Keck v. Billauer (In Re Keck)
2002 Bankr. LEXIS 463, 274 B.R. 740, 2002 WL 372840 (2002)
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Rule of Law:
Under the Illinois Uniform Partnership Act, a partner's liability for a wrongful act or omission committed by the partnership arises at the time the wrongful act or omission occurs, not when a subsequent judgment is entered or a claim is settled. A partner cannot escape this liability by withdrawing from the partnership before the claim is liquidated.
Facts:
- Keck, Mahin & Cate ('Keck') was an Illinois law partnership.
- In January 1989, conduct by Keck occurred that later formed the basis of a malpractice claim by Wozniak Industries, Inc. ('Wozniak').
- Barbara P. Billauer became a partner at Keck on July 2, 1990.
- In July 1991, conduct by Keck occurred that later formed the basis of a malpractice claim by Pacific Inland Bancorp ('Pacific Inland').
- Thomas E. Ho'okano was a partner at Keck from June 24, 1991, until March 26, 1993.
- While Billauer and Ho'okano were partners, Keck maintained a revolving loan with Citizens Commercial Leasing Corporation ('Citizens') for office equipment.
- Billauer withdrew from the partnership on August 31, 1993.
- After both partners left, Keck incurred significant new debt with Citizens by purchasing additional equipment.
Procedural Posture:
- Creditors of the law firm Keck, Mahin & Cate filed an involuntary chapter 7 bankruptcy petition against the partnership in federal bankruptcy court.
- On Keck's motion, the bankruptcy court converted the case to a chapter 11 reorganization.
- The bankruptcy court confirmed a chapter 11 plan, which appointed Jacob Brandzel as the plan administrator.
- Under the plan, partners could either pay a settlement to become 'participating partners' or decline and become 'non-participating partners' subject to further liability.
- Barbara Billauer and Thomas Ho'okano chose to be non-participating partners.
- The plan administrator, Jacob Brandzel, filed an adversary complaint in the bankruptcy court against Billauer and Ho'okano, seeking to hold them liable for certain allowed claims against the Keck estate.
- 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 partnership's wrongful act, under the Illinois Uniform Partnership Act, arise at the time of the wrongful act itself, or only when a subsequent judgment or settlement liquidates the claim?
Opinions:
Majority - Carol A. Doyle
Yes, a former partner's liability arises at the time of the wrongful act itself. Section 13 of the Illinois Uniform Partnership Act (IUPA) states that where a 'wrongful act or omission' of a partner causes injury, the partnership is liable. The court reasoned that this language makes clear that liability for all partners arises at the time of the misconduct, not when the resulting claim is later liquidated through a judgment or settlement. A partner cannot escape liability by simply leaving the partnership after the malpractice is committed but before the client wins or settles a claim. The defendants' reliance on statute of limitations 'discovery rule' cases is unpersuasive, as those rules determine when a claimant's cause of action accrues for filing purposes, not when the underlying liability arises for the partners. The court also rejected the defendants' other arguments, holding that: (1) dissolution of a partnership does not by itself discharge a partner's existing liability; (2) internal partnership agreements limiting liability are not binding on third-party creditors without their consent; and (3) the solvency of the partnership at the time of a partner's withdrawal is not a defense to liability under the IUPA.
Analysis:
This decision solidifies the principle that liability for a partner's professional malpractice attaches at the moment of the negligent act, not when the consequences are legally formalized. It serves as a crucial clarification for partners in professional service firms, particularly law firms, that withdrawal does not create a clean break from contingent liabilities that were created during their tenure. The ruling reinforces that partners remain jointly and severally liable for inchoate claims, significantly impacting risk management for both incoming and outgoing partners and complicating the process of a partner's departure from a firm.
