Where a law-firm LLP has entered the windup period and has ceased to provide any legal services, the windup period does not constitute practicing law and therefore no acts of malpractice could be committed during this period

Law Lessons from Mortgage Grader, Inc. v. Ward & Olivo, __ N.J. __ (2016), Supreme Ct., Nos. A-53-14, June 23, 2016:

Rule 1:21-1C conditions practice by law-firm LLPs on compliance with partnership law, adherence to the rules of professional responsibility, and maintenance of malpractice insurance. Specifically, section (a) provides that “[a]ttorneys may engage in the practice of law as limited liability partnerships” provided that

[t]he limited liability partnership shall obtain and maintain in good standing one or more policies of lawyers’ professional liability insurance which shall insure the limited liability partnership against liability imposed upon it by law for damages resulting from any claim made against the limited liability partnership by its clients arising out of the performance of professional services by attorneys employed by the limited liability partnership in their capacity as attorneys.

[R. 1:21-1C(a)(3) (emphasis added).]

The plain language of Rule 1:21-1C ties the mandate to carry malpractice insurance to damages from the performance of “professional services.” We find no indication that the administrative activities characterizing a windup are included within that term. Cf. Cal. Corp. Code § 16956(a)(2)(A) (stating that “[u]pon the dissolution and winding up of the partnership, the partnership shall, with respect to any insurance policy or policies then maintained pursuant to this subparagraph, maintain or obtain an extended reporting period endorsement or equivalent provision in the maximum total aggregate limit of liability required to comply with this subparagraph for a minimum of three years if reasonably available from the insurer”).

In addition to the plain language of the insurance mandate, subsection (a)(1) of Rule 1:21-1C instructs that “[a]ll provisions of the Uniform Partnership Act, N.J.S.A. 42:1A-1 through 56, shall be complied with, except where inconsistent with these rules.” R. 1:21-1C(a)(1). Because Rule 1:21-1C incorporates the UPA by reference, we next examine the language of the UPA and related legal authority.

A partnership’s existence continues during the windup period and “is terminated when the winding up of its business is completed.” N.J.S.A. 42:1A-40(a). Under the UPA, “the express will of all of the partners to wind up the partnership business” causes dissolution and commences the winding up of a partnership. N.J.S.A. 42:1A-39(b)(2). At any time prior to the completion of the winding up of a partnership, all of the partners “may waive the right to have the partnership’s business wound up and the partnership terminated.” N.J.S.A. 42:1A-40(b). In that event, “the partnership resumes carrying on its business as if dissolution had never occurred, and any liability incurred by the partnership or a partner after the dissolution and before the waiver is determined as if dissolution had never occurred.” N.J.S.A. 42:1A-40(b)(1) (emphasis added). The windup period is temporally indeterminate under the UPA due to the partners’ ability to waive dissolution and because winding up is limited in terms of activity.

During the windup period, the LLP continues to exist, but only to wind up the partnership’s affairs. “On dissolution the partnership is not terminated, but continues until the winding up of partnership affairs is completed, and for that purpose alone.” Scaglione v. St. Paul-Mercury Indemn. Co., 28 N.J. 88, 102 (1958). “A dissolved corporation exists solely to prosecute and defend suits, and not for the purpose of continuing the business for which it was established.” Lancellotti v. Maryland Casualty Co., 260 N.J. Super. 579, 583 (App. Div. 1992) (citing Leventhal v. Atl. Rainbow Painting Co., Ltd., 68 N.J. Super. 406, 412 (App. Div. 1961)). Our Appellate Division in addressing this issue has previously held that “dissolution is distinguished from termination of the partnership business; despite dissolution, the partnership continues for the purpose of winding up partnership affairs.” Wilzig v. Sisselman, 182 N.J. Super. 519, 525 (App. Div. 1982) (citing N.J.S.A. 42:1-30; Scaglione v. St. Paul-Mercury Indem. Co., 28 N.J. 88, 102 (1958)) (emphasis added). “[D]issolution designates the point in time when the partners cease to carry on the business together; termination is the point in time when all the partnership affairs are wound up; winding up, the process of settling partnership affairs after dissolution.” Insulation Corp. of Am. v. Berkowitz, 274 N.J. Super. 337, 344 (App. Div. 1994) (citing Official Comment, Uniform Partnership Act § 29, 6 U.L.A. at 365 (1969)) (emphasis added). Similarly, N.J.S.A. 14:12-9 would bar professional corporations from practicing law during the windup period. See N.J.S.A. 14A:12-9 (stating that a dissolved corporation “shall carry on no business except for the purpose of winding up its affairs”). The UPA sets forth activities that do not constitute “transacting business”: “collecting debts or foreclosing mortgages or other security interests in property securing the debts, and holding, protecting, and maintaining property so acquired.” N.J.S.A. 42:1A-53(a)(8). In sum, the important distinction pertaining to LLP liability is the point in time at which an LLP enters dissolution, commences winding up its affairs, and thus ceases to engage in the business for which it was created.

The administrative activities conducted during the windup period are not the transacting of business for which a law-firm LLP was established. Accordingly, where a law-firm LLP has entered the windup period and has ceased to provide any legal services, the windup period does not constitute practicing law and therefore no acts of malpractice could be committed during this period. Such a law firm is not required to maintain professional liability insurance under Rule 1:21-1C(a)(3).

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