Page 12 - 2014_0203_SSPartnership

S12 | MONDAY, FEBRUARY 3, 2014 | Partnership | NYLJ.COM

In the present context, what this all means
BY WILLIAM MGRANE
is simple: RUPA §401(h) forbids payment to At What Price
cpartners of “remuneration for services per-
AND GEORGE McKEEGAN
formed for the partnership.” An LLLP’s con- D
tracting in derogation of this provision—as uringthe late 20th century, being a
occurred, for example, when the Dewey & Big Law partner had the sweet smell
A Big Law Partnership?
Leboeuf LLP management committee agreed 1 of success.
to make guaranteed payments to its many The beginning of the 21st century, however,
so-called “deal partners” (all as was recent- has seen a wave of Big Law bankruptcy filings,
ly and very eloquently described in “The mainly involving Big Law firms organized as
Collapse”12)—is necessarily ineffectual as limited liability partnerships (failed Big Law
Partnerships).
respects creditors’ remedies because credi- 2
tors’ RUPA-created “rights” not to have their Circa 2014, the phenomenon of failed Big
creditors’ remedies diluted by large creditor Law partnerships has caused the odor associ-
claims coming from such “deal partners” can- ated with achieving the status of a Big Law
not be stripped from them (or, in bankruptcy, partner to become distinctly gamey. Why?
from the bankruptcy trustee acting in his Because bankruptcy filings by failed Big Law
creditors’ representative capacity) without partnerships have routinely prompted attacks
their consent.13
on the former partners in failed Big Law part-
nerships (former Big Law partners) on various
In contrast, the truly corporate (as
opposed to partnership) form of business theories of personal liability.3
organizations presently in use by Big Law In sum, former Big Law partners are often
firms, i.e., the LC form of business organiza- looked upon as the ultimate deep-pocket
tion, does not in any manner contemplate the defendants in Failed Big Law Partnership
wholesale deprivation of creditors’ remedies bankruptcy cases, both (i) by the bankruptcy
that adversely affect former Big Law part- trustees of failed Big Law partnerships4 as well
ners in failed Big Law partnerships.14 Meaning as (ii) by the individual creditors of failed Big
Law partnerships.5
that—at least when a Big Law entity wisely This article explores why—of all the vari-
operates as such an LC—then its individual
shareholders retain (i) the freedom to legiti- ous forms of business organizations presently
mately contract with their LCs on an employer being utilized by Big Law firms6—forms of
to employee basis and (ii) to legitimately business organizations which require their
claim that the professional services which equity security holders to identify themselves
they rendered their insolvent LCs were, in to the public as “partners” are by far the most
and of themselves, a legally cognizable type problematic of all the various and sundry
forms of business organization presently in
of reasonably equivalent value.
use by Big Law.7

Conclusion
Question Presented
’Tis but thy name that is my enemy; thou
art thyself though, not a [partner]. What is it about LLLPs that likely makes
them uniquely dangerous for former Big Law
What’s [a partner]? It is nor hand, nor partners when they (such LLLPs) become
foot, nor arm, nor face, nor any other failed Big Law partnerships?
part belonging to a man.
O! Be some other name: What’s in a
name? That which we call a rose by any Summary Answer
CK
other name would smell as sweet; so [a STO
partner] would, were he not [a partner] The reason LLLPs are especially prob- I
lematic is that the law governing LLLPs is
call’d, retain that dear perfection which an integral part of the common law (pres- partners and yet never be partners.10 cross-references RUPA §103(b)(1)-(10). That
he owes without that title.
ently codified as the Uniform Partnership Act As will be demonstrated, infra—and once latter statute lays out a series of limitations on
[Partner], doff thy name; and for that (1997) (RUPA) which governs all aspects of having elected the LLLP form of business just how far a partnership agreement can go in
name, which is no part of thee, take all partnership.8
organization prepetition—those Big Law firms deviating from Article IV as a default statute.
myself.
who do not heed the red flags contained in For present purposes, the key aspect of
this article by promptly ceasing to be LLLPs RUPA §103(b) is subdivision (b)(10). RUPA
Romeo & Juliet, LC (with apologies to the Analysis
Bard).
may well wind up (at least post-insolvency) §103(b)(10) reads, in full:
Under the Bankruptcy Code, LLLPs are not prevented from paying their partners reason- The partnership agreement may
•••••••••••••• •••••••••••••• •
true partnerships at all.9
able compensation for services rendered if not ... restrict rights of third parties
Rather, and as is made clear in Bromberg such partners choose to stay on despite a under [RUPA].
1. This article employs “Big Law” as a synonym for the Am Law Gross Revenue 100. The law firms compris- & Ribstein, §7.05(a), LLLPs are primarily tax financial crisis11—with the resulting chaos
ing the 2013 Am Law Gross Revenue 100 may be found avoidance devices intended to also insulate caused solely by an irrational desire to call Comment 12 to RUPA §103(b)(10) reads,
at http://www.americanlawyer.com/PubArticleTAL. their so-called “partners” from personal liabil- individuals practicing law in a group setting in pertinent part:
jsp?id=1202596371400.
ity to the same extent as the shareholders in by the sobriquet “partner,” an exercise in
2. As is demonstrated on Appendix 1 (which itself may an LC or the members in an LLLC are also nostalgia which (at least in today’s brutal Although stating the obvious, [RUPA
be found at https://mcgrane.egnyte.com/h-s/20140125/ d090238851ee420b), some 89% of the 2013 Am Law 100 §103(b)(10)] provides expressly that
utilize the limited liability partnership form of busi- protected from such personal liability.
Big Law marketplace) has about as much the rights of a third party under [RUPA]
ness organization. Big Law limited liability partnerships This article posits that RUPA’s above-noted practical significance as does describing a may not be restricted by an agreement
which eventually became failed Big Law partnerships on incorporation of the law of limited liability junior banker as a “vice president” at some among the partners to which the third
and after Jan. 1, 2000, include: In re Brobeck, Phleger & partnerships into the law of general partner- anonymous money center bank (meaning
party has not agreed.
Harrison, LLP, U.S. Bankruptcy Court for the Northern District of California, Case No. 03-32715 (Brobeck bank- ships both must and should be recognized none at all).
ruptcy); In re Coudert Brothers LLP, U.S. Bankruptcy for what it is: An imperfect attempt by RUPA’s Thus, RUPA §103(a) makes clear that, inso-
Thus, RUPA §103(b)(10) expressly assumes
Court for the Southern District of New York, Case No. drafters to allow former Big Law partners far as “relations [i] among the partners and that it is possible to draft a partnership agree-
06-12226 (Coudert bankruptcy); In re Dewey & LeBoeuf, to both have their cake and eat it too, i.e., [ii] between the partners and the partnership” ment that would sufficiently change “relations
LLP, U.S. Bankruptcy Court for the Southern District of New York, Case No. 12-12321 (Dewey bankruptcy); In
re Heller Ehrman, LLP, U.S. Bankruptcy Court for the to allow such individuals to call themselves
are concerned, i.e., with respect to Article IV [i] among the partners and [ii] between the
Northern District of California, Case No. 08-32514 (Heller of RUPA, it is the partnership agreement that partners and the partnership” so as to “...
bankruptcy); In re Howrey LLP, U.S. Bankruptcy Court controls, not RUPA itself.
restrict rights of third parties under [RUPA]”
for the Northern District of California, Case No. 11-31376 WILLIAM McGRANE is a partner at McGrane LLP in On its face, however, RUPA §103(a) does and then goes on to forbid such behavior
(Howrey bankruptcy); In re Thelen, LLP, U.S. Bankruptcy Court for the Southern District of New York, Case No. 09- San Francisco. GEORGE McKEEGAN is a shareholder not absolutely turn Article IV of RUPA into a without the consent of any third parties (obvi-
15631 (Thelen bankruptcy). See also http://en.wikipedia.
in McKeegan Law P.C. in Tarrytown.
mere default statute. Rather, RUPA §103(a)
ously including creditors) affected thereby.