P R O B A T E   &   P R O P E R T Y
Nov/Dec 2004
Other articles from this issue
Articles from other issues of Probate and Property

Department

Letters to the Editor

An article published in the July/August 2004 issue of this magazine (Daniel S. Kleinberger, Carter G. Bishop & Thomas Earl Geu, Charging Orders and the New Uniform Limited Partnership Act: Dispelling Rumors of Disaster, Prob. & Prop. 30 (July/Aug. 2004)) purported to refute mistruths that the authors believed were perpetuated by our article published in the November/December 2003 issue (Elizabeth M. Schurig & Amy P. Jetel, A Charging Order Is the Exclusive Remedy Against a Partnership Interest: Fact or Fiction?, Prob. & Prop. 57 (Nov./Dec. 2003)). We would like to take this opportunity to bring to light the fact that (contrary to what they may think) the authors of the July/August article do not fundamentally disagree with us, and their article further illustrates the salient point of our article.

Our article was written in response to the widespread belief among practitioners that a charging order is the “exclusive” remedy against a debtor’s partnership interest (meaning that a limited partner can never be permanently divested of his partnership interest through foreclosure). In our experience, this belief has led many practitioners to advise their clients that a limited partnership interest is a “protected asset” from the individual partner’s perspective, which, as the authors of the July/August article will agree, is wrong under most states’ limited partnership statutes. (In fact, when one of us discussed this matter at a recent conference, several attendees took issue with statements that a limited partnership interest is not a protected asset because, as they said, no one had ever said that to them before.)

Despite our agreement on this point, the authors of that article questioned our assertion that the 2001 Uniform Limited Partnership Act’s explicit mention of foreclosure as a creditor remedy is less protective than the 1976 Act’s silence as to foreclosure. In particular, they focused on the fact that creditors have historically been able to seek foreclosure of a debtor’s partnership interest to support their conclusion that “[t]here is nothing ‘shocking’ or even novel about the new Act’s approach to charging orders, and the charging order issue is no reason to fear adoption of the new Act.” Kleinberger et al., at 34.

Although we agree that the Act codifies the law as it currently exists in many states, we nonetheless believe that, despite the historical roots of the charging order remedy, the 2001 Act’s explicit mention of foreclosure in Section 703 is still less protective than the 1976 Act’s version of the same section (which does not mention foreclosure). This is because we are experiencing a shift in the overall attitude in the United States toward viewing “asset protection” as a legitimate and desirable goal in estate and business planning. More and more people outside of the plaintiff’s bar believe that (subject to fraudulent transfer law) an individual need not make all of his assets available to creditors. For instance, the passage of protective trust legislation in Alaska, Delaware, Nevada, Rhode Island, and Utah (and an interesting attempt in Oklahoma) evinces this change in attitude. This trend toward a more asset-protective environment in the United States opens up the possibility, in our opinion, that a court could construe a statute that is silent as to foreclosure to mean that a creditor may receive only a charging order and therefore will not order a foreclosure on an interest subject to a charging order. But a court faced with a partnership statute that explicitly provides for foreclosure has no such wiggle room. Unlike the 1976 Act, Section 703 of the 2001 Act states that “a charging order constitutes a lien on the judgment debtor’s transferable interest” and “the court may order a foreclosure upon the interest subject to the charging order at any time.” Although the availability of foreclosure is not “novel” historically and is nothing to be feared from the partnership’s perspective, the 2001 Act’s language itself is in fact less protective (and something to be feared) from the individual partner’s perspective than the foreclosure-silent 1976 Act, especially in light of the possibility that a court today may interpret the 1976 version of Section 703 to disallow foreclosure. After a foreclosure, the partnership may be no worse off, but the individual partner has forever lost his partnership interest and all of the future benefit in that interest, including a right to that partner’s pro rata share of the partnership’s net assets upon liquidation—even if it greatly exceeds the debt amount.

Further, as academics, our colleagues may have missed our point, which was that it is important for practitioners to understand when recommending these vehicles that, as our colleagues themselves stated in their article, “the charging order was created as a tool for ‘entity asset protection’ not ‘partner asset protection.’” Kleinberger et al., at 31. Therefore, if asset protection is the goal of the client’s planning, then the limited partnership may not be the most suitable vehicle.

In our upcoming article on limited liability company statutes, you will see that the Uniform Limited Liability Company Act (1996) goes even further than the Uniform Limited Partnership Act (2001) by allowing a creditor who forecloses on the membership interest to “seek . . . a judicial determination that it is equitable to dissolve and wind up the company’s business.” Uniform Limited Liability Company Act (1996) §§ 503(e)(3) and 504(b). Our purpose once again will be to highlight this issue for practitioners who believe that limited liability companies are asset protective vehicles.

Elizabeth M. Schurig
Amy P. Jetel

Giordani, Schurig, Beckett & Tackett, LLP
Austin, Texas  

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