Uniform Protected Series Act (UPSA)
Caution State Law Variances!
ARTICLE 1. GENERAL PROVISIONS
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.
Overview of Article I
Article I of the UPSA recites the "General Provisions", which one may think of at the concrete slab that underlays the rest of the Act. While one might be tempted to skip over that and proceed to the meatier provisions, such would be a profound error. As a new Act, the UPSA does not have the benefit of anything like generations of widely-enacted statutes and volumes of court decisions upon which to fall back upon. In fact, as to court decisions there are either none or close to none, and although some states had already passed into law their own versions of a Series LLC, those acts have almost entirely escaped the attentions of the courts. The effect is that the UPSA is largely built from scratch, and thus to truly understand the UPSA one must start from the concrete slab of Article I and work upwards from there.
Why The UPSA? Section 101
Section 101 of the UPSA states simply that the Act may be entitled the Uniform Protected Series Act. If you think that choosing a name for the new Act would be easy, you'd be wrong. Simply choosing what to call this thing took up an inordinate amount of the drafting committee's time. By the time that I went to my first meeting on January 31, 2014 -- after it had already spent a year in a study committee and then a year in the drafting committee before I got there -- it was called the Series of Unincorporated Business Entities Act ("SUBEA"), in reflection that it was then to also apply to series partnerships and series limited partnerships, should some attorney drop too much LSD one night and attempt to create one of those.
At the January, 2016, meeting, it was decided to punt the idea of series partnerships and limited partnerships for now, and this then resulted in the Uniform Limited Liability Company Protected Series Act (ULLPSA), later shortened to the name finally adopted, the Uniform Protected Series Act (UPSA, phonetic "oops-sah", the "oops" part not meant to convey anything, at least consciously, though future generations may be left to wonder depending on how things turn out).
The Language Of The UPSA: Section 102
Section 102 sets out the definitions of the UPSA, which is to say the language of the Act. The UPSA is a very complicated Act, and to not understand the definitions very well will likely lead to utter confusion and error. Here it must be recalled that the UPSA is a "plug in" to the Uniform Limited Liability Company Act (ULLCA, or sometimes RULLCA in a revised form), and so the definitions of the UPSA must be read in context with the definitions of ULLCA through a process known as extrapolation. The definitions that follow will probably make more sense if you look at them in reference to the following diagram:
The structure of the UPSA parses the components of a Series LLC into two types of entities.
First, the main company is the series limited liability company (a/k/a, though not defined as, series organization), which means a series LLC that has formed at least one protected series. This is a screwy definition, because on the date of formation, the local Secretary of State (by whatever name) is going to issue a Certificate of Formation for a "series LLC", which will not have any protected series at that moment in time. What this definition really means is that until the company forms at least one protected series, the company will be governed by ULLCA alone, whether formed as a series LLC or not. Upon the moment in time when the company creates its first protected series, then the company and the protected series fall under both ULLCA and UPSA.
Anecdotally, according to fellow ABA advisor (and buddy) John Williams who has formed literally hundreds of series LLCs, a considerable number of these companies never actually get around to forming even a single protected series, but operate simply as ordinary LLCs throughout their lifetime, but the owners of these companies merely wanted the option to be able to create protected series in the future should they then so desire. In this light, one wonders why somebody forming an LLC in a UPSA state would ever consider forming a non-series LLC for reasons other than additional cost, i.e., nothing compels the owner to form protected series but the future option is always open to them without having to later reorganize into a series LLC.
Second, a protected series under § 102(8) is defined as such a protected series as formed in a later provision of the UPSA (§ 201), but essentially means a tranche of equity in the series organization. An analogy frequently used in Drafting Committee meetings featured Dr. Evil as the series organization, and Mini Me as a protected series. My personal analogy is that the series organization is a large piece of honeycomb, and a protected series is an individual hex within the honeycomb.
A protected series manager under § 102(9) is a manager of the protected series, almost (but not quite) identical to a manager of an ordinary LLC.
A protected-series transferable interest under § 102(10) is basically the economic right to distributions from a protected series, and a protected series transferee is an assignee of that interest, which -- very importantly -- includes the interest (if any) of a former associated member of the protected series.
An asset under § 102(1) means that property in which either a protected series or the series organization either has rights or the power to transfer those rights. The definition of "asset" is specific to the UPSA, although as the Reporter's Comment notes, it is generally intended to have the same meaning as UCC § 9-203(b)(2). This definition is nothing like universal, however, even throughout the Uniform Acts, e.g., contrast with the definition of "asset" under the Uniform Voidable Transactions Act ("UVTA") which excludes property that is (1) exempt under applicable law, (2) held in tenancy by the entireties, or (3) to the extent that it is the subject of a bona fide security interest.
An associated asset under § 102(2) means an asset that has been "associated" with either a protected series or the series organization under the rules of a later provision (§ 301) that deals with the concept of association of assets. Arguably, the definitions of "associated asset" and "associated member" are the two most important definitions found in the UPSA. An "associated asset" is one that has been satisfactorily tied per § 301 to a particular protected series. If the asset has not been properly tied to a particular protected series, then it is an "unassociated asset" under § 102(6).
Conversely, a non-associated asset under § 102(6) refers to an asset that has not been "associated" with either a protected series or the series organization. The difference between an "associated asset" and a "non-associated asset" is this: An associated asset is only available to the creditors of a particular protected series, whereas a non-associated asset is available on a first-come, first-served basis to the creditors of any series or the series organization.
Section 102(7) tells us that a "person includes a protected series". These five words may not sound like much, but they are one of the most important parts of the UPSA. For a protected series to be a "person", at least in legal terms, is meant to convey that a protected series has all the rights, privileges, responsibilities, liabilities, etc., as any other person under the law. In other words, each protected series of a series organization is its own person who stands alone and independent in the legal world.
Among other things, the declaration of personage is made in the hopes that a protected series would be treated in bankruptcy as a separate juridical entity and not simply an appendage of the series organization. The harder question, which generated much debate within the Drafting Committee, was whether it even should be a person (my own view is that a protected series is simply a tranche of equity and should not be, but those taking this position were simply outvoted).
Will a protected series be considered a "person" for federal bankruptcy law purposes? Suffice it to say that there was nobody on the Drafting Committee, including Yours Truly, who would have wagered $20 on the issue one way or another. Nobody knows, and nobody will know until somebody in a black robe gives their ruling.
An associated member under § 102(3) means a member who has been "associated" with a protected series under another later provision (§ 302) that deals with the concept of association of members. Basically, an "associated member" is an owner of a particular tranche of equity which constitutes a particular protected series.
Here, there arises two terms that are not found in the UPSA, but likely will be part of any discussion of it. Although not statutorily defined, a non-associated member is a member of the series organization who, as it sounds, is not associated with the particular protected series being discussed, and in fact may not have ever been associated with any protected series. Similarly, a disassociated member is a member of the series organization who was once also associated as a member of the particular protected series being discussed, but has since ceased to be associated with that protected series.
There are also definition for a foreign series limited liability company (§ 102(5)) and a foreign protected series (§ 102(4)) which basically refer to those forms when they are formed in another state, but doing business or something else in-state such as that they would be subjected to the in-state UPSA. More on this in a subsequent article.
The UPSA is not, of course, restricted to these particular terms, and where the definition of a term is missing, then through the process of extrapolation the corresponding term for the ULLCA is to be used. This is further explained at length in the Reporter's Comments to section 102.
What Is A Protected Series? Section 103
Section 103 is captioned "Nature Of Protected Series" and strives to tell us what a protected series is, and isn't. Whether section 103 accomplishes that task is a question best left to conjecture, since it is not at all difficult to envision somebody who is not familiar with the concept of a Series LLC using that section as a starting place and, after staring at it for 15 minutes, come away utterly baffled.
One the positive side, section 103 again tells us that a protected series is a "person".* This does not mean that a protected series will be coming over to anybody's house for beer and bar-b-que anytime soon, but instead is meant to affirm, as a matter of law, that a protected series is a juridical person entitled to all the rights, privileges and responsibilities of any other such "entity person" (such as corporations, partnerships and plain vanilla LLCs) under our laws. This could be quite important should a protected series attempt to file for bankruptcy protection independently from the series organization; or not, since as previously discussed nobody has a real inkling of how protected series might be treated in such a bankruptcy proceeding (and if one follows the "tranche of equity" description of a protected series, the thought that it could file for bankruptcy independently of the series organization makes utterly no sense whatsoever, but who knows, and in this regard section 103 might be viewed as authorizing the attempt).
* The hope seems to be that if the UPSA says enough times that a protected series is a person, the U.S. Bankruptcy Courts will make that dream come true.
Having told us that a protected series is a "person", section 103 then switches to the negative and goes on to tell us what a protected series is not: A protected series is not, and entirely distinct from, the series organization, any other protected series, a member of the series organization, and any transferee of an interest in either the protected series or the series obligation.
In other words, while the protected series is a component of the series organization, it is its own fellow. Well, sort of, since the Reporter's Comment states that " a protected series cannot exist on its own; therefore, a protected series is not entirely distinct from the series limited liability company on whose existence the protected series depends." Half bottle of aspirin, check, full bottle of scotch, check.
The Powers And Duration Of A Protected Series: Section 104
Section 104(a) tells us that a protected series has the capacity to sue in its own name and be sued in its own name. This subsection further emphasizes that a protected series is a separate juridical entity from the series organization, and effectively its own fellow for purposes of maintaining or defending legal actions.
Next, we find an extrapolation provision in subsection 104(b) which tells us that a protected series has basically the powers and purposes of the series organization itself, i.e., if the series organization can do something, then presumably the protected series can do that too.
Can a protected series can exist on its own once the series organization has itself terminated? Section 104(c) answers this in the negative, by stating that a protected series can last no longer than the series organization. This subsection basically tells us that a protected series is an appendage of the series organization and cannot exist in the absence of the series organization. Thus, if the series organization terminates, all the protected series of that organization likewise terminate. Note that this provision significantly denigrates the concept of a protected series as an independent stand-on-its-own-two-feet separate juridical "person", and instead paints a protected series as simply an appendage of the series organization.
Note, however, that there is one situation where a protected series can survive the death of the series organization, which is where a merger of two series organizations has occurred, with a protected series from the one dying series organization becoming basically an appendage of the series organization that survives the merger. More about that when we get to section 604.
Moving on, subsection 104(d) tells us several important things, including that if the series organization is prohibited by law from doing something (say, holding a brothel license), then all the protected series of that company are likewise prohibited from that thing.
But probably more importantly, subsection 104(d) tells us that a protected series cannot be a member of the series organization, nor can one protected series establish another. This is in reflection that the concept of a series LLC where one series organization can create a bunch of protected series is difficult enough by itself. If you start trying to conceptualize structures where one protected series can create another like so many amoeba, then such things can only be understood after a healthy dose of tequila, peyote and mescaline and then a five mile run naked through the desert. Which is to say that the Drafting Committee didn't want series LLCs to go down the rabbit hole into the surreal world where protected series can grow and multiply on their own or be an owner of the series organization and thus the father of its parent. Thus, the prohibition of § 104(d) which had near-unanimous support within the Drafting Committee for the aforementioned quite practical reasons.
Whose Law Governs? Section 105
Probably most of the time, disputes arising from the UPSA will involve only in-state parties, i.e., the dispute will be confined to entities, members, and assets within a single state, and in which case that state's UPSA will apply to all aspects of the controversy and there will be utterly no reason to even think about choice-of-laws issues. Section 105 presumes that this will not be the case, and instead looks to situations where relationships involving a Series LLC have crossed state lines.
Subsection 105(1) relates only to "internal affairs", and basically says that for intra-Series LLC disputes, meaning those arising between members, the series organization, and protected series shall be determined by the laws of the state where the series organization was formed. Notably, the term "internal affairs" is a legal term of art, and denotes the legal affairs between the members, the managers, the series organization, and the protected series. However, the term does not include other third-persons to the arrangement, such as a creditor, even if their actions with the foregoing relationships, e.g., that a creditor may foreclose on a member's interest in a protected series is not considered an "internal affair" even though that may dramatically impact not only the debtor member but the protected series and even the series organization.
The effect of subsection 105(2) is to enlarge the internal affairs doctrine to include relationships between not only the directly-affected members and managers of a protected series, but also to distant other members an managers of the same series organization even if not involved in a particular protected series.
Moving away from internal affairs, the effect of § 105(3) is to choose local law for liability issues that arise from the management, ownership or transfer of a protected series, which liability "is asserted solely by reason of the person being or acting" in the capacity as a manager, member or transferee. Similarly, subsections 105(4) and (5) apply local law to issues of liability arising from the filing of a designation of a protected series with Secretary of State, acting as the manager of a protected series, situations where a protected series acts as the manager of the series organization, and the liability of a transferee of an interest in a protected series. Arguably, the effect of subsections 105(4) and (5) is to choose local law as to the question of whether a series organization may shield itself from the liabilities that are encapsulated and contained in a particular series organization, and those liabilities that may be subjected to what amounts to the "internal liability shields" of the individual protected series.
How The UPSA, The ULLCA And The Operating Agreement Work Together: Section 106
Section 106(a) sets out what the Operating Agreement for a series LLC will govern in terms of internal affairs, including defining the relationships between the series organizations and the various protected series, as well as manager and transferees.
As an aside, every LLC has an Operating Agreement, if simply verbal. The ULLCA operates such that if there is no written Operating Agreement, or if the written Operating Agreement fails for some reason or another, the ULLCA will provide the default operating rules for the LLC. But with a series LLC, the lack of a detailed, sophisticated, written Operating Agreement is nothing short of legal suicide, and akin to putting on a blindfold and then driving full-speed into rush hour traffic: It will not be very long before something very bad happens.
The Drafting Committee discussed, and came to the consensus, that no matter what the UPSA provides, there will still be folks who will form a series LLC and then simply adopt a standard-form Series LLC Operating Agreement with pedestrian provisions. This is one of those places in the discussion where the idea to name the UPSA the "LFEA" or "Litigators' Full Employment Act" went around.
In subsections 106(b) and (c), we find two extrapolation provisions that operate to bring the restrictions, etc., found in a state's ULLCA to apply as well to series organizations and protected series under the UPSA, and which restrictions, etc., override any contrary provisions in the Operating Agreement of a Series LLC.
Subsection 106(d) sets forth the hierarchy of governing authority in a Series LLC, which is:
1. The Operating Agreement, unless a provision is prohibited by other law or conflicts with the non-alterable provisions of the UPSA or ULLCA;
2. The UPSA, which trumps the ULLCA if the two conflict;
3. The ULLCA; and, finally;
4. Other law, e.g., common law as to breach of fiduciary duty, etc.
It cannot be overemphasized that the key to a successful series LLC is a sound, custom-drafted, sophisticated Operating Agreement. Can't say that enough.
What Can The Operating Agreement Toggle On And Toggle Off? Section 107
Section 107(a) sets forth the provisions of the UPSA that cannot be "toggled on or toggled off" by the Operating Agreement, and a provision in an Operating Agreement which attempts to do that should normally be unenforceable for that reason.
A note of caution: Most of the Section 107(a) restrictions are noted in the Reporter's Comment to the particular section restricted, but not always. The Drafting Committee discussed putting these restrictions not in a separate section (which became this § 107) but instead note these restrictions in the statutory language of the provisions to which they apply; that idea was discarded as unduly cumbersome, and thus this § 107 came about, but it essentially requires drafters to repeatedly reference this section to see whether or not they can do certain things in the Operating Agreement.
Section 107(b) has a special extrapolation provision for § 305 that we will get to later, which has the effect of imposing ULLCA limitations on the Operating Agreement.
How Should The UPSA And The ULLCA Be Interpreted Together? Section 108
Section 108 provides specific extrapolation provisions for five later subsection sections of the UPSA, which will be discussed when we get to them. Subsection 108(a) provides the extrapolation provisions, while subsection 108(b) says that extrapolation works until it doesn't. For instance, a state may have modified its ULLCA such that extrapolation wouldn't make sense in a given situation, or extrapolation may end up requiring a filing with the Secretary of State's office that cannot be made. (Still think that "Litigators Full Employment Act" would be a non-descriptive alternative title for the UPSA?).
UPSA AND WEBSITE CONTENTS
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.
SERIES LLC COURT OPINIONS
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 ... MRS Recovery Claims, Series LLC v. USAA General Indemnity Co., 2018 WL 5112998 (S.D.Fla., Oct. 19, 2018).
SERIES LLC ARTICLES BY JAY ADKISSON
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?
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