Adkisson's

Uniform Protected Series Act

(UPSA)

Caution State Law Variances!

SECTION 402. CLAIM SEEKING TO DISREGARD LIMITATION OF LIABILITY.

 

JayNote: Section 401 giveth protection, and § 402 taketh away protection in no insubstantial part.

 

(a) Except as otherwise provided in subsection (b), a claim seeking to disregard a limitation in Section 401 is governed by the principles of law and equity, including a principle providing a right to a creditor or holding a person liable for a debt, obligation, or other liability of another person, which would apply if each protected series of a series limited liability company were a limited liability company formed separately from the series limited liability company and distinct from the series limited liability company and any other protected series of the series limited liability company.

 

Reporter's Comment to Subsection (a) – This provision avoids a court having to reinvent the wheel when considering piercing, affiliate liability, and related theories in the context of a series limited liability company and its protected series. The provision encompasses outside reverse piercing claims (to the extent a state allows such claims) but by its terms does not address inside reverse piercing claims. A successful inside reverse pierce does not disregard a liability shield but rather permits an entity's owner to enjoy and exercise a right belonging to the entity or vice versa.

 

The provision's references to particular categories of "principles of law and equity" should not be interpreted as limiting the effect of Uniform Limited Liability Company Act (2006) (Last Amended 2013), Section 111 (stating that "[u]nless displaced by particular provisions of this ACT, the principles of law and equity supplement this ACT") (brackets in original) or of comparable provisions in other limited liability company acts. This provision refers to a subset of those principals but only to determine how to apply the subset's principles in a novel context.

 

JayNote: In English, § 402(a) says that if a claimant could assert a theory* to disregard the liability shields of an ordinary non-series LLC, then that same theory could be used to disregard the liability shields of a protected series or the series organization.

 

*Other than the mere failure to observe formalities, which is treated separately in ¶ (b) next following.

 

(b) The failure of a limited liability company or a protected series to observe formalities relating to the exercise of its powers or management of its activities and affairs is not a ground to disregard a limitation in Section 401(a) but may be a ground to disregard a limitation in Section 401(b).

 

Reporter's Comment to Subsection (b) – Piercing is based on a factor test. In the corporate context, two of the most prominent factors are the disregard of governance formalities and disregard of economic separateness between the entity and owners. However, "[i]n the realm of LLCs, [the governance] factor is inappropriate, because informality of organization and operation is both common and desired." Uniform Limited Liability Company Act (2006) (Last Amended 2013), Section 304(b), cmt. Some limited liability company acts expressly negate governance informality as a piercing factor entirely, and some courts have discarded or downgraded the factor for LLC piercing claims. See, e.g., Uniform Limited Liability Company Act (2006) (Last Amended 2013), Section § 304(b) ("The failure of a limited liability company to observe formalities relating to the exercise of its powers or management of its activities and affairs is not a ground for imposing liability on a member or manager for a debt, obligation, or other liability of the company.").

 

Consistent with both the 2006 and 2013 versions of the uniform act, this provision applies the same approach to the vertical shields provided by this act. The provision does not, however, apply to the horizontal shields. To do so would undercut the inducement to good recordkeeping provided by Sections 301 and 404.

 

JayNote: That general rule of § 402(a) comes with a sizeable caveat found in the following § 402(b), which is that the mere failure of either the series organization or a protected series to follow formalities does not create a ground to disregard the liability shields.

 

(c) This section applies to a claim seeking to disregard a limitation of liability applicable to a foreign series limited liability company or foreign protected series and comparable to a limitation stated in Section 401, if:

 

JayNote: Paragraph (c) may be characterized as a choice-of-law provision that requires § 402 to be used in certain situations involving a series LLC formed in another jurisdiction.

 

(1) the claimant is a resident of this state or doing business or registered to do business in this state; or

(2) the claim is to establish or enforce a liability arising under law of this state other than this ACT or from an act or omission in this state.

 

Reporter's Comment to Subsection (c) – Section 401(a) and (b) state limitations of liability comprising respectively the vertical and horizontal shields. Claims "seeking to disregard" such limitations of liability are traditionally referred to as "piercing" claims or, in some circumstances, "affiliate liability" claims. Section 402(a) applies an enacting state's existing jurisprudence on piercing and affiliate liability to domestic series limited liability companies and domestic protected series as "if each protected series of the series limited liability company were a limited liability company: (1) organized separately from the company that established the protected series; and (2) distinct from the company and any other protected series of the company."

 

In contrast, this provision–i.e., Subsection (c)–applies an enacting state's jurisprudence on piercing and affiliate liability to foreign series limited liability companies and foreign protected series in carefully and narrowly delineated circumstances. This stance is unusual but is neither novel nor, in the circumstances, unwarranted.

 

Virtually all, if not all, limited liability company acts provide that the law of the foreign limited liability company's jurisdiction of formation governs piercing claims. See, e.g., Uniform Limited Liability Company Act (2006) (Last Amended 2013), Section 901(a)(2). But the situation seems to be the result of "path dependence" on an initially unexplained choice. The approach of limited liability company acts reflects the approach of the Uniform Limited Partnership Act in effect in most states when limited liability company acts were first being enacted. See Uniform Limited Partnership Act (1976 with 1985 amendments) § 901(i) (stating that "the laws of the state under which a foreign limited partnership is organized govern its organization and internal affairs and the liability of its limited partners").

 

It is unclear why the Uniform Limited Partnership Act codified what had previously been a rule of common law. According to an official comment to the 1985 version, the Uniform Limited Partnership Act, Section 901 "first appeared in the 1976 Act." However, the comment provides no explanation for this variation from the original Uniform Limited Partnership Act of 1916, which relied on common law choice of law principles for both the "internal affairs doctrine" and piercing claims. See Se. Texas Inns, Inc. v. Prime 36 Hosp. Corp., 462 F.3d 666, 672-76 (6th Cir. 2006) (discussing at length which state law to apply to a claim to pierce the veil of a limited partnership, making no reference to the limited partnership statute of the forum state [Tennessee], determining that "the choice-of-law question is not outcome-determinative in this case," and therefore not deciding the issue).

 

In the corporate context, the choice of law has long been a matter of case law. See

Dassault Falcon Jet Corp. v. Oberflex, Inc., 909 F. Supp. 345, 348-49 (M.D.N.C. 1995);

Restatement (Second) of Conflict of Laws (1971) § 307 ("The local law of the state of

incorporation will be applied to determine the existence and extent of a shareholder's liability to the corporation for assessments or contributions and to its creditors for corporate debts.").

 

Although the Restatement might suggest the rule is invariable, venerable Supreme Court precedent allows for exceptions. Pinney v. Nelson, 183 U.S. 144, 150, 22 S. Ct. 52, 55, 46 L. Ed. 125 (1901) ("Contracting with reference to the laws of that state [not the state of incorporation] [the shareholders] …must be assumed to know the provisions of those laws; that by them a personal liability was cast upon the stockholders in corporations formed under the laws of the state, and that that same liability was also imposed upon the stockholders of corporations formed under the laws of other states and doing business within California.").

 

Given the novel concept of one legal person existing under the aegis of another legal person and the novel construct of a horizontal shield, the Uniform Law Commission chose to revert to common law flexibility rather than merely to reiterate a codification that entered the law of unincorporated organizations without explanation and whose rationale has never been fully explored.

 

Reporter's Comment to Subsection (c)(1)-(2) – These provisions limit subsection (c) to matters in which an enacting state has a substantial and direct interest – whether due to the nature of the claimant, the facts giving rise to the claim, the law providing the legal basis for the claim, or some combination.

 

Legislative Note: Subsection (b) parallels Uniform Limited Liability Company Act (2006) (Last Amended 2013), Section 304(b), but solely with regard to vertical shields. If an enacting state's limited liability company act contains a comparable concept but uses different language, the state should revise subsection (b) accordingly. If an enacting state's limited liability company act does not contain a comparable concept, the state should omit subsection (b).

 

C O M M O N    P A G E    F O O T E R

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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THE CHARGING ORDER PRACTICE GUIDE BY JAY ADKISSON

 

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

Click here for more information

 

Now available for purchase at https://goo.gl/faZzY6

MORE INFORMATIONAL WEBSITES BY JAY ADKISSON

 

  • About Jay Adkisson - More about Jay D. Adkisson, background, books, articles, speaking appearances - https://jayadkisson.com/

 

  • Captive Insurance Companies - Licensed insurance companies formed by the parent organization to handle the insurance and risk management needs of the business, by the author of the book Adkisson's Captive Insurance Companies - https://captiveinsurancecompanies.com/

 

 

  • Collecting On A Judgment - An explanation of common creditor remedies, strategies and tactics to enforce a judgment, including a discussion of common debtor asset protection strategies - https://collectingonajudgment.com/

 

  • Voidable Transactions - Discussion of the Uniform Voidable Transactions Act (a/k/a 2014 Revision of the Uniform Fraudulent Transfers Act) and fraudulent transfer law in general - https://voidabletransactions.com/

 

  • Private Retirement Plans - An exploration of a unique creditor exemption allowed under California law which can be very beneficial but is often misused - https://privateretirementplans.com/

 

  • Charging Orders - The confusing remedy against a debtor's interest in an LLC or partnership is explained in reference to the Uniform Partnership Act, the Uniform Limited Partnership Act, and the Uniform Limited Liability Company Act - https://chargingorder.com/

 

  • California Enforcement of Judgments Law - Considers the topic of judgment enforcement in California, including the California Enforcement of Judgments Law and other laws related to California creditor-debtor issues - https://calejl.com/

 

 

Contact Jay Adkisson:

 

Phone: 702-953-9617     Fax: 877-698-0678     jay [at] jayad.com

 

Unless a dire emergency, please send me an e-mail first in lieu of calling to set up a telephone appointment for a date an time certain.

 

Las Vegas Office: 6671 S. Las Vegas Blvd., Suite 210, Las Vegas, NV 89119, Ph: 702-953-9617, Fax: 877-698-0678. By appointment only.

 

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© 2018 by Jay D. Adkisson. All rights reserved. No part of this website may be copied in whole or in any part without the express written permission of Jay D. Adkisson. Nothing herein is any advertisement or offer by the firm to practice in any jurisdiction where no attorney of the firm is licensed to practice law. This website does not give any legal advice or opinion, and is no substitute for the advice and counsel of an attorney consulted in the relevant jurisdiction. Questions about this website should be directed to jay [at] jayad.com, by phone to 702-953-9617 or by fax to 877-698-0678. This website is http://www.protectedseriesact.com