Series trusts, limited partnerships and limited liability companies have been a feature of certain business sectors for years. The series concept originated in the mutual fund and captive insurance industries in an effort to reduce administrative burdens and achieve cost savings, but has since expanded into other areas, most notably finance. However, uncertainties in regard to the treatment of series under various legal regimes, including commercial law, bankruptcy, tax and litigation, have discouraged their widespread acceptance. In an effort to advance their use, the Uniform Law Commission in 2017 promulgated a model Uniform Protected Series Act for LLCs. While that Act addresses some issues regarding series LLCs, unfortunately questions remained, including as to the interaction between series LLCs and UCC Article 9. More recent strides in the form of 2019 amendments to the Delaware LLC Act and the Delaware Uniform Commercial Code and, just this past April, a draft commentary issued by the UCC Permanent Editorial Board, may finally bring some needed clarity to this area for practitioners.

Series LLCs

A series LLC has been described as cell or sub-unit of an LLC to which certain assets and liabilities of such LLC have been allocated. A series is not a subsidiary of the LLC but instead exists within it. In general, as a matter of statute, a series can have its own members and managers and can conduct its own business activities under a separate name. The primary appeal of this structure lies in its ability to shelter the assets of a series from claims of creditors of other series of the same LLC or of the LLC generally.

Delaware, the jurisdiction of choice for most LLCs in commercial transactions, has long provided a state statutory framework for utilizing LLC (as well as business trust and limited partnership) series. The concept of an entity within an entity was first introduced in Delaware in 1988 under the Delaware Business Trust Act. In 1996 Delaware amended its Limited Liability Company Act to authorize the creation of series LLCs and in 2007 the law was amended to explicitly permit series LLCs to hold assets and grant liens and security interests in their own name.

However, as noted above, reservations among practitioners in regard to the interaction between the then current statute and the UCC, as well as bankruptcy, taxation, interstate recognition of limited liability protections, and litigation issues including diversity jurisdiction and standing, inhibited widespread use of this concept.

In 2017, the Uniform Law Commission sought to create a roadmap for states seeking to implement a series LLC statute by promulgating the Uniform Protected Series Act (the UPSA). The UPSA clarified that while series can exist within the bounds of an LLC, they also have separate legal personalities. It confirmed that series LLCs can possess legal rights and duties, may enter into contracts independent of their members or the master LLC, and can be sued in their own name. The UPSA referred to these series as "protected" series and required that they be formed through a separate public filing, furthering the view of these units as separate legal entities. Unfortunately the UPSA did not address head-on a number of the other uncertainties of treatment of these types of entities. Currently four states have adopted this statute: Arkansas, Iowa, Nebraska and Virginia.

The paradox of series having separate legal personalities yet subsisting under the umbrella of a single LLC continued to raise questions about how they should be treated by creditors. Some states require filings for the series while others do not. From the perspective of a secured creditor, as noted above, many important questions remained, including: Is a UPSA "protected" series a "person" under the Uniform Commercial Code and an Article 9 debtor? Can it grant a security interest and, if so, how and where must you file UCC financing statements against it to perfect a lien?

Then in August 2019 Delaware amended both its LLC and limited partnership statutes to address concerns surrounding the treatment of series under Article 9 of the UCC. In so doing it decided to create two categories of series: "protected" and "registered." The "protected" series is essentially the equivalent to the existing Delaware LLC series, with changes to that category of series being largely terminology (although liability protection for managers and members was made explicit). But there were several material developments from a UCC perspective. Most important was the introduction of the "registered" series. The Delaware "protected" series (as compared to the UPSA protected series) is created under the related LLC's certificate of formation. The Delaware "registered" series, on the other hand, is created by the filing of its own certificate of formation, fitting it neatly within the definition of a "registered organization" under UCC Article 9 (i.e., entities "formed or organized" by the filing of a "public organic record with, the issuance of a public organic record by, or the enactment of legislation by the state or the United States"). Notably, registered organizations benefit from specific rules under Article 9 in regard to the location for, and what name to use for a debtor in, a UCC filing. The Delaware Secretary of State will also issue a certificate of good standing for a registered series, providing further comfort to creditors of that series.

In addition, Delaware amended its UCC to provide that a "person" under UCC §1-201(b)(27) specifically includes a "…, corporation, business trust, statutory trust, …, partnership, limited liability company, association…, any other legal or commercial entity, or any series of any of the foregoing," and its definition of "registered organization" to include a series of a registered organization if the series is an organization formed or organized under the law of a single State and the statute of the State governing the series requires that the public organic record of the series be filed with the State."

Finally, Delaware amended its LLC statute to provide that a "protected" series and a "registered" series each is an "association" "for all purposes of the laws of the State of Delaware." This classification of a series as an "association" may support treating a Delaware series as a "person" under the UCC of other states whose definitions already include an "association" but not series as recently added to the Delaware UCC.

One unfortunately confusing result of these amendments, at least from a nomenclature perspective, is that a protected series under Delaware law is not formed by the filing of a public organic record, whereas a UPSA protected series is formed by such a filing.

Most recently, the UCC Permanent Editorial Board (the PEB) has also weighed in on these issues. On April 1, 2020, the PEB released a draft Commentary that discusses how series LLCs under the UPSA should be interpreted under the UCC.

The Commentary addresses five questions in regard to the treatment of series LLCs under UCC Article 9, consisting of whether a protected series under is a "person" under UCC §1-201(b)(27); who the debtor is if a series LLC grants a security interest to secure an obligation; who the debtor is if a series LLC grants a security interest in accounts, chattel paper, payment intangibles or promissory notes; who the debtor is if the security interest is an Article 9 consignment; and where the debtor is located for the purposes of filing financing statements.

The Commentary concludes that the "clear intent of the UPSA's drafters is to establish the 'personhood' of a protected series," that the UPSA protected series is subject to Article 9 no matter the type of security interest, and that the series is "located" in the state under whose laws it was organized.

From this conclusion, it follows that the protected series can be a "debtor" for the purposes of UCC §9-102(a)(28), resolving the issue of which entity a security interest should be filed against. The PEB also concluded that because a series is a "person" but not an individual, it must be an organization under UCC §1-201(b)(25) and thus under UCC §9-307 its location is where it is organized. Given that under the UPSA, a series is established through filings with the applicable Secretary of State and thus there is an "organic public record" in accordance with UCC §9-102(a)(68) which fulfills the requirements of a "registered organization" under UCC §9-102(a)(71), the PEB further concludes that the UPSA protected series is a "registered organization" under the UCC, and thus the location of filing of UCC financing statements against such series is the state of organization of such series (which is also the state under whose law the limited liability company it forms part of is organized).

All of this is useful in states which have adopted the UPSA or which have public filing requirements for the creation of a series. However, in states which do not require public filings to create a series, the series will not be a "registered organization" under UCC Article 9 and uncertainty will remain as to the proper place of filing a UCC financing statement against such entity (assuming it can be a "person" and a debtor under the UCC).

Conclusion

While the UPSA, Delaware LLC Act amendments and the PEB Commentary provide further support for the treatment of series LLCs as separate entities, until the UPSA is more roundly adopted or states follow the lead of Delaware in both facilitating the treatment of LLC series as "registered organizations" under UCC Article 9 and clarifying the interaction between its LLC statutes and UCC Article 9, doubts may remain about the correct legal analysis for security interests against a series.

Ambiguity surrounding the status and treatment of series LLCs is exacerbated by the fact that a sizable majority of states have not adopted series LLC statutes. Similarly, LLCs formed under the laws of states that permit the formation of series but that operate in states without a similar statute run the risk that courts unfamiliar with their structure will misunderstand or misapply the law.

Also, as noted above, other areas, such as bankruptcy and litigation, continue to grapple with uncertainty regarding the treatment of series. An examination of those issues is beyond the scope of this article, but suffice to say that questions surrounding whether a series can be a debtor under the US Bankruptcy Code, whether diversity and standing are determined at the series level or the LLC level and whether a series has the capacity under local law to bring or defend itself in a lawsuit remain unresolved.

Those who wish to make use of series LLCs should strongly consider the Delaware "registered" series, which at least resolves the issues of the status of a series LLC as a UCC Article 9 debtor and the proper place to file financing statements against it. LLCs were themselves once a novel concept and similar concerns were raised. Time will tell if the series LLC will become as prevalent a business construct.

Barbara M. Goodstein is a partner in the finance practice at Mayer Brown. Helen Begley and Forrest Grossman, associates in the practice, both assisted in the preparation of this article.