(23) Formation/Liability Limits/Fiduciary Duties/Dissolution of an LLP

What is required to form an LLP?

The partnership must satisfy the statutory formation requirements established by the applicable state.

How does a partnership obtain the LLP liability shield?

By complying with the statutory requirements for LLP status.

What is the first step in forming an LLP?

The general partnership must file a registration statement with the state electing LLP status.

What document is generally filed to become an LLP?

A registration statement.

Why do many states require malpractice insurance for an LLP?

As a condition of receiving and maintaining the LLP liability shield.

Must an LLP maintain malpractice insurance after formation?

Yes, in jurisdictions requiring such insurance.

Do some states specify the minimum amount of malpractice insurance required for an LLP?

Yes.

What additional financial requirement do many states impose on LLPs?

The LLP must maintain a minimum amount of partnership assets throughout its existence.

Are LLP formation requirements governed primarily by state statute?

Yes.

Are LLP partners personally liable for their own torts, negligence, or malpractice?

Yes.

Does the LLP liability shield protect a partner from the partner's own wrongful conduct?

No.

When is an LLP partner vicariously liable for another partner's tort?

When the partner directly supervised or controlled the tortfeasor or the tortfeasor's employee.

When is an LLP partner liable because of failure to prevent another partner's negligence?

When the partner knew or should have known of the negligence and failed to take action to prevent the harm.

Does an LLP partner automatically escape liability for another partner's wrongdoing?

No. Liability may still arise through supervision or failure to prevent known negligence.

What fiduciary duties do LLP partners owe?

The same duties of loyalty and due care that apply in a general partnership.

May an LLP partner personally benefit at the partnership's expense?

No, absent limiting language in the partnership agreement.

How are partnership assets allocated when the partnership is liable for a tort judgment?

The allocation of partnership assets may affect which partners ultimately bear financial responsibility depending on the applicable LLP statute.

Why may allocation of partnership assets favor the tortfeasor partner in a narrow statute LLP?

Because innocent partners must still contribute personal assets to satisfy ordinary partnership debts if partnership assets have been exhausted paying the tort judgment.

Why might innocent partners seek an early distribution of partnership assets before a tort judgment becomes due?

To force the tortfeasor partner to satisfy most or all of the judgment from the tortfeasor's own personal assets.

When does the allocation of partnership assets constitute a breach of fiduciary duty?

When partnership assets are knowingly and willfully allocated to benefit one or more partners personally at the expense of the others.

What claim may innocent partners have if partnership assets are intentionally allocated to benefit certain partners personally?

A claim for breach of fiduciary duty.

How is dissolution of an LLP generally governed?

By the same rules governing dissolution of a general partnership.

Have many states clearly addressed whether the LLP liability shield continues during dissolution?

No.

Is it clear under most state statutes whether the LLP liability shield remains personal to the partners during dissolution?

No.

Have most states provided that LLP liability protection transfers to a successor partnership after dissolution?

No.

Testable Issue: Does LLP status protect a partner from liability for the partner's own negligence or malpractice?

No.

Testable Issue: When may an innocent LLP partner nevertheless become liable for another partner's tort?

When the partner supervised the tortfeasor or knew or should have known of the negligence and failed to prevent the harm.

Testable Issue: Does LLP status change the fiduciary duties among partners?

No. The ordinary partnership duties of loyalty and due care continue to apply.

Essay Rule: How should you analyze whether the LLP liability shield applies?

Determine whether the partnership properly obtained LLP status, identify the applicable state statute, determine whether the partner personally committed the wrongful conduct or supervised it, determine whether the statutory liability shield applies, and identify any statutory exceptions.

Essay Rule: How should you analyze fiduciary-duty issues in an LLP?

Apply the same fiduciary-duty principles that govern general partnerships, determine whether a partner improperly benefited personally, and analyze whether the allocation of partnership assets breached those duties.

Essay Rule: How should you analyze dissolution of an LLP?

Apply the general partnership rules governing dissolution while considering whether the applicable state statute addresses continuation of the LLP liability shield during dissolution or after a successor partnership acquires the business.

Master Synthesis: How does an LLP differ from a general partnership?

An LLP generally operates under the same management and fiduciary-duty rules as a general partnership, but provides a statutory liability shield protecting innocent partners from specified partnership liabilities.

Master Synthesis: What are the principal limits on the LLP liability shield?

A partner remains liable for the partner's own wrongful conduct, may become vicariously liable through supervision or failure to prevent known negligence, remains subject to fiduciary duties, and may lose protection where the governing statute provides.

Master Synthesis: What are the most frequently tested LLP issues?

Statutory formation requirements, the scope of the liability shield, liability for a partner's own misconduct, supervisory liability, continuing fiduciary duties, allocation of partnership assets after tort judgments, and the uncertain application of the liability shield during dissolution.