Indemnification May Add to LLP Protection

There are situations when indemnification against the partnership assets may indirectly obligate partners to outside creditors. While many LLP statutes hold that partners are not liable “either directly or indirectly, by way of indemnification, contribution, assessment or otherwise” for the specific claims in which their liability is limited, under contribution laws, many partners still may remain liable for some of the firm's general obligations, including obligations incurred before the firm registered as an LLP. Since, often times, the firm's assets must be exhausted before contribution obligations arise, it may be difficult to allocate the sources of the remaining partnership debt, and as a result, individual partners may indirectly pay towards liabilities for which they are otherwise protected. Bromberg & Ribstein, '3.09(b). There is an emerging trend by which partnership statutes require depletion of partnership assets before plaintiffs can proceed against individual partners for their vicarious. Bromberg & Ribstein, '3.08(b). The marriage of LLP statutes with the exhaustion requirement provides another layer of protection for law firm partners in preventing creditors from accessing partners' assets.

Generally speaking, indemnification is not a perfect solution. On one hand, it forces partners to contribute towards claims for which they otherwise have no vicarious liability. On the other hand, limiting a partner's right to indemnification can essentially deny them relief. In LLPs where the risk of vicarious supervisory liability is spread among the partners through indemnification agreements, it is the supervisory partners, rather than the tort creditors, that are left with the risk that the assets of non-supervisory partners would be inadequate or unavailable to pay the claims. Symposium, “Limited Liability Companies for Unincorporated Firms,” 64 U.Cin. L. Rev. 319, 331 (1996). As a result, supervising partners may take certain precautions, such as contracting to increase their profit shares and reducing their involvement with supervisory positions.