Series LLCs: What Happens When One Series Fails? Key Considerations and Issues

A handful of states permit companies to operate multiple businesses under a common organizational umbrella, referred to as a series LLC. These states are Delaware, Illinois, Iowa, Kansas, Nevada, Oklahoma, Tennessee, Texas, Utah, and Wisconsin. Both the District of Columbia and Puerto Rico have series LLC statutes as well.
The series LLC typically features a master or “parent” limited liability company (master LLC), with one or more separate businesses organized as limited liability companies (each a “series”) under the master LLC. The relationships between the master and the series LLCs are determined by the limited liability company agreement and may be referenced in the articles of organization or certificate of formation filed with the state where the entity is organized. If certain statutory requirements are met, each series is liable only for obligations of that particular series and shielded from the liability of the master LLC and the other series. For example, Delaware Code title 6 § 18-215(b) sets forth requirements in the establishment of a series LLC, including notations in the operating agreement, the maintenance of records, accounting for the assets from other assets of the master limited liability company, and providing notice concerning the limitation of liabilities in the certificate of formation. Illinois additionally requires the entity to file a certificate of designation for each series. 805 Ill. Comp. Stat. § 180/37-40(b) (2012).
The nuances of the series LLC structure are beyond the scope of this article. Rather, this article focuses on a few of the key issues that arise when one series or the master LLC experiences financial distress and elects to file a petition for relief under the U.S. Bankruptcy Code. As discussed below, this scenario poses several challenging issues, many of which remain unresolved and open to interpretation.
Overview of Basic Issues
The Bankruptcy Code provides two principal options for resolving the financial distress of business organizations – i.e., liquidation under Chapter 7 and reorganization under Chapter 11. Sections 109(b) and (d) of the Bankruptcy Code identify the category of “person” who may be a debtor in a Chapter 7 or Chapter 11 case. Those persons include “individuals, corporations and partnerships,” and the term “corporation” includes, among others, “unincorporated organizations and associations.” 11 U.S.C. §§ 101(9), (41). Courts have characterized LLCs as corporations under the Bankruptcy Code that generally are eligible to file a Chapter 7 or Chapter 11 case.
The primary challenge with a series LLC stems from the differing treatment of the structure under state law. For certain purposes, state law views the master LLC and the multiple series as one entity. Yet, for other purposes – primarily asset ownership and liability allocation – state law treats the master LLC and each series as separate and distinct entities. “For Secretary of State filing purposes, the series LLC is considered one entity that files a single annual report and pays a single fee. . . In other words, a series LLC is comparable to a structure with a parent LLC having multiple subsidiary LLCs except that the series LLC is considered one legal entity (at least for the Secretary of State filing purposes). . . .” Nick Marsico, Current Status of the Series LLC: Illinois Series LLC Improves Upon Delaware Series LLC but Many Open Issues Remain, J. Passthrough Entities, Nov-Dec. 2006, at 35. Whether courts will respect this united but separate characterization of the series LLC structure remains unclear.
The master LLC should qualify as a debtor under Sections 101 and 109 of the Bankruptcy Code. What then happens to the series if the master LLC seeks bankruptcy protection? Does each series remain a non-debtor entity, unaffected by the master LLC’s bankruptcy case? Alternatively, is each series part of the master LLC’s bankruptcy case but shielded from the debts of the master LLC and other series under applicable state law and the terms of their respective operating agreements? Or are the assets and liabilities of the master LLC and each series consolidated in one bankruptcy estate?
Similar questions exist with respect to the filing of a bankruptcy case by just one series. In addition, courts may raise the more basic question of whether a series is eligible to file i