Uniform Protected Series Act
Caution State Law Variances!
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.
C O M M O N P A G E F O O T E R
UPSA AND WEBSITE CONTENTS
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Now available for purchase at https://goo.gl/faZzY6
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