24 COMMUNIQUÉ May 2009

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24 COMMUNIQUÉ May 2009

NEVADA GENERAL PARTNERSHIPS:

By Neal A. Klegerman & Eric C. Willis

In 2005, the NRS was amended to adopt the Revised Uni-form Partnership Act (1997), NRS 87.4301 to 87.4357 (“RUPA”). However, Nevada gives general partnerships

the choice of either being governed by the Uniform Partner-ship Act, 87.010 to 87.430 (“UPA”) or RUPA. For a general partnership formed on or after July 1, 2006, the partner-ship must affirmatively elect to be governed by UPA, or it will be subject to RUPA. Similarly, a general partnership formed before that date is subject to UPA unless it opts in to RUPA. NRS 87.025; 87.4314. Lawyers advising clients on the formation of a Nevada general partnership should make them aware of the alternatives. As used in this article, “part-nership” refers only to general partnerships and not limited partnerships.

Whether a partnership is an entity may be important to the client. For example, partners may wish to be contrac-tually committed to their business enterprise, but may want to at least preserve the argument that their partnership is not an entity for purposes of some legal, business, regula-tory, or international tax consequences. On the other hand, the partners may want to have some certainty that their partnership will be treated as an entity.

UPA states that “a partnership is an association of two or more persons to carry on as co-owners a business for profit . . . .” NRS 87.060. According to the Official Comment to RUPA § 201(a), the ambiguous nature of this provision was the catalyst behind the adoption of Section 201(a) of RUPA (NRS 87.4321), which states that “[a] partnership is an entity distinct from its partners.” The comments to RUPA make clear that RUPA Section 201(a) was intended to “allay previous concerns stemming from the aggregate theory” of partnership in light of UPA’s “ambivalence on the nature of partnerships.” Official Cmt. to RUPA § 201(a).

With regard to UPA, Nevada case law has done little to eliminate the ambiguity. In Watson v. G.C. Assocs. Ltd. P’ship, 100 Nev. 586, 691 P.2d 417 (Nev. 1984) the Nevada Supreme Court addressed whether a partnership could be held liable as an entity independent of its partners when the partners are immune from liability under another state stat-ute. Watson, 100 Nev. at 588, 691 P.2d at 418. After referring to the definition of “partnership” under NRS 87.060(1), the court, citing an article written by one of the drafters of UPA, stated that “this language was intended to make clear that

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NEVADA GENERAL PARTNERSHIPS:

the act was based upon a common law or aggregate theory of partnership, as opposed to an entity theory which would have endowed the partnership as a separate legal personal-ity.” Watson, 100 Nev. at 588-89, 691 P.2d at 418 (citing Wil-liam Draper Lewis, The Uniform Partnership Act, 24 Yale L.J. 617, 638-40 (1915)). In an unreported case, the federal district court relied on Watson to state that “a partnership cannot be regarded as an entity independent of the persons who compose it.” Home Haven, Inc. v. United States, 1999 WL 691869, at *3 (D. Nev. 1999).

On the other hand, as discussed below, the Nevada Supreme Court has held that, for purposes of pleading and defending litigation, a partnership is “deemed a legal entity.” Richard Matthews, Jr., Inc. v. Vaughn, 91 Nev. 583, 589, 540 P.2d 1062, 1066 (Nev. 1975). But, even so, the court noted that a “partnership is not a separate legal entity in the sense that a corporation is a legal entity.” Richard Matthews, 91 Nev. 589, 540 P.2d 1066.

Considering the ambiguity in UPA and the lack of Nevada case law settling this “age-long conflict,” the nature of the UPA partnership may be categorized as a “hybrid” encompassing aspects of both the “entity theory” and the “aggregate theory,” consistent with the views of UPA draft-ers when discussing UPA generally. Summary: Uniform Partnership Act, Uniform Law Commissioners, available at http://www.nccusl.org/Update/uniformact_summaries/uniformacts-s-upa1994.asp (last visited April 1, 2009) [here-inafter Summary: Uniform Partnership Act].

As noted above, other factors beyond the definitional

or conceptual aspects may be relevant to the question of whether an UPA partnership is a separate legal entity. For example, one may wish to consider the following:

Factors indicating that an UPA partnership should be considered a separate legal entity.

An• UPA partnership can be sued as an entity. UPA does not explicitly address whether a part-nership can sue and be sued, and at common law, a partnership—not being a legal entity—was un-able to sue or be sued in the partnership’s name. Official Cmt. 1 to RUPA § 307. But Nevada, like many other states, has authorized partnerships to be sued in the partnership name in the state civil procedure statutes. See Official Cmt. 1 to RUPA § 307. NRS 12.110 states that “[w]hen two or more persons, associated in any business, transact such business under a common name . . . the associates may be sued by such common name . . . and the judgment in the action shall bind the joint prop-erty of all the associates . . . .” NRS 12.110; see also NRCP 23.1, 23.2. A partnership is “deemed a legal entity for purposes of pleading and defend-ing litigation.” See Nev. Civ. Prac. Man. § 5.15 (October, 2007) (citing Richard Matthews).

An UPA partnership can own real property in •its own name. NRS 87.080. However, whether a

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Entity continued from page 25partnership can own personal property in its own name is unclear under UPA. See NRS 87.080; see also Official Cmts. to RUPA §§ 203-204.

An UPA partnership can, by implication, enter •into a contract in its name. NRS 87.090 (“Every partner . . . and the act of every partner, including execution in the partnership name of any instru-ment . . . binds the partnership . . . .”); see also Official Cmt. to § 301 of RUPA (stating that “by virtue of partnership status, each partner has ap-parent authority to bind the partnership . . .”).

Factors indicating that an UPA partnership should not be considered a separate legal entity.

The NRS states that an UPA partnership is an •“association of two or more persons to carry on as co-owners a business for profit,” without refer-ence to partnerships being considered “entities.” NRS 87.060.

RUPA defines a partnership as “an entity distinct •from its partners.” NRS 87.4321. This suggests that UPA partnerships were not “entities.”

“No person may become a member of an UPA •partnership without the consent of all the part-ners.” NRS 87.180(7). Although this may be var-ied by the partnership agreement, simply having this as the default rule appears somewhat incon-sistent with the concept of a distinct entity.

Notwithstanding the broad statement in • Richard Matthews cited above, whether an UPA partner-ship can commence an action in its own name is unclear in Nevada. In 1868, the Nevada Supreme Court held in The Proprietors of the Mexican Mill v. The Yellow Jacket Silver Mining Co., 4 Nev. 40 (1968) that “a partnership does not have the capac-ity to commence suit in its own name.” Nev. Civ. Prac. Man. § 5.15 (October, 2007) (citing Mexi-can Mill). Neither UPA nor any predecessor was in effect in Nevada in 1868, so the relevance and applicability of Mexican Mill is questionable. This ambiguity has been cleared up in RUPA, which provides that “[a] partnership may sue and be sued in the name of the partnership.” NRS 87.4331. The drafters of RUPA point out that this provision is intended to simplify suits by and against partner-ships. Official Cmt. 1 to RUPA § 307.

An UPA partnership does not need to file or •register to form. See NRS 87.070. While a RUPA partnership also need not file, as noted above, it is an entity pursuant to the language of RUPA.An UPA partnership automatically dissolves •upon the death, resignation, expulsion, or bank-ruptcy of a partner. NRS 87.310. This aspect of UPA partnerships has been changed in RUPA, which allows continuation of a partnership not-withstanding the departure of a partner. See NRS 87.4351. It should be noted, however, that even under UPA the actual winding up of the partner-ship business can be avoided notwithstanding dissolution.Although “real property • may be acquired in the name of an UPA partnership” in accordance with NRS 87.080 (emphasis added), it seems that own-ership in the partnership’s name is not required. See NRS 87.080; NRS 87.100. First, NRS 87.080 uses the word “may” instead of “shall” or “must.” Second, NRS 87.100(3) and (4) indicate that title to real property may be “in the name of one or more but not all the partners.” On the other hand, RUPA provides that property acquired by a part-nership is property of the partnership and not the partners individually. NRS 87.4323. More-over, assets owned by an UPA partnership are co-owned by the partners. NRS 87.250(1) states that “[a] partner is co-owner with his partners of specific partnership property holding as a tenant in partnership” whereas RUPA provides that “[a] partner is not a co-owner of partnership prop-erty and has no interest in partnership property which can be transferred . . . .” NRS 87.4339. As indicated in the comments to RUPA, this “sec-tion abolishes [NRS 87.250(1)] . . . and reflects the adoption of the entity theory.” Comment to RUPA § 501.If the client wants a partnership to be an entity, then

make sure RUPA applies. Although the result is ambiguous, if the client wants to preserve the argument that a partner-ship is not an entity, UPA is the way to go.

Neal A. Klegerman (nklegerman@cekcounsel.com) is a stockholder of Coppedge Emmel & Klegerman PC where he focuses on corporate and securities law and transactions. Eric C. Willis (ewillis@kkbrf.com) is an associate of Kum-mer Kaempfer Bonner Renshaw & Ferrario where he focus-es on real estate and corporate law and transactions.