Convert Your Limited Partnership into a Limited Liability Limited Partnership

The Texas Legislature made several changes to the Texas Business Organizations Code (BOC) that become effective September 1, 2011. Several of these changes deal with limited liability partnerships. I have, until now, not advised my clients to make use of the limited liability partnership provisions in the BOC because of their administrative difficulties and questionable liability protections. Those impediments have been removed. So, I am now advising my limited partnership and general partnership clients to take advantage of the limited liability partnership provisions unless the annual filing fees prove to outweigh the liability protections offered to LLPs and LLLPs.

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Ninth Circuit rules that ESOP Trustees' Payment of Excessive Executive Compensation Could be Breach of Fiduciary Duty

The Ninth Circuit has ruled that, where one of an ESOP's trustees was also the company's president, and on its board of directors, the trustees' “business decisions” leading to the payment of excessive executive compensation to the company president could constitute a breach of ERISA fiduciary responsibility to the ESOP. Johnson v. Couturier, (2009, CA9) 572 F.3d 1067. The court also ruled that ERISA preempted the indemnification agreements provided by the company to the president as a director and ESOP trustee.

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When is a Survival Statute Not a Survival Statute

According to Gary Rosin, it is "when the legislature (bar committee?) forgets to check all the moving parts. See a discussion of the problem at his blog.

Texas Allows Series LLCs

Texas recently amended its LLC law, effective Sept. 1, 2009, to provide for series LLCs. More information, including a link to the enrolled version of the bill signed by the Governor, is on
the Unincorporated Business Law Prof blog.
 

Texas Supremes Overturn Single Business Enterprise Theory

Our previous detailed discussion of Piercing the Corporate Veil notes that this theory has been followed by Texas courts. The Texas Supreme Court recently ruled that it would not follow this theory and that the theory had no place in Texas corporate law. (SSP Partners, et al. v. Gladstrong Investments (USA) Corporation, Inc., No. 05-0721, November 14, 2008.) Therefore, the more traditional tests regarding piercing the corporate veil now hold sway in Texas.

The Single Business Enterprise Theory provided that one corporation could be held liable for the debts of another corporation whenever the two corporations coordinate operations and combine resources in pursuit of the same business purpose. The Court noted that this theory has never been approved by the Court and the Court had prevously pointed out that an issue exists whether the theory is a necessary addition to Texas law. The Court notes: 

Creation of affiliated corporations to limit liability while pursuing common goals lies firmly within the law and is commonplace. We have never held corporations liable for each other’s obligations merely because of centralized control, mutual purposes, and shared finances. There must also be evidence of abuse, or as we said in Castleberry, injustice and inequity. By “injustice” and “inequity” we do not mean a subjective perception of unfairness by an individual judge or juror; rather, these words are used in Castleberry as shorthand references for the kinds of abuse, specifically identified, that the corporate structure should not shield — fraud, evasion of existing obligations, circumvention of statutes, monopolization, criminal conduct, and the like. Such abuse is necessary before disregarding the existence of a corporation as a separate entity. Any other rule would seriously compromise what we have called a “bedrock principle of corporate law”55 — that a legitimate purpose for forming a corporation is to limit individual liability for the corporation’s obligations.

 

Changes in Charging Orders for Texas Entities

The Texas legislature, in its most  recently ended regular session, made many changes to the Texas Business Organizations Code (BOC) and to the old Texas statutes that were codified to become the BOC. Those changes became effective September 1, 2007 and were, for the most part, technical in nature. Among the substantive changes adopted were new provisions regarding charging orders for Texas partnerships and LLCs.

Texas will now use the so-called Delaware approach to charging orders. Under this approach, charging orders are the exclusive remedy of creditors to reach the ownership interest of an owner of one of these Texas entities. The charging order is considered a lien on the owner’s interest. The creditor specifically has no rights to interfere in the entity's operations or to exercise any remedies regarding the entity's assets.

These new rules will create consistency between all of the non-corporate business entities in Texas. They should also reduce the use of Nevada or Delaware entities in Texas. Before these new rules were adopted, Nevada or Delaware entities may have been used in order to get more certainty regarding charging orders and the asset protection that owners of them may expect to get from these entities. Using Nevada or Delaware entities in Texas for asset protection purposes should no longer be necessary with the adoption of these new rules.