“What’s in a name?” Shakespeare once asked, rhetorically. According to Shakespeare’s character Juliet – and according to the US Bankruptcy Court for the District of Columbia – not a great deal.
In a decision issued in early August, US Bankruptcy Judge Martin Teel, Jr. held that the so-called “general partner” of a District of Columbia limited liability partnership (LLP) could not, despite her title, initiate an involuntary bankruptcy proceeding against the debtor LLP.
Bankruptcy Code section 303(b)(3) provides that one or more of a partnership’s general partners are eligible to commence an involuntary petition against the entity. Acting under this section, the designated “general partner” of Washington DC’s Beltway Law Group, LLP commenced an involuntary Chapter 7 case against her own firm. Judge Teel subsequently found in reviewing the petition that – notwithstanding her title of “general partner” – the principal of a District of Columbia LLP could not commence an involuntary petition against the entity.
Judge Teel observed that the term “general partner,” for purposes of section 303(b)(3), refers to a partner who has at least some personal liability for the partnership’s debts. Under District of Columbia partnership law, however, partners in an LLP are not liable for the LLP’s debts as a result of their partnership status. Instead, such partners are at risk only to the extent of the capital subscribed. An LLP is therefore more akin to a “corporation” as that term is used in section 101(9)(A).
Judge Teel allowed that if an LLP had previously been a partnership within the contemplation of section 303(b) such that its partners were liable for the former partnership’s debts, the LLP’s status as a partnership for purposes of those debts would remain in place. But this was not Beltway Law Group’s case. Consequently, the petitioner – despite her title – was not a “general partner” for purposes of commencing an involuntary petition against the LLP.
The limited liability partnership is a common entity form in many jurisdictions. It is also an entity form which did not exist at the time the Code was drafted. Understanding how the form is treated for purposes of involuntary filings provides useful guidance in the event of financial distress and/or a dispute amongst the holders of interests in an LLP.
Though based in local law (here, the District of Columbia), Beltway Law Group’s discussion provides a helpful, straightforward analytical framework for determining whether an LLP may ever be classified as a “partnership” for purposes of an involuntary bankruptcy filing. Of particular help is Judge Teel’s clarification of the difference between a “corporation” and a “partnership” as those terms are employed by the Code.
Beltway Law Group provides localized – but nevertheless useful – guidance for practitioners who may be evaluating the possibility of an involuntary “partnership” bankruptcy filing.