Series LLCs: The Asset Protection Dream Machines? (2010)

I. Introduction II. Background A. Series LLCs Defined 1. The Development of Series LLCs 2. Following Delaware's Lead: Series LLCs in Other States B. Asset Segregation in SLLCs C. Series LLCs and Unanswered Bankruptcy Issues D. Can a Series File for Bankruptcy? E. Will Bankruptcy Courts Allow Series Limited Liability? III. ANALYSIS A. Unincorporated Corporate Divisions in Bankruptcy B. Corporate Groups in Bankruptcy: Entity and Enterprise Law 1. Bankruptcy and Entity Law 2. Bankruptcy and Enterprise Law C. Liability within SLLCs Must Be Predictable: Four Possible Standards 1. The Importance of Predictable Liability i. Liability Is Important ii. Liability Must Be Predictable 2. Possible Standards for Liability Boundaries Within SLLCs i. Option 1: Impenetrable Boundaries Between Series ii. Option 2: Entity Law with Exceptions iii. Option 3: Enterprise Law iv. Option 4: No Boundaries Between Series in Bankruptcy IV. RECOMMENDATION A. Bankruptcy Courts Should Not Permit a Series to File for Bankruptcy Independently of Its SLLC B. Bankruptcy Courts Should Not Permit Series Limited Liability 1. Eliminating Series Limited Liability Improves Predictability and Fairness i. Series Engaging in a Common Business ii. Series External Integration iii. Series Internal Integration 2. Neither a Rebuttable Presumption of Limited Liability nor Enterprise Law Is Practical in SLLC Bankruptcies V. CONCLUSION I. INTRODUCTION In uncertain economic times, bankruptcy and asset protection become hot topics. Businesses begin looking for new ways to avoid bankruptcy and shield their assets from creditors if bankruptcy is unavoidable. The series limited liability company (SLLC) represents the growing popularity and increasing sophistication of asset protection strategies. (1) An SLLC has the potential to be the next evolutionary step in limited liability companies (LLCs). (2) An SLLC partitions its assets, debts, obligations, liabilities, and rights among separate series, or cells. (3) Through this asset and liability segregation, the SLLC might provide the next business structure that helps businesses avoid bankruptcy and protect assets. (4) Throughout this Note, the hypothetical businesswoman, Julie, will highlight the potential benefits and unresolved legal issues of SLLCs. Julie wants to form a business to buy and sell Amazing, Boring, and Clunky widgets. However, she has two main concerns. First, given the state of the economy, demand for Boring widgets might be low for the next few years. Julie must sell both Amazing and Boring widgets, but she is afraid that low Boring sales will drive her business into bankruptcy. Julie is also worried that Clunky widgets might break and cause liability issues, driving her new company into bankruptcy. Julie's lawyer Lucy suggested forming an SLLC to decrease the risk of total bankruptcy. Julie is nervous. She knows that SLLCs are not yet widely used because of a number of unresolved legal issues regarding SLLCs. (5) Two related questions affect the value of an SLLC as an asset-protection mechanism in bankruptcy: (1) whether an individual series in an SLLC can file for bankruptcy, and if so, (2) whether bankruptcy courts will shield the wider SLLC from that series' liabilities. Part II of this Note introduces the SLLC and presents the unresolved issues regarding the treatment of SLLCs in bankruptcy. (6) Part III of this Note explains how a series in an SLLC is a hybrid between an unincorporated corporate division and a corporation in a corporate group. (7) It then summarizes the laws governing unincorporated corporate divisions and corporate groups in bankruptcy with a focus on entity and enterprise law as applied to corporate groups. …