Limited Liability Companies

Indiana Series LLCs, Part VI: Ownership structures

September 10, 2016 | Michael R. Smith

If you are not already familiar with series LLCs or with the new Indiana series LLC statute that takes effect on January 1, 2017, you may want to read the articles at Part I, Part II, Part III, Part IV, and Part V.

In the first of these articles, I compared a series LLC to a parent LLC with subsidiary LLCs, and I stated that one difference between the two concepts is that a master LLC does not own its series in the same sense that a parent company owns its subsidiaries. Instead, the interest that makes up each series is held by persons who may or may not also hold interest in the master LLC or in other series. Although I believe that is commonly the way series LLCs are set up, I think it may be possible to set up a series LLC so that the master LLC does, in fact, hold part or all of the interest in its series. Let’s look at four possible structures, using the example of a real estate developer than develops and owns three apartment buildings.

Structure #1

Indiana Series LLCs, Part V: Series LLC Operating Agreements

September 6, 2016 | Michael R. Smith

[The previous articles on this topic are here: Part I, Part II, Part III, Part IV.]

Now that we’ve discussed the formal public filings necessary to set up a master LLC and series, we’ll turn out attention to the content of operating agreements.

As mentioned in the last post, every master LLC must have an operating agreement, and prudence dictates that it be in writing, even though the statute does not, at least not expressly. As a starting point, the operating agreement for a master LLC should have all the same elements as an operating agreement for a traditional LLC.

Indiana Series LLCs, Part IV: Setting up an Indiana Series LLC

September 5, 2016 | Michael R. Smith

The first article on series LLCs contained some basic concepts and terminology. The second and third ones addressed the fundamental questions of whether a series is a separate entity (answer: yes, but it lacks some of the attributes of a separate entity) and of what defines or constitutes a series (answer, at least as contemplated by the Indiana statute: a portion of the interest in the master LLC designated as the series). We’ll return later to some other metaphysical questions, but this article discusses the more mundane issue, how does one set up a series LLC in Indiana?

Organizing the Master LLC

As with a traditional LLC, a master limited liability company is formed by filing articles of organization[1] with the Indiana Secretary of State. Ind. Code § 23‑18.1‑3‑1 and § 23‑18.1‑6‑1. An existing LLC can be converted to a master LLC with appropriate amendments to its articles of organization, but the amendment requires unanimous consent of the members, regardless of any provision of the operating agreement permitting the articles of organization to be amended with less than unanimous consent. Ind. Code § 23‑18.1‑3‑2. It appears that it is permitted, but not necessary, for the articles of organization to include the names of the series that may be designated. See Ind. Code § 23‑18.1‑6‑7, discussed below.

Indiana Series LLCs, Part III: What constitutes a series?

September 4, 2016 | Michael R. Smith

[Please read Part I and Part II before reading this article.]

The second of this group of articles on series limited liability companies addressed the question of whether a series is an entity under Indiana law and concluded that the best answer is probably, yes, even though it lacks some of the attributes that one would ordinarily expect of an entity. But exactly what is it that makes up a series?

The definition of “series”

Indiana Series LLCs, Part II: Is a series an entity?

September 1, 2016 | Michael R. Smith

[This is the second of several articles on series LLCs, especially Indiana series LLCs. Go here for Part I, which includes an introduction to the concept of series LLCs and some terminology.]

Is a series an entity?

That’s the question almost every lawyer asks when first introduced to series LLCs. It is really shorthand for a lot of other questions: Can a series enter into its own contracts? Can it sue and be sued in its own name? Can assets be titled in the name of the series, as opposed to the name of the master LLC? And so on.

Indiana Series Limited Liability Companies, Part I: Introduction

September 1, 2016 | Michael R. Smith

This is the first of several articles about series limited liability companies in general and Indiana’s new series limited liability company statute in particular – a “series series” of articles. (Sorry. I couldn’t resist.)

Even as lame as that joke is, it demonstrates that terminology in this area can be very confusing, and the confusion is compounded by the fact that the series LLC statutes in different states use different words for the same concepts. Here are some rules I’ll follow throughout these articles.

Generally, I’ll stick with the definitions contained in the Indiana statutes, and I’ll let you know when I don’t.

Indiana’s New Series LLC Statute

May 22, 2016 | Michael R. Smith

On March 23, Indiana’s governor signed House Enrolled Act 1336 which adds to the Indiana Business Flexibility Act to provide for series LLCs. In general, I think it’s a good thing that Indiana has joined the dozen or more other states (plus D.C. and Puerto Rico) with series limited liability companies. I expect to post a detailed analysis of the bill, pointing out the good and the bad, before too long. In the meantime, here’s a letter I wrote in support of the bill.

February 16, 2016

VIA email Senator.Zakas@iga.in.gov

LLC Interests and a Member’s Bankuptcy, Part VII

March 2, 2016 | Michael R. Smith

[The last in a seve-part series. The other articles in the series are here: Part I, Part II, Part III, Part IV, Part V, Part VI.]

With the bankruptcy courts’ inconsistent treatment of a debtor’s LLC membership rights, how should someone structure a limited liability company to maximize the possibility that, should the member file for bankruptcy protection, the member’s noneconomic rights will not end up in the hands of a bankruptcy trustee and, possibly, a subsequent acquirer? With the current state of case law, there seems to be no sure-fire way, but the following factors may help. Please recognize, however, that other, these factors may run counter to other goals and the decision to include them should be made cautiously with the advice of counsel.

Avoid LLCs owned by one person or by a married couple. There appears to be no way of preventing a bankruptcy trustee from acquiring the economic and noneconomic rights in a single-member LLC or in, in the case of joint bankruptcy of a married couple, a limited liability company owned entirely by two spouses.

LLC Interests and a Member’s Bankruptcy, Part VI

March 2, 2016 | Michael R. Smith

[The other articles in this seven-part series are here: Part I, Part II, Part III, Part IV, Part V, Part VII.]

In the last installment of this series, we discussed a few of the bankruptcy cases in which the court, faced with a question of the trustee’s right to exercise the debtor’s noneconomic rights as a member of a limited liability company, considered whether the LLC’s operating agreement was an executory contract under Section 365 of the Bankruptcy Code. In this post we discuss bankruptcy cases that concluded that all the debtor’s membership rights, both economic and noneconomic, were automatically the property of the estate under Section 541 without considering whether the operating agreement was an executory contract. In doing so, those courts tacitly (and erroneously, in the author’s respectful opinion) treat a member’s rights in a limited liability company as if they were equivalent to a shareholder’s rights represented by stock in a corporation. Unlike the rights held by LLC members, the economic and noneconomic rights represented by a share of stock are essentially inseparable and both are correctly treated as in the nature of property rights, not contractual rights.

We’ve already mentioned the case that prompted this series, In re Lee, 524 B.R. 798 (Bankr. S.D. Ind. 2014), in which the court held that the trustee acquired all the debtor’s rights, both economic and noneconomic, without considering the potential applicability of Section 365, possibly because neither of the parties to the proceeding that the court argued that the operating agreement was an executory contract. Although the Lee court cited to a number of cases to support its holding that the trustee acquired both the economic and noneconomic membership rights of the debtor, all but one them[1] reached that conclusion without addressing whether it was necessary to consider the possible applicability of Section 365. While In re Lee is consistent with those cases, none of them actually holds that the trustee acquires the debtor’s noneconomic rights with no need to analyze the operating agreement under Section 365.

LLC Interests and a Member’s Bankruptcy, Part V

March 1, 2016 | Michael R. Smith

[The other articles in this seven-part series are here: Part I, Part II, Part III, Part IV, Part VI, Part VII.]

We are considering the nature of the economic and noneconomic rights of a member of a limited liability company and whether, if the member enters bankruptcy, the bankruptcy trustee acquires those rights. As explained in Parts III and IV, the member’s economic rights are property rights that belong to the bankruptcy estate in accordance with Section 541 of the Bankruptcy Code, but the member’s noneconomic rights are contractual in nature and, therefore, are potentially subject to Section 365 of the Bankruptcy Code, under which the trustee must assume an executory contract and comply with its conditions in order to exercise the rights it affords. One of the leading bankruptcy cases to address the question is In re Ehmann, 319 B.R. 200 (Bankr. D. Ariz. 2005):

While the parties disagree on several relevant legal principles, a dispute that is absolutely central to the motion to dismiss is whether the Trustee’s rights are governed by Bankruptcy Code § 541(c)(1) or by § 365(e)(2). In a very general sense, the latter provision, if applicable, permits the enforcement of state and contract law restrictions on the Trustee’s rights and powers, whereas the former provision, if applicable, would render such restrictions and conditions unenforceable as against the Trustee. Because § 541 applies generally to all property and rights that the Trustee acquires, whereas § 365 applies more specifically to executory contract rights, the answer to this question hinges on whether the Trustee is asserting a property right or an executory contract right.