristics -- generally, continuity of life and free transferability of interests.

Despite the commonality of the liability shield and partnership tax themes, state acts reflect a dazzling array of diversity. Unfortunately, this lack of uniformity manifests itself in basic but fundamentally important questions. Arguably, the most important issue relates to the treatment of dissociated members. State laws accord vastly different treatment to the effect of member dissociation on the dissociating member (purchase of interest and management rights) and its separate effect on the business continuity of the limited liability company (dissolution). Because each state act is an amalgam of general and limited partnership and corporate laws, the results are far from uniform. Shareholder events such as death, bankruptcy, retirement or resignation of employment, incapacity, and share transfers generally do not require the company to purchase the dissociated shareholder's interest absent an agreement to the contrary. Also, these events do not affect the corporation's perpetual business continuity.

Partnership law is different. A dissociating partner is usually entitled to either force the partnership to liquidate or to purchase that partner's interest. Most state limited liability company acts are designed to have the entity taxed like a partnership because it lacks the corporate characteristics of continuity of life and free transferability of interests. Therefore, in most respects the acts adopt the partnership rather than the corporate paradigm regarding the effect of member dissociation on that member's right to be bought out by the company and to cause a liquidation of the entity. Unfortunately, because of the Service's view on specific aspects of its tax classification regulations, important details of these state laws are extremely varied and inconsistent as state legislatures cope with how much uncertainty their limited liability law should tolerate. The Service itself has publicly recognized these limitations and endorses radical change in its tax classification regulations that should ultimately stabilize state legislation. Widely divergent rules on the effects of member dissociation will ultimately create confusion and inhibit the development of uniform case law. As a result, case law will have little precedential value from state to state.

uniform limited liability company act, dissociation, member, withdrawal, payment, fair value, ULLCA, NCCUSL

Abstract:
Is that trust an ordinary trust or a business trust? The tax man says it makes a difference.

Business lawyers commonly assume that trusts formed for their clients will be taxed as ordinary trusts under federal income tax rules. This generally means trust income is taxed to the beneficiaries when trust income is actually distributed. When trust income is accumulated for later distribution, it is temporarily taxed to the trust itself and then later to beneficiaries who receive distributions and a form of tax credit for the tax paid earlier by the trust.

These trust taxation norms do not apply when a trust is considered a business trust and is therefore taxed like other similar business entities. The applicable legal standard distinguishing an ordinary trust from a business trust has remained relatively static (albeit vague) since the ancient origins of our federal tax system. However, the consequence of business trust status was radically altered in 1997. In that year, the blockbuster check-the-box federal tax regulations mercifully mitigated the stakes of a trust being considered a business trust (the regulations were so designated because they allowed lawyers to choose tax classification simply by in effect checking the box relating to the most desired tax classification. See Treas. Reg. 301.7701-1 to -4).

trust, tax classification, business entity, ordinary trust, business trust, subchapter J

Abstract:
Twenty years ago the release of Revenue Ruling 88-76 planted a seed of business entity revolution never before seen in the history of America. Nearly ten years later the infamous "check-the-box" regulations fueled the revolution by regarding all unincorporated entities as partnerships or disregarded entities, depending on the number of owners. This Symposium examines that history and its future.

Abstract:
The Uniform Limited Partnership Act (2001) (ULPA 2001) adopted by the National Conference of Commissioners on Uniform State Laws is the first uniform limited partnership act to exist independently of general partnership law, to set forth express limited liability limited partnership provisions, and to provide a full corporate-styled liability shield for limited partners regardless of the magnitude and scope of participation in the control of the business. This Symposium explores some of the critical components of that Act.

Abstract:
In Federal Court, the only member of a SMLLC may not represent the SMLLC unless that owner is also a lawyer. To do so exposes the SMLLC to dismissal as well as the owner to the unauthorized practice of law. The article explores the implications of these rules to small closely held LLCs.