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The Uniform Voidable Transactions Act - New Section 11 and Series LLCs

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(This article is the fourth in a series on the Uniform Voidable Transactions Act of 2014 (“UVTA”), as found at  http://goo.gl/kS7MqZ and adopted by the Uniform Law Commission on July 16, 2014. Your author was an American Bar Association Advisor to the Drafting Committee to this Act.)

Completely new to the 2014 Amendments to the Uniform Fraudulent Transfer Act (now called the Uniform Voidable Transaction Act), is Section 11, which deals with Series Organizations.

Well, what the heck is a "Series Organization"? The Drafting Committee struggled with that question too, and it is here that must include a little unofficial history as eye-witnessed by your faithful correspondent.

At the time the UFTA/UVTA Drafting Committee convened to work on its 2014 Amendments, a new Committee was just starting its work, being the Drafting Committee for the Uniform Series of Unincorporated Business Entities Act ("USUBEA"). Despite the heavyweight title, this new act is really the Uniform Series LLC Act, with an unnecessarily convoluted name.

A Series LLC (or "Series Organization") is really just an LLC that has different "series" of membership classes, with each of those classes owning specific assets of the LLC. In theory (and this is probably a really bad idea), each "series" is treated as a separate entity apart and aside from any other "series" such that if something bad happens in Series A, then none of the assets in Series B are exposed to the creditors of Series A.

I have previously written about Series LLCs for this column at:

Anyhow, the new Section 11 consists of 236 words, of which 193 words try to state exactly what constitutes a "Series Organization".

The reason for this confusing section goes to the unofficial history. As mentioned, the UFTA/UVTA Drafting Committee and the USUBEA Drafting Committee started off about the same time, and ran concurrently for at least a year. The two Drafting Committees were in adjoining rooms, and shared a couple of members.

At some point, somebody in the USUBEA Drafting Committee got the idea that the UFTA/UVTA Drafting Committee had better include some provisions to better conform the two Acts. Thus, the new Section 11 to the UFTA/UVTA, which originally wasn't desired by the UFTA/UVTA Drafting Committee, and frankly never received more than a lukewarm reception by that Committee.

During the passage of the UFTA/UVTA before the assembly of the Uniform Law Commission, several questions from the floor inquired why this Section 11 was to be included. The Chair of the UFTA/UVTA Drafting Committee, Edwin Smith, replied quite honestly: "Because they made us!" He was referring to the USUBEA Drafting Committee, of course, and thereafter a vigorous discussion occurred on the floor as to whether this Section 11 should be included (ultimately, it passed unanimously, but with not just a few Commissioners grousing about doing something in anticipation of another Act (USUBEA) that might or might not ultimately become law.)

In other words, the new Section 11 of the UFTA/UVTA should not be taken as any endorsement, express or implied, by the Uniform Law Commission about USUBEA or other Series legislation. The USUBEA will have to stand or fall on its own merits.

But this all overlooks that even if USUBEA fails to become a Uniform Act for whatever reasons, there are states out there which have already adopted their own Series LLC Acts, and so at least in those states such entities create issues from a fraudulent transfer viewpoint -- issues which Section 11 addresses.

As mentioned, the new Section 11 consists of 236 words, of which 193 words (paragraph (a)) try to state exactly what constitutes a "Series Organization". The other 43 words (paragraph (b)) actually say something of value:

(b) A series organization and each protected series of the organization is a separate person for purposes of this [Act], even if for other purposes a protected series is not a person separate from the organization or other protected series of the organization.

In English, this simply makes clear that the UFTA/UVTA applies transfers between separate Series of a Series LLC, which was probably how the UFTA would have treated such transfers before the 2014 amendments anyway. But, after all these exertions, at least that matter is clear now.

As to the viability of the Series LLC against unsecured and nonconsensual creditors? Not so much.

This article at http://onforb.es/1r0LINE and http://goo.gl/UMQWII