Presenting a live 90-minute webinar with interactive Q&A Lending to Series of LLCs: Navigating UCC and Bankruptcy Code Risks and Providing Closing Opinions Identifying Potential Pitfalls for Lenders and Mitigating Risks in Finance Transactions WEDNESDAY, AUGUST 26, 2015 1pm Eastern 12pm Central 11am Mountain 10am Pacific Today s faculty features: Norman M. Powell, Partner, Young Conaway Stargatt & Taylor, Wilmington, Del. Jonathan R.C. Arkins, Partner, Kaye Scholer, New York The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.
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Lending to Series LLCs Jonathan Arkins Kaye Scholer LLP, New York jonathan.arkins@kayescholer.com Norman M. Powell Young Conaway Stargatt & Taylor, LLP, Wilmington npowell@ycst.com
Overview Series LLC: an LLC with one or more series. A series is like, yet unlike, a subsidiary or, perhaps, a division. Most series have their own assets and liabilities associated with the series. Internal liability shields: series assets are available only to creditors of that series. Most series can act in their own names. 5
Overview Series might not be organizations, entities, or persons. Most statutes don t define series. They provide that an operating agreement may establish (or provide for the establishment of) one or more series of members, managers, assets, and economic rights. Many current statutes do not require any publicly available notice of series. 6
Establishing Internal Shields Where public notice and additional conditions are satisfied, the debts, obligations, and other liabilities of a series are enforceable only against the assets associated with that series. Internal shields are important to lenders. 7
Establishing Internal Shields Conditions include public notice. Some statutes require general notice filing with the Secretary of State. e.g., Delaware notice can indicate that the series LLC has or may in the future have one or more series. Some require specific notice filing with the Secretary of State. (e.g., Illinois - notice must be filed with respect to and specifically referencing each series by name). 8
Establishing Internal Shields Records for any series must account for the assets associated with such series separately from the other assets of the series LLC or its other series. The LLC agreement must adequately provide for all relevant series. Establishment of series is facilitated by the enabling statutes, but accomplished by or pursuant to the LLC agreement. 9
Establishing Internal Shields Internal shields requires satisfaction of both static and ongoing requirements. Static - e.g., the requisite filing and LLC agreement language. Ongoing - e.g., maintaining separate records. Failure to maintain separate records results in loss of internal shields. But the series continues to exist as a series despite the loss of internal shields. 10
Internal Shields in States Other Than Delaware Will internal shields be respected in states that don t offer shielded series? Some say yes - law of the formation state. Implicitly assumes shields are internal affairs. Others take a contrary view. Alphonse v. Arch Bay Holdings, L.L.C., 548 F. App x 979 (5th Cir. 2013) offers insights. 11
Internal Shields in States Other Than Delaware The Alphonse dispute arose in a residential foreclosure. Plaintiff was a series of a Delaware series LLC. The homeowner did not defend, but later brought an action against the series LLC alleging robo-signing and fraud. Trial court dismissed: the series and the series LLC were separate from each other. 12
Internal Shields in States Other Than Delaware On appeal, the court acknowledged the law of the state of formation normally determines issues relating to internal affairs. But different conflict-of-laws principles apply where the rights of third parties (i.e., strangers to the LLC agreement) are involved. Internal affairs does not apply to disputes that include people or entities that are not part of the LLC. How apply intra-series 13
Series Might Not Be Entities Most series have a great many entity characteristics. Series can sue. Series can contract. Series can hold property. But most series are denied certain entity characteristics cannot exist except during the life of the series LLC, cannot merge. Are series separate entities? Most statutes are silent (e.g., Delaware). 14
Series Might Not Be Entities Under some statutes, an LLC agreement may provide that series are to be treated as separate entities (e.g., District of Columbia). Thus, entity status can be a matter of contract. Other statutes also require internal shields for entity status (e.g., Illinois). Still others explicitly disclaim separate entity status (e.g., Texas). 15
Series Might Not Be Entities Complicating matters, a series may be an entity for some purposes, but not for others. Under the Treasury Department s proposed regulations, a series is treated as an entity formed under state law, regardless of whether the series is a juridical person for state law purposes. 16
Series Governance General default rule is governance by associated members in proportion to their interests. Most permit other governance as agreed. Thus, a series can have most any governance structure. Governance of a series can differ from that of the series LLC, and governance of one series can differ from that of another series. 17
Series Purpose Generally, series may have any lawful purpose. Some statutes authorize series both for profit and not for profit. Many statutes exclude regulated activities such as banking. Some provide that a series purpose may differ from that of the series LLC. It is less clear whether a series can have a purpose inconsistent with the purpose of the related series LLC. 18
Series Purpose Statutes differ in explicitness as to holding title to property, granting security interests, and suing and being sued. Most statutes provide options for holding of property: in the name of the series LLC, in the name of the series, and in the name of a nominee. The statute tells us what s possible. Documents tell us what s been chosen. 19
Series and UCC Article 9 By definition, the debtor is the person having an interest in the collateral. LLCs are registered organizations (i.e., filing required) Thus LLCs are located in their formation jurisdictions, and their names are ascertainable with certainty. But things may be different for assets associated with a series. Secured parties must determine what, in fact, is the debtor within the meaning of RA9. 20
Series LLC as Article 9 Debtor If a series LLC is the debtor, make an ordinary filing against and naming the series LLC as debtor, in the series LLC s location. Matters unique to the series can be addressed in the collateral description, or in box 17 (miscellaneous) of a financing statement addendum on form UCC1Ad, as appropriate. 21
Nominee as Article 9 Debtor If a nominee is the debtor, determine whether the nominee is an organization, a registered organization, or an individual. File in the nominee s location and name. Note that a nominee s location may differ from that of the series LLC or a given series. 22
Series as Article 9 Debtor If a series purports to be the debtor, first consider whether the series is an organization. UCC Article 1 1-201(b)(25) - organization is a person other than an individual. UCC Article 1 1-201(b)(27) 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. 23
Series as UCC Article 9 Debtor Is a series a legal or commercial entity? If it s neither, it may not be a possible Article 9 debtor. Series likely are not registered organizations (compare Illinois series with internal shields). By definition, a registered organization must be formed or organized by the filing or issuance of a public organic record. 24
Series as UCC Article 9 Debtor Under general notice statutes, the State need not receive any record showing a series to have been formed or organized. Even specific notice statutes, the filing is not a condition to establishment of a series, but only to its having internal shields. Thus, series likely are not registered organizations (except Illinois series with internal shields). Series analogous to limited liability partnerships? LLP is not a registered organization. See PEB COMMENTARY NO. 17. 25
Series and the Bankruptcy Code Treatment of series under the Bankruptcy Code is still more uncertain. Because many series are not entities, they may be ineligible to become Bankruptcy debtors. A debtor is a person... concerning which a case has been commenced. Person includes individuals, partnerships, and corporations. If series is a person, is it a partnership or a corporation? 26
Series and the Bankruptcy Code The Bankruptcy Code does not define partnership. It provides an illustrative, but not exclusive or exhaustive, definition of corporation. Corporation (A) includes (i) [an] association having a power or privilege that a private corporation...possesses; (ii) [a] partnership association [in which] only the capital subscribed [is] responsible for the debts of such association; (iii) [a] joint-stock company; (iv) [an] unincorporated company or association; or (v) [a] business trust; but (B) does not include [a] limited partnership. 27
Series and the Bankruptcy Code LLCs generally fit the Bankruptcy Code s definition of corporation. But its unclear whether series do. Similarly, its unclear whether internal shields would be respected in a bankruptcy proceeding. 28
Closing Opinions for Series Lenders to series have the same concerns as lenders to traditional borrowers. Lenders to series may have additional concerns unique to series. Even a status opinion is based in contract law. A closing opinion isn t a good way to address the viability of internal shields. Where a series LLC has one series, it will likely eventually have additional series. If any series is amenable to suit in a jurisdiction that may not respect internal liability shields, a lender to any series may find its expectations frustrated. 29