Caution State Law Variances!
The Uniform Protected Series Act
This website considers the Uniform Protected Series Act (UPSA), adopted by the Uniform Law Commission on July 19, 2017.
The UPSA authorizes what is known as "Series LLC" (SeLLC). With little doubt, the Series LLC is the most complex legal entity yet created by humankind. The complexity of the Series LLC simply boggles the mind of even those who are familiar with, if not expert in, LLC law.
Think of the original LLC law passed by Wyoming in 1977 as the Wright Brothers' Flyer 1 which first took to the air. Subsequent revisions to the LLC laws as embodied current in the Uniform Limited Liability Company Act (ULLCA), as repeatedly revised and amended, brought the LLC to the level of a Sopwith Camel, which now constitutes the ultimate state-of-the-art of LLC law.
If the simple LLC is a Sopwith Camel, with simple controls that anybody can learn to fly at a basic level in just a few hours, the Series LLC may be analogized to a modern 787 with literally dozens of major systems that interface in ways that create many thousands of potential issues. It is not an entity for the feint-of-heart, at least if significant assets are involved.
For these reasons, the Series LLC is not an entity for general consumption, for the do-it-youselfer or even the average LLC planner who is inexperienced with Series LLCs. From time to time during the drafting process, there was talk of restricting the use of Series LLC only to those regulated industries which already have some experience with these entities and can be expected to use experienced counsel in forming them, those entities being primarily the hedge fund and insurance sectors. Releasing the Series LLC to the general public was feared to be, in the words of noted LLC expert Tom Rutledge, like "giving an Uzi to a three-year old". In the end, however, it was decided that if users were willing to take the risks then the Series LLC should be available to them.
The drafters of the Uniform Protected Series Act (including me as an ABA Advisor) recognized early on that it would be utterly impossible to anticipate these myriad potential issues, and instead sought to build a basic statutory construct on which the planners creating Series LLC transactions (often referred to as "deals") could themselves build their complex structures.
The basic idea behind a Series LLC is not particularly difficult. With an ordinary LLC, there is only one type of membership interest (or sometimes two, if there are managing or non-managing interests), and everybody has the same quality of rights. But with a Series LLC, there are many potentially many different tranches of equity. Each tranche of equity (a/k/a "protected series") has its own assets and its own operations, and only the members who own a particular tranche share in the profit and loss distributions and increases or decreases in the value of equity from that particular tranche.
This is shown by the following illustration:
The "protected" part of a "protected series" comes from the statutory benefit that the assets and operations of each tranche of equity is protected from the liabilities of other tranches and their assets and operations -- in effect, each tranche is "walled off" from every other tranche (and the parent organization), and to a significant degree exists as its own entity.
The positive of this protection is that the owners of a particular tranche don't have to worry if another tranche is mismanaged or unlucky and thus suffers liability. The downside to this protection is that it can be easily misused to imbalance ordinary creditor-debtor relationships or to commit fraud.
Thus, the UPSA introduces the concept of the "associated asset" and the "non-associated asset", as well as important record-keeping requirements.
An asset is "associated" with a particular protected series only if the contemporaneous records denote the ownership of that asset by that protected series. An asset that has been properly associated with a series is available to the creditors of that series only, an not to creditor of any other series nor to the creditors of the parent organization.
If for whatever reason records do not exist or are not well-kept as to an asset, then the asset is deemed to be "non-associated" and is thus available to the creditors of any tranche or the parent organization, i.e., it is up for grabs for whichever creditor of any series or the parent organization gets to the asset first. Suffice it to say that for this reason Series LLCs are not for those who are not particularly good at keeping the books, and it is somewhat anticipated (based on, if nothing else, common sense) that a Series LLC will have its own professional accounting staff to make sure that the books are well kept.
The fraudulent transfer laws (now represented by the Uniform Voidable Transactions Act) are meant to and do apply to Series LLCs and their intra-series transfers. Concepts of alter ego/veil piercing and organizational liability also apply to Series LLCs. The application of these other bodies of law should substantially mitigate risks that a Series LLC could be used as a giant shell game by a financially-distressed or simply dishonest debtor.
This is the simple version of the UPSA. The statute itself is, of course, much more difficult to comprehend in all of its workings. What makes this comprehension somewhat easier are the sage comments by the Reporter to the UPSA, Prof. Dan Kleinberger, which are included with the Act. Although these comments do not themselves have the force of law, they are extremely enlightening into how the various pieces of the UPSA are supposed to work in concert and illuminating as to what the Drafting Committee was attempting to accomplish and why.
One more thing: The UPSA is not a standalone Act, but rather is in the nature of a "plug in" to a particular state's own Uniform Limited Liability Company Act (ULLCA, or sometimes RULLCA in revised versions). The UPSA thus requires, sometimes expressly but often by implication, a process of "extrapolation" by which how things work or are defined under the ULLCA are applied to the UPSA. For instance, the UPSA does not speak directly to the concept of charging orders as a creditor remedy against a member's particular interest in a protected series, but by extrapolation that concept does apply to protected series interests just as it would to any ordinary LLC membership interest.
But beware, however, that there is also "negative extrapolation" in the sense that sometimes the UPSA supersedes or overrides the ULLCA when a Series LLC is involved. Basic LLC law allows the members to "toggle on" or "toggle off" certain (but not all) features by way of the operating agreement, which concept the UPSA continues -- but the UPSA is more restrictive in what can be toggled on or off. Very simply, extrapolation is required in many areas and can be useful to planners, but it can also be a deadly trap for the unwary.
The obvious key to a successful Series LLC is a comprehensive and detailed Operating Agreement and ancillary documents that are carefully tailored to the specifics of the deal. Although a barebones or weak Operating Agreement might not cause too many problems with an ordinary LLC, that would be tantamount to suicide with a Series LLC. An off-the-shelf or do-it-yourself Operating Agreement for a Series LLC, or an Operating Agreement for an ordinary LLC with only slight modifications, will be little more than legal suicide should a significant issue arise. [For this reason, some members of the Drafting Committee only half-humorously suggested that the UPSA should instead be renamed the LFEA, for "Litigators Full Employment Act".] Giving an Uzi to a three-year old, indeed.
And now on to the Prefatory Note, where the Reporter summarizes the UPSA and its operations.
ARTICLE 1. GENERAL PROVISIONS
SECTION 101. SHORT TITLE. SECTION 102. DEFINITIONS. SECTION 103. NATURE OF PROTECTED SERIES. SECTION 104. POWERS AND DURATION OF PROTECTED SERIES. SECTION 105. GOVERNING LAW. SECTION 106. RELATION OF OPERATING AGREEMENT, THIS ACT, AND LIMITED LIABILITY COMPANY ACT. SECTION 107. ADDITIONAL LIMITATIONS ON OPERATING AGREEMENT. SECTION 108. RULES FOR APPLYING LIMITED LIABILITY COMPANY ACT TO SPECIFIED PROVISIONS OF ACT.
ARTICLE 2. ESTABLISHING PROTECTED SERIES
SECTION 201. PROTECTED SERIES DESIGNATION; AMENDMENT. SECTION 202. NAME. SECTION 203. REGISTERED AGENT. SECTION 204. SERVICE OF PROCESS, NOTICE, DEMAND, OR OTHER RECORD. SECTION 205. CERTIFICATE OF GOOD STANDING FOR PROTECTED SERIES. SECTION 206. INFORMATION REQUIRED IN ANNUAL BIENNIAL REPORT; EFFECT OF FAILURE TO PROVIDE.
ARTICLE 3. ASSOCIATED ASSET; ASSOCIATED MEMBER; PROTECTED-SERIES TRANSFERABLE INTEREST; MANAGEMENT; RIGHT OF INFORMATION
SECTION 301. ASSOCIATED ASSET. SECTION 302. ASSOCIATED MEMBER. SECTION 303. PROTECTED-SERIES TRANSFERABLE INTEREST. SECTION 304. MANAGEMENT. SECTION 305. RIGHT OF PERSON NOT ASSOCIATED MEMBER OF PROTECTED SERIES TO INFORMATION CONCERNING PROTECTED SERIES.
ARTICLE 4. LIMITATION ON LIABILITY AND ENFORCEMENT OF CLAIMS
SECTION 401. LIMITATIONS ON LIABILITY. SECTION 402. CLAIM SEEKING TO DISREGARD LIMITATION OF LIABILITY. SECTION 403. REMEDIES OF JUDGMENT CREDITOR OF ASSOCIATED MEMBER OR PROTECTED-SERIES TRANSFEREE. SECTION 404. ENFORCEMENT AGAINST NON-ASSOCIATED ASSET.
ARTICLE 5. DISSOLUTION AND WINDING UP OF PROTECTED SERIES
SECTION 501. EVENTS CAUSING DISSOLUTION OF PROTECTED SERIES. SECTION 502. WINDING UP DISSOLVED PROTECTED SERIES. SECTION 503. EFFECT OF REINSTATEMENT OF SERIES LIMITED LIABILITY COMPANY OR REVOCATION OF VOLUNTARY DISSOLUTION.
ARTICLE 6. ENTITY TRANSACTIONS RESTRICTED
SECTION 601. DEFINITIONS. SECTION 602. PROTECTED SERIES MAY NOT BE PARTY TO ENTITY TRANSACTION. SECTION 603. RESTRICTION ON ENTITY TRANSACTION INVOLVING PROTECTED SERIES. SECTION 604. MERGER AUTHORIZED; PARTIES RESTRICTED. SECTION 605. PLAN OF MERGER. SECTION 606. STATEMENT OF MERGER. SECTION 607. EFFECT OF MERGER. SECTION 608. APPLICATION OF SECTION 404 AFTER MERGER.
ARTICLE 7. FOREIGN PROTECTED SERIES
SECTION 701. GOVERNING LAW. SECTION 702. NO ATTRIBUTION OF ACTIVITIES CONSTITUTING DOING BUSINESS OR FOR ESTABLISHING JURISDICTION. SECTION 703. REGISTRATION OF FOREIGN PROTECTED SERIES. SECTION 704. DISCLOSURE REQUIRED WHEN FOREIGN SERIES LIMITED LIABILITY COMPANY OR FOREIGN PROTECTED SERIES PARTY TO PROCEEDING.
ARTICLE 8. MISCELLANEOUS PROVISIONS
SECTION 801. UNIFORMITY OF APPLICATION AND CONSTRUCTION. SECTION 802. RELATION TO ELECTRONIC SIGNATURES IN GLOBAL AND NATIONAL COMMERCE ACT. SECTION 803. TRANSITIONAL PROVISIONS. SECTION 804. SAVINGS CLAUSE. SECTION 805. SEVERABILITY CLAUSE. SECTION 806. REPEALS; CONFORMING AMENDMENTS. SECTION 807. EFFECTIVE DATE.
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Protected Series Agreements and Forms -- A list of the "best practices" agreements and records that all protected series structures should have.
UPSA COURT OPINIONS
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NON-UPSA COURT OPINIONS
191212 ... Ohio ... Delaware Act .. MSP Recovery Claims, Series LLC v. Phoenix Ins. Co., 2019 WL 6770981 (N.D. Ohio, 2019).
181019 ... Florida ... Delaware Act ... MRP Recovery Claims, Series LLC v. USAA General Indemnity Co., 2018 WL 5112998 (S.D.Fla., Oct. 19, 2018).
2020.03.17 ... Series LLC Not Allowed To Play Pea-Shell Game In City Of Urbana Opinion
2020.02.16 ... Talisman Casualty Denied Diversity Jurisdiction Of Protected Cell Series LLC In National WW II Museum Case
2019.01.28 ... Understanding The Protected Series Act: Article 8 And Final Thoughts
2018.11.24 ... Understanding The Protected Series Act: Treating Out-Of-State Series
2018.11.18 ... Understanding The Protected Series Act: Mergers
2018.10.29 ... Understanding The Protected Series Act: Dissolution And Winding Up Of Protected Series
2018.10.21 ... Understanding The Protected Series Act: Liability Limitations And Claims
2018.08.30 ... Understanding The Protected Series Act: Assets, Members And Management
2018.08.28 ... Understanding The Protected Series Act: Creating A Protected Series And Service Of Process
2018.07.18 ... Understanding The Protected Series Act: The Framework of UPSA - Part 2 of a Series
2018.06.18 ... Understanding The Protected Series Act: What Is A Protected Series?
More articles on Series LLCs by Jay Adkisson click here
The Charging Order Practice Guide: Understanding Judgment Creditor Rights Against LLC Members, by Jay D. Adkisson (2018), published by the LLCs, Partnerships and Unincorporated Entities Committee of the Business Law Section of the American Bar Association
Now available for purchase directly from the ABA at https://goo.gl/faZzY6
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