COMMENT

Note to Georgia Revised Uniform Limited Partnership Act This Section eliminates the rule that a limited partner is liable as a general partner if he takes part in control of the partnership.

The following is a summary of the reasons for eliminating the "control" rule:

(1) The control rule has, over the years, been greatly watered down, so that in its current version in RULPA there is no liability without creditor reliance and a broad safe harbor as to what constitutes control.

(2) Even in a watered down form, the control rule leaves some uncertainty as to liability of limited partners, and therefore operates as an important disincentive to limited partnership investments. In particular, many of the "safe harbor" categories of non-control acts are open to interpretation.

(3) Even without a control rule, third parties are protected if (despite their ability to check the certificate) they are misled by a limited partner's participation in control into believing that he is a general partner. Thus, a limited partner may be liable on estoppel (see Section 14-8-16) or fraud grounds, or on general equitable grounds under a "veil-piercing" theory. Fraud liability may be imposed, for example, if the limited partner's name is used in the name of the partnership in violation of Section 14-9-102. This Section only eliminates liability imposed solely because a limited partner participates, as such, in control of the business.

(4) The control rule is not effective in fulfilling the objective of ensuring that only those with personal liability, and thus a strong incentive to be careful, will manage the business. General partners can always incorporate or delegate control to individuals other than limited partners. The control rule may actually serve to weaken the quality of management since the risk of liability for participation in control deters limited partners from monitoring the generals. If third party creditors want a limitation on partner participation in control, Section 14-9-303 does not prevent third parties from entering into agreements, similar to loan covenants, that provide for certain rights if the limited partners participate in control. Finally, it should be noted that RULPA Section 303 does not protect third parties who are misled other than by relying on a limited partner's participation in control.

Prior Georgia Law Section 14-9A-41 provides that a limited partner is liable as a general if he "takes part in the control of the business."

Comparison With Official RULPA The official version provides for liability of limited partners who participate in control to creditors who transact business reasonably believing on the basis of the limited's conduct that he is a general partner. A number of activities are specified as not constituting participation in control. For further discussion of the RULPA provisions, see Note to Georgia Revised Uniform Limited Partnership Act.

Cross-References Partnership-by-estoppel liability: § 14-8-16. Liability of limited partner to perform contribution obligation: § 14-9-502.

JUDICIAL DECISIONS

Cited in Antonic Rigging & Erecting of Missouri, Inc. v. Foundry E. Ltd. Partnership, 773 F. Supp. 420 (S.D. Ga. 1991).

RESEARCH REFERENCES