HB 296 - UNIFORM PARTNERSHIP ACT [Contains discussion of HB 239 relating to placement of definitions and general provisions in uniform Acts adopted in Alaska.] Number 0038 CHAIRMAN KOTT announced the first item 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." [The bill was sponsored by the House Judiciary Committee. Before the committee was CSHB 296(L&C).] CHAIRMAN KOTT briefly explained that the bill, which brings Alaska up to date from a 1914 version of the Uniform Partnership Act, was promulgated by the National Conference of Commissioners on Uniform State Laws (NCCUSL). He called upon Art Peterson, noting that John McCabe was online to testify as well. Number 0139 ARTHUR H. PETERSON, Uniform Law Commissioner for Alaska, came forward, noting that he is also an attorney in private practice in Juneau. He agreed that HB 296 is basically an update promulgated by the NCCUSL; it replaces the 1914 version, which Alaska enacted in 1917. This new version reflects modern business practices and eight decades of court decisions and scholarly analysis. The basic change made by this bill, over current partnership law, is the statutory specification and clarification of the "entity" concept: treating partnerships as entities rather than aggregates of individuals. That basic principle is manifested throughout the Act in a number of provisions regarding suing and being sued in the partnership's name, for instance, or the way a partnership is terminated, or how it isn't terminated just because a partner leaves. Mr. Peterson pointed out that under current law, a partner's leaving ends the partnership; under the proposed bill and modern partnership concepts, however, that would not occur. The bill goes into some detail on all those various points. Number 0320 MR. PETERSON advised members that at the request of the Department of Community and Economic Development (DCED), the House Labor and Commerce (L&C) Standing Committee had changed the annual reporting to biennial reporting. "We did not oppose that," Mr. Peterson added. Another change was shortening the transition period after the effective date of the Act from a five years to three years. There was general agreement on that, including agreement of the chair of the [NCCUSL] drafting committee for this Act, Harry Haynsworth from Minnesota. MR. PETERSON recommended one change not made by the L&C Committee: relocation of the general provisions, specifically including the definitions section, to the beginning of the Act, where it appears in the national version. Following the latest L&C Committee hearing, a request was made to Pam Finley, Revisor of Statutes, to address that point; Chairman Kott had been provided a memorandum from Ms. Finley dated 2/9/00 [not included in packets], and a response to the memo from Mr. Peterson dated 2/10/00 [copy provided at the end of today's hearing]. MR. PETERSON highlighted his and Ms. Finley's basic point: the ease of use of the Act and of finding provisions in it. With a uniform Act, his two main concerns are substance and the ability to find that substance. People nationwide will want to pull up Alaska law on their screens; when looking for definitions, they will go to the beginning of the Act, where they are used to looking in all research and national conference materials. They won't know that Alaska normally places its definitions at the end. Finding the definitions shouldn't require diligent research but should be made as easy as possible. Mr. Peterson repeated his recommendation, then deferred to John McCabe, who he said knows much more about the bill and the subject. Number 0528 JOHN McCABE, Legislative Director/Legal Counsel, National Conference of Commissioners on Uniform State Laws, testified via teleconference from Chicago, Illinois, as follows: The Uniform Partnership Act was originated in 1914, as Art [Peterson] indicated to you. And we cannot, I think, be accused of being overly ambitious about amending it or revising it, because the final revision is dated 1997, and that is the bill that you have before you. The Uniform Partnership Act of 1914 and its successor essentially are the law of partnership in the United States today. ... And what we are asking you to do here with this bill is simply to update your existing partnership law, based upon the 1914 Act, plus to do an update on your more recent Limited Liability Partnership Act, which amends your old partnership law, because limited liability partnerships are part of our 1997 Act as well. ... Art [Peterson] indicated to you that the major substantive change ... in partnership law is the articulation of entity theory in the Uniform Partnership Act. A partnership is a business organization. It is often called the residual business organization because it organizes, in a sense, in spite of itself. What it takes ... to have a partnership are two or more people, aggregated together, coming together to do business; and they may become a partnership even though there is not a specific agreement that they are a partnership. They do not have to register to create a partnership relationship; that is, they don't have to put a charter or a statement of any kind on any record to indicate that they are a partnership. Simply by doing business together, they become a partnership. In the law from 1914 - indeed, preceding 1914 - there was always a question as to whether a partnership was an aggregate of those individuals who constituted it - and that's the aggregate theory of partnership - or whether it was an entity all to itself. And, in fact, the 1914 Act is a kind of interesting amalgamation of the two theories. The 1914 Act never did clarify whether entity theory prevailed - whether the partnership is truly an entity - or whether the partnership is an aggregate of individuals. And, to some degree, the ambiguities that exist ... with respect to aggregative-versus-entity are some of the reasons that we're coming to you with this revision today, in a much more modern, updated economic world. Number 0740 MR. McCABE continued: This Act clearly provides that a partnership is an entity. Being an entity, that gives it certain characteristics, which are ... more useful to doing business than the ambiguity of the old '14 Act provides. And let me give you ... three cogent examples of what I mean. A partnership, as an entity, may be sued in its own name and may sue in its own name. ... All the partners don't have to be named in a lawsuit, and if the partnership itself is suing, it does not have to name all the partners ... to be an appropriate party to a lawsuit. The partnership ... may be able to sue and be sued simply in the partnership name. Another characteristic, and a very important one: the partnership may hold property, including real property, in its own name. No partner need have ... nor, unless agreed, will have an interest in partnership property that is an interest either along with the partnership or along with the other partners. The third characteristic that is important relates to actually what is a partner's interest in a partnership, and that is that under the new Act, a partner's interest is called the partnership interest, and it's really an interest in the distributions of the partnership to the partner. The partner has only that interest; and in terms of the partner's own creditors, the interest that the partner's creditors can reach is only that partnership interest, which is its distribution interest. And also, a partner, if it assigns its interest or can ... assign its interest, it may only assign - without the consent of the partnership - only its partnership interests, which is those interests in distributions. ... A partner may not assign its position as a partner within the partnership. Now, these are all outcomes that are important in terms of business organization and organization for business purposes. And they are all outcomes because we ... clearly state that a partnership is an entity, not an aggregate of its partners. Number 0891 MR. McCABE continued: With respect to the basic partnership, however - and a major interest here, and a major issue, always is liability - this Act quite clearly states that in a general partnership - that is, a partnership that has not elected limited liability partnership - you have joint and several liability among the partners, something that is not clearly articulated in the 1914 Act. Another thing that this Act does that is different from the 1914 Act, ... related to the issue of entity, ... is it articulates the fiduciary obligations of the partners among themselves. ... And fiduciary obligation issues ... are a characteristic part of the case law of partnership, and have been a very important part of the case law, and a lot of interest in the case law on fiduciary obligations. In Section 401 of this Act, ... the partners' fiduciary obligations to each other are articulated, and articulated in statute. This is, again, something like what is often done in corporate statutes, and it's helpful to be able to do this against the entity character of the partnership. Another issue that ... the entity concept serves is the issue of dissolution of the partnership upon disassociation of a partner. Under the 1914 Act - and under the old common law rules - when a partner left a partnership that automatically dissolved the partnership. One partner could walk away, and the one walking partner automatically triggered dissolution. What we want to achieve for business purposes is an entity that is ... more resistant to dissolution than is the case under the 1914 Act. And what this Act does, essentially, is it initially provides that a disassociating partner - a partner who leaves the partnership - the first thing that must attempt to be accomplished is essentially a buy-out of that partner's interest. If there's a buyout of that interest, then the partnership continues without a hitch; it remains the entity it always ways, ... and the remaining ... partners continue to conduct the business of the partnership. If the disassociating partner triggers a dissolution without a buyout, then the partnership has "safe harbor" provisions which allow the partners, via vote, to continue the partnership even against ... the disassociation and the dissolving disassociation of a walking partner. ... And there is still opportunity there ... for the partnership to remain and to continue ... with the remaining partners conducting the business of the partnership. ... And the dissolution and disassociation rules, I think, are perhaps if not the most important part of this Act - because continuity of the partnership is one of those issues that has plagued partnership law - it is clearly no further down than number 2 in terms of importance, with regard ... to the Uniform Partnership Act of 1997. That is, I think, a sort of description of the differences between the 1997 Act and the old 1914 Act. A partnership is basically a business organization. The legislation, the law, provides for its creation. In this case, creation is merely a matter of people getting together to do business. And it provides for its termination, which are those dissolution rules that I talked about. And in between, the management and the conduct of the affairs of the partnership, which engage things like the fiduciary obligations, and things like distribution rules and ... how one pays out of the partnership. And the partnership interest concept ... is clearly key to how distributions are handled in the partnership. And all of these new rules clearly meet the needs of partnerships today in a way that the 1914 partnership Act could not. Number 1151 MR. McCABE continued: There also is another thing in here, and that has to do with what we call statements of authority. And remember, ... a partnership is never registered; it arises as a result of what people do doing business together, although there may be a formal agreement. And often, in complex partnerships, there is a formal agreement. But ... because of the fact that partners are jointly, severally liable, and in a general partnership each ... may conduct the business in the partnership, there are times and places when it is important to have somebody designated to do certain business of the partnership. And in particular in real estate transactions ... is it important sometimes to designate a partner who is the exclusive partner with respect to those transactions. And a way that may be accomplished is by filing what are called statements of authority. This is a filing that occurs for a partnership that has no prior registration, because this is not anything to do with liability issues. But what it does, ... when a statement of authority goes on the record, it gives notice to third parties dealing with the partnership who in fact has the authority to make the transactions that the statement declares may be made. ... And particularly when it's important to have notification as to who exclusively conducts real estate transactions on behalf of the partnership, that's something very important to those who finance real estate transactions and who will do business with the partnership as financing entity - again, something to make partnership up-to-date, and bring it up to modern business practices. That kind of describes ... the general partnership under the new uniform Act. The new uniform Act also contains provisions for the creation ... and maintenance of limited liability partnerships. Alaska law also has limited liability partnership provisions, which are built in to, and attached to, ... its original partnership Act. A limited liability partnership concept is one that's relatively new in our law. It is linked to other business entities that are not corporate entities, such as limited liability companies, ... by the capacity to provide limitation of liability. In a limited liability partnership, essentially, partners become not liable vicariously. And what I mean by "vicariously" is they become not liable for the actions of the other partners - personal actions of the other partners - so that a tort liability accrued in the name of the partnership by another partner, or business obligations accrued by another partner, do not, in a limited liability partnership, obligate a partner not involved in those transactions or ... in those liability situations -- does not provide that that partner's assets are available to the full extent of the partner's assets. Only the assets in the partnership are available to satisfy liabilities. Each partner is responsible for his own actions. Each partner is responsible, under this concept, for his or her own liabilities, to the full extent of the partner's assets. It's just that the other partners do not have full liability to the extent of all their assets in the partnership, except for the assets in the partnership. Number 1361 MR. McCABE continued: Now, a limited liability partnership is a registered entity. Like all entities in our law where we provide for some limitation of liability for the participants in the business, we require registration. Historically, we've always done that for corporations. In recent years, we've done that for limited liability companies. Limited partnerships have been around in that form for a long time. A limitation of liability for limited partners is obtained by registering a limited partnership; and that's a law that's been around since ... 1916. ... Alaska is like almost every state in the United States. I don't think there's a state without the opportunity to do limited liability partnerships. What we have in the new uniform Act is updated provisions on limited liability partnerships. You'd file a statement of registration, and when you file that statement in the appropriate office in the State of Alaska, under the revised Act, the liability shield is in place from the point of time that the registration takes place. The liability shield under the uniform Act is what I would call ... full-shield vicarious liability. ... Alaska's current statute does not provide for the full- shield liability. It does not shield partners from liability for certain kinds of commercial transactions on behalf of the partnership, and ... this current Alaska law does not shield a partner from the malpractice liability of another party. The uniform Act would have full-shield liability, which is the trend in the United States; and this, I think, is where everybody is going. Alaska's statute appears to have been derived originally from what we call TRUPA, the Texas Revised Uniform Partnership Act, which is actually the state that pioneered ... the notion of limited liability partnership. The other major difference ... for LLPs [limited liability partnerships]: under the current statute in Alaska, there are no insurance requirements under the uniform Act. Number 1469 MR. McCABE continued: The third thing I think that is fairly different is that the Alaska Act has a lot more elaborate registration provisions, including name issues, reservation of names, and that kind of thing. ... The reason the uniform Act does not get into that is this: we assume that there is always - and I think the Alaska statute really does this too - we assume that there is an existing general partnership that is operating as a traditional general partnership and then applies for registration as a limited liability partnership. We do not have registration of names for partnerships. In fact, you can have a partnership without a name; you don't really have to create a name to create a partnership. And we did not want, with our limited liability partnership provisions, to change in any way the stature or status of the partnership when it applies for a limited liability partnership. So, we do not have elaborate name issues in the uniform limited liability partnership provisions under the 1997 Act. The basic idea is that a partnership remains as it was. Its organization remains as it was. It simply achieves, by registering, ... the qualities of limited liability, as the Act provides. ... And we go no further with it in the uniform Act, so that we do not change the face of partnerships or partnership law in any other way than to deal with ... the narrow issue of limitation of liability for partners. Number 1542 MR. McCABE continued: I guess the only other thing I would say about this Act generally is - about the new Act is - clearly it's what we call in the law a "default statute." What I mean by that is that the first thing you will look to - in determining what the rights and obligations of partners in a partnership are - is the partnership agreement, if there is a partnership agreement. And you will only look to the statute itself with a fairly narrow range of exceptions ... for good faith and fiduciary obligations. You will look to the partnership agreements to determine what everybody's rights and obligations are; and only when the agreement itself does not state it, you will look, then, at the statute. ... It is true under the uniform Act that even though you have an LLP, the partners may agree - or some partners may agree - to forego limitation of liability even, by agreement. There is very little that you cannot agree to. In fact, partnerships under our law, under ... parts of our law, are generally regarded as entities, as business organizations of agreement. The primary binding elements in a partnership always are what is agreed between the partners. And what we're really doing, in the uniform Act, is recognizing that fact. The 1914 Act was always thought to be mostly a default Act; we've just merely stated it expressly in the 1997 Act. Number 1636 REPRESENTATIVE CROFT brought attention to a memorandum in packets from Mr. McCabe to Mr. Peterson dated 2/4/00, which listed four major and minor differences between current Alaska law and the Revised Uniform Partnership Act (RUPA), as follows: [1] Alaska's current liability shield is limited to tortious actions and does not cover ordinary commercial transactions of the partnership. [2] Both Alaska's current law and RUPA require registration to become a limited liability partnership. Alaska, however, requires a more detailed filing, requires a distinguishable name, and requires that the name of the partnership be registered. [3] Existing Alaska law requires that a limited liability partnership carry a set amount of liability insurance or have qualified assets of a certain amount. [4] Both Alaska and RUPA require a periodic filing[;] however[,] Alaska requires reports be filed biennially while RUPA provides for annual filing. MR. McCABE, in response to a query from Representative Croft regarding point 1, said that under the uniform Act, if adopted, there would be a full liability shield. Number 1680 REPRESENTATIVE CROFT said for points 2 and 4, it make sense to him why they would be changed. He read from point 3, however, and asked whether the bill gets rid of that requirement. MR. McCABE affirmed that. REPRESENTATIVE CROFT asked why that is a good idea. MR. McCABE said one answer is that it is the trend in the law. He again mentioned Texas, where LLPs were first proposed; he said in the beginning it wasn't thought that it would be very saleable to provide full-shield liability for partners, and that in order to paint any kind of shield, some requirements for insuring liability loss were necessary. However, almost all the states now have moved to full-shield liability and no insurance. Therefore, Alaska essentially would be following the trend of all the states. Liability insurance is no longer thought to be absolutely essential for providing a full-shield liability. A partnership will, when necessary, protect itself by buying insurance. Mr. McCabe continued: I think the other thing here, in some of these requirements, is that it was essentially thought of in light of certain kinds of professional partnerships, where malpractice is an issue - for example, law firms, accounting firms, those kinds of things. The fact is that partnership and full-shield liability or liability shield goes well beyond those kind of professional partnerships, and that putting requirements like insuring requirements on other kinds of business partnerships is probably a burden, and it's a cost burden, particularly in the small business, and that ... to impose that kind of ... an obligation upon them, and to impose it at a time when they're generally capital- short and getting started in business - and they really don't have any malpractice issues anyway - is ... sufficient a burden that we ... shouldn't have the insuring requirements in the law. Number 1808 REPRESENTATIVE CROFT responded that it may be, but that burden has been in Alaska for a while, and he assumes there was an informed policy reason to have it in the first place. He said he is comfortable making a lot of the technical and updating changes. However, for the significant policy choices between Alaska's old law and the new law, he wants to know that there are good policy reasons. He asked Mr. McCabe to explain point 1 of his memorandum. MR. McCABE answered that it is limited to tortious acts by the partnership because there is no liability shield for commercial transactions in which the partnership engages. And, actually, the shield does not extend the malpractice liability, either. REPRESENTATIVE CROFT asked why it wouldn't be the other way around, to have a shield for the ordinary but not for the "extraordinary, weird tortious stuff." MR. McCABE replied that the "tortious stuff" isn't extraordinary. If somebody drives a car that is the property of the partnership, doing partnership business, and has an accident, that is the kind of tortious action for which there is a liability shield. That is, every partner's assets are not subject to the liability in that accident. He added, "The partnership assets are, and the [partner] who's involved in the accident, his or her assets are. But the other [assets] are not subject to that vicariously. And that's the way the law works, I believe, in Alaska today." Number 1886 REPRESENTATIVE CROFT posed an example. If he were in a partnership with Representative Kerttula, who, in the course of the partnership, was driving the car and got in an accident, he suggested, he himself would be shielded from that. But if, in the course of business, she made a bad deal, he wouldn't be shielded from that. The uniform Act would change it to where he is shielded from both her bad decision and her bad driving. MR. McCABE affirmed that. Number 1906 REPRESENTATIVE CROFT asked whether, to some extent, this isn't business entities trying to have their tax "cake" and eat it too. They would have not only the benefits of corporations, in terms of immunity and not being responsible for the particulars, but also all of the tax benefits of partnership. MR. McCABE responded that a lot of the interest in partnerships and partnership-like entities, such as limited liability companies, is clearly based upon an interest in avoiding federal corporate income tax, because they are pass-through entities. The tax is paid only upon the income of the partner, or the member of the limited liability company or the limited partnership, or the limited partner in a limited partnership. He agreed there is a tax advantage there. However, he doesn't think that is particularly related to liability issues, except in this way: for many years, federal tax laws were interpreted to apply corporate characteristics to entities. This didn't go to the issue of whether anybody was registered as a corporation, but it determined corporate status based upon certain characteristics that can be applied to the entity. One characteristic, clearly, was limitation of liability, because historically it was the corporate statutes that provided full limitation of liability for shareholders. So for many years, one way to judge whether entities had corporate characteristics was to look at limitation of liability. That was very complicated. MR. McCABE, noting that it is very old law, explained that limited partnerships in which limited partners have limitation of liability - in the same way that corporate shareholders have limitation of liability - were judged to be pass-through entities, always, because there was always a general partner who had full liability, and because the full partner could run the business and had all the management responsibilities. Limited partnerships were considered, for those reasons, not to be corporations. Over time, the notion of a limited liability company entered into the law ubiquitously. But limited liability company law, and the structure of limited liability companies, varied substantially, in order to meet the burden of the tax rule. MR. McCABE further explained that in 1996 the Internal Revenue Service (IRS) decided to forego those kinds of analyses; they put into place a "check the box" regulation that essentially allows an entity to make a determination as to whether it is a corporation or a pass-through entity. That is why there are "full-shield liability, limited liability companies" in every jurisdiction in the United States today. And it clearly had an influence on the development of LLP legislation. Mr. McCabe said that "once you've gotten over the fact that folks can clearly get pass-through status with full-shield liability," there seems to be little reason to avoid giving these entities an option for full-shield liability, as long as it is clear on the record that there is full-shield liability, so that every third party dealing with a partnership recognizes what the entity is all about. That is kind of where the law has gone, as a result of all of this. Number 2093 REPRESENTATIVE CROFT responded that the fact that the federal government is willing to give pass-through tax status in a variety of circumstances doesn't determine whether Alaska decides to give full-shield liability. He suggested this is an evolving change from a long-standing decision that business entities had about whether to be a separate entity such as a corporation - with its protections, including the shield from liability - or an aggregate of people, in which case the people have the tax consequences and the liability. MR. McCABE replied that the tax issues aren't that old, going back, he believes, to the 1955 tax code. He then stated: I think you have to go back to the question of what's good for business and what's good for people doing business, basically. And I think the general consensus is that it encourages folks to do business .... And I will say, with regard to partnership, it gives folks who are ... less organized but perhaps in a startup position as business people the opportunity to obtain some of the advantages of a corporation. ... You don't get full corporate ... limitation of liability, but you can fairly easily obtain ... a vicarious shield here, and that this is a relatively cheap and inexpensive way for people who are ... beginning businesses, who are in less organized circumstances. It gives them an opportunity to maintain their partnership status, and to take their partnership status and use that to obtain limitation of liability. When I talk to people about the array of business entities in the United States today, we have opportunities ... in the business entity world that are just unprecedented and, I should say, are also probably the envy of the free world. ... I talk to people who are concerned about these kinds of entity issues all across the world today, where they don't have ... the rather interesting array of entities, and entities available with liability shields, that exist in the United States today, and who are seeking to get to a point where they are somewhat like the United States, because they view that as good for business and good for economic development. Number 2220 REPRESENTATIVE CROFT pointed out that what is good for business is one relevant question but not the only one. To the extent that this creates more ways for people to not be responsible for the conduct of their business enterprises, that may be a bad public policy choice. MR. McCABE suggested this is more a limitation on exposure to liability. He added that the partnership remains fully liable for its obligations and actions, and the partnership assets are available. He pointed out that every partnership and entity needs to think about its insurance requirements, then stated: What we're essentially saying is that folks who ... are personally and individually innocent of any kind of ... obligation here have a way of protecting their personal assets. That's basically what this is all about. And that's always been an underlying characteristic that we have considered to be good for business. What we're doing ... is encouraging people to aggregate together to do business, to accumulate capital to do business, and to give them the liability shield. This is what's been fundamental in the corporation for many, many years. But to give them the liability shield is the price that we pay to allow them to aggregate and to do business. ... As I say, I think we have an array of business entities now, ... and we make it easier for them, and much simpler to do business and ... to aggregate their capital to do it. At the same time, ... we're not allowing people to hide things here that we would consider to be matters that are unfair. ... There is really no reason why ... we should not allow partnerships, and bearing in mind that this is an election each partnership has to make, because they don't get it automatically, that we should ... give partnerships the same options and opportunities - and partners the same options and opportunities - to protect themselves. Number 2339 REPRESENTATIVE CROFT responded that it is for the very reason of not being fully responsible for the conduct of the business enterprise that the shield is there. It may be an appropriate choice to make. However, when combined with the change that says one doesn't have to carry insurance, it is a significant public policy step that is contrary to individual responsibility. He suggested perhaps one provision or the other should be retained. He emphasized that regardless of what Texas or other states have done, the legislature must make its own decision as to whether it seems fair, appropriate or in the interest of Alaskans generally. MR. McCABE surmised that possibly Alaska's earlier decision was made without serious policy considerations. He said the liability insurance required is essentially a kind of malpractice insurance, which isn't an issue for someone working with a partner developing a software business, for example. Number 2412 REPRESENTATIVE GREEN returned to Mr. McCabe's example regarding a small entrepreneur with a capital problem. He said he shares with Representative Croft the concern about that very entity and the inability to take care of a liability that might be incurred. Representative Green then asked whether Mr. McCabe agrees that the definitions section should be in the front of the statutes, rather than is normally done in Alaska. MR. McCABE answered that it would be extremely helpful if the definitions and the general sections were brought up-front. TAPE 00-13, SIDE B Number 0001 REPRESENTATIVE ROKEBERG referred to discussions in the L&C Committee. He said they were basically adopting uniform rules and Acts, not making any sweeping change in public policy. Number 0021 REPRESENTATIVE KERTTULA asked whether the insurance requirement was actually part of the uniform law when it was adopted. MR. McCABE said no. When they did the LLP portion of this Act in 1996, they didn't put in insurance requirements. However, before the uniform Act - and in the initial states that did this, of which Texas is regarded as the pioneer model - they did have insurance requirements. REPRESENTATIVE KERTTULA asked, "So malpractice insurance is what we have now. That's right?" MR. McCABE answered, "Basically right." REPRESENTATIVE KERTTULA asked, "But we're not requiring them to carry insurance currently on anything but malpractice?" MR. McCABE affirmed that, saying insurance and potential liabilities are matters for any kind of business. Number 0093 REPRESENTATIVE KERTTULA asked how difficult it is to incorporate in Alaska, versus remaining a partnership. She further asked whether just the tax difference is why people don't incorporate. MR. McCABE answered that he thinks there is a lot more to it than that. A partnership is a specific form, a creature of agreement; the fundamental thing that holds the partnership together is the partnership agreement. It may be organized simply or complexly. Mr. McCabe surmised that the real advantage of the LLP provisions is that one can achieve limitation of liability in this vicarious form, without having to change the basic entity and, in the case of a partnership, without having to dissolve it and then start all over again as a corporation. All it requires is registering. MR. McCABE, in response to questions from Representative Kerttula, acknowledged that Alaska has both an LLP law and a limited liability company (LLC) law. He said the way one becomes an LLP in Alaska today is not terribly different from the way one would do it under the revised Act; actually, the revised Act is probably a little simpler, but it is the same effect. The main thing here is that LLPs exist to allow partnerships, and partners, to get liability shield without having to reorganize. Number 0244 REPRESENTATIVE KERTTULA suggested it may be a matter of semantics, then, as to whether an entity calls itself a partnership or an LLP. She asked, "The LLP exists, so why not simply say this is the way it's going to be for those people who, for some reason, weren't smart enough to register as an LLP?" AN UNIDENTIFIED SPEAKER said the requirements are a little different. MR. McCABE responded that the uniform Act would simply expand the shield and eliminate the insurance requirement. That is basically all it would do. Number 0283 REPRESENTATIVE KERTTULA asked why people wouldn't want to form an LLP, then. MR. McCABE said he doesn't know how professionals organize in Alaska or what the professional standards are. But, for instance, in some states law firms cannot organize as LLPs; that is because of the application of professional standards under the regulation of law practice in the state. Sometimes people organize as partnerships and agree to forego any limitation of liability because that is what the people doing business want. For example, certain kinds of joint ventures couldn't do business with their creditors if they had limited liability. Partnerships don't necessarily arise consciously, and partners may not even recognize that LLPs are available to them. Number 0342 REPRESENTATIVE KERTTULA pointed out that she wasn't a contract attorney but was reminded of some of the reasons for shielding from liability, in terms of incorporating versus having people joining together. She said an interesting point is the idea that even if people haven't taken that responsibility among themselves to put assets aside, perhaps to be able to protect the public, they still act like a business. She recalled that perhaps to be one reason that partnerships didn't get the shield. MR. McCABE said Representative Kerttula was hitting on some central points. He stated, "We create partnerships or allow partnerships to create, and that's really to protect third parties ... that do business with the partnership." He noted that historically, law firms and accounting firms, as professional organizations, have mostly been partnerships in the United States. He has been told anecdotally that perhaps one-third of those have no written agreement. They operate informally, under the general rules of partnership. Even if it is a good idea for them, they aren't likely to seek LLP status because of their basic informality and because they operate without consciousness of their partnership form in many instances. REPRESENTATIVE KERTTULA pointed out that this would protect that form of partnership, however. MR. McCABE affirmed that, adding, "If they seek it." Number 0453 REPRESENTATIVE JAMES mentioned her own exposure to small business taxes and accounting, agreeing that many partnerships are very loosely drawn. The biggest item partners have to fear losing is their house; recalling ten years as a bankruptcy trustee, she said it has happened. Representative James pointed out that having a corporation requires strict discipline in order to not mix up the corporate business and assets with one's personal business and assets. "Many times, thinking they had liability protection, they didn't," she noted, "because they'd pierced the corporate veil in the whole process." Representative James said these are small business people, not "high rollers," both of which are encompassed by this bill; she surmised that the latter would get insurance, for example. She concluded, "I think there's a lot of rationale for doing it this way, and I support this document." Number 0541 REPRESENTATIVE ROKEBERG remarked that he wanted to verify with Mr. McCabe his understanding of this "bottom-up" approach to business organization and the importance of how this particular legislation fits into that. He recalled Mr. McCabe's testimony about so-called default partnerships. He then suggested that usually a business organizing today would elect to go into a limited liability [company](LLC) because of tax treatment and organizational costs. He indicated his understanding that costs for legal counsel for an LLC are about equal to those of an LLP. REPRESENTATIVE ROKEBERG said to him the rationale for even the existence of an LLP includes the change from a partnership to a sheltered, shielded organization - an LLP - without having to dissolve. In contrast, that couldn't be accomplished in going from a partnership to an LLC. He also voiced curiosity about the "historic syndication route, where you had a general partner and the limited partners, with limited liability." He asked whether the LLP replaces that type of a business formation. MR. McCABE answered no, it doesn't replace limited partnerships. REPRESENTATIVE ROKEBERG asked whether that still exists under the statutes, then. MR. McCABE affirmed that, saying it is untouched by this. It is another entity. REPRESENTATIVE ROKEBERG said the point is why an LLP even exists when an LLC would seem to provide the same tax [advantages]. MR. McCABE suggested it is a question of where people start. Clearly, LLPs are the entity of choice for many kinds of startup businesses where people seek a liability shield. An LLP is easier to organize and, like a partnership, is an agreement-oriented organization. The advantage is to existing partnerships, because all that LLP statutes require to become an LLP is registration. Therefore, LLPs are basically there for the convenience of people who organized as partnerships and conceived of themselves as partners before determining that they want limitation of liability. MR. McCABE pointed out that, clearly, everybody else probably will organize as LLCs. An LLP and an LLC have very different characteristics; the latter are more adaptive to centralized management, looking more like a limited partnership than general partnership, because limited partnerships traditionally have been developed to provide a centralized management regime with the limited partners as passive investors. That can be done in an LLC in almost exact mimicry of the old limited partnership, Mr. McCabe indicated, except that the management entity falls within the liability shield. He concluded that LLPs are there primarily to give a convenient way to obtain limitation of liability to existing partnerships, so they don't have to go through the dissolution. Number 0819 CHAIRMAN KOTT thanked Mr. McCabe and asked Mr. Peterson if he wanted to wrap up. MR. PETERSON said he had nothing to add to Mr. McCune's testimony. For Representative Croft, who had been absent for a time, he explained that Alaska's LLP law was enacted in 1996 with a deferred effective date. Therefore, the current provisions, with the insurance requirements, the partial shield, and so forth, have only been there for a couple of years. Derived from the Texas version, that was further developed by the national group, he noted. REPRESENTATIVE CROFT asked whether there have been a lot of LLCs and LLPs formed under it. MR. PETERSON deferred to the Department of Community and Economic Development. Number 0881 DAWN WILLIAMS, Records and Licensing Supervisor, Corporations Section, Division of Banking, Securities and Corporations, Department of Community and Economic Development (DCED), came forward. She answered that right now, there are approximately 32 or 36 active LLPs, and approximately 3,000 LLCs. REPRESENTATIVE CROFT asked whether there is an insurance requirement for LLCs. MS. WILLIAMS said she isn't sure. CHAIRMAN KOTT commented, "I'm an LLC, and I'm required to carry insurance." REPRESENTATIVE MURKOWSKI noted that she'd heard this bill in the L&C Committee. She requested confirmation that there are approximately 2,000 regular partnerships as well. MS. WILLIAMS said that sounds approximately right. Number 0953 REPRESENTATIVE ROKEBERG indicated he would look up the history of the 1996 bill. He asked Ms. Williams whether she recalls the reason that the DCED had brought that forward. MS. WILLIAMS said she doesn't recall that. REPRESENTATIVE ROKEBERG asked Chairman Kott what kind of insurance he was required to have for being an LLC. Asking whether it is general liability insurance, he said he doesn't think that is what is being referred to here. Number 1015 REPRESENTATIVE CROFT stated, "What this says is existing Alaska law requires that a LLP carry a set amount of liability insurance." He referred to talk about how this is mainly done in E&O [errors and omissions] or professional policies, but pointed out that this says "liability." He asked whether there is a general requirement of LLPs carrying some set amount of liability insurance now. MR. PETERSON said he hadn't checked on that question nor had occasion to look at it, but the statute is easy enough to find. He noted that it would be in AS 32.05, somewhere after section 405. [The statutes were then brought to Representative Croft.] REPRESENTATIVE ROKEBERG announced that he would look up the legislative history regarding adoption of the LLC statutes. Number 1125 CHAIRMAN KOTT asked if anyone else wished to testify, then closed public testimony. He stated his understanding, from Pamela Finley's memorandum of 2/15/00, that the drafting manual is adopted by Legislative Council; therefore, the desired change would require going back to the Legislative Council. He asked Mr. Peterson to comment. MR. PETERSON explained that it is merely a chance that when he himself was Revisor of Statutes 30 years ago, he didn't happen to put in the drafting manual an exception for the uniform Acts. He didn't think of it. Had he done so, this issue would not be before them today. He said with regard to the policy, there are exceptions. He pointed out that he hadn't seen the memorandum from Ms. Finley dated 2/15/00. Bringing attention to his own memorandum dated 2/10/00, however, he suggested that it beautifully sets out the rationale in favor of the change, responding to Ms. Finley's earlier points and picking up on the fact that there are exceptions. MR. PETERSON, referring to the current bill, called it a beautiful example where the exception should be applied again, because it is a long, complicated Act where Alaska ought to follow the national version. He said it helps Alaskans as well as people elsewhere, because Alaskans doing research will use various sources, such as a publication by West Publishing called "Uniform Laws Annotated," which will use the national version. Mr. Peterson restated that he could have changed this 30 years ago, as Revisor of Statutes, but had failed to. "And now I think we need to correct that," he concluded. Number 1321 CHAIRMAN KOTT said he couldn't agree more. He pointed out, however, that the definitions are in the front for the next bill scheduled before the committee [HB 239, relating to the Uniform Commercial Code (UCC)]. He suggested there isn't any uniformity at all in this regard. REPRESENTATIVE MURKOWSKI [sponsor of HB 239] pointed out that the UCC, Article 9, revisions have the definitions at the outset. As she recalls, when she received the recommended draft from NCCUSL, the definitions were in the back. However, the drafter chose to put those in the front. She agreed that there is some inconsistency. REPRESENTATIVE ROKEBERG suggested that the current committee pass a resolution on to the Legislative Council proposing a change in policy and the need to revise the drafting manual to be more consistent with national practice. He emphasized the need to look into it further. REPRESENTATIVE CROFT asked what the exception is in the drafting manual that Mr. Peterson believes fits here. MR. PETERSON specified that the exception is not printed in the manual. Had he thought of the point 30 years ago, it would be in there, and it ought to be in there, which footnote 2 of his own letter of 2/10/00 indicates, in recognition of the complexity and the interstate use of these uniform Acts. He emphasized the need to make these as easy to use as possible. REPRESENTATIVE CROFT requested confirmation that right now the drafting manual has no exception that would allow the legislature to do this, and the rules say that they should follow the drafting manual. MR. PETERSON replied, "But we tacitly condone exceptions, because there have been exceptions ... in the Alaska Statutes for several decades now, the UCC being the prime example, the UPC [Uniform Probate Code] being the second example." Number 1469 REPRESENTATIVE JAMES agreed that should probably be in the drafting manual as an exception for uniform Acts, although she believes that for statutes drafted by Alaska's legislature, having those sections in back is good. Therefore, the resolution should only refer to the exception, not to anything else the legislature does. MR. PETERSON agreed that the general policy, which he'd enforced for a number of years as Revisor of Statutes, is good. He also concurred with Ms. Finley that consistency eases the use of the statutes. However, when talking about a lengthy uniform Act used around the country, that complicates rather than eases things, he said, and it can thwart research. Number 1574 REPRESENTATIVE KERTTULA declared that she has a problem doing it in one of the bills [HB 296 and HB 239] but not the other. She suggested consistency is needed there. CHAIRMAN KOTT said that is the direction he was pursuing, but he also understands the rationale for putting the definitions up- front. He called an at-ease at 2:35 p.m., then called the meeting back to order at 2:40 p.m. Number 1660 CHAIRMAN KOTT asked Ms. Finley, who had just arrived, why the legislature can't put the definitions in the front in HB 296 but has done so in HB 239 [relating to the UCC]. PAMELA FINLEY, Revisor of Statutes, Legislative Legal Services, Division of Legal and Research Services, Legislative Affairs Agency, explained that in the UCC [for Alaska], all of the articles have definitions up-front, which follows the UCC order. That decision was made long ago, but she wouldn't quarrel with it now, even, because the UCC has been adopted in all of the states - unlike many uniform Acts, which have been adopted in some but not all states. She suggested perhaps one of her predecessors had just decided to use the regular order for the UCC in that one case. The UCC secured transactions bill [HB 239] essentially conforms with the previous decision to have UCC definitions in the front. MS. FINLEY pointed out that with perhaps one other exception, these Acts have put the definitions in the back; in Alaska Statutes, the definitions go in the back, and they always have, a decision made long ago. For the Uniform Partnership Act, the definitions are in the back, where it has been decided to keep them. She emphasized that what really matters is whether the law is the same. They do try, with Alaska Statutes, to be consistent in placement of the definitions, she added, so that people can find them at the end, where they expect them. Number 1855 CHAIRMAN KOTT asked whether the legislative drafting manual has an exception for putting the definitions in the UCC up-front. MS. FINLEY said no, as far as she knows. She suggested Mr. Peterson may be able to answer that. CHAIRMAN KOTT asked whether technically, then, the legislature is in violation of AS 24.08. MS. FINLEY answered that technically, in redoing the UCC Article 9, they may be; however, she isn't too worried about it because the constitution gives the power to the legislature to make its own rules; they can deviate from those, which they have in the past. She said certainly no court is going to say that the bill is invalid for that reason, if that is the concern. Number 1965 CHAIRMAN KOTT asked whether it matters to Ms. Finley where the definitions go. MS. FINLEY said not personally. However, she tries to keep the statutes clean. Essentially the choice here is whether to have the definitions at the end for just about everything except the UCC, or to have them at the end for most things except uniform Acts, which can go up-front. She stated, "I guess I don't really object to that. I think it might be wise for Legislative Council ... to adopt that policy, if that's going to be the policy. They're the ones that adopt the drafting manual. I make recommendations, and anyone can make recommendations too, but they adopt it." Number 2018 CHAIRMAN KOTT said it seems that there has been other legislation in the past with the definitions up-front, but perhaps it dealt with this type of an issue. MS. FINLEY responded that the probate code spans several chapters, from AS 13.06 through AS 13.36. Therefore, there is no logical place to put the definitions section. Putting it at the end of AS 13.36 doesn't make a lot of sense, for example, because people looking at AS 13.06 would need to use it. Therefore, in the probate code, they left it where it was in the uniform Act, because it was such "an odd thing." Number 2100 REPRESENTATIVE MURKOWSKI asked what would happen if the Legislative Council looked at this and determined the need to provide for certain exceptions, where definitions are put up-front, with the exceptions being for extremely complex or lengthy legislation. She asked whether that would make Ms. Finley's job that much more difficult in interpreting what is extremely complex or lengthy. MS. FINLEY suggested that if they put definitions up-front for uniform Acts, it should be for all uniform Acts proposed by the NCCUSL, but not for so-called uniform Acts proposed by other entities, as occasionally happens. Those Acts proposed by the NCCUSL are the ones that tend to get adopted by a large body of states, she noted. Number 2207 REPRESENTATIVE JAMES pointed out that since she has been a legislator, uniform Acts have been brought before the legislature but not acted upon. Other states have that option as well, and therefore the Acts aren't totally uniform. MS. FINLEY agreed. In fact, she said, the only uniform Act that she believes is pretty close to uniform throughout the United States is the UCC, but that has little changes in every state, and Louisiana - having the French background - has a "sort of odd version" of it. To her knowledge, no other uniform Act is adopted by all of the other states; for example, the last time she'd looked, Washington hadn't adopted the Uniform Probate Code. In response to mention of the child custody Act, she said that may have definitions in the front as well, because of that same interstate quality. She noted that the partnership Act isn't adopted everywhere. Many states don't want to adopt these Acts for one reason or another; they may not necessarily like the approach of the uniform commissioners, for example. Furthermore, some things need to be uniform more than others do; partnership don't tend to be interstate-related the way that sales are, for instance. Those factors enter into a legislator's decision as to whether to adopt a uniform Act. Number 2379 REPRESENTATIVE JAMES asked whether an Act is still considered uniform if adopted by a majority of states, in which case the location of the definitions may be important. MS. FINLEY emphasized her belief that any competent lawyer could find those definitions in a uniform Act, even if they were at the end, by looking at the index or table of contents. She said she can't believe that anyone looking wouldn't find them. TAPE 00-14, SIDE A Number 0001 MR. PETERSON provided some history of the adoption of the UCC in Alaska. When the Alaska Statutes were adopted, as a codification, he said this "definitions and general provisions at the end" rule went into effect. It was in a transition period, 1961-62. He said he believes the UCC was enacted in Alaska in 1962, and it kind of coincided with that. It was not a "grandfathering" situation. It was a situation of recognizing the value of the uniform arrangement. MR. PETERSON asserted that, indeed, a number of uniform Acts have been enacted in all states, including the Uniform Child Custody Jurisdiction Act and the partnership Act. He reported that the original partnership Act was much simpler; this one is much longer, more complicated, and more attuned to the year 2000 and modern business practices. He believes it is appropriate to follow the national version, and to try to address that kind of complexity that people face in society now. Number 0205 REPRESENTATIVE KERTTULA asked how many states have adopted this Act. MR. PETERSON said 24 have adopted essentially the 1997 or 1996-97 version of the Revised Uniform Partnership Act. Four more adopted the 1994 version before these 1996-97 amendments came out, and whether those are being considered now in those four states he doesn't know. Therefore, essentially 28 jurisdictions have already enacted this product of the national conference that was promulgated just a couple of years ago. He suggested this is seen as sweeping the country, and he believes eventually all 53 jurisdictions - including all the states plus Guam, Puerto Rico and the District of Columbia - will enact it, although there may be a little bit of tinkering with it here and there. He offered a table showing all the uniform and model Acts produced by the NCCUSL, and what states have enacted them. Number 0328 REPRESENTATIVE ROKEBERG moved that the committee send a letter the Legislative Council recommending 1) that henceforth all UCC Acts, as an exception to the drafting manual, have the definitions placed in front; and 2) that the Legislative Council decide whether the same exception would apply to uniform Acts. Number 0382 CHAIRMAN KOTT announced that at the direction of the committee, a memorandum to Legislative Council would be prepared doing just that. He said it would be two separate issues. MS. FINLEY commented that if it makes anyone feel better, actually the revisor has the power to renumber anything if he or she feels like it; she thinks it is by statute - AS 05.10.031 - that the revisor can do that. Certainly, if the Legislative Council asks her to renumber something, she will. However, it doesn't take an act of the legislature to renumber, as long as she doesn't change the substance of the law. "And we do that, frequently," she added. REPRESENTATIVE ROKEBERG suggested it should be part of the manual, however. Noting that he is on the Legislative Council, he offered to carry the letter drafted by the committee. Number 0504 REPRESENTATIVE CROFT made a motion to move CSHB 296(L&C) from the committee with individual recommendations and the attached zero fiscal note. There being no objection, CSHB 296(L&C) was moved from the House Judiciary Standing Committee.