Protection of LLP Shield Isn't Ruined By Lack of Required Liability Insurance

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Nov. 17— An LLP's failure to maintain malpractice insurance as required by a New Jersey rule does not defeat a partner's individual immunity from liability for another partner's malpractice, the New Jersey Superior Court, Appellate Division, held Nov. 14.

The court ruled that a law firm structured as a limited liability partnership does not convert to a general partnership when it drops or loses its coverage. Instead, Judge Douglas M. Fasciale said, the penalty is specified in the rule itself: the firm's right to practice may be terminated or it may be disciplined by the New Jersey Supreme Court.

Rule Specifies Sanctions

The court concluded that the LLP liability shield in the state's Uniform Partnership Act protects attorney John Ward from personal liability for the alleged malpractice of his former partner John Olivo in a client's patent infringement action, even though the lawyers' LLP became uninsured after they stopped practicing together and did not buy tail coverage.

N.J. Stat. Ann. §42:1a-18(c) plainly expresses legislative intent that the partners of an LLP are shielded from personal liability for a fellow partner's act, the court said.

Fasciale acknowledged that law firms are required to obtain and maintain liability insurance under N.J. R. 1:21-1C(a)(3), which is part of the court rule that regulates law firm LLPs. However, an LLP is not relegated to the status of a general partnership if it fails to do so, he said.

Fasciale pointed out that according to the state UPA, the status of an LLP remains effective until the LLP itself cancels it or the status is revoked by the state treasury department for failing to file an annual report or required filing fees.

“Nowhere in the UPA did the Legislature state that, when attorneys practice as an LLP, the LLP reverts to a GP if it fails to maintain professional liability insurance, as required by the court rules,” Fasciale wrote.

The court also noted that the court rule on law firm LLPs provides that a firm's violation of the rule “shall be grounds for the Supreme Court to terminate or suspend the limited liability partnership's right to practice law or otherwise to discipline it.” N.J. R. 1:21-1C(a)(2).

“The Court did not include as a sanction the conversion of an LLP into a GP, thereby removing the protection afforded to a partner in an LLP under the UPA, when attorneys practice as an LLP without maintaining professional liability insurance,” Fasciale said.

Legislature Didn't Override Rule

The court noted that the rule enumerating sanctions for a law firm's noncompliance with LLP requirements was adopted in 1996, yet the legislature never amended the UPA to require an LLP to revert to general partnership status as a sanction for failing to maintain insurance.

In addition, it said, the committee report that proposed the rule on law firm LLPs does not suggest any intent to convert an LLP into a general partnership if the entity fails to carry the required malpractice insurance.

“Thus, if attorneys practice as an LLP, and the LLP fails to maintain malpractice insurance as required by the court rules, then the Supreme Court may terminate or suspend the LLP's right to practice law or otherwise discipline it,” the court said. “As currently written, however, the court rules do not authorize a trial court to sanction a partner of an LLP for practicing law as an LLP without the required professional liability insurance by converting an otherwise properly organized LLP into a GP,” Fasciale wrote.

Judges Joseph L. Yannotti and Richard S. Hoffman concurred in the opinion.

Piro, Zinna, Cifelli, Paris & Genitempo LLC represented Ward. Pashman Stein P.C. represented the plaintiff, Mortgage Grader Inc.

Full text at http://www.bloomberglaw.com/public/document/Mortg_Grader_Inc_v_Ward__Olivo_LLP_No_A377713T3_2014_BL_321527_NJ.

 

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