Section 509. Liability for Improper Distributions

(a) A general partner that consents to a distribution made in violation of Section 508 is personally liable to the limited partnership for the amount of the distribution which exceeds the amount that could have been distributed without the violation if it is established that in consenting to the distribution the general partner failed to comply with Section 408.

(b) A partner or transferee that received a distribution knowing that the distribution to that partner or transferee was made in violation of Section 508 is personally liable to the limited partnership but only to the extent that the distribution received by the partner or transferee exceeded the amount that could have been properly paid under Section 508.

(c) A general partner against which an action is commenced under subsection (a) may:

(1) implead in the action any other person that is liable under subsection (a) and compel contribution from the person; and

(2) implead in the action any person that received a distribution in violation of subsection (b) and compel contribution from the person in the amount the person received in violation of subsection (b).

(d) An action under this section is barred if it is not commenced within two years after the distribution.

Comment

Source – ULLCA Section 407. See also RMBCA Section 8.33.

In substance and effect this section protects the interests of creditors of the limited partnership. Therefore, according to Section 110(b)(13), the partnership agreement may not change this section in a way that restricts the rights of those creditors. As for a limited partnership’s power to compromise a claim under this section, see Section 502(c).

Subsection (a) – This subsection refers both to Section 508, which includes in its subsection (c) a standard of ordinary care (“reasonable in the circumstances”), and to Section 408, which includes in its subsection (c) a general duty of care that is limited to “refraining from engaging in grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law.”

A limited partnership’s failure to meet the standard of Section 508(c) cannot by itself cause a general partner to be liable under Section 509(a). Both of the following would have to occur before a failure to satisfy Section 508(c) could occasion personal liability for a general partner under Section 509(a):

• the limited partnership “base[s] a determination that a distribution is not prohibited . . . on financial statements prepared on the basis of accounting practices and principles that are [not] reasonable in the circumstances or on a [not] fair valuation or other method that is [not] reasonable in the circumstances” [Section 508(c)]
  
  AND

• the general partner’s decision to rely on the improper methodology in consenting to the distribution constitutes “grossly negligent or reckless conduct, intentional misconduct, or a knowing violation of law” [Section 408(c)] or breaches some other duty under Section 408.

To serve the protective purpose of Sections 508 and 509, in this subsection “consent” must be understood as encompassing any form of approval, assent or acquiescence, whether formal or informal, express or tacit.

Subsection (d) – The subsection’s limitation applies to the commencement of an action under subsection (a) or (b) and not to subsection (c), under which a general partner may implead other persons.