BILL ANALYSIS                                                                                                                                                                                                    



                                                                  SB 1008
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          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  








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          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; 








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             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  








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            "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  








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               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  








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          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.








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          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  








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          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.









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          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  








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          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