AB837: Bill Text

LRB-4582/1

ARG:wlj&amn

2015 - 2016 LEGISLATURE

2015 Assembly BILL 837

January 29, 2016 - Introduced by Representatives Jarchow, Goyke, Ballweg, Berceau, Kahl and A. Ott, cosponsored by Senators LeMahieu, Risser and Marklein. Referred to Committee on Judiciary.

AB837,2,2 An Act to repeal 73.14, 179.76 (5) (bm), 179.76 (5m), 179.77 (5) (bm), 179.77 (5r), 180.1161 (5) (bm), 181.1105 (1m), 181.1161 (5) (bm), 182.01 (7), 183.1204 (1) (cm) and 183.1207 (5) (bm); to renumber 179.10; to renumber and amend 179.04 (1) (b) and 179.82 (4); to amend 13.69 (1), 70.21 (2), 71.80 (21), 71.80 (22), 73.03 (58) (a) and (b), 77.21 (1e), 77.25 (6), 77.25 (6d), 77.25 (6m), 77.61 (15), 108.02 (20r), 179.065 (2), 179.70 (2) and (3), 180.0121 (1) (a) 4., 180.0121 (2), 180.0501 (2), 180.1100 (2) and (3), 180.1507 (2), 181.0121 (1) (a) 4., 181.0121 (2), 181.0501 (2), 181.1100 (2) and (3), 181.1507 (2), 182.01 (3) (intro.), 183.0105 (1) (b), 183.0109 (1) (a) 5., 183.0109 (2), 183.1200 (2) and (3), 244.49 (9), 766.01 (9) (d) and 815.18 (13) (e); to repeal and recreate chapter 178; and to create 71.80 (21m), 71.80 (22m), 73.03 (58) (c) and (d), 77.25 (6q), 77.25 (6t) and 179.10 (2) of the statutes; relating to: adopting revisions to the state's uniform partnership law, providing an exemption from emergency rule procedures, granting rule-making authority, and providing a criminal penalty.

Analysis by the Legislative Reference Bureau

This bill adopts, with modifications, the Revised Uniform Partnership Act (1997), as last amended in 2013.

In 1914, the National Conference of Commissioners on Uniform State Laws (NCCUSL) drafted and approved the Uniform Partnership Act (1914). In 1992, NCCUSL adopted a Revised Uniform Partnership Act and, in 1993 and 1994, adopted amendments to this revised act. In 1996, NCCUSL adopted limited liability partnership (LLP) amendments to its revised act. All of these changes were combined in a Revised Uniform Partnership Act (1997). In 2013, NCCUSL, now called the Uniform Law Commission, modified the Revised Uniform Partnership Act (1997).

Current law in Wisconsin adopts the Uniform Partnership Act (1914), with modifications. One of these modifications, made in 1995 Wisconsin Act 97, allows partnerships in Wisconsin to become LLPs.

This bill repeals and recreates Wisconsin's partnership law, including the law related to LLPs, to adopt the Revised Uniform Partnership Act (1997), as last amended in 2013 (RUPA), subject to certain modifications. Many provisions of RUPA are similar to current law. For example, under both current law and RUPA, the partnership agreement provides rules of governance for the partnership and, in many instances, statutory provisions are default rules that govern the partnership only in the absence of applicable terms in the partnership agreement. However, in some instances, the terms of the partnership agreement may not vary from statutory requirements. Also under both current law and RUPA, a filing with the Department of Financial Institutions (DFI) is not required to form a partnership, but a filing is required for a partnership to become an LLP.

Some of the significant changes to current law made by RUPA, as adopted under this bill, are discussed below.

Partnership as distinct legal entity

Under this bill, a partnership is a distinct legal entity, not merely an aggregation of individual partners. Accordingly, instead of a partner being a co-owner of partnership property as a tenant in partnership, the partnership entity generally holds the only ownership interest in partnership property and each partner's interest in the property is derivative through the partner's interest in the partnership. The bill also specifies that a partnership may sue and be sued in the name of the partnership.

Partnership agreement and partnership formation

Current law specifies certain rules that apply to the rights and duties of partners in relation to the partnership, subject to any agreement between the partners.

This bill provides more specific guidance, in comparison with current law, as to when the provisions of a partnership agreement override contrary statutory provisions and when they do not. Under the bill, subject to certain exceptions discussed below, the partnership agreement governs relations among the partners as partners and between the partners and the partnership; the business of the partnership and the conduct of that business; and the means and conditions for amending the partnership agreement. On these topics, statutory provisions govern only in the absence of an applicable provision in the partnership agreement. However, the bill imposes certain restrictions on the terms of a partnership agreement. Among these restrictions, a partnership agreement may not vary from certain statutory provisions relating to the grounds for expulsion of a partner by judicial order; the causes of dissolution; requirements for winding up the partnership's business; requirements for DFI filings or for an LLP's registered agent; lawsuits by and against partners and the partnership; a partner's right of access to partnership books and information; a partner's fiduciary and other duties (discussed further below); and the applicable law governing an LLP's internal affairs and the liability of its partners. The partnership agreement also governs the obligations of the partnership and its partners to a person dissociated as a partner and to a person to whom a partner's interest (right to receive partnership distributions) has been transferred.

Although current law does not require the filing of a certificate or articles with DFI to form a partnership, it does allow partnership agreements and amendments to these agreements, as well as notices of partnership dissolution, to be recorded with the register of deeds in the county where the partnership is located.

As under current law, this bill does not require the filing of a certificate or articles with DFI to form a partnership, but the bill allows a partnership to voluntarily file with DFI various types of statements, including a statement of partnership authority. This statement may grant or limit, for purposes of a third-party dealing with the partnership, authority of a partner to act as an agent of the partnership and to enter into transactions on behalf of the partnership. In this statement, the partnership may identify the authority of any person or position (which covers all persons holding that position) or identify limitations on the authority of a person or position. The statement of authority is effective for five years from its original date or its most recent amendment or renewal, and the statement affects only the power of a person to bind the partnership to persons that are not partners. The bill allows any person named in a statement of authority to file with DFI a statement of denial of authority. If the statement of authority is recorded with the register of deeds, it may grant or limit authority of a partner to transfer real property on behalf of the partnership. The bill also allows the filing of other voluntary statements with DFI, including a statement of dissociation of a partner which limits the authority of the dissociated partner, a statement of dissolution which gives notice that the partnership has dissolved and is winding up its business, and a statement of termination which gives notice that the partnership is terminated. A person who is not a partner is considered to have knowledge of facts contained in a statement of dissociation, statement of dissolution, or statement of termination 90 days after the statement becomes effective.

Fiduciary and other duties of partners

Under current law, a partner is a fiduciary who must account to the partnership for any benefit, and hold as a trustee for it any profit, derived by the partner without the consent of the other partners from any transaction connected with the formation, conduct, or liquidation of the partnership or from use by the partner of partnership property.

This bill provides a broader and more explicit description of the duties of each partner to the partnership and to other partners and also specifies the extent to which these statutory duties may be overridden by the partnership agreement. Under this bill, unless the duty is permissibly modified in the partnership agreement (as discussed below), a partner owes to the partnership, and to the other partners, duties of loyalty and care, as described below. A partner must also discharge its duties and obligations, whether statutory or arising under the partnership agreement, and exercise its rights, consistently with the contractual obligation of good faith and fair dealing. However, a partner does not violate a duty or obligation solely because the partner's conduct furthers the partner's own interest.

Under the bill, a partner owes a fiduciary duty of loyalty that includes the duty: 1) to account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner in the conduct or winding up of the partnership's business, from use of the partnership's property, or from the appropriation of a partnership opportunity; 2) to refrain from dealing with the partnership, in the conduct or winding up of the partnership business, adversely or on behalf of a person having an adverse interest; and 3) to refrain from competing with the partnership in the conduct of the partnership's business. However, all the partners, or one or more disinterested partners with authority to act in the matter, may authorize or ratify, after disclosure of all material facts, a specific act or transaction that otherwise would violate the duty of loyalty. Also, it is a defense to a claim of dealing adversely with the partnership (item 2, above) that the transaction was fair to the partnership.

Under the bill, a partner also owes a duty of care, in the conduct or winding up of the partnership business, to refrain from 1) willfully failing to deal fairly with the partnership or its partners when the partner has a material conflict of interest; 2) violating the criminal law; 3) engaging in a transaction in which the partner derives an improper personal profit; or 4) engaging in willful misconduct.

Under the bill, the partnership agreement may not alter or eliminate, or restrict remedies for the breach of, the duty of loyalty or the duty of care, except as described below; eliminate, or restrict remedies for the breach of, the contractual obligation of good faith and fair dealing, but it may prescribe standards, if not manifestly unreasonable, by which performance of the obligation is measured; or relieve a person from liability for conduct that violates the duty of care described in items 1) to 4) in the immediately preceding paragraph. However, the partnership agreement may specify the method by which an act or transaction that would otherwise violate the duty of loyalty may be authorized or ratified after the disclosure of all material facts. The partnership agreement may also eliminate or limit a partner's fiduciary duty if it also relieves the partner of a responsibility and imposes it on another partner. Although the partnership agreement may not relieve a person from liability for conduct that violates the duty of care described in items 1) to 4) in the immediately preceding paragraph, it may, if not manifestly unreasonable, alter or eliminate, or restrict remedies with respect to, certain aspects of the duty of loyalty; identify specific types or categories of activities that do not violate the duty of loyalty or the contractual obligation of good faith and fair dealing; otherwise alter the duty of care; or alter or eliminate any other fiduciary duty. A court determines, as a matter of law, whether a term of a partnership agreement is manifestly unreasonable.

Dissociation of partners and dissolution and winding up of partnership

Under current law, the dissolution of a partnership is the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on of the business. Dissolution may be caused by various events, including by the will of any or all partners or by the death or bankruptcy of a partner. However, a partner's assignment (usually by sale) of the partner's interest in the partnership does not of itself dissolve the partnership, although the assignee is entitled to receive only the partner's profits from the partnership and not any right to management or participation in partnership business.

This bill adopts the term "dissociation," as used in connection with a partner, and specifies when a partner's dissociation from the partnership occurs. Among other events causing a partner's dissociation from the partnership, a partner is dissociated upon the occurrence of any of the following: 1) when the partner withdraws from the partnership or is expelled from the partnership; 2) when an event occurs that, under the terms of the partnership agreement, results in the partner's dissociation; 3) when the partner becomes a debtor in bankruptcy, dies, has a guardian or conservator appointed for him or her, or is adjudged to be incapable of performing his or her duties under the partnership agreement; or 4) when the partnership dissolves and completes winding up. A person has the power to dissociate as a partner at any time, rightfully or wrongfully, by withdrawing from the partnership unless the partnership is an LLP and the partnership agreement provides otherwise; however, a partner that wrongfully dissociates is liable to the partnership and to the other partners for damages caused by the dissociation. A partner's dissociation is wrongful if, among other things, the dissociation is in violation of a term of the partnership agreement. A dissociated partner has no right to participate in the management of the partnership. The obligations of the partnership and other partners to the dissociated partner are generally governed by the terms of the partnership agreement, although the bill contains certain provisions relating to partnership distributions to dissociated partners.

Under the bill, a partner's dissociation from the partnership does not automatically require dissolution of the partnership; a partnership is dissolved only upon the occurrence of specified events. For example, in a partnership for a definite term or particular undertaking, dissociation of a partner as a result of the partner's death causes dissolution of the partnership only if, within 90 days after the death, at least half of the remaining partners affirmatively act to dissolve the partnership. As under current law, under the bill a partner's sale of his or her interest in the partnership does not automatically require dissolution of the partnership or entitle the transferee to participate in the management of the partnership. It also does not, by itself, cause the partner's dissociation from the partnership.

This bill modifies some of the grounds under which a partnership is dissolved and its business must be wound up, including grounds for dissolution by court order. As new grounds for dissolution under the bill, a partnership is dissolved, and its business must be wound up, if the partnership does not have at least two partners for 90 consecutive days or if an event or circumstance occurs that the partnership agreement states causes dissolution. Also, under the bill, a court order is required for dissolution on the basis that the partnership's activities are or would be unlawful.

The bill also allows a partnership to rescind its dissolution unless it has already filed with DFI a statement of termination or a court has ordered dissolution. If a partnership rescinds its dissolution and meets certain requirements, the partnership may resume carrying on its business as if dissolution had never occurred.

Limited liability partnerships

Under current law, to become an LLP, a domestic partnership must file a registration statement with DFI that contains specified information. To do business in this state, a foreign LLP must file with DFI a foreign registration statement. Current law includes various provisions relating to these registration statements, amendment or termination of these registration statements, acceptable names for an LLP or foreign LLP, registered offices and registered agents for LLPs and foreign LLPs, and service on LLPs and foreign LLPs.

Under this bill, to become an LLP, a domestic partnership must file with DFI a statement of qualification, rather than a registration statement. However, a foreign LLP must still file a registration statement with DFI to do business in this state. The bill includes many provisions, including some based on RUPA and some that depart from the model provisions of RUPA, relating to procedures applicable to LLPs and foreign LLPs, including provisions related to maintenance of a registered agent and registered office, service of process on an LLP or foreign LLP, and DFI's revocation of an LLP's statement of qualification or foreign LLP's registration. The bill requires an LLP or foreign LLP to submit an annual report to DFI.

As under current law, the provisions of this bill afford the partners in an LLP a certain level of immunity from liability, although the bill includes some modifications to current law relating to LLP liability. Under current law, all partners in a partnership are generally liable as follows: 1) jointly and severally for loss or injury caused to a person who is not a partner by any wrongful act or omission of a partner acting in the ordinary course of the partnership business or with partnership authority; and 2) jointly for all other debts and obligations of the partnership. However, a partner in an LLP is not personally liable for any debt, obligation, or liability of the LLP, except that the partner may be liable for the partner's own actions or the actions of a person under the partner's supervision and control and for debts, obligations, and liabilities resulting from the partner's acts or conduct other than as a partner.

Under this bill, a partnership is liable for loss or injury caused to a person as a result of a wrongful act or omission of a partner acting in the ordinary course of the partnership's business or with the actual or apparent authority of the partnership. In a partnership that is not an LLP, all partners are generally liable jointly and severally for all debts, obligations, and other liabilities of the partnership. However, subject to an exception, in an LLP, a debt, obligation, or other liability of the LLP is solely the debt, obligation, or other liability of the LLP, not of the partners, and a partner is not personally liable for the debt, obligation, or other liability of the LLP solely by reason of being a partner. Under the exception, an LLP can make an election that this provision (under which a debt, obligation, or other liability of the LLP is solely that of the LLP and a partner is not personally liable) does not affect the liability of a partner in an LLP for the partner's own negligence or wrongful acts or for the negligence or wrongful acts of a person under the partner's supervision and control. The bill also specifies that an LLP's failure to observe formalities relating to the exercise of its powers or management of its business is not a ground for imposing liability on a partner for a debt, obligation, or other liability of the LLP.

The bill includes restrictions on an LLP in making distributions to partners, or to transferees of partners, under certain circumstances. An LLP may not make a distribution if, after the distribution, the LLP would not be able to pay its debts as they become due in the ordinary course of business or the LLP's assets would be less than its liabilities. If a partner of an LLP consents to a distribution that violates these restrictions and, in consenting to the distribution, fails to comply with the partner's duties of loyalty and care (as described above), the partner is personally liable to the partnership for the amount of the distribution that exceeds the amount that could have been distributed without the violation.

Mergers, conversions, and other business combinations

This bill specifies procedures for domestic or foreign partnerships, including LLPs, to engage in business-structure transactions in the form of mergers, conversions, interest exchanges, and domestications. In an interest exchange, a domestic partnership acquires interests of another domestic or foreign business entity, or has its own interests acquired by another domestic or foreign business entity. In a domestication, an entity governed by the law of a foreign country (a non-US entity) may domesticate as a domestic partnership under Wisconsin law while continuing to be subject to the foreign country's law and a domestic partnership may domesticate as a non-US entity subject to a foreign country's law while continuing to be a domestic partnership. The bill allows mergers, conversions, interest exchanges, and domestications to involve a diverse array of business entities, including business corporations, nonprofit corporations, limited liability companies, limited partnerships, LLPs, cooperative associations, and unincorporated nonprofit associations. Certain requirements apply to these business-structure transactions, including approval of a plan of merger, conversion, interest exchange, or domestication and filing with DFI articles of merger, conversion, interest exchange, or domestication, although the terms of the partnership agreement generally govern mergers, conversions, interest exchanges, and domestications. When the merger, conversion, interest exchange, or domestication becomes effective, certain results occur automatically, as a matter of law, with respect to such matters as assets, obligations, continued existence, and organizational documents of the parties involved in the transaction.

The bill also repeals a tax reporting requirement under current law that applies to corporations, LLCs, and limited partnerships. Under current law, if an acquired business entity in a merger or the converted business entity in a conversion owned a fee simple ownership interest in any Wisconsin real estate immediately prior to the merger or conversion, the surviving business entity must submit a report to the Department of Revenue within 60 days of the merger or conversion containing specified information relating to the merger or conversion and the Wisconsin real estate.

This bill eliminates this reporting requirement.

Partnership records and information

Under current law, subject to the provisions of the partnership agreement, partnership books must be kept at the principal place of business of the partnership and, at all times, each partner must have access to them and may inspect and copy them. Partners must also render, on demand, to any other partner true and full information of all things affecting the partnership.

This bill provides for a partnership to keep its books and records at its principal office. On reasonable notice, a partner may inspect and copy, during regular business hours and at a reasonable location specified by the partnership, any record maintained by the partnership regarding the partnership's business, financial condition, and other circumstances, to the extent the information is material to the partner's rights and duties under the partnership agreement or the statutes. The bill specifies information that the partnership must furnish to each partner, without demand by the partner, as well as information that the partnership must furnish to a partner upon demand by the partner. The duty to furnish information also applies to each partner, not just to the partnership. The bill also specifies the rights to information of a person dissociated as a partner. The bill allows a partnership to impose reasonable restrictions and conditions on access to and use of information furnished by the partnership.

Other changes

This bill includes numerous other substantive and stylistic changes from current law. The bill eliminates existing provisions, and creates new provisions, as to when a person is considered to have notice or knowledge of a fact, and also specifies when a person is considered to have given another person notice of a fact. The bill also modifies certain terms used in connection with partnerships, such as changing the term "registration statement" for an LLP to "statement of qualification" and changing the term "articles of dissolution" to "statement of dissolution."

The bill also includes numerous modifications from, or additions to, the model language of RUPA, including provisions relating to DFI procedures and fees.

Phase-in

The changes in this bill apply to a partnership formed on or after January 1, 2018, and apply, on January 1, 2018, to a partnership formed before that date unless 1) the partnership elects to be governed earlier by the new provisions of the bill, or 2) the partnership elects to be governed by the existing law applicable before enactment of the bill. When the provisions of the bill become applicable to a partnership, provisions of prior law relating to liability and legal actions continue to apply to obligations incurred prior to enactment of the bill and any provision of a partnership agreement that was valid before enactment of the bill remains valid.