Richards Layton & Finger
 

Perfecting a Security Interest in the Assets of a Series of a Delaware LLC or LP

July 31, 2019

For a number of years, the Delaware Limited Liability Company Act (the "LLC Act") has permitted Delaware limited liability companies ("LLCs") to establish designated series of members, managers, limited liability company interests or assets. In 2007, the LLC Act was amended to provide series the power and capacity to, in their own names, enter into contracts, hold title to assets, grant liens and security interests, and sue and be sued. Related provisions in the Delaware Revised Uniform Limited Partnership Act (the "LP Act") have permitted Delaware limited partnerships ("LPs") to establish series with similar powers and capacities. The creation and use of series of LLCs and LPs ("Series"), however, has been limited, due in part to uncertainties surrounding the treatment of Series under Article 9 of the Uniform Commercial Code (the "UCC"). Amendments to the Delaware UCC, the LLC Act and the LP Act that will go into effect on August 1, 2019, are intended to alleviate many of these uncertainties.

Amendments to the LLC Act and the LP Act

The amendments to the LLC Act and the LP Act primarily relate to two categories of Series: (i) "protected series" and (ii) "registered series."

Series established under Section 18-215(b) of the LLC Act or Section 17-218(b) of the LP Act, both before and after the enactment of the amendments, will be known as "protected series." The obligations of a "protected series" will be enforceable against the assets of such "protected series" only (and, in the case of LP's, the general partners associated with such Series), and not against the assets of the applicable LLC or LP generally or any other Series thereof, except as may be provided in the limited liability company agreement or partnership agreement. Similarly, none of the obligations of the applicable LLC or LP generally or any other Series thereof will be enforceable against the assets of such "protected series," except as may be provided in the limited liability company agreement or partnership agreement. A separate filing with the Secretary of State of the State of Delaware (the "Secretary of State") is not required to establish a "protected series," but notice of its limitation on liabilities must be set forth in the certificate of formation or certificate of limited partnership of the applicable LLC or LP. Some of the uncertainties that exist for Series under Article 9 of the Delaware UCC will continue for "protected series" after August 1, 2019.

A "registered series" is a new type of Series that may be established pursuant to the amendments to the LLC Act and the LP Act. A "registered series" is similar to a "protected series" from an asset and liability protection standpoint, but in order to establish a "registered series" a certificate of registered series must be filed with the Secretary of State. Pursuant to the amendments, a "protected series" will be able to convert to a "registered series" and vice-versa. The certificate of registered series must include the name of the "registered series" and the name of the applicable LLC or LP (and, in the case of an LP, the name and address of each general partner of such Series). The uncertainties that exist for Series under Article 9 of the Delaware UCC will be largely alleviated for "registered series" after August 1, 2019.

Issues for Series Under the UCC

One issue that arises under Article 9 of the UCC is whether a Series can be a "debtor." Under Article 9, in connection with the grant of a security interest, a "debtor" is generally required to be a "person," which has meant "an individual, corporation, business trust, statutory trust, estate, trust, partnership, limited liability company, association, joint venture, government, governmental subdivision, agency, or instrumentality, public corporation, or any other legal or commercial entity." It has been unclear whether a Series would fall within any of these categories. To address this uncertainty, the definition of "person" in the Delaware UCC is being amended to include series of the entities previously listed in the definition of "person," which includes partnerships and limited liability companies. Related changes are being made to the LLC Act and the LP Act to clarify that "protected series" and "registered series" are "associations" for purposes of the laws of the State of Delaware. As "associations" they would also constitute "persons" and "organizations" under the Delaware UCC. These changes should clarify that "protected series" and "registered series" can be "debtors" for purposes of Article 9 of the Delaware UCC.

Another issue that arises under Article 9 of the UCC is where to file a financing statement naming a Series as a debtor. Generally, financing statements are to be filed where the debtor is deemed located for purposes of Article 9 of the UCC. For an LLC or LP, this is easily determined. LLCs and LPs that file public organic records (i.e., certificates of formation or certificates of limited partnership) solely in the office of the Secretary of State constitute "registered organizations" under the Delaware UCC. As a "registered organization," the location (for purposes of Article 9 of the UCC) of an LLC or LP, and the appropriate place for filing a financing statement naming an LLC or LP as debtor, is the state in which it is organized.

Unlike LLCs and LPs, the formation of a Series has not required the filing of a public organic record; therefore, a Series has not constituted a "registered organization" under the Delaware UCC. If not a "registered organization," the general rule under Article 9 of the Delaware UCC for the location of a debtor that is an organization is the location of the organization's place of business if it has one place of business, or its chief executive office if the organization has more than one place of business. This general rule may lead to some uncertainty when applied to Series. It may indicate that a Series and the applicable LLC or LP are "located" in different states. Additionally, depending on the nature of the Series, it may be difficult to determine its place of business, places of business or chief executive office.

The issue described in the preceding paragraph is intended to be resolved for "registered series." The amendments to the LLC Act and the LP Act will require the filing of a certificate of registered series in the office of the Secretary of State to establish a "registered series." Additionally, the definition of "registered organization" in Article 9 of the Delaware UCC will be amended to include a series of a registered organization if the series is an organization formed or organized under the law of a single state and the statute of the state governing the series requires that the public organic record of the series be filed with the state. Together, these changes are intended to clarify that a "registered series" constitutes a "registered organization" for purposes of Article 9 of the Delaware UCC and is therefore located in the state in which it is organized.

A related issue that arises in connection with Series that are debtors is what name to use for the Series on the financing statement. The LLC Act and the LP Act have previously been silent regarding the naming of Series. This has provided flexibility, but it has also led to uncertainty. In some cases, Series have been established without being clearly named. In many other cases, Series have been established with generic names, such as "Series 1." It has been unclear how to identify a Series as a debtor in a financing statement when the Series does not have a clearly identifiable name or a name that is distinguishable from the names of other organizations.

Following the amendments to the LLC Act and the LP Act, this issue should be resolved for "registered series." The certificate of registered series must set forth the name of the Series and that name must begin with the full name of the applicable LLC or LP, including any word, abbreviation or designation required by the LLC Act or the LP Act, as applicable. In addition, the name must be such as to distinguish it upon the records of the office of the Secretary of State from the names of other organizations reserved, registered, formed or organized under the laws of the State of Delaware or qualified to do business or registered as a foreign organization in the State of Delaware. This change should clarify the name of a "registered series" debtor for purposes of a financing statement. While these naming requirements will not apply to "protected series," they do provide a useful guideline for clearly naming a Series in a unique and distinguishable way that could resolve some uncertainty for those Series.

Conclusion

The introduction of "registered series" under the LLC Act and the LP Act will provide a path to alleviate most of the uncertainty surrounding Series in the context of Article 9 of the Delaware UCC. In addition, the other amendments to the Delaware UCC, the LLC Act and the LP Act will resolve some of the uncertainty for "protected series," while still providing the flexibility that is an integral part of the LLC Act and the LP Act.