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The aim of a limited liability partnership is to shield the personal assets of the members of a firm. But there are a host of unanswered questions about how much protection LLPs provide in court. And for managing partners of general partnerships and LLPs alike, the Enron litigation involving Arthur Andersen LLP could be a test of the limited liability structure. One issue that may be addressed is supervisory liability. Under most LLP statutes, a partner whose misdeed creates liability is not protected. The more open question is whether others involved with the case or project can also be liable. “What does it mean to be a partner directly involved?” asks Stuart Pape, managing partner of Patton Boggs, which is an LLP. “Most courts would probably treat me as the chief executive of this firm. Does that mean that I have personal exposure for everything that happens on my watch? What about practice group leaders?” Thurston Moore, managing partner of Hunton & Williams, a general partnership, echoes Pape: “There is an uncharted scope of supervisory liability and what is unknown in the law is how tightly or loosely that concept will be applied.” Mark Foster, a partner at limited liability partnership Zuckerman Spaeder who counsels firms on ethics and liability issues, says that case law tends to hold supervisors liable only if they “knew or should have known that there was a problem with the case.” Another issue for LLPs, says Foster, is that some personal assets may not be protected in certain scenarios. A recent ruling in a federal bankruptcy court in Illinois provides a case study. Two partners who left Chicago-based Keck, Mahin & Cate, a general partnership, before its 1997 bankruptcy have been ordered to pay $3.7 million, including $1.6 million for malpractice claims against the firm. The court’s reason: the malpractice was committed while they were partners with the firm. For managing partners wondering about the protections really afforded by LLPs, one troubling aspect of the Keck Mahin ruling is that the firm became liable on the day the misconduct occurred, even if the misconduct had not been detected. By that logic, Foster explains, a firm could be insolvent, and not know it, if it’s hit with a big malpractice judgment, and the firm’s total liability exceeded its assets back at the moment a partner slept through a final appeal or signed off on a botched tax plan. From that point forward, any transfer, including distributions to the partners, could be deemed fraudulent because of the firm’s insolvency. And any so-called fraudulent conveyance to partners, even if the partners didn’t know the firm was bankrupt, could be set aside later to pay plaintiffs. In other words, even an LLP might not shield all partner assets. For example, says Foster, “If Andersen became liable to the creditors of Enron when it gave the advice it gave, it may have been insolvent at that moment.” Any transfers since then to Andersen partners could thus be up for grabs. “Everybody will learn a lot from what’s going on,” says Hunton & Williams’ Moore. “Maybe in this litigation there will be enough resolution that people can get beyond a lot of the speculation.”

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