Source: http://www.businesslawbasics.com/series-llcs-potential-pitfalls-revisited
Timestamp: 2020-05-30 17:43:59
Document Index: 376381263

Matched Legal Cases: ['§ 126', '§ 18', '§ 18', '§ 18', '§ 18', '§ 18', '§ 18', '§ 18', '§ 18', '§ 18', '§ 18', '§ 18', '§ 9', '§ 1', '§ 9', '§ 1', '§ 19', '§ 9', '§ 14', '§ 12', '§ 9', '§ 22', '§ 6', '§490', '§48', '§48', '§183', '§ 18', '§ 9', '§ 18']

Series LLCs: Potential Pitfalls Revisited | businesslawbasics.com
In 1996, Delaware amended the Delaware Limited Liability Company Act to permit a limited liability company (a "Series LLC") to establish one or more series of members, managers, limited liability company interest or assets. (18-215(a)). The various series are, at least in theory, protected from liabilities incurred by other series within the company. The series LLC was first enacted in Delaware[1] but has since been adopted in a number of other states.[2]
The Delaware series LLC statute[3] reads as follows:
Series of members, managers, limited liability company interests or assets.
(a) A limited liability company agreement may establish or provide for the establishment of 1 or more designated series of members, managers, limited liability company interests or assets. Any such series may have separate rights, powers or duties with respect to specified property or obligations of the limited liability company or profits and losses associated with specified property or obligations, and any such series may have a separate business purpose or investment objective.
(b) Notwithstanding anything to the contrary set forth in this chapter or under other applicable law, in the event that a limited liability company agreement establishes or provides for the establishment of 1 or more series, and if the records maintained for any such series account for the assets associated with such series separately from the other assets of the limited liability company, or any other series thereof, and if the limited liability company agreement so provides, and if notice of the limitation on liabilities of a series as referenced in this subsection is set forth in the certificate of formation of the limited liability company, then the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to a particular series shall be enforceable against the assets of such series only, and not against the assets of the limited liability company generally or any other series thereof, and, unless otherwise provided in the limited liability company agreement, none of the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to the limited liability company generally or any other series thereof shall be enforceable against the assets of such series. Assets associated with a series may be held directly or indirectly, including in the name of such series, in the name of the limited liability company, through a nominee or otherwise. Records maintained for a series that reasonably identify its assets, including by specific listing, category, type, quantity, computational or allocational formula or procedure (including a percentage or share of any asset or assets) or by any other method where the identity of such assets is objectively determinable, will be deemed to account for the assets associated with such series separately from the other assets of the limited liability company, or any other series thereof. Notice in a certificate of formation of the limitation on liabilities of a series as referenced in this subsection shall be sufficient for all purposes of this subsection whether or not the limited liability company has established any series when such notice is included in the certificate of formation, and there shall be no requirement that any specific series of the limited liability company be referenced in such notice. The fact that a certificate of formation that contains the foregoing notice of the limitation on liabilities of a series is on file in the office of the Secretary of State shall constitute notice of such limitation on liabilities of a series.
(c) A series established in accordance with subsection (b) of this section may carry on any lawful business, purpose or activity, whether or not for profit, with the exception of the business of banking as defined in § 126 of Title 8. Unless otherwise provided in a limited liability company agreement, a series established in accordance with subsection (b) of this section shall have the power and capacity to, in its own name, contract, hold title to assets (including real, personal and intangible property), grant liens and security interests, and sue and be sued.
(d) Notwithstanding § 18-303(a) of this title, under a limited liability company agreement or under another agreement, a member or manager may agree to be obligated personally for any or all of the debts, obligations and liabilities of one or more series.
(e) A limited liability company agreement may provide for classes or groups of members or managers associated with a series having such relative rights, powers and duties as the limited liability company agreement may provide, and may make provision for the future creation in the manner provided in the limited liability company agreement of additional classes or groups of members or managers associated with the series having such relative rights, powers and duties as may from time to time be established, including rights, powers and duties senior to existing classes and groups of members or managers associated with the series. A limited liability company agreement may provide for the taking of an action, including the amendment of the limited liability company agreement, without the vote or approval of any member or manager or class or group of members or managers, including an action to create under the provisions of the limited liability company agreement a class or group of the series of limited liability company interests that was not previously outstanding. A limited liability company agreement may provide that any member or class or group of members associated with a series shall have no voting rights.
(f) A limited liability company agreement may grant to all or certain identified members or managers or a specified class or group of the members or managers associated with a series the right to vote separately or with all or any class or group of the members or managers associated with the series, on any matter. Voting by members or managers associated with a series may be on a per capita, number, financial interest, class, group or any other basis.
(g) Unless otherwise provided in a limited liability company agreement, the management of a series shall be vested in the members associated with such series in proportion to the then current percentage or other interest of members in the profits of the series owned by all of the members associated with such series, the decision of members owning more than 50 percent of the said percentage or other interest in the profits controlling; provided, however, that if a limited liability company agreement provides for the management of the series, in whole or in part, by a manager, the management of the series, to the extent so provided, shall be vested in the manager who shall be chosen in the manner provided in the limited liability company agreement. The manager of the series shall also hold the offices and have the responsibilities accorded to the manager as set forth in a limited liability company agreement. A series may have more than 1 manager. Subject to § 18-602 of this title, a manager shall cease to be a manager with respect to a series as provided in a limited liability company agreement. Except as otherwise provided in a limited liability company agreement, any event under this chapter or in a limited liability company agreement that causes a manager to cease to be a manager with respect to a series shall not, in itself, cause such manager to cease to be a manager of the limited liability company or with respect to any other series thereof.
(h) Notwithstanding § 18-606 of this title, but subject to subsections (i) and (l) of this section, and unless otherwise provided in a limited liability company agreement, at the time a member associated with a series that has been established in accordance with subsection (b) of this section becomes entitled to receive a distribution with respect to such series, the member has the status of, and is entitled to all remedies available to, a creditor of the series, with respect to the distribution. A limited liability company agreement may provide for the establishment of a record date with respect to allocations and distributions with respect to a series.
(i) Notwithstanding § 18-607(a) of this title, a limited liability company may make a distribution with respect to a series that has been established in accordance with subsection (b) of this section. A limited liability company shall not make a distribution with respect to a series that has been established in accordance with subsection (b) of this section to a member to the extent that at the time of the distribution, after giving effect to the distribution, all liabilities of such series, other than liabilities to members on account of their limited liability company interests with respect to such series and liabilities for which the recourse of creditors is limited to specified property of such series, exceed the fair value of the assets associated with such series, except that the fair value of property of the series that is subject to a liability for which the recourse of creditors is limited shall be included in the assets associated with such series only to the extent that the fair value of that property exceeds that liability. For purposes of the immediately preceding sentence, the term "distribution'' shall not include amounts constituting reasonable compensation for present or past services or reasonable payments made in the ordinary course of business pursuant to a bona fide retirement plan or other benefits program. A member who receives a distribution in violation of this subsection, and who knew at the time of the distribution that the distribution violated this subsection, shall be liable to a series for the amount of the distribution. A member who receives a distribution in violation of this subsection, and who did not know at the time of the distribution that the distribution violated this subsection, shall not be liable for the amount of the distribution. Subject to § 18-607(c) of this title, which shall apply to any distribution made with respect to a series under this subsection, this subsection shall not affect any obligation or liability of a member under an agreement or other applicable law for the amount of a distribution.
(j) Unless otherwise provided in the limited liability company agreement, a member shall cease to be associated with a series and to have the power to exercise any rights or powers of a member with respect to such series upon the assignment of all of the member's limited liability company interest with respect to such series. Except as otherwise provided in a limited liability company agreement, any event under this chapter or a limited liability company agreement that causes a member to cease to be associated with a series shall not, in itself, cause such member to cease to be associated with any other series or terminate the continued membership of a member in the limited liability company or cause the termination of the series, regardless of whether such member was the last remaining member associated with such series.
(k) Subject to § 18-801 of this title, except to the extent otherwise provided in the limited liability company agreement, a series may be terminated and its affairs wound up without causing the dissolution of the limited liability company. The termination of a series established in accordance with subsection (b) of this section shall not affect the limitation on liabilities of such series provided by subsection (b) of this section. A series is terminated and its affairs shall be wound up upon the dissolution of the limited liability company under § 18-801 of this title or otherwise upon the first to occur of the following:
(1) At the time specified in the limited liability company agreement;
(2) Upon the happening of events specified in the limited liability company agreement;
(3) Unless otherwise provided in the limited liability company agreement, upon the affirmative vote or written consent of the members of the limited liability company associated with such series or, if there is more than 1 class or group of members associated with such series, then by each class or group of members associated with such series, in either case, by members associated with such series who own more than 2/3 of the then-current percentage or other interest in the profits of the series of the limited liability company owned by all of the members associated with such series or by the members in each class or group of such series, as appropriate; or
(4) The termination of such series under subsection (m) of this section.
(l) Notwithstanding § 18-803(a) of this title, unless otherwise provided in the limited liability company agreement, a manager associated with a series who has not wrongfully terminated the series or, if none, the members associated with the series or a person approved by the members associated with the series or, if there is more than 1 class or group of members associated with the series, then by each class or group of members associated with the series, in either case, by members who own more than 50 percent of the then current percentage or other interest in the profits of the series owned by all of the members associated with the series or by the members in each class or group associated with the series, as appropriate, may wind up the affairs of the series; but, if the series has been established in accordance with subsection (b) of this section, the Court of Chancery, upon cause shown, may wind up the affairs of the series upon application of any member or manager associated with the series, or the member's personal representative or assignee, and in connection therewith, may appoint a liquidating trustee. The persons winding up the affairs of a series may, in the name of the limited liability company and for and on behalf of the limited liability company and such series, take all actions with respect to the series as are permitted under § 18-803(b) of this title. The persons winding up the affairs of a series shall provide for the claims and obligations of the series and distribute the assets of the series as provided in § 18-804 of this title, which section shall apply to the winding up and distribution of assets of a series. Actions taken in accordance with this subsection shall not affect the liability of members and shall not impose liability on a liquidating trustee.
(m) On application by or for a member or manager associated with a series established in accordance with subsection (b) of this section, the Court of Chancery may decree termination of such series whenever it is not reasonably practicable to carry on the business of the series in conformity with a limited liability company agreement.
(n) If a foreign limited liability company that is registering to do business in the State of Delaware in accordance with § 18-902 of this title is governed by a limited liability company agreement that establishes or provides for the establishment of designated series of members, managers, limited liability company interests or assets having separate rights, powers or duties with respect to specified property or obligations of the foreign limited liability company or profits and losses associated with specified property or obligations, that fact shall be so stated on the application for registration as a foreign limited liability company. In addition, the foreign limited liability company shall state on such application whether the debts, liabilities and obligations incurred, contracted for or otherwise existing with respect to a particular series, if any, shall be enforceable against the assets of such series only, and not against the assets of the foreign limited liability company generally or any other series thereof, and whether any of the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to the foreign limited liability company generally or any other series thereof shall be enforceable against the assets of such series.
Since the enactment of Delaware's series limited liability company statute, practitioners have debated the usefulness of Series LLCs. Those in favor of using Series LLCs point out their utility in segregating assets in an unlimited number of series while providing cost savings from a single set of filing fees, registered agent fees and annual franchise taxes. Detractors point out that the cost savings associated with Series LLCs are far outweighed by the uncertainty associated with these entities because they are untested in the courts. In earlier posts on Series LLCs, this blog has reviewed the recently revised Florida limited liability company statute and one case which raises doubts about (i) how a series of a Series LLC will be treated in jurisdictions outside of its jurisdiction of formation, especially in foreign jurisdictions that do not have series LLC statutes, and (ii) the effectiveness of the internal segregation of series assets from the Series LLC and other series.
Another problem with Series LLCs surfaces in the context of using series in commercial financings. This problem stems from the interaction of the Delaware Series LLC statute with Article 9 the Uniform Commercial Code (the "UCC"). Article 9 of the UCC comes in to play for secured transactions, and it contains rules for the creation, perfection and priority of security interests in personal property. Unfortunately, Series LLCs do not fit neatly into Article 9's framework for identifying the debtor in a secured transaction. Identifying the type and location of a debtor is required in order to know where to file a financing statement and what name to list on the financing statement.
In order to better understand the problematic relationship between Series LLCs and Article 9, it is useful to note that an individual series in a Series LLC is a quasi-entity in that they have some entity-like features and other non-entity features. Just like other legal entities, a series of a Series LLC can have its own business purpose, hold its own assets, have its own management structures, make distributions and dissolve and wind up its own affairs. However, series of a Series LLC do not have an existence that is entirely separate and distinct from the Series LLC, and in Delaware, no separate filing with the Secretary of State of Delaware is required in order to form a series. The lack of a filing with the Secretary of State means that a series cannot be a "registered organization" under Article 9.
Under the UCC, a "'registered organization' is an organization formed or organized solely under the laws of a single State or the United States by the filing of a public organic record with, the issuance of a public record by, or the enactment of legislation by the State or the United States."[4] If a series is not a registered organization, then seemingly, the filing rules pertaining to "organizations" would apply, and financing statements would be filed according to rules set forth in UCC § 9-307 at the organization's place of business or chief executive office.
However, it is not even clear that a series of a Series LLC is an "organization" under Article 9. Under UCC § 1-201(b), an "'organization' means a person other than an individual', and a "'person' means an individual, corporation, business trust, estate, trust, partnership, limited liability company, association, joint venture, government, governmental subdivision, agency, or instrumentality, public corporation, or any other legal or commercial entity." It is not clear that a series of a Series LLC is "any other legal or commercial entity" because such terms are undefined and because series have certain, but not all, of the characteristics of legal and commercial entities.
To muddy the waters further, the Delaware LLC Act specifically confers upon series of Series LLCs, the power to grant liens and security interests.[5] Therefore, it is clear that series can hold assets and grants security interests, but it is unclear if they can be debtors under the UCC. Furthermore, even if one takes the leap to say that series can be debtors, there is no clear guidance about where financing statements should be filed and what name should be listed on the financing statement.
Notwithstanding all of the potential pitfalls that may be associated with using Series LLCs in financing transactions, attorneys are recommending the use of Series LLCs. As was the case with their predecessor entities (e.g. corporations, limited partnerships and limited liability companies), the early adoption and use of Series LLCs is fraught with risk and uncertainty. However, the continued use of Series LLCs will also help to develop the case law, best practices and perhaps eventually, confidence in the use of Series LLCs in the legal business community.
NCCUSL Releases Revised Draft of Uniform Series of Unincorporated Entities Act
[1] 70 Del. Laws, c. 360, § 9; 70 Del. Laws, c. 186, § 1; 71 Del. Laws, c. 77, §§ 19-23; 71 Del. Laws, c. 341, §§ 9, 10; 72 Del. Laws, c. 389, §§ 14-18; 74 Del. Laws, c. 85, §§ 12, 13; 74 Del. Laws, c. 275, § 9; 76 Del. Laws, c. 105, §§ 22-28; 78 Del. Laws, c. 270, § 6.
[2] E.g., Iowa Code §490A.305; Ill. Pub. Act 094-0607; Tenn. Code §48-249-309; Utah Code §48-2c-606; Wis. Stat. §183.0504.
[3] 6 Del. C. § 18-215.
[4] UCC § 9-102(a)(71).
[5] 6 Del. C. § 18-215(c).