Han v. Hallberg: Playing Pick-up Sticks With Presta Logic

• Publication year: 2020
• Author: Layton L. Pace

Han v. Hallberg: Playing Pick-up Sticks with Presta Logic

Layton L. Pace

Layton L. Pace is a tax and closely-held-business attorney practicing in Hermosa Beach, California. He is a past chair of the Corporate and Pass-Through Entities Committee of the Taxation Sections of the State Bar of California (now part of the California Lawyers Association) and Los Angeles County Bar Association. He has served on the LLC Committee of the Business Law Section of the CLA. He represents partnerships, limited liability companies, and their managers and owners, but has no stake in the outcome of, relationship to, or financial interest in, the Han v. Hallberg litigation.

Can a trust be a partner in a partnership? Does the death of a partner who has transferred a partnership interest into a trust trigger buy-out provisions of a partnership agreement? In May 2019, the Second Appellate District of the Court of Appeal of California in Han v. Hallberg concluded yes and no to those questions. That result conflicts with the November 2009 decision reached by the Fourth Appellate District in Presta v. Tepper. In August 2019, the California Supreme Court granted review in Han v. Hallberg to decide those questions. This article sets out the issues.

I. INTRODUCTION

California has adopted uniform acts to govern various of its legal entities and codified them as part of the California Corporations Code. Specifically, California has adopted: (i) the Revised Uniform Partnership Act of 1994 ("RUPA"),¹ governing general partnerships, (ii) the Uniform Limited Partnership Act of 2008 ("ULPA"),² governing limited partnerships, and (iii) the Revised Uniform Limited Liability Company Act ("RULLCA"),³ governing limited liability companies ("LLCs").

Uniform acts arise from the efforts of the Uniform Law Commission ("ULC"), which is a national organization that for well over a century has prepared and submitted comprehensive legislation to be adopted by the states of the United States in many areas of law. The ULC website summarizes itself as: "[P]racticing lawyers, judges, legislators and ... law professors ... appointed ... to research, draft, and promote enactment of uniform state laws in areas of state law where uniformity is desirable and practical."⁴ The uniform acts come with detailed comments that explain various provisions.

RUPA, ULPA, and RULLCA came about in California because the Business Law Section of the then State Bar of California sought to keep California current with business needs and developments occurring in other states. This author firmly believes that the Business Law Section did so on behalf of the people of California, and not special interests. The Business Law Section wrote legislative proposals, obtained bill sponsors, and otherwise assisted in ushering RUPA, ULPA, and RULLCA through the California Legislature. Although as initially proposed the bills for RUPA, ULPA, and RULLCA generally followed the uniform acts prepared by the ULC, marching those bills through the California Legislature resulted in the inclusion of various provisions unique to the concerns of California legislators and their constituents.

Why does that matter? Drilling down into RUPA, ULPA, and RULLCA, each refers to "Person" in defining the owners of partnerships and LLCs. Each of those acts also includes a "trust" in the definition of "Person." Moreover, the definition of "Person" came from the same source, the uniform acts, and not from changes made by the California Legislature. Accordingly, decisions such as Han v. Hallberg⁵ or Presta v. Tepper,⁶ which are the subject of this article, that involve general partnerships governed by RUPA, also can impact limited partnerships and LLCs governed by California law, and entities formed under the same uniform acts adopted by many other states.

II. CAN TRUSTS BE PARTNERS UNDER RUPA?

In November 2009, Presta v. Tepper directly answered the question of whether an ordinary express trust, created and governed by the California Probate Code, could be a partner of a California general partnership. After reviewing California trust and partnership law, the Presta court said "no," the individual trustees were the partners.

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In Presta, Mr. Presta and Mr. Tepper had entered into three California general partnerships. The individuals involved entered into their 1986 partnership agreement in their own names, but denoted that they entered into their 1993 and 1995 partnership agreements in their capacities as trustees of their respective trusts. All three partnership agreements contained identical mandatory buy/sell provisions that required the partnerships to buy the partnership interests of a deceased partner upon his death. Mr. Tepper died, and Mrs. Tepper, as successor trustee of the pertinent trusts, agreed to sell the partnership interest in the 1986 partnership, but refused to sell the partnership interests in the 1993 and 1995 partnerships. She contended that, because the trigger for the buy/sell provisions was the death of a partner and the partner of those partnerships was the trust, rather than the trustee, she was not obligated to sell.

The Presta court upheld the lower court's conclusion that the death of Mr. Tepper triggered the buy/sell provisions. The Presta court first reasoned that an ordinary express trust is a relationship and not an entity under well-settled California law, so a trust could not be a partner. The Presta court then reviewed the meaning of "Person" in RUPA, which has the following language:

"Person" means an individual, corporation, business trust, estate, trust, partnership, limited partnership, limited liability partnership, limited liability company, association ... or any other legal or commercial entity.

The Presta court interpreted that phrase, "or other legal or commercial entity," to limit the term "trust" to mean only a trust to the extent that California law recognizes it as a legal or commercial entity. The court concluded that longstanding California law held that an ordinary express trust was not a legal entity, so an ordinary express trust could not be a partner.

Next, the Presta court undertook to find other provisions of RUPA to support that conclusion. The court found section 16601(8) of the California Corporations Code. Section 16601(8) deals with the circumstances in which a partner is dissociated from a partnership.⁷ The court found the language of section 16601(8) to recognize that either a trust or a trustee of a trust (when the trust itself cannot be a partner) can be a partner.

The court completed its analysis by stating its conclusion was...