Limited Liability for Limited Partners: An Argument for the Abolition of the Control Rule
One of the important features of the limited partnership' that makes investment in this form of business organization attractive is the general immunity afforded to limited partners from liability for the obligations of the partnership. This immunity, however,can be forfeited. Under both the Uniform Limited Partnership Act (ULPA) and the Revised Uniform Limited Partnership Act (RULPA), a limited partner becomes liable for the obligations of the partnership if, in addition to the exercise of the rights and powers of a limited partner, the limited partner "takes part in the control of the business.''
Not surprisingly, when sophisticated investors are offered limited partnership interests, these investors often request provisions in the certificate of limited partnership or the partnership agreement' providing that the general partners may commit the partnership to certain types of transactions only with the consent of the holders of some specified percentage of the limited partnership interests or that the limited partners be given some voice in the selection of the partnership's managers. Although these requests are understandable, an obvious tension arises between the limited partners' desire to exercise control over important decisions affecting the partnership and the threat of personal liability for taking part, or participating, in the control of the business of the partnership. One of the most vexing problems facing lawyers who represent sophisticated limited partnership investors is advising these investors how much decision-making power they can obtain through negotiation with the general partners without losing immunity from liability for the obligations of the partnership.
There has been no dearth of insightful commentary pointing out the uncertainty inherent in the control rule. Most of this commentary has attempted to suggest the appropriate judicial standards for deciding whether the particular conduct of a limited partner in relation to the partnership business should subject the limited partner to personal liability for the obligations of the partnership. Few commentators, however, have had the temerity even to suggest that the control rule be abolished and that limited partners have no personal liability for the obligations of the partnership regardless of the degree to which the limited partners participate in the control of the partnership business.
This Article presses that argument. Part II examines the origins and present status of the control rule. This examination ex-poses the uncertain boundaries of a limited partner's potential liability under the rule and the resulting difficulty of advising potential investors in limited partnerships. Part III criticizes the control rule on the grounds that it complicates a potential investor's calculation of the risk of investing in a limited partnership, compromises the negotiating position of limited partners relative to general partners, and is not supported by any valid policy that could not be accommodated by other existing legal principles. Finally, part IV argues that the control rule should be abolished in favor of a rule that generally would free limited partners from personal liability for the obligations of the partnership. Part IV also suggests specific legislation that would effect this change.
Joseph J. Basile, Jr.,
Limited Liability for Limited Partners: An Argument for the Abolition of the Control Rule,
38 Vanderbilt Law Review
Available at: https://scholarship.law.vanderbilt.edu/vlr/vol38/iss5/2