September 2001

RUPA is Coming:
UPA-- LLPs Beware

by Daniel S. Kleinberger

"the transition . . . warrants attention by all lawyers who have clients in general partnerships or who themselves practice within a general partnership"

On January 1, 2002, the Revised Uniform Partnership Act ("RUPA") becomes the only general partnership statute still "on the books" in Minnesota.1 On that day, the original Uniform Partnership Act ("UPA") is repealed2 and all existing UPA general partnerships become subject to the newer statute by operation of law.3

RUPA is a far more detailed and elaborate statute than its predecessor,4 and the transition therefore warrants attention by all lawyers who have clients in general partnerships or who themselves practice within a general partnership. The moment of transition is particularly important and potentially dangerous for existing limited liability partnerships ("LLPs") currently governed by the UPA. These UPA--LLPs risk losing their liability shields -- at least for 32 hours and perhaps much longer -- unless they take preventative action.

Fortunately, thanks to legislation enacted early in the 2001 session, preventative measures are now easily available. Understanding what measures to take requires first understanding the nature of the LLP liability shield, the structure of RUPA's transition provisions, and a bit about New Year's Day.

Once upon a time, when the law of business organizations was considerably simpler, it was axiomatic that each partner in a general partnership was personally liable for the obligations of the partnership. This "owner liability" was automatic, existed without regard to a partner's fault or participation in the partnership's business, and was a major reason to avoid using a general partnership.

In 1994 Minnesota joined the early phase of what became a sea change in the law of partnerships and amended Minnesota's UPA to provide for limited liability partnerships ("LLPs") -- general partnerships in which each partner benefits from a full, corporate-like liability shield.5 Becoming an LLP was quite simple: approval by a majority of the partners (unless the partnership agreement provided otherwise)6 and the filing of a one page "registration" with the secretary of state.7

The shield protected only against partnership obligations accrued while the shield was in effect, and, for various technical reasons, a renewal registration had to be filed annually.8 However, assuming that the shield was timely acquired and the registration properly renewed, partners in a Minnesota UPA--LLP were no more automatically liable for the partnership's obligations than shareholders in a Minnesota corporation were liable for the corporation's obligations.9

In 1997, the Minnesota Legislature adopted RUPA, which, like the Minnesota UPA, allowed a general partnership to become an LLP by filing a simple document with the secretary of state. RUPA labeled the document a "statement of qualification" and dispensed with any annual renewal requirement.10 An registration is necessary, however, to keep current basic information in the public record. Failure to file the report can imperil the LLP shield.11

RUPA also contained a multifaceted, multiyear transition section, applicable to all general partnerships but with special consequences for LLPs formed under the UPA.12 The key dates and provisions are as follows:

1. January 1, 1999 -- RUPA takes effect and governs all Minnesota general partnerships newly formed on or after that date.13 The UPA remains temporarily "on the books" and continues to govern each Minnesota general partnership that came into existence before January 1, 1999, unless that preexisting general partnership elects to be governed by RUPA.

2. January 1, 1999 to December 31, 2001 -- Any UPA general partnership "voluntarily may elect, in the manner provided in its partnership agreement or by law for amending the partnership agreement, to be governed by" RUPA.14

3. January 1, 2002 -- RUPA takes over completely. The UPA is repealed and all then remaining UPA general partnerships become RUPA general partnerships by operation of law.15 All UPA paraphernalia -- including the UPA's LLP provisions -- disappear.16

The transition into RUPA is problematic for preexisting Minnesota LLPs because a partnership's UPA--LLP shield inevitably disappears when the partnership becomes subject to RUPA. Fortunately, a fully functioning RUPA--LLP shield is immediately available, and a little preventative action can make the transition seamless.17 What particular action is necessary depends on whether the UPA general partnership elects before January 1, 2002, to be governed by RUPA or waits instead for the transition to occur by operation of law.

Electing in early. Merely electing to be governed by RUPA does not establish a RUPA--LLP shield. The "electing in" partnership must separately approve and effect the filing of a RUPA statement of qualification. To avoid any gaps in the shield, the election should take effect simultaneously with the effectiveness of the statement of qualification.18

Simultaneity is crucial. A partnership cannot benefit from RUPA's LLP provisions without first being subject to RUPA, and a partnership that has elected to become subject to RUPA cannot thereafter benefit from the UPA's LLP provisions.

Although the statement of qualification takes effect pursuant to a public filing and the "electing in" depends on a private agreement among the partners, simultaneity is no great technical problem. The document evidencing the election should state that the election takes effect at the same moment the statement of qualification takes effect.19
There is also a more substantive problem that must be addressed. Minn.Stat. ¤ 323A.12-02(c) states:

provisions of chapter 323A relating to the liability of the partnership's partners to third parties apply to limit those partners' liability to a third party who had done business with the partnership within one year preceding the partnership's election to be governed by chapter 323A, only if the third party knows or has received a notification of the partnership's election to be governed by chapter 323A.

DANIEL KLEINBERGER is professor of law at William Mitchell College of Law. A coauthor of Limited Liability Companies: Tax and Business Law (Warren, Gorham & Lamont); he is also the Reporter for NCCUSL's new uniform limited partnership act.

Although this provision was not drafted with the LLP shield protections in mind,20 the words of the provision plainly apply to those protections. As a result, the RUPA--LLP shield of an "electing in" partnership is perforated in favor of customers, vendors and other third parties who did business with the partnership in the year proceeding the election.

Thanks to the legislation enacted in the 2001 session, the perforations seal themselves for claims accruing after December 31, 2001.21 To seal the holes for the period between the "electing in" date and January 1, 2002, the partnership should identify each "third party who had done business with the partnership within one year before the partnership's election," and make sure that each receives the required notification.
RUPA itself defines the mechanics of notification: "A person receives a notification when the notification: (1) comes to the person's attention; or (2) is duly delivered at the person's place of business or at any other place held out by the person as a place for receiving communications."22
As for the contents of the notification, there are no magic words. However, from an exclusively legal perspective, brevity is probably the safest course. For example: "As provided in Minnesota Statutes ¤ 323A.12-02(c), [full name of partnership] is informing you that [full name of partnership] has elected to be governed by Minnesota Statutes, chapter 323A."

For business reasons a partnership may wish to briefly explain the notice in order to anticipate and avoid questions from the recipients. If so, the explanation must be carefully phrased to avoid misleading the recipients. For example, it is correct to state "We are providing you this information so that the provisions of chapter 323A limiting the liability of the our partners to you apply immediately rather than on January 1, 2002. You are not obligated to reply to or take any other action in response to this notice." It is not, in contrast, correct to state merely: "You need not take any action in response to this notice."

Letting the law take its course. The notification requirements of Section 323A.12-02(c) do not apply to UPA partnerships that become subject to RUPA by operation of law. However, a UPA--LLP that it is "dragged in" under RUPA does not automatically acquire a RUPA LLP shield. To the contrary, the "dragging in" process actually strips away the preexisting UPA--LLP shield. It is therefore necessary for each "non-electing" UPA--LLP to have a RUPA statement of qualification in effect from the moment that RUPA takes over.

Here is where New Year's Day becomes significant, because RUPA takes over at 12:01 AM, New Year's Day, 2002.23 That day is a legal holiday, and therefore the Office of the Secretary of State will not be open to file any RUPA statements of qualification.

Indeed, as Minnesota RUPA was originally enacted, each "dragged in" UPA--LLP would have faced a shield gap of at least 32 hours. (This calculation assumes that the secretary of state's office would have opened at 8:00 AM January, 2, 2002, and that each UPA--LLP seeking to file a statement of qualification would have been first in line.)

It would have been no solution to prefile a statement of qualification with a delayed effective date,24 because such a filing would either have been:

• the act of a UPA partnership -- i.e., an organization not subject to RUPA -- and therefore meaningless; or
• an act indicating that the partnership had elected to be governed by RUPA, had left behind both the UPA and the UPA--LLP shield, and had chosen to go "shield-less" until the delayed effective date.

Fortunately, the 2001 Legislature fixed this problem completely, allowing UPA partnerships to prefile RUPA statements of qualification while remaining governed by the UPA. The prefiling:

• is available "[a]fter August 31, 2001, and before January 1, 2002" in the Office of the Secretary of State,
• must contain the same information as required for an ordinary RUPA statement of qualification,
• does not constitute an election to be governed by RUPA,
• will take effect automatically when RUPA "drags in" the partnership, and
• must contain "clearly and conspicuously" these words:

This statement of qualification is filed pursuant to section 5 of this act [Minn. Laws 2001, ch. 64], is not an election under Minnesota Statutes, section 323A.12-02, paragraph (c), to be governed by Minnesota Statutes, chapter 323A, and is to take effect on January 1, 2002, when by operation of law, Minnesota Statutes, chapter 323A, will govern the partnership that is filing this statement.25

RUPA takes over completely on January 1, 2002, and at the same moment every LLP shield based on Minnesota's Uniform Partnership Act will vanish. To prevent a gap in its shield, each Minnesota UPA--LLP should either:

• before January 1, 2002, elect to be governed by <H>rupa<P>, and take care to:

• 1. file a RUPA statement of qualification that takes effect simultaneously with the election, and
  2. give the notification to third parties as provided in Section 323A.12-02(c); or
• between September 1 and December 3, 2001, (inclusive), prefile a statement of qualification under the 2001 legislation, so that the moment the partnership is dragged into RUPA a RUPA-LLP shield will arise automatically.

1. RUPA is a product of the National Conference of Commissioners on Uniform State Laws ("NCCUSL"). The Minnesota version appears in Minn. Stat. ch. 323A. NCCUSL formally eschewed the label "Revised Uniform Partnership Act," and Minn. Stat. ¤ 323A.12-01 states that "Chapter 323A may be cited as the Uniform Partnership Act (1994)." However, throughout the country practitioners and academics experienced with the statute refer to it as the "Revised Uniform Partnership Act" and "RUPA."
2. The UPA is also a NCCUSL product, approved in 1914 and adopted in Minnesota in 1921. Minnesota's UPA appears in Minn. Stat. ch. 323. The repealer was enacted as part of the bill enacting Minnesota RUPA. Minn. Laws 1997, ch. 174, ¤ 68.
3. Minn. Stat. ¤ 323A.12-02(b).
4. Minnesota's version of the UPA occupies 21 pages in the official volumes of Minnesota statutes. Minnesota's RUPA takes up 28 pages.
5. Minn. Laws 1994, ch. 539, ¤¤ 12 - 18, amending Minn. Stat. ¤¤ 323.14, 323.17, 323.35, 323.39 and enacting ¤¤ 323.44 - 323.46.
6. Minn.Stat. ¤ 323.44, subd. 4.
7. Minn. Stat. ¤ 323.44, subds. 1 and 2.
8. Minn.Stat. ¤ 323.44, subd. 1.
9. Minn.Stat. ¤ 323.14, subd. 2.
10. Minn. Stat. ¤ 323A.10-01.
11. Minn. Stat. ¤ 323A.10-03. Minnesota's version of RUPA requires the secretary of state to send each RUPA LLP an annual registration form containing a warning that failure to timely file the form will result in revocation of the LLP's statement of qualification. Minn.Stat. ¤ 323A.10-03(a). However, even if revocation occurs and the shield disappears, the general partnership has a one-year grace period in which to apply for reinstatement. ¤ 323A.10-03(f). "A reinstatement under subsection (f) relates back to and takes effect as of the effective date of the revocation, and the partnership's status as a limited liability partnership continues as if the revocation had never occurred." ¤ 323A.10-03(g).
12. Minn. Stat. ¤ 323A.12-02.
13. The UPA continues for a time to apply to any successor "partnership [that] is continuing the business of a dissolved [UPA] partnership." Minn. Stat. ¤ 323A.12-02(a)(1).
14. Minn. Stat. ¤¤ 323A.12-02(c) and 323A.12-02(a)(2). Unless the partnership agreement provides otherwise, the manner for amending the partnership agreement is unanimous consent. Minn.Stat. ¤ 323.17(8).
15. Minn. Stat. ¤ 323A.12-02(b) (RUPA hegemony) and Minn. Laws 1997, ch. 174, ¤ 68 (UPA repealer).
16. Laws 1997, c. 174, art. 12, ¤ 69, provides that chapter 323A does not affect an action or proceeding commenced or right accrued before January 1, 1999. Presumably, the UPA also remains relevant for rights accrued relative to a UPA partnership before that partnership became subject to RUPA.
17. There will be no need to change the partnership's name, thanks to an amendment made to Minnesota RUPA in 1999. Minn. Laws 1999, c. 133, ¤ 6, amending Minn. Stat. ¤ 323A.10-02.
18. Like its Minnesota predecessor, RUPA's LLP shield protects partners against owner's liability only as to partnership obligations "incurred while the partnership is a limited liability partnership" -- i.e., while the partnership has a statement of qualification in effect. Minn. Stat. ¤ 323A.3-06.
19. RUPA does not require the election to be documented, Minn. Stat. ¤ 323A.10-01, but documentation is nonetheless the prudent approach.
20. See the Official (NCCUSL) Comment to RUPA ¤ 1206.
21. Minn. Laws 2000, ch. 64, ¤ 4 (amending Minn. Stat. ¤ 323A.12-02(c)). The legislation was sponsored by the MSBA Business Law Section, supported by the Minnesota Secretary of State and drafted by the author and Bert Black of the Office of the Minnesota Secretary of State.
22. Minn. Stat. ¤ 323A.1-02(d).
23. See Minn. Stat. ¤¤ 323.12-02(b) ( "On and after January 1, 2002, chapter 323A governs all partnerships.") and 645.02 ("Each act takes effect at 12:01 a.m. on the day it becomes effective, unless a different time is specified in the act.").
24. Minn. Stat. ¤ 323A.10-01(c)(5).
25. Minn. Laws 2000, ch. 64, ¤ 5.