Legislature(1999 - 2000)
02/07/2000 03:27 PM House L&C
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HB 296-UNIFORM PARTNERSHIP ACT CHAIRMAN ROKEBERG announced the first order of business would be HOUSE BILL NO. 296, "An Act relating to partnerships; amending Rule 25(c), Alaska Rules of Civil Procedure; and providing for an effective date." PAT HARMAN, Legislative Aide to Representative Pete Kott [who chairs the House Judiciary Standing Committee], came forward to testify on behalf of the House Judiciary Standing Committee, sponsor of HB 296. He apologized for not having a sectional analysis on the bill. He introduced Art Peterson, Uniform Law Commissioner for Alaska. Number 0139 ART PETERSON, Private Attorney, Uniform Law Commissioner for Alaska, National Conference of Commissioners on Uniform State Laws, reported the following: The current partnership law in Alaska is based on the Uniform Law Conferences' 1914 version. HB 296 updates it to the 1997 version. The original UPA [Uniform Partnership Act] was enacted in all states except Louisiana, and partnership law in this country essentially is the Uniform Partnership Act and the court decisions incorporating it. This update of the 1914 version has already been enacted in 24 states plus 4 that have enacted the basic revision without the 1996 and '97 amendments. So, they have essentially 28 states that have already enacted this bill before you. It reflects modern business practices and eight decades of court decisions and scholarly analysis. The basic change, with ramifications throughout the Act, is the clear legislative statement of the entity concept of partnerships. The other basic concept that's been floating around for years under the common law and integrated, to some extent, into the current law, is the aggregate concept: that a partnership is merely an aggregate of individuals. And that notion, too, has various ramifications that appear in the current law. The current law, as I say, is a blend - somewhat confusing sometimes - of the two concepts. So the Act before you makes the shift and makes it consistent and brings things into, pretty much, the modern world. There's one change I would like to see the committee request in the bill, and that is the relocation of a definition section and a general provisions back to the front where they are in the official, national version. In Alaska, we have this drafting style requirement that puts definitions and general provisions in the back. And that's fine. Some of you may recall that I was the second revisor of statutes for this state back in the 60s and early 70s, and I helped enforce that rule. And I know the rationale for that rule, and that was to facilitate the use of the statutes within a state so that a person can go from Title 1 to Title 47, and all the pieces in between, and know where to find the general provisions or to find definitions. That makes sense, but when you're talking about a uniform Act - especially a complex one like we've done in the Uniform Commercial Code, like we've done in the Uniform Probate Code - you just follow the national version. If the idea of going to a uniform Act is to facilitate interstate use of Alaska law, facilitate business, facilitate commerce, et cetera, then it makes sense to use the national version of the numbering. So, I would like to see the committee request Legislative Affairs to reestablish the official sequence of sections. And with that, I'd like to defer to John McCabe who is the Legislative Director and Legal Counsel for the National Conference of Commissioners on Uniform State Laws [NCCUSL]. He knows much more about the field than I do, and, I believe, also online is Harry Haynsworth, who is the chair of the drafting committee that produced this latest version. Number 0516 JOHN MCCABE, Legislative Director and Legal Counsel, National Conference of Commissioners on Uniform State Laws, testified via teleconference from Chicago, Illinois. He commented: As Art [Peterson] said to you, partnership law stems from the Uniform Partnership Act of 1914, and this is the first major effort to revise that 1914 Act. The concluding Act is called the Uniform Partnership Act 1997. That Act includes the revision of the original 1914 Act plus provisions on limited liability partnership (LLP), which we originally worked on in 1995, 1996, as a kind of separate Act, but then folded them into this draft so that they would be one seamless whole between the revision of the 1914 Act and the addition of limited liability partnership. And I'd like to set aside limited liability partnership for a second and simply talk about what RUPA [Revised Uniform Partnership Act] does basically. Partnership law ... was originally an amalgamation of what we call entity theory and aggregate theory, but even before that, I think I'd like to identify what a partnership is. It's often been called a residual business organization in American law. If you have more than one person doing business and you do not have a corporation or a limited partnership or a limited liability company or any other kind of registered entity, frequently the conclusion will be that the individuals together, who are doing business, are doing business as a partnership. You don't have to have a specific agreement that the partners are in a partnership. They simply have ... to be doing business together in a consensual form that may be implied from the way that they are doing business. It is possible, under American law - and this is based on centuries of law - that two guys meeting on the street corner with a handshake can create a partnership to do business together. And that form of partnership formation and the way people get into partnerships continues from the 1914 Act to this Act. This Act does say that a partnership is clearly an entity, and from that a number of serious outcomes result. The entity is able to hold property in its own name, and the property of the entity, the partnership, is not the property of an individual partner. The entity may sue and be sued in its own name. And it does not have to include all of the partners in a lawsuit, nor does anybody who sues the partner need to name all of the partners in order to have an effective lawsuit. Number 0727 MR. MCCABE further stated: A partnership ... articulates joint and several liabilities of the partners, continuing the notion of each partner liable for the debts of the partnership. However, in this Act, because it is an entity, we divide, essentially, a partnership's interests from that property or those assets that are the partnerships assets .... A partner does not have ... a specific right or title to partnership property and, therefore, a creditor of a partner goes to the partnership interest of the partner, not to any of the assets of the partnership. This, again, is one of those outcomes of the entity concept. Perhaps the major outcome of going to an entity concept may be found in the dissolution rules. ... Under current law and under the common law of partnerships, ... if a partnership leaves a partnership, the partnership dissolves and goes into a winding-up phase. Much of the difficulty of modern partnerships is sustaining the partnership when a partner actually dissociates. Under this Act, this association is not automatic dissolution. There are provisions for buying out the partner's interests. And even if those interests are not viable, ... the partnership and the members of the partnership - the partners themselves - have provisions whereby they can continue the partnership beyond the dissociation of the single partner. And the dissolution rules are probably one of the largest advances in partnership law under this Act. MR. MCCABE continued: The Act does some other things relating to partnership fiduciary obligations. They are stated in the Act. The Act makes it very clear that this is a default Act. That is, we make it very clear that the partnership agreement, or agreement between the partners, will control with the exception of certain provisions of this Act that apply notwithstanding agreement. But, for the most part, a partnership is a consensual organization driven by its own agreements, and the relationships between the partners are generally governed by the partnership agreement and the four corners of that agreement. And we look there first before we actually look to the legislation to determine that relationship. That is kind of a schematic description ... of what is happening in the '97 Act with regard to partnership law and bringing it up to date from 1914 to 1997. We believe that the new partnership Act is much more attuned to the way people do business today and is a much more utilizable Act and a much easier Act to get switched to draft partnership agreements. And having said that, I'd like to talk a minute about limited liability partnerships (LLPs) under the revised Act and just give you a short dissertation about the difference between this and Alaska Statutes that are currently in place, because Alaska, like most states, has some provisions on limited liability partnership currently attached to its existing partnership law. The idea of limited liability partnership came out of the 1990s. The first Act was an Act that we all in the partnership arena call TRUPA, Texas Revised Uniform Partnership Act, that kind of pioneered the notion of limited liability partnerships. The notion is very simple - that a partnership, by registering a document, a statement under the Uniform Act provision, can obtain ... a shield from vicarious liability for its partners. That is, a partner is clearly liable for his own contracts, for his own obligations, for his own tortious acts, and can be held liable for them along with a partnership when he's doing partnership business, but that other partners are not vicariously liable. And that's the fundamental notion here that the Uniform Act serves, and it's done with a fairly simple registration and some simple administrative provisions to provide for limited liability. The differences between this Uniform Act and the Alaska Statute, as we read it, are threefold, and the first is by far the most important. The Uniform Act is a full- shield liability statute. That is, there are no restrictions on the kinds of obligations, conduct, whatever, for which a partner might have vicarious liability. The Alaska Statute follows earlier patterns of limited liability partnership, again harkening back really to TRUPA, which was the pioneer in this area, and that is, it provides a shield from vicarious liability but it doesn't for certain things. It doesn't for malpractice. It doesn't for commercial relationships that the partnership enters into. And the clear trend in the United States is clearly the full-shield liability, so that what Alaska would do with adopting the Uniform Act would be to go with the rest of the country in moving towards full-shield liability. And I think that's the big significant difference here. The second difference is that Alaska's registration provisions are a little more, shall we say, complicated than those under the Uniform Act. The Uniform Act looks at a partnership as a partnership and doesn't want to change the character of the partnership by registering it as a limited liability partnership. What the Uniform Act wants to do is to retain the partnership as we've always known it. What that means, for instance, in terms of registration, is we don't worry about things like names and name registration and keeping name registries as we do for corporations, limited liability companies, et cetera. We have never controlled the names of partnerships nor tried to avoid duplication of names of partnerships. And the Uniform Act continues that with regard to registered limited liability partnership. The third thing ... is that there is an insurance requirement which is related to the liability shield in current Alaska law, and the Uniform Act has no insurance requirements, which is part, really, of the notion of the full-shield vicarious liability protection for partners. Having said all of that, I think probably I should defer and let Harry correct my errors and provide any other information and fill in the holes here with regard to this Act, and then I'd be happy to answer questions. Number 1138 CHAIRMAN ROKEBERG asked Mr. McCabe to explain vicarious liability. MR. MCCABE explained that vicarious liability is liability for the acts of other people. In a non-limited liability partnership, every partner is liable to the full extent of his or her assets, whether they are personal or partnership assets. In a limited liability partnership (LLP), a partner continues to be liable to the fullest extent of his or her own assets, for his or her own obligations, and for the debts of the partnership that that person has himself or herself incurred. The partnership is also liable, but the other partners are not liable simply for being partners in the partnership. CHAIRMAN ROKEBERG wondered, "The partner can incur a liability for the partnership and be responsible for it, but ... just because partners B and C are not liable for the partnership liability?" MR. MCCABE clarified that [the partner] is not personally liable. CHAIRMAN ROKEBERG said the entity is liable, then. MR. MCCABE affirmed that the entity is clearly liable. CHAIRMAN ROKEBERG asked if the insurance requirements are left over from the LLP statute. MR. MCCABE indicated there are insurance requirements in the current LLP statute. He said this is consistent with early LLP Acts. CHAIRMAN ROKEBERG asked, "The Alaska registration requirements, you're referring to the names, is that it?" MR. MCCABE said much of it is name registration. Number 1265 HARRY HAYNSWORTH, Dean, William Mitchell College of Law, testified via teleconference from Arizona. He apologized for not having a sectional analysis. MR. PETERSON interjected and stated that earlier Mr. Harman was referring to a request for a simplified version from the legislative staff. CHAIRMAN ROKEBERG asked, "Is that the page 1 through 18?" MR. PETERSON replied, "Yes. We have that, and then there's an additional one that addresses the limited liability stuff, and you have that in your packet, too, but what you don't have is the simplified version from Legislative Affairs Agency." CHAIRMAN ROKEBERG indicated he had a summary in hand and asked if it is the 1996 summary of limited liability. MR. PETERSON responded yes. MR. HAYNSWORTH added that there was a request for a section-by- section comparison of the Uniform Act and the present Alaska Statute. He said he did not receive the material in time to do anything. MR. MCCABE clarified that it was already done. MR. PETERSON said he had received it. MR. HAYNSWORTH said Mr. Peterson and Mr. McCabe had summarized very well the nuts and bolts of the Uniform Partnership Act and what it does. He said the Act modernizes the partnership Act and is not as radical of a change as it may appear. He does not think there has been mention of the transition provisions that apply. He directed his comments to Mr. Peterson and said, "I assume you use the uniform provisions in your Act." MR. PETERSON replied yes. MR. HAYNSWORTH explained that a double transition period has been provided, which enables the Act to be adopted. It would then apply to all new partnerships formed after the effective date of the Act. It would not apply to existing general partnerships until a time certain. He indicated many states have used two or three years after the adoption date. In the meantime, any existing partnerships that would like to apply the new Act could elect to have it apply by filing out a registration statement. It gives existing partnerships a period of several years to decide whether to have the new Act apply. This seems to have worked in the states that have tried it. Number 1485 CHAIRMAN ROKEBERG asked Mr. Haynsworth to describe the dissolution area in the new Uniform Act. MR. HAYNSWORTH explained: If you're familiar at all with a corporation, one of the things that you know about a corporation is that it has perpetual existence, that is, that it exists even if one or more of the shareholders may die or leaves the corporation for some reason. ... In contrast, a traditional common-law partnership, or a partnership formed under the Uniform Partnership Act of 1914, ... if a partner left, for whatever reason, that automatically caused that partnership to cease to exist. ... Legally, you say it dissolved and it had to be liquidated. Even if the very next day the remaining partners continued to do business, those remaining partners, when they started up business the next day, were actually a new partnership. And the old partnership no longer existed, and all the assets and liabilities had to be wound up, if you will. It went into a dissolution procedure, and then you liquidate and you pay off all those debts and et cetera that the partnership had. So, that's always been a real problem for the general partnership. And so, what we did when we were drafting the new Act, we really made it like a corporation, basically. And, that is, when a partner leaves, the partnership does not dissolve, but it continues on. And then the partners themselves make a decision as to whether or not it will continue forever or it will dissolve, ...,but it automatically continues on just like a corporation. And that clarifies a lot of very difficult issues ... that were present when you had the old partnership Act. There's a case, for example, in Ohio where a partner died. And the case involved a title insurance policy. And the question was whether or not the title insurance policy continued to apply to the partnership, which continued on in business. And the answer ... was no, it didn't, because that was a new partnership and the title insurance company policy only covered the old partnership. Well, those kinds of things just created horrible messes for people, and so that was one of the major reforms, I would say, that was made in the new Act. But it really does nothing more than basically do what now already occurs in a corporation anyway. But they just would apply that same kind of analysis to a partnership. And, incidentally, that's the ... ruling we have now in the revised partnership Act. ... But it really actually simplifies the partnership law tremendously by giving it that continuity. CHAIRMAN ROKEBERG asked, "Is there like a default date if there is not a recasting of a new partnership, if you don't re- register?" Number 1696 MR. HAYNSWORTH replied that there is usually no registration in a general partnership. Under the current law, people just continue in business, and most assume it is the same partnership; however, legally, it is not. The registration only comes in with respect to LLPs. CHAIRMAN ROKEBERG commented, "Right. Surprise, surprise. People have probably been operating without knowing they're not supposed to be operating that way for years and years." MR. HAYNSWORTH said that was the kind of problem that people were not aware of. He explained that many mortgages have a provision in which the acceleration is triggered in the event the property is sold or disposed of, or if the entity changes in any way. Some mortgage companies have delayed a mortgage when a partner died, even though the partnership continued doing business. Number 1752 MR. MCCABE stated that it is difficult to have LLPs without continuity rules. For example, if a partnership dissolves in a registered LLP, it will dissolve automatically if a partner dissociates. This would require the partners to re-register the new partnership. If they continued without re-registering, they would be operating without limitation of liability. This would be an unpleasant surprise if [the partners] were not aware of how it works. CHAIRMAN ROKEBERG asked whether this particular legislation changes the historic general partnership joint and several liabilities. MR. MCCABE said it does not. CHAIRMAN ROKEBERG asked, "Only if there's a LLP?" MR. HAYNSWORTH affirmed that. CHAIRMAN ROKEBERG asked: Tell me gentlemen, if you could both answer this question, first Mr. McCabe and then Dean Haynsworth. As a practical matter, can you give me a reason why any of you would counsel somebody establishing a LLP rather than a LLC [Limited Liability Company] now? Number 1818 MR. MCCABE replied: LLPs are available to existing partnerships. In other words, you're operating under a partnership, that is, an existing partnership with agreements between the partner about the relationships within the partnership. For that partnership to go to an LLC would technically require that it do dissolve and wind up the partnership business before reforming itself as an LLC. The limited liability partnership provisions in the Uniform Act expressly honor the continuity of that entity. In other words, to obtain limitation of liability, you don't have to dissolve. You just simply register your existing partnership as an LLP and your partners obtain it, so you don't disrupt the organization of the partnership. The basic agreements between the partners remain much the same. Their relationships remain much the same. You do not have to go through dissolution and winding up, all of those things that would potentially disrupt a business. You simply, from the point in time of the registration, and, with respect to your business with third parties, become a limited liability partnership. And because of the registration from that time forward, there would be limitation of liability in the sense that we described it, but to get to LLC status would require considerable change and considerable difficulty that you don't get if you go to an LLP. I think we have to confine our thoughts about LLPs to partnerships that are already there and wish to obtain limitation of liability. And the LLP provisions are there to make it doable without going through all of that. Number 1909 MR. HAYNSWORTH wondered if the question is whether somebody would want to form an LLC as opposed to an LLP. CHAIRMAN ROKEBERG responded yes. MR. HAYNSWORTH explained: In that case, the answer is, as lawyers always give you: it depends. ... My own feeling is that I would generally advise someone to form a limited liability partnership as opposed to a limited liability company. And the reason for that would be, primarily, that a limited liability partnership is really just a partnership by another name. And so, ... the partnership agreement is the same basic agreement you have in a partnership. And it's something that's got a hundred years of history behind it because ... the partnership rules basically apply except for the liability issue. But, with respect to a limited liability company, there's very little case law out there interpreting what a limited liability company is and what the relation among the owners is. And you have a different kind of agreement. It's called an operating agreement, and they're not partners, they're members and managers. And so, you've got a lot of new terminology and a lot of new concepts in an LLC, which a lot of people find very difficult to work with, and they're not as comfortable with that as they would be with a limited liability partnership, which gives you the same protection of liability, but does it in the format of a set of principles that everyone is familiar with. So, I come down, basically, primarily, on the side of using an LLP as long as the statute is the uniform-type statute which covers all types of businesses. Number 2010 CHAIRMAN ROKEBERG indicated there seems to be a distinction between the liability shield of an LLC and that of an LLP. MR. HAYNSWORTH clarified that there is no distinction between the two under the Uniform Act. CHAIRMAN ROKEBERG wondered if LLCs and LLPs are treated the same for tax purposes. MR. HAYNSWORTH replied yes. They are both taxed under the partnership provisions of the Internal Revenue Service (IRS). CHAIRMAN ROKEBERG asked, "And the new provisions we have before us allow the back-of-the-napkin partnership deal to be made, and so this statute would be the default organization in lieu of a written agreement?" MR. HAYNSWORTH affirmed that. CHAIRMAN ROKEBERG inquired, "Can you, by contract, overcome or override some provisions of the state statute?" MR. HAYNSWORTH replied yes. He explained: The only ones you can't really totally override are the fiduciary duty sections, the ones that say that the partners can't steal from the partnership and they must act in good faith towards each other. Those, you can set standards for how that will be interpreted, but you can't eliminate those. But virtually everything else you could, whatever the agreements says would control, even if it's something different from that in the Act itself. Number 2160 BRYAN MERRELL, Underwriter, First American Title Insurance Company, testified via teleconference from Anchorage. He noted that he handles questions from agents relating to what types of transactions insurance can be written for. He has had the misfortune in the past of dealing with a few claims relating to partnerships and authority issues. He stated: This change in the Partnership Act is important to us and, certainly, [we] do see some benefits toward our industry and toward the real estate industry in general. ... Most of our difficulty relates to just the very nature of the partnership and, in particular, general and limited partnerships, but trying to determine just who has the authority to bind that entity for purposes of our being able to insure the documents that those people would execute - whether they're deeds or leases or deeds of trust or some other mortgage instrument that we're going to insure. ... The concept of treating a partnership as an entity is helpful to us, in that the concept makes it's clearer that if a judgment, for example, is entered against the partnership and not the partners, then we can feel more secure in not showing that judgment as having effects (indisc.) individual partner's interest. And that's certainly clarified in the Act. One of the things that I'm concerned with - and ... quite honestly wish that the new Act went a little bit further to go toward - is the concept of the registration, in particular, the provisions that would allow a partnership, should they choose to do so, to register a certificate of authority stating what parties can bind the partnership. Knowing something like that would be quite useful to us, because then we could rely on it, and we're entitled to rely on it under the terms of the Act. However, the Act, as written here in the bill, allows that to be - as I read it - only permissive and not mandatory; [it] may be only somewhat helpful to us. And I would be interested to hear any of the [bill's] proponents' ... advice if there was any reason why that provision couldn't be made a little more mandatory, ... so that those who deal with partnerships can do so with some greater degree of security and certainty. The other issue was one that was mentioned briefly before, and that is the transitional provisions of the Act, where you're going to have a term. And the way that the bill is written right now, it's going to be a five-year transition from January 1, 2001, until 2006, where those who deal with partnerships are going to have to be concerned, to a certain degree, with whether or not the partnership is acting under the old Act or the new Act, and, therefore, whether or not it can be treated as an entity or not. That causes a good deal of extra analysis for folks who'd just as soon not do that much more analysis - and for a pretty long period of time. It sounds to me like longer than what some other states have done. And I'm curious ... why five years ... and why, at all, is it required or necessary that that be done? I understand that it eases some administrative burden or choice burden, I suppose, if you will, on the current existing partnerships as to whether or not they want to be governed by the old or new Act, but it's a choice that - I think, if I'm understanding the bill correctly - they'll eventually have to make anyway. And my thought was that if it could be somewhat more like the transition that was made several years ago, ... where existing entities could choose a few provisions from the old Act to remain effective, but otherwise they were all governed by the new provisions of the new Act in a somewhat quicker fashion. Number 2397 MR. HAYNSWORTH responded: On the certificate of authority issue - and, for those of you who may not be familiar, what we've done in the Act is allow and authorize a partnership to file something that says who has authority to sign deeds and things like that, and once that's filed, then any third party can rely on that - so, that clarifies on the things that Mr. Merrell was talking about. But he said, "Why is it only permissive and not mandatory?" And there were two reasons for that. One is that not every entity that's a partnership knows it's a partnership. Going back to what Mr. McCabe talked about, you're a partnership if you're not another business entity and you're in business for profit. You are a partnership by default. And so, there was some concern about do you make this mandatory? But you have hundreds and maybe thousands of partnerships that don't even know they're partnerships. It's going to create a mess. The second thing was that ... your secretary of states, in many states, objected to making it mandatory because they were concerned about having all of these things filed and the amount of pressure it would put on them .... TAPE 00-10, SIDE B Number 0001 MR. HAYNSWORTH continued [begins midspeech because of tape change]: ... is the fact that a title insurance company is going to tell a borrower or an owner, "You file that certificate of authority or we're not going to issue the title insurance policy or we're not going to authorize the mortgage to this person." And so, for the people that it makes a difference, they will be filing. So that sort of solves the problem. And if you have a law firm, for example, and they don't own any real property, there's no real reason for them to file unless they're going to buy some property. ... The way we have, it seems to work and satisfy the concerns that were raised by title insurance companies and mortgage companies and people like that. Then, with respect to the transitional rules, you ... asked a question about really why not just have a situation where you will allow an existing partnership to retain some of the old rules but still be bound by everything else in the new Act once it went into effect. And we tried to do that at one point. We actually spent a lot of time drafting, and we could never make it work because there's so many differences in the old Act and the new Act. They're not radical, but there's so many differences that the list would have had to be too long. So, we chose this double-effective-date mechanism as an alternative that seemed to work best of all. And the five years versus any other time period, that's simply a legislative determination. Most states I know have been two or three years. MR. MCCABE interjected and stated there is a constitutional issue underlying this. Certain things have to be done in transition to provide that people's rights, obligations, and contracts are not disrupted by a law change. The single goal is for one Act to be available so there are not two partnership Acts out there forever. The double-effective-date mechanism seems to be a pretty effective way to accomplish this. He thinks the five-year period was chosen because it appeared to be the safest. He believes a shorter time period might be as good. Number 0156 MR. PETERSON observed that the official Act leaves blanks for the number of years. He said, "The official commentary says that that's to be left to the states, noting that Texas put the deferred date at five years. ... So, I suppose I would ask collectively, to Harry Haynsworth and John McCabe, whether they have any consensus". MR. MCCABE said he does not think there would be any objection. MR. HAYNSWORTH said he thinks five years is too long. MR. PETERSON commented, "I'd say if Dean Haynsworth says that's too long, we should go to three". CHAIRMAN ROKEBERG stated that the average seems to be three years. He said he was somewhat disturbed by Mr. Merrell's comments regarding the election of portions of a prior statute. He thinks it is a problem to have two different sets of statutes for similar types of property, depending on when they were developed. MR. MCCABE agreed. He said this is an issue with which he is extremely familiar because he has spent a lot of time with the Uniform Common Interest Ownership Act (UCIOA) and the Uniform Condominium Act. In that arena of law, he thinks there is a much more difficult transition problem because it changes the fundamental nature of real property and real estate holdings. He said: So, you have essentially a perpetual situation of two Acts going on effectively forever, but you do allow communities to opt into the new law fully, if they so desire to do that. The provisions that apply are to the Common Interest Act, ...,and those provisions were determined to be provisions that would not violate any constitutional norms by applying them, but they were very (indisc.) constitutional problems if they, in fact, tried to apply the new Act to holdings forever and ever. ... Under the Partnership Act, though, we have a situation where the old Act ultimately goes away, finally. It could take three years or five years, whatever it is; and three years, I think, is very good. Ultimately, after that three-year period of time, the old partnership law no longer is effective for anybody. And I think that's a much better situation than exists clearly in the common interest community arena. And, of course, you can opt into the old Act. A partnership formed in the 1914 Act has the ability to opt into the '97 Act before the final effective date. So, partnerships are allowed to make the transition even sooner, as that suits their purposes and suits their relationships. I think we have a better transition situation here than we have under the Common Interest Act. And the final outcome is one piece of law that applies to everybody. CHAIRMAN ROKEBERG said: I'm glad you brought up UCIOA [Uniform Common Interest Ownership Act], because this committee has been struggling with the Alaska Home Builder's Association and trying to put together a revision on that. We've been looking around for legal assistance. Number 0344 MR. MERRELL stated: Back to the registration issue, I guess my problem with the concept of not making it mandatory is that it makes it more difficult for those dealing in real property transactions, or anybody who's trying to figure out who has authority to bind the partnership, when you don't have one place to try and go to figure that out. ... In many cases, partnerships are formed without any formalities and, perhaps, without even any knowledge of the participants in the partnership. And in those situations, essentially, those in the real estate industry - particularly title companies that have to make sure the transactions are closed correctly - usually won't deal with those entities until they straighten out the formalities. CHAIRMAN ROKEBERG interjected, "Dean Haynsworth indicated that you had, fundamentally, the power of the checkbook in the closing to mandate that they register. ... Am I correct? And what do you do now?" MR. MERRELL replied: What we do now is request, or require, that we be given a copy of the partnership agreement of the parties. And we'll review that and try and determine from the document who has authority, together with, in some cases, requiring some form of an indemnity from the party that claims that they have the ability to bind the partnership, stating that there hasn't been any changes in the agreement and that they still have the authority as shown by the document. Obviously, the indemnity and 50 cents will buy you a cup of coffee or maybe half a cup. But it isn't any sort of clear protection. I was encouraged in looking at the new Act to see that there was this registration requirement in the third- party protection, because that's real useful to us, and getting the registration done would be great. The problem is, I think everybody's sort of overestimating our ability to demand or require that people do things in a competitive situation, when the other guy, Brand X, might not be so stringent. If the state could help all of us out, by making it always required, it would lend a good deal of regularity and protection for everybody dealing in real estate in the state if they did that. So, that's why I was asking for a consideration of whether or not that provision could be mandatory. In a sense, the way that we do it now ... in the LLC side might be a way to do it here, in that you could have a corporation or a ... limited liability company that operates in the state, and it can still transact business, but there are some penalties involved if you don't register properly. For example, you can't sue or be sued. If that were to be carried over into this situation so that there's, in a sense, a carrot, if you will, to lead those involved in partnerships who know that they're in partnerships to register, I think that'd be helpful to our industry. Number 0506 CHAIRMAN ROKEBERG wondered, "Like for corporations, don't you require a proof of corporate resolution of authority at a closing for signing?" MR. MERRELL replied: Absolutely, we do. There isn't a similar document though in the partnership setting, and so the existence of the registration and the ability to go [to] the state records helps us determine who the parties are that want to be involved in doing that resolution, and then we get the resolution to back it up. So, there's a little bit more assurance involved in the corporate setting, but nothing like that that we can do in the partnership setting. And that's why I was hoping to beef up the registration requirement. CHAIRMAN ROKEBERG said, "Well, it looks like we are, but we're just not going all the way for you, I guess. Would that be a fair assessment?" MR. MERRELL indicated it would be a very fair assessment. CHAIRMAN ROKEBERG asked what is being done for LLCs. MR. MERRELL stated: We require that we be allowed to review the articles of organization and the operating agreement - the operating agreement being essentially the equivalent of a partnership agreement - and then the articles of organization tell us ... whether or not the thing has been properly registered and then who are the members. MR. HAYNSWORTH said to have an LLC a person must file articles of organization. In a general partnership, articles of organization are not filed. He explained: You've always got something of record in a corporation or a limited liability partnership or even a limited partnership that you can point to. A general partnership, you don't. And that's why we came up with this idea of certificate of authority, but to have it only there when it's necessary, that is, when you have a real estate transaction and somebody wants to have that certificate of authority on record so that they can have some assurance that the person has the authority to bind the partnership. MR. MCCABE interjected and stated that it is not really the question whether partners do not have authority. Much of the problem is that all of the partners have the authority. He said, "What is looked for, with regard to statements of authority, is not only an affirmation of authority, but also an affirmation that excludes the authority of other partners to make the same transaction". Number 0632 CHAIRMAN ROKEBERG replied, "I think, as a matter of public policy, this committee would not want to enact anything that would be a further barrier or a mandate to the business formation." MR. MCCABE predicted that statements of authority will come into regular use primarily where real estate transactions take place, but also with other transactions. He thinks that in order for partnerships to deal with third parties, they will have to do this and make sure the lines of authority are clear. Number 0727 TERRY ELDER, Director, Division of Banking, Securities and Corporations (DBSC), Department of Community and Economic Development (DCED), came forward to testify on HB 296. He said Dawn Williams, Records and Licensing Supervisor, DBSC, had reviewed the bill. He referred to AS 32.06.913 on page 33, beginning on line 29, which requires LLPs and foreign LLPs to file an annual report. He said these organizations currently file biennially. This section would essentially double their reporting requirement. CHAIRMAN ROKEBERG asked Mr. Elder to clarify who was required to file reports. MR. ELDER clarified that both LLPs and foreign LLPs are required to file reports. CHAIRMAN ROKEBERG asked how many LLPs and LLCs are registered in the state. MR. ELDER replied that as of November 1999, there were 28 LLPs registered. He indicated there are 2,507 LLCs registered. CHAIRMAN ROKEBERG said, "But you don't know how many partnerships we have in the state because there's not any existing mandatory registration; is that correct?" MR. ELDER said that is correct. CHAIRMAN ROKEBERG wondered how many file. MR. ELDER said 1,906 have filed. Number 0844 CHAIRMAN ROKEBERG asked what the advantages are of filing as a partnership in the state. He wondered if it is a unique Alaska provision. MR. ELDER said he does not know that it is a unique Alaska provision. He explained there are two aspects to registering. One is a revenue issue. The other is that when entities register with the state, it makes doing business with them easier. CHAIRMAN ROKEBERG asked, "We fixed the name thing well enough so the provisions of the naming in here don't bother you?" MR. ELDER replied, "The short answer is yes. The longer answer is that it doesn't look like there really is a name requirement in here for the limited liability partnerships". He reiterated that DCED just wanted to point out the issue regarding reporting requirements. He suggested a change could be made on page 34, lines 7 through 9, paragraph 3, subsection (b), to reflect the required dates that are in the current statute [AS 32.05.590]. Number 1007 REPRESENTATIVE MURKOWSKI wondered, "With the LLCs, with the others, isn't it currently a biennial report?" MR. ELDER replied yes. REPRESENTATIVE MURKOWSKI asked, "So, this would be the only one, then, that would have a requirement for an annual report?" MR. ELDER responded, "If you pass it as-is, this would be the only one." REPRESENTATIVE HARRIS wondered, "Are all the other terms of the reporting the same?" MR. ELDER said he would rely on Ms. Williams' review. He indicated that she said this would not be more of a burden on DCED as the filing agency. CHAIRMAN ROKEBERG asked Janet Seitz, Legislative Aide, if there is a zero fiscal note. JANET SEITZ, Legislative Aide to Representative Rokeberg, replied yes. REPRESENTATIVE HARRIS made a motion to adopt a conceptual amendment to change "annual" to "biennial" in Section 32.06.913, page 33, line 31, and page 34, line 7. This amendment would be consistent with the current statute, Section 32.05.590. Number 1140 CHAIRMAN ROKEBERG asked if there were any objections. There being none, conceptual Amendment 1 was adopted. REPRESENTATIVE MURKOWSKI made a motion to adopt conceptual Amendment 2. She explained, "This is in Section 10 of the bill, regarding the transition dates, to reflect a three-year time period as opposed to a five-year; so, therefore, it would be before January 1, 2004, with corresponding changes." CHAIRMAN ROKEBERG objected for the purposes of a question. He asked when the effective date of the bill is. MR. PETERSON answered that the effective date is January 1, 2001. The amendment would allow for three years after this date. which would be 2004. CHAIRMAN ROKEBERG removed his objection and explained that the changes would occur in Sections 10 and 13 of HB 296. He asked whether there were objections to conceptual Amendment 2. There being none, conceptual Amendment 2 was adopted. CHAIRMAN ROKEBERG commented that he feels the definition issue should not be dealt with in this committee. MR. HARMAN said he thinks the issue should be taken up in the House Judiciary Standing Committee. CHAIRMAN ROKEBERG asked Mr. Harman to obtain a letter from Tamara Cook, Director, Legislative Legal and Research Services, regarding this issue. Number 1311 REPRESENTATIVE MURKOWSKI made a motion to move HB 296 [as amended] out of committee with individual recommendations and a zero fiscal note. There being no objection, CSHB 296(L&C) moved from the House Labor and Commerce Standing Committee.
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