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Hofstra Law Review Volume 35 | Issue 1 Article 9 2006 "Wide Open": Nevada's Innovative Market in Partnership Law Allan W. Vestal Follow this and additional works at: http://scholarlycommons.law.hofstra.edu/hlr Part of the Law Commons Recommended Citation Vestal, Allan W. (2006) ""Wide Open": Nevada's Innovative Market in Partnership Law," Hofstra Law Review: Vol. 35: Iss. 1, Article 9. Available at: http://scholarlycommons.law.hofstra.edu/hlr/vol35/iss1/9 This document is brought to you for free and open access by Scholarly Commons at Hofstra Law. It has been accepted for inclusion in Hofstra Law Review by an authorized administrator of Scholarly Commons at Hofstra Law. For more information, please contact [email protected]. Vestal: "Wide Open": Nevada's Innovative Market in Partnership Law "WIDE OPEN": NEVADA'S INNOVATIVE MARKET IN PARTNERSHIP LAW Allan W. Vestal* I. INTRODUCTION A decade ago, as the Revised Uniform Partnership Act ("RUPA") was being drafted, I wrote an article' questioning whether the act should be retroactive in application.2 As drafted, RUPA applies to pre-existing partnerships after a certain date, typically bringing to a close a brief transition period after the initial effective date.3 I proposed that the more equitable arrangement would be to have pre-existing partnerships continue to be governed by pre-RUPA partnership law, with partnerships formed after the effective date of RUPA governed by the new statute.4 I was almost alone in questioning retroactive application,5 and as promulgated by the National Conference of Commissioners on Uniform State Laws ("NCCUSL"), RUPA provided for retroactive application. The first thirty-six jurisdictions that adopted RUPA almost uniformly failed to adopt my suggestion, and instead implemented the inequitable retroactivity regime. 6 And then along came Nevada, and a jurisdiction finally got it right. * Dean and Professor of Law, University of Kentucky College of Law. I would like to thank Bill Callison, Biff Campbell, and Tom Rutledge for their comments. 1. Allan W. Vestal, Should the Revised Uniform Partnership Act of 1994 Really Be Retroactive?,50 Bus. LAW. 267 (1994). 2. See id. at 268-69. 3. See UNIF. P'SHIP ACT § 1206(a)(1), 6 U.L.A. 266 (1997). 4. See Vestal, supra note 1, at 285-88. 5. See Larry E. Ribstein, The Revised Uniform PartnershipAct: Not Ready for Prime Time, 49 BuS. LAW. 45, 77-78 (1993). 6. ROBERT W. HILLMAN, ALLAN W. VESTAL & DONALD J. WEIDNER, THE REVISED UNIFORM PARTNERSHIP ACT app. B at 507-10 (2005). Two states adopted partial modifications of the RUPA regime: 1) Arizona, which made RUPA retroactively applicable to LLPs, but not traditional GPs, and 2) Wyoming, which excluded RUPA retroactivity as to only one section. Two other states adopted comprehensive modifications of the RUPA regime: New Mexico and Kentucky Published by Scholarly Commons at Hofstra Law, 2006 1 Hofstra Law Review, Vol. 35, Iss. 1 [2006], Art. 9 276 HOFSTRA LAW REVIEW [Vol. 35:275 This discussion looks at the retroactivity issue with specific reference to the fiduciary duties of partners, and suggests that Nevada provides a useful model. The following section briefly looks at the RUPA retroactivity regime, the criticisms of that regime, and the state variations. The third section suggests a better approach to retroactivity. The fourth section examines, and rejects, interstate competition as a solution to the retroactivity problem. The fifth section reviews, with approval, the Nevada model. Finally, in the conclusion, I suggest how the Nevada model might be profitably incorporated by those states that have yet to adopt RUPA. II. THE RETROACTIVE APPLICATION OF RUPA: RENEGOTIATION WITH A GUN TO YOUR HEAD RUPA provides for retroactive application of the new partnership law regime to pre-existing partnerships. The uniform language provides for an effective date and for a transition period. Partnerships formed after the effective date are governed by RUPA. 7 Partnerships formed prior to the effective date are governed by pre-RUPA partnership law during the transition period, although they may elect to be governed by RUPA even during the transition period.8 At the conclusion of the transition period, all partnerships---even pre-existing partnerships that do not elect to come under RUPA during the transition period-are governed by RUPA. 9 The theory behind the transition period followed by mandatory application to pre-existing partnerships is that the mechanism "affords existing partnerships and partners an opportunity to consider the changes effected by RUPA and to amend their partnership agreements, if appropriate."' I have criticized the retroactive application of RUPA on several grounds. The essential problem is that the retroactive application of RUPA takes the deal negotiated by the partners and changes it without their consent, and does so in ways that may advantage some partners acted in conformity with my suggestion and made the application of RUPA to pre-existing partnerships fully elective. See infra note 48 and accompanying text. 7. REVISED UNIF. P'SHIP ACT § 1206(a)(1), 6 U.L.A. 266 (2001) ("(a) Before January 1, 199_, this [Act] governs only a partnership formed: (1) after the effective date of this [Act] .... "). 8. REVISED UNIF. P'SHIP ACT § 1206(a)(2), 1206(c), 6 U.L.A. 267 (2001) ("(a) Before January 1, 199_, this [Act] governs only a partnership formed: . .. (2) before the effective date of this [Act], that elects, as provided by subsection (c), to be governed by this [Act]."). 9. REVISED UNIF. P'SHIP ACT § 1206(b), 6 U.L.A. 267 (2001) ("(b) On and after January 1, 199, this [Act] governs all partnerships."). 10. REVISED UNIF. P'SHIP ACT § 1206 cmt., 6 U.L.A. 267 (2001). http://scholarlycommons.law.hofstra.edu/hlr/vol35/iss1/9 2 Vestal: "Wide Open": Nevada's Innovative Market in Partnership Law 2006] NEVADA 'S INNO VATIVE PARTNERSHIP LAW over others. The official commentary to RUPA casts this process in designedly neutral terms-retroactivity "affords existing partnerships and partners an opportunity to consider the changes effected by RUPA and to amend their partnership agreements, if appropriate,"'" while in fact the process is anything but neutral. Retroactivity does not "afford[] ...an opportunity";" it mandates a change.' 3 The partners do not "consider the changes effected by RUPA"' 14 in some neutral manner; they engage in a self-interested calculation of the advantages and disadvantages afforded by the change in the terms of their agreement from the UPA/common law regime to the RUPA regime. 15 They do not "amend their partnership agreements, if appropriate ' 6 in some neutral manner; they calculate their self-interest and determine on that basis whether to amend their partnership agreement or simply await the 7 imposition of RUPA to change their agreement for them.' Retroactive application of a new statute only matters if the substantive provisions of the new statute differ from those of the statute being displaced. 18 In the case of RUPA and the UPA/common law regime it seeks to displace, the differences are significant.' 9 RUPA makes several important changes in the underlying theory of the prior uniform act. The new regime tends toward rejection of the aggregate 20 theory of the partnership relationship, and toward the entity theory. The role of the partnership agreement is changed, and partners are given much broader statutory latitude to vary their relationship from that 2 provided in the statute. ' Other changes included in RUPA involve changes in the authority of partners to bind the partnership, 22 changes in the nature of the partnership interest,23 changes in the mechanism for transfer of the 11. Id. 12. Id. 13. See id. 14. Id. 15. See Vestal, supra note 1,at 279. 16. REVISED UNIF. P'SHIP ACT § 1206 cmt., 6 U.L.A. 267 (2001). 17. See Vestal, supranote 1,at 279. 18. See id.at 273. 19. See id. at 274-81 (noting that differences between regimes include partner authority, the nature of a partnership interest in property, rules governing the transfer of partnership interests, and capacity to dissolve the partnership). 20. See id. at 274 & n.35. 21. See id. at 280-83; see also REVISED UNIF. P'SHiIP ACT § 103(a), 6 U.L.A. 73 (2001). 22. See Vestal, supranote 1, at 275 & n.36. 23. See id.at 275 & n.37. Published by Scholarly Commons at Hofstra Law, 2006 3 Hofstra Law Review, Vol. 35, Iss. 1 [2006], Art. 9 HOFSTRA LA W REVIEW [Vol. 35:275 partnership property,24 changes in the formulation of partner liability for the debts of the partnership, 25 and changes in the way in which a partner's interest in the partnership is conceived and calculated.26 A significant range of changes addresses what happens when a partner wants out of the relationship. Any of these differences could significantly alter the calculus of the deal originally struck by the partners, making the retroactive application of RUPA, I believe, fundamentally unfair. For example, imagine a situation where Able, Baker and Clark form a partnership under the UPA to buy racehorses. Able and Baker, who know each other well and have done business together frequently in the past, put up fifty percent of the capital. Clark puts up the remaining fifty percent of the capital. The partnership agreement expresses the agreement of the partners that the partnership is one at will, and not for a definite term or particular undertaking. Clark is unsure about how things will work out with Able and Baker, who he only knows in passing, but he understands that he is protected by the provisions of the UPA. Clark can cause the dissolution of the partnership by his express will at any time.27 Upon dissolution, Clark knows, the authority of the partners to act for the partnership is terminated, except as is necessary to wind up the partnership's affairs or complete transactions already begun.28 Finally, Clark knows that he has the right to participate in the winding up.
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