HB 222 - LTD. PARTNERSHIPS AND LTD. LIAB. COMPANIES CHAIRMAN KOTT announced the final item of business would be HOUSE BILL NO. 222, "An Act relating to the remedies available to judgment creditors against limited liability company members and their assignees and against limited partnership general and limited partners and their assignees; and providing for an effective date." Number 2216 LESIL McGUIRE, Legislative Assistant to Representative Pete Kott, Alaska State Legislature, serving as Committee Aide to the House Judiciary Standing Committee, presented an overview based on the sponsor statement for HB 222. She explained that limited partnerships and limited liability companies are often used for closely held businesses or investment activities. One key advantage for structuring businesses under one of these forums is that a partner can choose who will be his or her partner, and can be certain that the venture will continue for the time period agreed upon by the partners. If a creditor obtains a judgment against a partner or member of the limited partnership or limited liability company, the statutes provide that a creditor can obtain a so-called charging order against the debtor's interests in that business. This remedy allows the creditor to receive the distributions to which the partner or member would be entitled. MS. McGUIRE continued. The Alaska Statutes don't expressly provide for any other remedy, she noted, a concept consistent with the purposes behind these limited liability business formats. The policy is to prohibit active disruption of other partners' business interests, and to prevent partners or members from being forced into taking on that judgment creditor as an unanticipated partner or member. Alaska Statutes, with respect to the judgment debtor remedies, have been clear and are consistent with the Uniform Limited Partnership Act (ULPA). In fact, the ULPA charging order codification attempted to remedy the uncertainty evident at common law by protecting the integrity of the partnership itself, while providing the creditor with some interest in the partnership and some remedy. MS. McGUIRE reported that recently, however, a Connecticut court ruled that a judgment creditor of a limited liability partnership interest could strictly foreclose on the partnership interest and become an actual partner. Depending on the provisions of the partnership agreement, a judgment creditor could then force a dissolution of the entity or sale of its assets. Obviously, this kind of result would be harmful to other partners, and it isn't what was intended by the formation of a limited liability entity. The proposed amendments in HB 222 clarify that a judgment creditor has only the remedy of a charging order, and not that of a foreclosure. The creditor will have the right to receive all distributions to which the debtor or partner is entitled, but won't be entitled to any other remedies. This clarification will serve to insulate the law from judicial misinterpretation. MS. McGUIRE noted that HB 222 is a technical modification, not one of policy. The language clearly states that a judgment creditor has only the rights of an assignee of the members' interests. However, in light of concern about this Connecticut case - as well as the potential for judicial misinterpretation - HB 222 emphasizes and clarifies that the only judicial remedy that will be allowed is a charging order. Ms. McGuire pointed out that the judicial creditor has the remedy of any of the revenue due to that partner or debtor. Such a creditor would not have the ability to foreclose and then, in fact, become a partner. Number 2362 REPRESENTATIVE MURKOWSKI expressed her understanding that this issue has not yet been tested in Alaska's courts. MS. McGUIRE affirmed that, adding that it is preventive or proactive. REPRESENTATIVE ROKEBERG asked Representative Murkowski whether this is consistent with other, unspecified, legislation regarding the Uniform Commercial Code (UCC). REPRESENTATIVE MURKOWSKI said this is good, and it is consistent with what they are doing. Number 2394 ERIC KUEFFNER, Attorney at Law, Faulkner Banfield, PC, came forward again to express support for HB 222. He said nobody ever thought one could get anything more than a charging order from a limited partnership, and this bill is intended to make sure that is clear. Number 2408 DAVID SHAFTEL, Attorney at Law, testified again via teleconference from Anchorage, saying he had worked on drafting language for HB 222, in consultation with a nationally known expert on limited liability companies and limited partnerships who had recommended the proposed language. Mr. Shaftel asked that members consider passing this provision. He believes all practitioners have the following expectation, and so advise their clients: when forming these small business entities for their family businesses or their closely held businesses, they can expect to choose with whom they will do business, without being forced to dissolve the business or to take in a partner or member - whom they hadn't contemplated - because one of their partners has a creditor problem. MR. SHAFTEL noted that it was a surprise nationally to see that Connecticut case come out, and a very unexpected result. This amendment says that kind of result cannot occur in Alaska; rather, the expectations of the practitioners and the clients will be preserved. He believes it is an excellent amendment that will strengthen Alaska's law. It is also important from a business standpoint, because many nonresidents who set up Alaska trusts will also set up Alaska limited liability companies or limited partnerships; they will expect the normal rules to apply, and this will support that expectation. Number 2460 STEPHEN GREER, Attorney at Law, testified again via teleconference from Anchorage, saying he is in full accord with HB 222, which he believes is very good legislation. TAPE 00-2, SIDE B Number 0001 DOUGLAS BLATTMACHR, President and Chief Executive Officer, Alaska Trust Company, testified again via teleconference from Anchorage, in support of HB 222. He said it is an excellent amendment. It will strengthen Alaska law and encourage people to use Alaska's trust jurisdiction, which most practitioners throughout the country are starting to realize is the premier jurisdiction. Number 0049 CHAIRMAN KOTT, noting that no one else was on teleconference, closed public testimony. He called an at-ease at 2:33 p.m., then called the meeting back to order at 2:36 p.m. Number 0058 REPRESENTATIVE ROKEBERG made a motion to move HB 222 from the committee with individual recommendations and the attached zero fiscal note(s). There being no objection, HB 222 moved from the House Judiciary Standing Committee.