Series LLC’s: When Things Go South
There is no business model that provides complete immunity from market reversals, natural disasters or changes in laws and regulations. “Stuff happens. To everyone, in every business.” And when even the best-laid plans of talented and successful business people go awry, the polygamous marriage among companies, creditors or customers often end up in court. Unlike holy matrimony or other business models, DE SLLC’s can protect all parties in advance. Most often, with the right lawyer as “Best Man” or “Maid of Honor” chaperoning the courtship, the headaches and heartache of divorce court can be avoided altogether.
Space limitations only allow for “bare bone” treatments of two examples. For those interested in more information, further research is available on the Internet or consultation with our firm (devoted exclusively to Series LLC’s (SLLC) and real estate investment) at no charge.
The first comes from real life: the premier, if not only, case in which a federal bankruptcy court upheld the concept and validity of SLLC’s and denied a creditor’s attempt to “game the game” – change the rules – stack the deck. The second is hypothetical, primarily since the cancellation of, “Leave it to Beaver” more than 50 years ago, “happy ever after fairy tale marriages” are … well … fairy tales. Regardless, at all levels of state, local and federal government – courts, legislatures, regulatory agencies, the I.R.S. itself are interpreting and enforcing myth as reality. Judges, politicians and bureaucrats don’t like change – they love inertia, momentum and precedent – campaign speeches notwithstanding.
#1) In re Dominion Ventures, LLC, No. 11-12282 (Bankr. D. Del.)
Now, it’s impossible to get 2 lawyers together without getting lost in a gigantic bowl of word salad or a maze of rabbit holes. Put them in a courtroom – in front of a judge (who’s also a lawyer) – and, well …. The focus and facts here are limited to a relevant Reader’s Digest version. Legalese will be kept to minimum.
Dominion a legitimate and reputable group of businessmen established an SLLC in full compliance with state law. Both the “parent” company and each of the “children” cells operated independently, maintained separate accounting and did everything “by the book” in exercising sound business practices. One thing led to another and Dominion needed some help on credit and cash flow. “Creditor X” to the rescue!
All that was required was a change in the original Operating Agreement and absolute veto power over all operations and decision making. Well, the bailout didn’t prevent the boat from sinking and ultimately everyone ended up in Bankruptcy Court. Now remember, the issues had nothing to do with DE SLLC legislation – as with any business, things just didn’t work out. “Creditor X” claimed that its after-the-fact position prevented SLLC protection and that all assets of all “children” should be consolidated in order to satisfy the debt.
Maybe “Creditor X” should have retained a lawyer who had the experience and expertise to advise against the unenforceable loan at the altar. ‘end of the day, the assets of Dominion, its members (owners), all other respective creditors of the individual “parents” and “children” were protected.
#2) Moldy Mary vs. Larry Landlords, (S) LLC
Larry Landlord bought his first duplex just after his graduation from high school. The property wasn’t much to look at, but it was cheap and he was handy with his hands. Four years later, a complete repainting of the exterior, a brand new roof had improved the curb appeal. The kitchens were remodeled. The flooring, plumbing and paneling were upgraded. Weeds and dirt had been replaced with immaculate landscaping. Prospective\tenants had to get in line on a waiting list.
So, he bought another rental property. And another. And another … all under the protection, as independent series, of an SLLC. Tenants clamored for a space in his well-maintained, well-managed rental properties. As many investors were knocking on the door to participate in the net project.
Eventually, Larry had expanded operations to include 14 properties (and 14 segregated series), to include 5 apartment complexes and 10 members (owners). Each was fully compliant with state law requirements for documentation, maintaining separate bank accounts, tax filings and accounting. Some participants were members of a dozen common projects. Some had invested in only 1. According to sound business practice, common sense and the exercise of due diligence – among all the title searches, revenue projections and surveys, a highly reputable building inspector was hired to give the building a comprehensive evaluation for each one.
A sixth property, high-rise apartment complex costing as much as all other holdings combined, came onto the market and Buster Bankroll contacted Larry. Knowing nothing about real estate or property management, Buster wanted to invest as an absentee landlord. Negotiations went well. Occupancy was at 94% after the first month.
Moldy Mary was one of Larry Landlord’s very first tenants. She’d been living in the same apartment, owned by a different series, for about 8 years. A few years previously, after a particularly heavy rainstorm, she’d noticed water spots on her walls and a peculiar smell in her bedroom. The next day, Larry Landlord’s maintenance crew arrived, replaced a section of roofing shingles as well as some interior sheetrock.
Fast forward to 6 months later. Mary got sick, really sick … as did her husband and 3 kids. Medical bills exceeded insurance limits. Neither spouse could work and lost their jobs. The entire family was forced to leave the apartment and move in with relatives. (Remember: this is not a true story.)
But to prove a point, when the family contacted Louie Litigator, lawsuits (BIG lawsuits) were filed the same day. Fortunately, for Larry and Buster and all other members (to include those who owned Mary’s series), “Regardless, at all levels of state, local and federal government – courts, legislatures, regulatory agencies, the I.R.S. itself are interpreting and enforcing myth as reality.”
Based on every law, every directive, every court decision regarding the protections provided to the DE SLLC structure only one of the choices below are NOT true. Let us know which you chose:
- Larry Litigator did an hour’s worth of research and determined that liability lies with only the series that owns Mary’s apartment. He has withdrawn from the case and the “blood-from-a-turnip strategy.
- The members of the series who own Mary’s apartment have no exposure beyond their investment.
- The very specific language of statutes and growing legal precedent will not threaten the assets Buster or Larry or all other members of any and all other series (or Larry Landlords, (S)LLC).