Update from the JEB on Uniform Unincorporated Organization Acts

The Joint Editorial Board on Uniform Unincorporated Organization Acts (“the JEB”) met Friday, February 19th in Washington, D.C. The JEB monitors judicial and legislative developments affecting unincorporated organizations governed by uniform acts, e.g., LLCs and partnerships; considers issues referred to it by either the ULC or ABA Business Law Section; and makes recommendations as appropriate for consideration and possible action by the ULC. At its meeting the JEB took up a number of issues. Three are most notable.

UCC §§ 9-406 and 9-408 and “Pick-Your-Partner.”   The right of partners or LLC members to “pick their partners” has been enshrined in the uniform acts from the beginning. It is a core, identifying principle of these organizations, but UCC Article 9 Sections 9-406 and 9-408 appear to override both the principles and the statutory and contractual restrictions that protect the principles. After more than a decade of study, analysis, and discussion, last December the JEB Chair and Research Director reached a tentative agreement with PEB representatives that amendments to UCC 9-406 and 9-408 need to be made. At its February meeting, the JEB discussed this development, examined the language of various state statutes, and, after further discussion with PEB representatives, will recommend the text for necessary amendments to the ULC Executive Committee.

Law Firm Bankruptcies and the “Unfinished Business Doctrine.” In recent years, numerous cases of law firm bankruptcies have involved claims by bankruptcy trustees that “unfinished business” of the firm—specifically, non-contingency, hourly rate clients’ cases—are the property of the bankrupt firm under partnership law, and not of a lawyer or other firm to whom a client transferred the case. The ABA has taken the position through amicus curiae briefs that the bankruptcy trustees are wrong and that hourly rate, non-contingency cases cannot ethically be regarded as “the property” of the firm.

In the fall of 2015, the ABA Business Law Section’s Bankruptcy Court Structure and Insolvency Process Committee (“BSCIP”) adopted a Resolution intended for Section Council and House of Delegates’ consideration, calling on states to amend their partnerships acts to preclude the analysis made and result sought by bankruptcy trustees. Specific reference to uniform acts was deleted when objection was raised that neither the JEB nor the LLCPUE Committee had had the opportunity to consider the proposed Resolution, but the Resolution’s call is otherwise alive and well—including a call to make statutory changes as necessary.

The JEB discussed the Resolution and its background and the JEB consensus was three-fold, that: (1) the BSCIP Resolution calling for unspecified statutory amendments is most likely to be understood as a call for changes to the partnership statute and LLC statutes; (2) as such the Resolution is overbroad, would make inappropriate changes to the statutes, and is unnecessary; but (3) in the law firm bankruptcy cases, the ABA is correct based on the ethics analysis. The JEB will report back to the LLCPUE Committee and also enter into discussions with the sponsors of the Resolution.

Proposal Authorizing JEB to Draft and Recommend to the ULC Executive Committee Proposed Amendments in Certain Situations. The JEB is responsible for monitoring legislative and judicial developments concerning uniform acts concerning business entities. On occasion, developments occur that make amending a uniform act appropriate but do not warrant appointing a new drafting committee.

The ULC Executive Committee is authorized under Section 4.3(b)(3) of the ULC Constitution to approve amendments to uniform acts, subject to the right of each commissioner to object and call for full Conference deliberation and action. During the last year, the JEB has developed a proposed mechanism for the efficient use of Section 4.3(b)(3) in connection with uniform business entity acts. With LLCPUE concurrence, the JEB has proposed to the Executive Committee a mechanism: (i) authorizing the JEB to draft language in certain cases, for reasons stated, that would amend uniform business entity acts, and submit the proposal to the Executive Committee for expedited approval under Section 4.3(b)(3); and (ii) providing that the Executive Committee may approve or reject the proposal or take other appropriate action (e.g., referring the matter back to the JEB.) The JEB approved the final wording at its February meeting. The proposal is being referred to LLCPUE leadership for essentially pro forma final approval, after which the JEB will submit the proposal to the Executive Committee.

 David S. Walker, Chair, JEB for Uniform Unincorporated Organization Acts

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Update from the JEB on Uniform Unincorporated Organization Acts