Prof. Larry Ribstein, the nation’s leading authority on "alternative entiies" such as LLCs and LPs, flags a recent decision by a bankruptcy court in New York that misses the mark on an issue of liability of a limited partner in the context of a bankruptcy claim. Here is the introductory quote:
In re Adelphia Communications Corp., 376 B.R. 87(Bkrtcy.S.D.N.Y., 2007), involv[es] a creditor’s (Lucent) $45 million claim against a limited partner for liability for the debts of a Delaware limited partnership.
As most lawyers know, limited partners in most states are generally protected from vicarious liability by provisions based on Revised Uniform Limited Partnership Act Section 303
Here is the whole post that should be read by anyone interested in the risk of bankruptcy courts interpreting state law in a way that may not be consistent with enforcing the limited liability concepts of most state law in this area.
Prof. Ribstein summarizes the gist of the opinion and his problem with it thusly:
The limited partner argued in Adelphia that the plaintiff had actual knowledge of its status as a limited partner. But even accepting this, the court denied summary judgment because the relevant creditor belief under the statute has to be "based on the limited partner’s conduct" and "material issues of fact exist as to whether the conduct of ACC would support a reasonable belief that ACC was a general partner."
Yikes! It seems that while the court was focusing on the "based on the . . . " language, it forgot about the "reasonable" belief part. How can the plaintiff have a reasonable belief in the limited partner’s status as a general partner when it actually knows the limited partner is a limited partner?
However, the good professor provides solace for those fearing this decision may be a sign of more to come:
I doubt any state courts will follow the Adelphia case because they would not want to frustrate the protection their legislatures clearly intended to provide. But Adelphia suggests that limited partners may not have limited liability precisely when they need it most – in bankruptcy, at least in the important Southern District of NY