Delaware statutory trusts, limited liability companies, and limited partnerships can form separate series of assets that, if certain statutory requirements are met, cannot be reached by creditors of the entity as a whole or of any other series. Recently, many practitioners and commentators have been concerned that such series may not fall under the UCC’s definition of “person” and thus may not be “debtors” for purposes of Article 9 of the UCC (“Article 9”). This article reviews the series provisions in the acts governing Delaware statutory trusts, limited liability companies, and limited partnerships, and provides a framework for analyzing questions regarding the perfection of security interests in the assets of a series.
The term “alternative entity” is widely used to refer to legal entities other than corporations. Among the more popular alternative entities available under Delaware law are the statutory trust (“DST”), the limited liability company(“DLLC”), and the limited partnership (“DLP”), (collectively, “Alternative Entities”). They are formed and exist, respectively, under the Delaware Statutory Trust Act (the “DST Act”), the Delaware Limited Liability Company Act (the “DLLC Act”), and the Delaware Limited Partnership Act (the “DLP Act”). Each of these statutes facilitates the formation of entities with attributes to meet the needs of a given application and is regularly revised to assure that Delaware alternative entities meet the needs of a changing marketplace.
Formation of an Alternative Entity requires filing a certificate with the Delaware Secretary of State and drafting an operating agreement endowing the entity with desired attributes. Many of the most sought-after attributes of a given alternative entity are a function of carefully drafted operating agreements that alter or displace statutory default rules. The establishment of “series” in these operating agreements is permitted with respect to all three types of Alternative Entities.
In some ways, a “series” is like a subsidiary. A DST with series is permitted, in the name of such series, to contract, hold title to assets, grant liens and security interests, and sue and be sued. Reflecting still greater autonomy, DLLCs and DLPs with series, as well as series of DLLCs and DLPs themselves, are permitted to do these things in their own names, and to carry on any lawful business other than the business of banking. Thus, DLLC Series and DLP Series have more, and DST Series fewer, of the attributes and capabilities one generally associates with legal or commercial entities. All three Alternative Entity series differ in another fundamental way from subsidiaries—no such series can exist beyond the existence of the Alternative Entity under which it was established.
A given series’ lack of entity status presents troubling issues where series purport to be debtors under the Uniform Commercial Code (the “UCC”). Generally, the UCC defines “debtor” as “a person having an interest . . . in the collateral.” “Person… [is] an individual, corporation, business 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.” Many practitioners and commentators have concerns that a given series may not fall within the UCC’s definition of “person” and thus may fall outside the realm of potential “debtors” for UCC purposes.
There is a complicated interplay between the series provisions of Delaware’s Alternative Entity acts and UCC Article 9. Care must be taken in determining how assets associated with a given series are held, addressing the identity of the relevant debtor, as well as its name for UCC section 9-503 purposes and its location for UCC section 9-307 purposes. A reference chart for filing financing statements under UCC Article 9 to perfect security interests in assets associated with Delaware’s Alternative Entities and series can be found in the full text of this article.
Norman M. Powell has been an adjunct professor at Temple Law. His primary professional affiliation is as a partner in the Delaware law firm of Young Conaway Stargatt & Taylor, LLP where his practice includes formation of and service as Delaware counsel to corporations, limited liability companies, and statutory trusts, and the delivery of legal opinions involving complex matters of Delaware law.