10.3 Proposed Changes to MRULPA
The National Conference of Commissioners on Uniform State Laws (“NCCUSL”) has proposed a revised Uniform Limited Partnership Act (2001) (“ReRULPA”). Section 703 of ReRULPA generally tracks Corps & Ass’ns § 9A-504. The Comment emphasizes that a charging order does not extend beyond the powers of an assignee (“transferee” per RULPA):
“Under this section, the judgment creditor of a partner or transferee is entitled to a charging order against the relevant transferable interest. While in effect, that order entitles the judgment creditor to whatever distributions would otherwise be due to the partner or transferee whose interest is subject to the order. The creditor has no say in timing or amount of those distributions. The charging order does not entitle the creditor to accelerate any distributions or to otherwise interfere with the management and activities of the limited partnership.
Foreclosure of a charging order effects a permanent transfer of the charged transferable interest to the purchaser. The foreclosure does not, however, create any rights to participate in the management and conduct of the limited partnership’s activities. The purchaser obtains nothing more than the status of a transferee.
Subsection (a) – The court’s power to appoint a receiver and ‘make all other orders, directions, accounts, and inquiries the judgment debtor might have made or which the circumstances of the case may require’ must be understood in the context of the balance described above. In particular, the court’s power to make orders ‘which the circumstance may require’ is limited to ‘giv[ing] effect to the charging order.’
Example: A judgment creditor with a charging order believes that the limited partnership should invest less of its surplus in operations, leaving more funds for distributions. The creditor moves the court for an order directing the general partners to restrict re-investment. This section does not authorize the court to grant the motion.”
The Reporters for the NCCUSL drafting committee on the 2001 Act defend the new provisions as not enlarging creditor remedies from that afforded under prior law. Kleinberger, Bishop & Gen, Charging Orders and the New Uniform Limited Partnership Act, Dispelling Rumors of Disaster, Real Prop. Prob. & Tr. J. 30 (July /Aug. 2004).
Under current Maryland law, a judgment creditor of a debtor partner could either hold a charging order to receive distributions or foreclose on the right to receive such distributions. This was true under the “old” uniform partnership act and under the revised uniform partnership act. It will continue to be true under the 2001 revisions to the uniform limited partnership act if adapted in Maryland. 91st Street Joint Venture v. Goldstein, 114 Md. App. 561, 691 A.2d 272 (1997); Lauer Construction Inc. v. Schrift, 123 Md. App. 112, 716 A.2d 1096 (1998).
Under the old, new, or proposed acts, the status of a creditors in generally not strong:
“The lot of a ‘naked assignee’ is not a happy one: not a partner, not protected by partner-to-partner fiduciary duty, not entitled to participate in partnership affairs in any way, and with virtually no rights to obtain partnership-related information.
Moreover, the naked assignee faces adverse tax consequences. The purchaser of a foreclosed partnership interest is considered a partner for federal tax purposes (even though not a partner under state partnership law), Rev. Rul. 77-137, 1977-1 C.B. 178, which means that the purchaser is subject to tax on its share of the partnership’s income regardless of whether the partnership actually distributes any of that income.
The tax situation is different from a mere holder of a charging order. Because that person does not own the underlying interest, the person should not be considered a partner for tax purposes. There is no specific IRS authority on this point. But the point follows from core concepts of partnership tax law and means that — so long as the charging order is not foreclosed and the interest sold — the debtor partner remains taxable on it shares of partnership income even though that share is distributed directly to the judgment creditor.
Thus, the typical judgment creditor does not salivate at the prospects of foreclosure, and a foreclosure sale will typically draw no crowd.”
Kleinberger, et al. (at 32-33).