The Uniform Partnership Act
The law prohibiting a creditor from reaching the assets of the partnership has been well established for many years. In fact, these particular provisions of partnership law were first adopted as part of the English Partnership Act of 1890 and were subsequently adopted as part of the Uniform Partnership Act, which has been the basis of the law in the United States since the 1940s. The reason for these provisions is that they are necessary to accomplish a particular public policy objective. This policy is that the business activities of a partnership should not be disrupted because of non-partnership related debts of one of the partners. Prior to the adoption of these provisions, it was possible for a creditor of a partner to obtain a Writ of Execution ordering the local sheriff to levy directly on the property of the partnership to satisfy the creditor’s debt. The local sheriff went to the partnership’s place of business, shut down the business, seized all of the assets, and sold them to satisfy the debt. These methods not only destroyed the partnership’s business but also caused a significant economic injustice to the non-debtor partner through the forced liquidation of partnership assets. The non-debtor partner didn’t do anything wrong. Why should he be forced to suffer?
To avoid precisely these unfair results, the law was formulated so that a creditor with a judgment against a partner-but not against the partnership-cannot execute directly on partnership assets. Instead, the law allows the creditor to obtain a charging order, which affects only the actual distributions made to the debtor partner. The business of the partnership is allowed to continue unhampered, and the economic interest of the non-debtor partner is not impaired.
The protection of partnership assets from the claims of one partner’s creditors is deeply entrenched in the foundation of American and English partnership law. Without such protection, the formation of partnerships would be discouraged and legitimate business activities would be impeded. When understood in this light, it is clear that the asset protection features of a Family Limited Partnership are neither a fluke nor a loophole in the law. Rather, these provisions are an integral part of partnership design, and it is unlikely that changes in the law will ever be made which would impair these features.