Legislature(1999 - 2000)
02/07/2000 03:27 PM House L&C
| Audio | Topic |
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE LABOR AND COMMERCE STANDING COMMITTEE
February 7, 2000
3:27 p.m.
MEMBERS PRESENT
Representative Norman Rokeberg, Chairman
Representative Andrew Halcro, Vice Chairman
Representative Lisa Murkowski
Representative John Harris
Representative Tom Brice
Representative Sharon Cissna
Representative Jerry Sanders
MEMBERS ABSENT
All members present
COMMITTEE CALENDAR
HOUSE BILL NO. 296
"An Act relating to partnerships; amending Rule 25(c), Alaska
Rules of Civil Procedure; and providing for an effective date."
- MOVED CSHB 296(L&C) OUT OF COMMITTEE
PREVIOUS ACTION
BILL: HB 296
SHORT TITLE: UNIFORM PARTNERSHIP ACT
Jrn-Date Jrn-Page Action
1/21/00 1961 (H) READ THE FIRST TIME - REFERRALS
1/21/00 1961 (H) L&C, JUD
1/21/00 1961 (H) REFERRED TO LABOR & COMMERCE
2/07/00 (H) L&C AT 3:15 PM CAPITOL 17
WITNESS REGISTER
PAT HARMAN, Legislative Aide
to Representative Pete Kott
House Judiciary Standing Committee
Alaska State Legislature
Capitol Building, Room 118
Juneau, Alaska 99801
POSITION STATEMENT: Testified on behalf of the House Judiciary
Standing Committee, sponsor of HB 296.
ART PETERSON, Private Attorney
Uniform Law Commissioner for Alaska
National Conference of Commissioners on Uniform State Laws
The Ebner Building
350 North Franklin Street
Juneau, Alaska 99801
POSITION STATEMENT: Testified on HB 296.
JOHN MCCABE, Legislative Director
and Legal Counsel
National Conference of Commissioners on Uniform State Laws
312 East Ontario Street, Suite 1300
Chicago, Illinois 60611
POSITION STATEMENT: Testified on HB 296.
HARRY HAYNSWORTH, President and Dean
William Mitchell College of Law
875 Summit Avenue
St. Paul, Minnesota 55105-3076
POSITION STATEMENT: Testified on HB 296.
BRYAN MERRELL, Underwriter
First American Title Insurance Company
3035 C Street
Anchorage, Alaska 99503
POSITION STATEMENT: Testified on HB 296.
TERRY ELDER, Director
Division of Banking, Securities and Corporations
Department of Community and Economic Development
P.O. Box 110807
Juneau, Alaska 99811-0807
POSITION STATEMENT: Testified on HB 296.
JANET SEITZ, Legislative Aide
to Representative Rokeberg
Alaska State Legislature
Capitol Building, Room 24
Juneau, Alaska 99801
POSITION STATEMENT: Provided information regarding the fiscal
note for HB 296.
ACTION NARRATIVE
TAPE 00-10, SIDE A
Number 0001
CHAIRMAN NORMAN ROKEBERG called the House Labor and Commerce
Standing Committee meeting to order at 3:27 p.m. Members present
at the call to order were Representatives Rokeberg, Harris,
Cissna and Sanders. Representatives Brice, Halcro and Murkowski
arrived as the meeting was in progress.
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.
ADJOURNMENT
Number 1325
There being no further business before the committee, the House
Labor and Commerce Standing Committee meeting was adjourned at
4:45 p.m.
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