Ederer v. Gursky, 9 N.Y.3d 514 (2007) (uncorrected and subject to revision before official publication)

Brief Summary
Even after withdrawal, partners in a law firm organized as a limited liability partnership (“LLP”) may be personally liable for the debts of the LLP owed to present or former partners.

Complete Summary
Prior to 2001, plaintiff Ederer became a 30 percent shareholder in defendant Gursky’s professional corporation (“PC”). In 2001, they formed an LLP with the same division of interest (30 percent and 70 percent), but they did not create a partnership agreement. Shortly after its formation, three partners joined the LLP, taking a collective 15 percent interest and thus dropping Gursky to 55 percent. For around two years, both the PC and the LLP practiced law, with the PC handling old matters, lending money to the LLP and gradually transferring assets to the LLP. In 2003, Ederer withdrew from the PC and the LLP. Later that year, Ederer brought this suit against all four remaining partners in which he sought an accounting of his interests in both entities. Defendants asserted immunity from suit under New York Partnership Law § 26(b) which provides:

no partner of [an LLP] is liable or accountable, directly or indirectly . . . for any debts, obligations or liabilities of, or chargeable to, the [LLP] or each other, whether arising in tort, contract or otherwise, which are incurred, created or assumed by such partnership while such partnership is a registered [LLC], solely by reason of being such a partner.

Mckinney’s Partnership Law § 26(b) (emphasis added).

The primary issue was whether limited liability in this section truly applies to “any debts” or only applies to debts owed to third parties. The Court of Appeals of New York adopted the latter interpretation, holding the four partners potentially personally liable to Ederer. The court’s reasoning was based on three observations: first, the predecessor to § 26 expressly limited liability to third persons; second, § 26 is part of article 3 of Partnership Law (“Relations of Partners to Persons Dealing with the Partnership”) rather than article 4 (“Relations of Partners to One Another”); finally, LLPs were originally created to protect partners from the type of ruinous personal liability to third parties that arose out of the savings and loan crisis.

Notably, Ederer had claims to assets which had been transferred from the PC to the LLP. His claims were based on agreements that he had with the PC. Despite the fact that the newer three partners were not parties to these agreements, they were still potentially personally liable to Ederer to the extent that they were in possession of those assets.

The court also emphasized that such liability could be eliminated with a properly drafted partnership agreement.

Significance of Opinion
Lawyers at LLPs should make sure that the language of their LLP agreements expressly and unambiguously reflects their intentions.

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