BILL ANALYSIS SB 1008 Page 1 Date of Hearing: June 29, 2010 ASSEMBLY COMMITTEE ON JUDICIARY Mike Feuer, Chair SB 1008 (Padilla) - As Amended: April 28, 2010 PROPOSED CONSENT (As Proposed to Be Amended) SENATE VOTE : 33-0 SUBJECT : ENGINEERING AND LAND SURVEYING: LIMITED LIABILITY PARTNERSHIPS KEY ISSUE : SHOULD LICENSED ENGINEERS AND LAND SURVEYORS BE ALLOWED TO ORGANIZE AND OPERATE AS LIMITED LIABILITY PARTNERSHIPS (LLP) SO LONG AS THEY PROVIDE SECURITY FOR CLAIMS AGAINST THE LLP MAINTAINING SPECIFIED LEVELS OF INSURANCE LIABILITY COVERAGE, CASH RESERVES, AND MINIMUM NET WORTH, AS SPECIFIED? FISCAL EFFECT : As currently in print this bill is keyed fiscal. SYNOPSIS This bill, sponsored by the American Council of Engineering Companies of California (ACEC-CA), seeks to authorize licensed engineers and land surveyors to organize and operate as limited liability partnerships (LLP). Supporters, most of whom represent professionals working in the engineering and land surveying field, contend that the authority sought under this bill will allow these firms to combine with other firms with complementary expertise in order to better compete for projects, and provide desired business flexibility to help manage complex projects for their clients. Under the LLP statute, the limited members of an LLP are liable for general partners' acts to the extent of their investment in the LLP, whereas general partners of the LLP are liable jointly and severally for all obligations of the limited partnership. LLP members are not shielded from personal liability to the extent that members of a limited liability company (LLC) may be shielded under the Beverley-Killea LLC Act. This key difference between LLCs and LLPs may help to explain why California authorizes a handful of professions-accountants, attorneys, and architects - to render professional services while operating as a registered LLP, but never as a LLC. If this bill is signed into law, licensed civil SB 1008 Page 2 engineers and land surveyors would join those ranks authorized to operate as LLPs in California. California law currently allows licensed architects, attorneys, and accountants to organize and operate as registered LLPs, on the condition that they provide for security for claims against the LLP by maintaining specified levels of insurance liability coverage, cash reserves in trust, and minimum net worth. As proposed to be amended, this bill would raise the liability coverage requirement from $1.5 million ($1,500,000) to $2 million ($2,000,000) for partnerships of five or fewer licensees, while maintaining the requirement for an additional $100,000 per additional licensee up to a maximum of $5,000,000 in security. This bill passed the Senate by a 33-0 vote and there is no known opposition. SUMMARY : Seeks to authorize licensed engineers and land surveyors to organize and operate as limited liability partnerships, provided that they provide security for claims against the LLP by maintaining specified levels of insurance liability coverage, cash reserves in trust, and minimum net worth. Specifically, this bill : 1)Adds limited liability partnerships (LLP) to the list of approved organizations that can be formed by civil, electrical, or mechanical engineers and land surveyors. 2)Includes the practices of engineering and land surveying in the definitions of "foreign limited liability partnership," "registered limited liability partnership," and "professional limited liability partnership services." 3)Authorizes engineers and land surveyors to organize as LLPs if certain existing conditions are satisfied. 4)Requires engineers and land surveyors organizing as registered limited liability partnerships or foreign limited liability partnerships to provide security for claims by complying with one, or some combination, of the following: a) Maintain an insurance policy or policies in the amount of at least $2,000,000 for five or less licensees rendering services, with an additional $100,000 for each additional licensee, and an aggregate limit of liability not to exceed $5 million; SB 1008 Page 3 b) Maintain in trust or bank escrow, cash, bank certificates of deposit, U.S. Treasury obligations, bank letters of credit, or bonds of insurance in the amount of at least $2,000,000 for five or less licensees rendering services, with an additional $100,000 for each additional licensee, and an aggregate limit of liability not to exceed $5 million; c) File an annual confirmation with the Secretary of State's office demonstrating the LLP has a net worth equal to or exceeding $10 million; d) Unless the LLP has confirmed its minimum net worth to be above $10 million, require each partner, by virtue of that person's status as partner, to personally guarantee payment of the difference between the maximum amount of security required and the security otherwise provided. 5)Provides for a 5-year sunset date of January 1, 2016 on which these provisions will be repealed unless a later enacted statute that is enacted before that date deletes or extends the sunset. EXISTING LAW : 1)Provides that a limited partner is not liable for any obligation of a limited partnership (including a LLP) unless named as a general partner in the certificate or, in addition to exercising the rights and powers of a limited partner, the limited partner participates in the control of the business. (Corporations Code Section 15903.03.) 2)Provides that a limited partnership (including a LLP) is liable for loss or injury caused by the result of a wrongful act or omission of a general partner acting in the ordinary course of activities of the limited partnership or with authority of the limited partnership. (Corporations Code Section 15904.03.) 3)Provides that general partners of LLPs are jointly and severally liable for all obligations of the limited partnership. (Corp. Code Sec. 15904.04.) 4)Defines "foreign limited liability partnership" and SB 1008 Page 4 "registered limited liability partnership" to include partnerships licensed to engage in the practice of architecture, public accountancy, or the practice of law. (Corporations Code Section 16101(6)(A), 16101(8)(A).) 5)Recognizes only registered limited liability partnerships and foreign limited liability partnerships and provides that neither entity may render professional LLP services in this state except through licensed persons. (Corporations Code Section 16951.) 6)Requires a LLP providing professional LLP services in this state to comply with all statutory and administrative registration or filing requirements of the state board, commission, or other agency that prescribes the rules and regulations governing the particular profession in which the partnership proposes to engage, as provided. (Corporations Code Section 16953(h).) 7)Requires architects and accountants organized as LLPs to provide security for claims by complying with one, or some combination, of the following: a) Maintain an insurance policy or policies in the amount of at least $1,000,000 for five or less licensees rendering services, with an additional $100,000 for each additional licensee, and an aggregate limit of liability not to exceed $5 million; b) Maintain in trust or bank escrow, cash, bank certificates of deposit, U.S. Treasury obligations, bank letters of credit, or bonds of insurance in the amount of at least $1,000,000 for five or less licensees rendering services, with an additional $100,000 for each additional licensee, and an aggregate limit of liability not to exceed $5 million; c) File an annual confirmation with the Secretary of State's office demonstrating the LLP has a net worth equal to or exceeding $10 million; d) Unless the LLP has confirmed its minimum net worth to be above $10 million, require each partner, by virtue of that person's status as partner, to personally guarantee payment of the difference between the maximum amount of security SB 1008 Page 5 required and the security otherwise provided. (Corporations Code Section 16953(a), paragraphs (1) and (3).) 8)Does not prohibit civil, electrical, mechanical engineers, or land surveyors from practicing as a sole proprietorship, partnership, firm, or corporation, as specified. (Business & Professions Code Sections 6738, 8729.) 9)Sunsets authority for architects to organize as limited liability partnerships as of January 1, 2012. (Corp. Code Sec. 16101(19).) COMMENTS : This bill, sponsored by the American Council of Engineering Companies of California (ACEC-CA), seeks to authorize licensed engineers and land surveyors to organize and operate as limited liability partnerships (LLP), a privilege that is currently granted only to limited partnerships of persons who are licensed to engage in the professions of architecture, public accountancy, and law. Author's Stated Need for the Bill. The author states that the bill is needed for the following reasons: Existing law does not allow for the formation of limited liability partnerships providing engineering and land surveying services. . . . ACEC-CA firms commonly use the LLP structure in other states and when they try to bring those business models here, to comply with existing law, they must completely restructure business relationships and models. Allowing engineering and land surveying firms the option to structure as LLPs will grant parity with related design professionals (architects) who can currently form LLPs . . . . and allow these firms to combine with other firms with complementary expertise in order to better compete for projects. As the needed infrastructure projects become more complex, the flexibility of design and construction firms to adapt is key in being able to effectively deliver for their clients. Brief Review of Liability Under the LLP Form of Business Organization. Generally speaking, a limited liability partnership form is attractive to businesses because it allows SB 1008 Page 6 pass-through tax treatment, flexibility in financial structuring, and limited liability for the partners, as long as they do not take part in the control of the business. The one exception is the general partner, who is liable jointly and severally for all obligations of the limited partnership. Members of an LLP are liable for general partner's acts only to the extent of their investment in the LLP. The distinguishing characteristic of a LLP from a corporate or general partnership is that in an action regarding the negligence or wrongful act of a partner, a plaintiff can enforce judgment against only the partnership assets and the personal assets of the negligent partner. The personal assets of the non-negligent partners are not available to satisfy the judgment. A limited liability partnership thus enables the limited partners to share in the profits of the partnership, but avoid the joint and several liability of a partnership. Under the Beverly-Killea LLC Act, a foreign or domestic LLC is prohibited from rendering professional services in this state unless expressly authorized. Professional services are those services for which a license, certification, or registration is required under specified statutes. The rationale for the exclusion was that professionals who harm others by their misconduct, incompetence or negligence should not be able to limit their liability by operating as an LLC and thus become potentially judgment-proof. While LLCs shield their members from personal liability, by contrast the members of an LLP are liable for general partner's acts to the extent of their investment in the LLP. Furthermore, general partners of the LLP are liable jointly and severally for all obligations of the limited partnership. Under this rationale, if general partners personally profit when the partnership profits are distributed, they should remain personally liable for any judgment against the partnership when the partnership assets are not sufficient to pay. (Otherwise, general partnerships could avoid paying liability judgments by distributing its assets to its partners, leaving only modest assets in the partnership account to satisfy judgments.) This key difference between LLCs and LLPs is perhaps one reason why California authorizes a handful of professions-accountants, attorneys, and architects - to render professional services while operating as a registered LLP. If this bill is signed into law, licensed civil engineers and land surveyors would join those ranks. SB 1008 Page 7 To mitigate the public's potential concerns over the limitation of liability, California law requires licensed professionals organized as an LLP to provide a high level of security for claims, which is usually accomplished by carrying professional liability insurance. The LLP can also meet the security requirements by a combination of insurance, maintaining cash reserves in trust, and confirmation of minimum net worth. Liability Coverage Requirements for LLPs Have Been Modified Several Times in Recent Years. In 1995, SB 513 (Calderon, Ch. 679, Stats. 1995) authorized the establishment of LLPs for licensed attorneys and licensed accountants, provided the LLP purchased a liability insurance policy or maintained bank deposits of at least $100,000 per limited liability partner (or an aggregate of not less than $500,000 for fewer than five partners and not more than $5 million for all others). Only partnerships with a net worth of $10 million or more were allowed to become LLPs. In 1998, the statute allowing professional LLPs (Business & Professions Code Section 16956) was extended to architects, under the same conditions as accountants and attorneys, for a trial period of ten years (AB 469, Cardoza, Ch. 504, Stats. 1998). In 2006, the repeal date for architects was extended to 2012 and the liability coverage requirement was increased to $1,000,000 for partnerships of five or fewer licensees, and an additional $100,000 per additional licensee up to a maximum of $5,000,000. (AB 2914, Leno, Ch. 426, Stats. 2006.) In 2007, SB 414 (Corbett, Ch. 80, Stats. 2007) updated the liability coverage requirement for accountants and attorneys to that applicable to architects. To date, only attorneys, accountants, and architects are permitted to operate as LLPs, provided that they meet conditions specified for liability coverage. Attorneys organized as LLPs have similar requirements with the following differences: (1) instead of $5 million, the insurance policy aggregate is not required to exceed $7.5 million; (2) instead of $5 million, the security amount is not required to exceed $7.5 million; and (3) instead of $10 million, the LLP may confirm a net worth equal to or exceeding $15 million. As proposed to be amended, this bill would raise the liability coverage requirements for engineers and land surveyors to $2,000,000. According to insurance and claims data summarized SB 1008 Page 8 by the sponsor, ACEC-CA, and provided to the Senate Judiciary Committee, the highest claims paid in five of the last 15 years surveyed exceeded $1 million. The highest were $3.5 million in 2002, $1.45 million in 1995, $1.15 million in 1994, $1,100,000 in 2003, and $1,086,500 in 1998. The Senate Judiciary Committee noted that liability coverage of $1,000,000, as originally proposed in this bill, would have covered only five of the highest claims reported. In order to address this, the bill was amended in Senate Judiciary to raise the liability coverage amount from $1 million ($1,000,000) to $1.5 million ($1,500,000). To further address the concern, suggested by insurance data, that higher limits should be imposed on engineers and land surveyors, the author now proposes to amend this bill to raise the liability coverage requirement from $1.5 million ($1,500,000) to $2 million ($2,000,000) for partnerships of five or fewer licensees, while maintaining the requirement for an additional $100,000 per additional licensee up to a maximum of $5,000,000. Consistent with existing law and past changes to these amounts, the liability coverage amount is the same whether satisfied by an insurance policy or by cash reserve in trust. The suggested amendment reads as follows: Page 18, lines 39 to 40, delete "one million five hundred thousand dollars ($1,500,000)" and insert "two million dollars ($2,000,000)" Page 19, lines 37 to 39, delete "one million five hundred thousand dollars ($1,500,000)" and insert "two million dollars ($2,000,000)" PREVIOUS RELATED LEGISLATION: SB 414 (Corbett), Chapter 80, Statutes of 2007, increased the minimum amount of insurance required of LLP firms registered for the practice of public accountancy or law from $500,000 to $1 million. AB 2914 (Leno), Chapter 426, Statutes of 2006, extended the sunset date on licensed architects' ability to organize as LLPs to January 1, 2012, and increased the minimum liability coverage requirements for architectural LLPs to $1 million (from $500,000) as of January 1, 2008. SB 1008 Page 9 AB 180 (Horton) of 2005 would have authorized, until January 1, 2009, engineers and land surveyors to operate within their scope of registration, and to conduct business as a LLP similar to that of architects, certified public accountants and attorneys, and to be designated as a registered LLP or a foreign LLP, and specifies the level of liability insurance or security the LLPs are required to maintain. This bill was amended to address an unrelated issue. AB 1265 (Benoit) of 2003 would have authorized engineers and land surveyors to organize and operate as a LLP with the same insurance liability coverage requirements as that of architects. AB 1265 was held in the Senate Judiciary Committee. AB 1596 (Shelley), Chapter 595, Statutes of 2001 extended the sunset date for architects to form a LLP from January 1, 2002, until January 1, 2007. AB 469 (Cardoza), Chapter 504, Statutes of 1998, permitted architects to organize and operate as a LLP when the partnership meets specified insurance requirements. SB 513 (Calderon), Chapter 679, Statutes of 1995, authorized licensed accountants and licensed attorneys to organize and operate as a LLP when the partnership meets specified insurance requirements. REGISTERED SUPPORT / OPPOSITION : Support American Council of Engineering Companies (ACEC) (sponsor) American GI Forum of California Amersoft International Asian Business Association Asian Indian Association of America CalChamber California Business Properties Association California Hispanic Chambers of Commerce California Land Surveyors Association Century Diversified, Inc. CMTS, Inc. Emergintec, LLC Golden State Management Services Greater Los Angeles Chapter of the Society of Hispanic SB 1008 Page 10 Professional Engineers, Inc. Green America Public-Private Partnership Hernandez, Kroone & Associates Hispanic Contractors Association La Raza Roundtable Latino Business Chamber of Greater Los Angeles Latino Institute for Corporate Inclusion League of United Latin American citizens Lista Design Studio NCA (National Concilio of America) Testing Services & Inspection, Inc. Valle & Associates W2 Design, Inc. Yang Management Yerba Buena Engineering and Construction Opposition None on file Analysis Prepared by : Anthony Lew / JUD. / (916) 319-2334