Unincorporated Business Entities Law

In Ederer v. Gursky, 9 N.Y.3d 514, 881 N.E.2d 204, 851 N.Y.S.2d 108, 2007 N.Y. Slip Op. 09960 (2007), the New York Court of Appeals interpreted the New York LLP shield to allow claims by partners for breach of obligations of other partners, or of the partnership.  See my earlier post, Liability of LLP partners To Each Other. 

Section 47 of Senate Bill 1442 amends Section 152.801(a) of the Texas Business Organizations Code to read as follows:

     (a) Except as provided by Subsection (b) or the partnership agreement, a partner in a limited liability partnership is not personally liable to any person, including a partner, directly or indirectly, by contribution, indemnity, or otherwise, for a debt or obligation of the partnership incurred while the partnership is a limited liability partnership.

Oddly, the Legislature chose to add "or the partnership agreement" to the introductory exception.  Like the RUPA, Texas has a central provision regarding partner autonomy and its limits.  TBOC § 152.002.  While the Legislature may have felt a "belt and suspenders" approach was necessary to catch the attention of the courts, it seems bad policy to start dropping in references to the partnership agreement.

posted by Gary Rosin

Yet another way in which unincorporated business entities (UBEs) under the Texas Business organizations code ("TBOC") differ is the ability to contract as to fiduciary duties.

General Partnerships (Chapter 152).  Section 152.002(B)(2)-(4) are parallel to RUPA section 103(b)(3)-(5).  That is, no eliminations of the Section 152.204-.207 duties, but excluded specific activities or standards, so long as not manifestly unreasonable.

Limited Partnerships (Chapter 153).  Chapter 153 is a RULPA-type statute, so Section 153.003(a) generally incorporates Chapter 152, and a general partner has the same rights, powers and restrictions, and liabilities as a partner in a general partnership, § 153.152.

Limited Liability Companies (Chapter 101).  Section 101.401 is based on the early version of Delaware LLC 18-1101(c)(2):  the company agreement may "expand or restrict" duties, including fiduciary duties, and related liabilities.  As suggested by the Delaware Supreme Court in Gotham Partners, L.P. v. Hallwood Realty Partners, L.P.,817 A.2d 160, expanding or restricting probably does not include eliminating.  Id. at  166-68.  Such an interpretation would be consistent with Section 152.002(b)(2-(4), but without an express "manifestly unreasonable" limitation.  Would a "manifestly unreasonable" limitation be the equivalent of an elimination?

posted by Gary Rosin

We have already noted the preemption of Sections 9.406 & 9.408of the Texas UCC and the elimination of the right to foreclose a charging order on an ownership interest in a Texas LLC.  The rights of creditors of owners of interests in Texas unincorporated business entities (UBEs) under the Texas Business Organizations Code ("TBOC") vary widely, depending on the form of UBE:

• Ownership interests in all forms of Texas UBEs subject to TBOC–(general) partnerships, limited partnerships and LLCs–are excluded from 9.406 and 9.408 of the Texas Business & Commerce Code.  TBOC §§ 101.106(c) & 154.001(d) (added by Sections 39 and 57 of Senate Bill 1442) (TBOC Chapter 154 is one of two mini-hubs that apply to both (general) partnerships and limited partnerships).
• TBOC chapter 152, and its predece

ssor statute, deleted the concept of charging orders, as applied to interests in (general) partnerships.  Compare TBOC §§ 152.401-.406 with TBOC §§ 101.108-.112 and TBOC §§ 153.251-.257.  As a result, the traditional remedies–attachment, garnishment, etc.–are available to creditors of owners of interests in (general) partnerships.

Tom Rutledge has already pointed out that SB 1442 pre-emptsSection 9.406 and 9.408 of the Texas UCC.  Sections 40 and 53 of the bill go even further, and adds language that prohibits the foreclosure of a "charging order lien", whether "under this code or any other law," for ownership interests in LLCs and in limited partnerships.  Tex. Bus. Org. Code §§ 101.112(c) & 153.256(c)  (emphasis added).

posted by Gary Rosin
revised 06/19/2009

Among things, SB 1442 amends the Texas Business Organizations Code  to provide for series LLCs.  Id.at § 45 (adding Subchapter M, §§ 101.601 et/ seq.).  The Bill Analysis describes the amendment as follows:

S.B. 1442 authorizes the creation of a series limited liability company by allowing a limited liability company agreement to establish or provide for the establishment of one or more designated series of members, managers, membership interests, or assets

   that has separate rights, powers, or duties with respect to specified property or obligations of the company or profits and losses associated with specified property or obligations, or

   that has a separate business purpose or investment objective.

The bill sets out provisions relating to

   the enforceability of the obligations and expenses of a series against its assets,

   the holding of assets associated with a series, and

   the requirements for a notice of limitation on the liabilities of a series.

The bill 

   establishes the general powers of a series;

   provides that a member or manager associated with a series or a member or manager of the company is not liable for a debt, obligation, or liability of a series unless the company agreement specifically provides otherwise; and

   allows the company agreement to expand or restrict any duties, including fiduciary duties, and related liabilities that a member, manager, officer, or other person associated with a series has to the series or the company, a member or manager associated with the series, or a member or manager of the company.

The bill

   authorizes the company agreement to establish classes or groups of members or managers associated with a series and

   sets forth provisions relating to

the governing authority of a series,

the effect of certain events on a manager or member with respect to a series,

the status of a member with respect to a distribution,

the establishment of a record date for allocations and distributions, and

the making of distributions with respect to a series.

The bill establishes that the provisions of law related to limited liability companies apply to a series limited liability company and its associated members and managers, to the extent the provisions governing each company are not inconsistent.

The bill

   authorizes a series and its business and affairs to wind up and terminate without causing the winding up of the company[,]

   provides that the series terminates on the completion of the winding up process[,}.

   … specifies the conditions that require the winding up of a series and sets out procedures for the winding up and termination[, and]

   …  provides for the revocation of a voluntary winding up, the cancellation of an event requiring a winding up, the authority of a series to continue business following either situation, and the winding up by order of a district court with appropriate jurisdiction.

Id. at 4-5 (indentations added).

While the general approach of Subchapter M is a statute-within-a-statute, Section 101.609 includes a general incorporation of Chapter 101 (The tex. Bus. Org. Code "spoke" for LLCs):

Sec. 101.609. APPLICABILITY OF OTHER PROVISIONS OF CHAPTER; SYNONYMOUS TERMS.

     (a) To the extent not inconsistent with this subchapter, this chapter applies to a series and its associated members and managers.

     (b) For purposes of the application of any other provision of this chapter to a provision of this subchapter, and as the context requires:

     (1) a reference to "limited liability company" or "company" means the "series";

     (2) a reference to "member" means "member associated with the series"; and

     (3) a reference to "manager" means "manager associated with the series."

posted by Gary Rosin

Section 39 of Texas S.B. 1442 provides, inter alia, for 9-406 and 9-408 carve-outs for membership interests in an LLC. Specifically, it is provided that a new subsection (c) will be added to Section 101.106 of the Texas Business Organizations Code to provide:

Sections 9.406 and 9.408, Business & Commerce Code, do not apply to a membership interest in a limited liability company, including the rights, powers and interests arising under the company’s certificate of formation or company agreement or under this code. To the extent of any conflict between this subsection and Section 9.406 or 9.408, Business & Commerce Code, this subsection controls. It is the express intent of this subsection to permit the enforcement, as a contract among the members of a limited liability company, of any provision of a company agreement that would otherwise be ineffective under Section 9.406 or 9.408, Business & Commerce Code.

A similar revision appears at section 57, there addressing interests in a partnership. You may also want to take a look at sections 60 and 61 of that bill, which amend 9-406 and 9‑408 to expressly provide that they do not apply to interests in either an LLC or a partnership.

The effective date is 9/1/09.

posted by Thomas E. Rutledge

Update:  The House Bill Analysis of Section 39 describes the amendments as follows:

Provides that Sections 9.406 (Discharge of Account Debtor; Notification of Assignment; Identification and Proof of Assignment; Restrictions on Assignment of Accounts, Chattel Paper, Payment Intangibles, and Promissory Notes Ineffective) and 9.408 (Restrictions on Assignment of Promissory Notes, Health-Care-Insurance Receivables, and Certain General Intangibles Ineffective), Business & Commerce Code, do not apply to a membership interest in a limited liability company, including the rights, powers, and interests arising under the company's certificate of formation or company agreement or under this code. Provides that to the extent of any conflict between this subsection and Section 9.406 or 9.408, Business & Commerce Code, this subsection controls. Provides that it is the express intent of this subsection to permit the enforcement, as a contract among the members of a limited liability company, of any provision of a company agreement that would otherwise be ineffective under Section 9.406 or 9.408, Business & Commerce Code.

Id. at 9 (emphasis added).

posted by Gary Rosin