DELAWARE SERIES LLCs: WHO (AND WHERE) IS YOUR DEBTOR?

The Delaware Limited Liability Company Act (the “Delaware LLC Act”) permits the creation of one or more series under a single operating agreement—a “series LLC.” Series LLCs provide the ability to maintain separate pools of assets, each shielded from the others, without the administrative burden of setting up multiple LLCs. In many ways, the relationship between a Delaware LLC and its series resembles a traditional “parent-subsidiary” relationship:  the assets of each series are accounted for separately from the other assets of the LLC, and the debts, liabilities, obligations and expenses of a particular series are enforceable only against the assets of that series. 

However, there is one important distinction between a series LLC and a formal parent-subsidiary relationship that is of particular note to lenders and others seeking to perfect a security interest against assets associated with a series LLC. While a “true” subsidiary entity is formally organized under state law and can be readily identified, an individual series under a Delaware LLC is not a separate legal entity that meets the definition of a “registered organization” for Uniform Commercial Code Article 9 filing purposes, as it is not necessary to file a separate organizational document as a public document in the State of Delaware to establish a series of an LLC. As initially pointed out by Norman M. Powell, a partner in the Delaware law firm Young Conaway Stargatt & Taylor, LLP, the ability of an individual series of a Delaware LLC to hold its own assets leads to questions for those trying to secure an interest in those assets – who is the “debtor” for purposes of Article 9 and where is that debtor located for Article 9 filing purposes?

Under the Delaware LLC Act, 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.” If the series’ assets are held in the name of the Delaware LLC (or of a nominee that is a registered organization), it is fairly easy to identify what party should be named in a financing statement and where the financing statement would be filed—the state in which the registered organization is organized. On the other hand, if the assets are held by the series itself, in perfecting a security interest in those assets the following issues must be resolved:

• What is the debtor’s name? A financing statement is not effective against a debtor if an incorrect debtor name renders the financing statement “seriously misleading.” Because series names are not part of any public record and there is no standard convention for filing against a series, the potential for error is heightened.

• Where is the debtor located? Under Article 9, a debtor that is a “registered organization” is located in the state under whose laws it is organized. Other organizations are located in the state of their place of business, or if they operate in more than one location, in the state in which their chief executive offices are located. As noted above, a series may not meet the requirements of a “registered organization,” in which case, the alternative filing rules for non-registered organizations need to be followed.

As a lender to a Delaware series LLC, how can you protect your interests in light of the above uncertainties? Careful planning and diligence are necessary to ensure your interests are properly perfected. The LLC agreement may set forth in what name a series’ assets can be held and in what manner the series can enter into agreements on its own behalf. Further, both parties should work together to ensure that financing statements are accurately prepared and properly filed in the appropriate jurisdiction. A precautionary filing in a second jurisdiction may be advisable if there is a question as to whether the assets are held in an organization that is not “registered” and having its place of business or chief executive office located outside of Delaware.

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This alert is a copyrighted publication produced by Oppenheimer Wolff & Donnelly LLP. The information contained in this alert is of a general nature and is subject to change. Readers should not act without further inquiry and/or consultation with legal counsel.