Keck v. Billauer (In Re Keck)
274 B.R. 740, 2002 Bankr. LEXIS 463, 2002 WL 372840 (2002)
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Rule of Law:
Under the Illinois Uniform Partnership Act, a partner's liability for a partnership's wrongful act or omission arises at the time the act or omission occurs, not when a claim is later adjudicated or settled. A partner cannot escape this liability by withdrawing from the partnership after the wrongful act has been committed but before a claim is finalized.
Facts:
- Keck, Mahin & Cate ('Keck') was an Illinois law firm organized as a general partnership.
- In January 1989, conduct occurred that later gave rise to a malpractice claim by a client named Wozniak Industries, Inc. ('Wozniak').
- Barbara P. Billauer was a capital partner at Keck from July 2, 1990, to August 31, 1993.
- Thomas E. Ho’okano was a capital partner at Keck from June 24, 1991, to March 26, 1993.
- In July 1991, conduct occurred that later gave rise to a malpractice claim by clients Bank of Orange County and Pacific Inland Bancorp ('Pacific Inland').
- Ho'okano withdrew from the partnership on March 26, 1993.
- Billauer withdrew from the partnership on August 31, 1993.
- After both partners had withdrawn, the Wozniak and Pacific Inland malpractice claims were formally asserted and settled.
Procedural Posture:
- Creditors of Keck, Mahin & Cate filed an involuntary chapter 7 bankruptcy petition against the partnership.
- The bankruptcy court granted Keck's motion to convert the case to chapter 11.
- The bankruptcy court confirmed a chapter 11 plan, appointing Jacob Brandzel as the plan administrator.
- The plan administrator, as assignee of all allowed claims, filed an adversary complaint in the United States Bankruptcy Court for the Northern District of Illinois against non-participating former partners Barbara P. Billauer and Thomas E. Ho’okano.
- The bankruptcy court held a trial on the merits of the administrator's complaint.
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Issue:
Does a former partner's liability for a malpractice claim under the Illinois Uniform Partnership Act arise at the time of the wrongful act or omission, even if the claim is not settled or adjudicated until after the partner has withdrawn from the partnership?
Opinions:
Majority - Judge Carol A. Doyle
Yes, a former partner's liability for a malpractice claim arises at the time of the wrongful act or omission. Under Section 13 of the Illinois Uniform Partnership Act (IUPA), it is the 'wrongful act or omission' itself that gives rise to the liability of all other partners. Therefore, partners cannot escape liability by leaving the partnership after the malpractice is committed but before the client wins or settles a claim. The court rejected the defendants' argument that liability only attaches when a judgment is entered, stating that cases applying the discovery rule for statute of limitations purposes do not alter when liability arises for purposes of partnership law. The court also held that the dissolution of a partnership does not, by itself, discharge the existing liability of any partner to third parties without the third party's consent.
Analysis:
This decision solidifies the principle of 'tail' liability for partners in professional service firms. It clarifies that a partner's departure does not sever their responsibility for tortious acts committed by the firm during their tenure. The ruling is significant because it prevents partners from strategically resigning to avoid liability for known or suspected wrongful acts before they mature into formal claims. It reinforces that internal partnership agreements limiting liability are generally ineffective against third-party creditors who have not consented to such limitations, thereby protecting the rights of those harmed by the partnership's actions.
