WASHINGTON OVERHAULS LAWS GOVERNING LIMITED PARTNERSHIPS

Date: October 29th, 2009

On April 23, 2009, Governor Christine Gregoire signed into law the most significant update to Limited Partnership law in a generation. Effective January 1, 2010, Washington limited partnerships will be governed by the Washington Uniform Limited Partnership Act (the “WULPA”), representing a wholesale replacement of the Revised Uniform Limited Partnership Act (the “RULPA”) first enacted in 1981.

The WULPA is based on the Uniform Limited Partnership Act (“ULPA”) adopted by the National Conference of Commissioners on Uniform State Laws in 2001. Including Washington, 15 states have enacted versions of the ULPA, among them California, Florida, Illinois and Nevada, and ULPA legislation is under consideration in other states..

The principal objectives of the WULPA are to update and modernize Washington’s limited partnership laws so that they conform more closely to the Washington Business Corporation Act and the Washington Limited Liability Company Act (the “LLC Act”). In general, the WULPA is far more detailed than the RULPA, eliminating the need for the state’s limited partnership statute to reference its statute governing general partnerships. Below are some of the highlights of the new law:

Non-Waivable Provisions: Section 110 for the first time clarifies that a limited partnership agreement governs the relations among partners and between partners and the limited partnership, except for thirteen non-waivable provisions set forth in the new statute. Anything not addressed by the limited partnership agreement is governed by the WULPA. Perhaps the most significant non-waivable provisions are those prohibiting a limited partnership from eliminating the statutory duty of loyalty (Section 408) or duty of care (Section 408(3)) owed by general partners to the limited partnership and the other partners and the obligation of good faith and fair dealing (Sections 305(2) and 408(4)). However, a limited partnership agreement can identify specific types or categories of activities and/or transactions that do not violate the duty of loyalty and can specify the number or percentage of partners that may ratify an act or transaction that would otherwise violate the duty of loyalty. To some degree, these provisions are intended to enable limited partnerships to address conflicts of interest between owners and managers of the business, an ability that is well developed in Washington’s corporation law, but is not addressed at all in Washington’s limited liability company statutes.

Enhanced Limited Liability: Under existing law, a limited partner may lose limited liability protection against a third party if the limited partner participated in the control of the business and the third party transacted business with the partnership with the reasonable belief that the limited partner was a general partner. Section 303 of the WULPA eliminates that risk entirely. Now, a limited partner cannot be held liable for partnership debts even if the limited partner participates in the management and control of the limited partnership.

Limited Liability for General Partners: Perhaps the most novel and useful aspect of the WULPA is the ability of a limited partnership to elect to be a Limited Liability Limited Partnership (LLLP), which provides a full liability shield to all general partners. Under existing law, the liability of general partners is unlimited, complete, automatic and formally inescapable. Consequently, counsel often recommend that general partners themselves be limited liability entities, typically LLCs, and not individuals. By fully shielding general partners from liability, the LLLP structure eliminates the need for this extra layer of limited liability protection for general partners. Thus, under the new law it will be reasonable for individuals to consider serving directly as general partners of limited partnerships that elect LLLP status. They would have limited liability protection without the additional expense and ongoing administrative burden of forming a limited liability entity to serve as general partner. Limited partnerships formed after January 1, 2010 can simply elect LLLP status on their initial Certificate of Limited Partnership. For an existing limited partnership to elect LLLP status, all partners must consent and an amendment to the limited partnership’s Certificate of Limited Partnership must be filed with the Secretary of State. Significantly, once the LLP election is made, it automatically supersedes anything in the partnership agreement that would make the general partner liable for the limited partnership’s obligations. Of course, limited liability is not the absence of liability. The WULPA does contain provisions creating liability for general partners that are inescapable. For example, a general partner who consents to an unlawful distribution (discussed below) is personally liable to the limited partnership for the amount that exceeds what could properly be distributed. To shield themselves from such liabilities, individuals may still prefer to serve as general partners indirectly through limited liability entities.

Enhanced Information Rights: The WULPA now includes more detailed information rights for limited partners that are largely analogous to the information rights of shareholders of Washington corporations.

No Fiduciary Duties for Limited Partners: Under the WULPA, limited partners will have no fiduciary duties to the limited partnership or fellow limited partners. This is a substantial change from existing limited partnership law, which imports such a fiduciary duty from general partnership law. Moreover, the elimination of fiduciary duties in limited partnerships is a major distinction from current limited liability company law. Although Washington’s LLC Act does not address the issue of fiduciary duties at all, the Washington Supreme Court ruled in 2007 that LLC members “owe each other fiduciary duties and are obligated to deal with each other with candor and the utmost good faith.” Bishop of Victoria Corp. Sole v. Corporate Bus. Park, L.L.C., 138 Wn. App. 443 (2007). It is reasonable to expect that Washington’s legislature will consider amending the LLC Act to also eliminate the fiduciary duties of LLC members and managers.

General Partners’ Duties of Loyalty and Care: The only fiduciary duties a General Partner has to the limited partnership and the other partners are the duties of loyalty and care that are expressly defined in Section 408 of the WULPA. As previously mentioned, these duties are non-waivable, but a limited partnership agreement can identify specific types or categories of activities or transactions that do not violate the duty of loyalty and can specify the number or percentage of partners that may ratify an act or transaction that would otherwise violate the duty of loyalty.

Liability for Unlawful Distributions: Section 508 of the WULPA is an attempt to bring limited partnerships more in line with corporations in the treatment of distributions made improperly during periods of insolvency. Current law prohibits distributions when (a) the limited partnership would not be able to pay its debts as they become due in the usual course of business, or (b) all liabilities of the limited partnership exceed the fair value of the assets of the limited partnership. This standard has been viewed as restrictive, from an accounting perspective, because it hinges on determining the “fair value” of assets. The new law prohibits distributions by a limited partnership when “total assets would be less than the sum of its total liabilities,” and allows limited partnerships to determine that a distribution is proper based on “financial statements prepared on the basis of accounting practices and principles that are reasonable in the circumstances or on a fair valuation or other method that is reasonable in the circumstances.”

Resolving Claims Upon Dissolution: The WULPA will include provisions allowing dissolved limited partnerships to dispose claims in much the same way as dissolved corporations. With respect to known claims, the limited partnership can notify the claimants who then have 90 days to file a claim. If a claimant does not file a claim with the limited partnership of file a lawsuit within the 90-day period, the claim is barred. To handle unknown claims, a limited partnership can publish notice of its dissolution and claims will be barred unless they are brought within 3 years of the notice publication date.

Separateness: Section 104 expressly states that a limited partnership is an entity distinct from its partners. Although this was always understood by Washington lawyers to be the case, the express statement brings welcome certainty.

Effective Date: The WULPA takes effect January 1, 2010 and will apply to limited partnerships formed on or after that date. Pre-existing limited partnerships may elect to be governed by the WULPA on or after January 1, 2010. However, effective July 1, 2010, all Washington limited partnerships will be governed by the WULPA.

Overall, the WULPA is a major step forward for Washington limited partnerships and makes them a worthy competitor to the popular LLC structure. The WULPA’s many provisions that are analogous to those in the Washington Business Corporation Act greatly increase the certainty and predictability of conducting business as a limited partnership. This stands in stark contrast to recent developments regarding LLCs. As mentioned above, LLC members and managers must contend with the fact that they currently owe each other the same fiduciary duties as partners in a general partnership. In addition, recent legislative and judicial developments regarding LLCs have highlighted serious inconsistencies in the LLC Act regarding the way LLCs are dissolved, wound up and canceled. Amendments to the LLC Act are expected, but may not arrive before the WULPA takes effect on January 1, 2010.

For our clients operating as limited partnerships, we strongly encourage a complete review of existing entities to ensure compliance with the WULPA. A significant part of that review should involve considering an election to be organized as an LLLP, and amendments and revisions to the limited partnership agreement to bring it in line with the new law. We encourage you to contact us soon about reviewing your limited partnership structure. Once the new law takes effect, existing limited partnerships will have only six months before they become governed by the new law, so there is a relatively short time to make needed and advisable adjustments to harmonize limited partnership agreements with the WULPA.