Corporate Law: Individuals seeking to buy into a partnership in New York should be wary of the fact that their personal assets may be at risk in the event of a future dispute with the other partners of the company. Pursuant to a 2007 decision handed down by the New York Court of Appeals, the partners in a firm operating as a limited liability partnership, or LLP, are not shielded from personal liability in disputes with one another. Ederer v. Gursky, 9 N.Y.3d 514 (N.Y. 2007).
Under well-established principles of New York partnership law, when a claim is brought against an LLP, individual liability is generally limited to only those partners directly involved in the activity underlying the claim. However, the Court of Appeals in Ederer held that the legislative intent behind the New York LLP statute was clearly to protect partners from claims brought against the partnership by third parties, and was not meant to interfere with the fiduciary duties and obligations existing between the partners themselves.
In Ederer, one partner in an LLP filed suit against his former partners for money he claimed he was owed when he withdrew from the firm pursuant to a partnership agreement. The claimant’s former partners disputed the claim but also asserted that they were shielded from personal liability because of the firm’s status as an LLP. The Court held that the liability shield does not protect the partners from personal liability for breaches of the partners’ obligations to each other.
Per the dissent in Ederer, it is noteworthy that the decision could create unfair results for partners with relatively smaller interests in an LLP. In practice, the minority partners could be held personally liable for claims of former partners who had much larger interests in the firm. In that respect, the decision arguably gives preferential treatment to such majority partners over both the other partners of the LLP and other third party creditors.
The Ederer case highlights the need for careful drafting of a partnership agreement, or other applicable documentation, at the outset of a company’s establishment. Many ignore this critical aspect because they are still in the “honeymoon” period. However, before buying into a partnership, it is crucial to clearly set forth each partner’s rights and obligations at the beginning and to prepare for the potential that some or all of the partners may want to go different ways in the future. It also emphasizes the importance that the document be customized to the company’s and the partners’ unique needs, rather than be left to chance by using “form” agreement that is not fully vetted by an attorney.
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