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May 2013

May 2013
From the Colorado Bar Association
Business Law Section

Ed Naylor, Editor
In this issue...

Will a Series LLC Work in Colorado?

By Allen Sparkman, Sparkman + Foote LLP

The Series Concept. The series concept arose in Delaware when that state in 1988 adopted its Business Trust Act (changed to Statutory Trust Act in 2001). 12 Del. Code §3801(g). This statute provided a framework for trusts utilized for asset securitization and the organization of investment companies.

In 1996, Delaware enacted the first statutory series LLC provisions at the same time that it added series provisions to its limited partnership statute. Although this statute arguably did not respond to any perceived need, lawyers quickly began seeing potential uses for series LLCs after a few other states also enacted series provisions.

The Delaware LLC Act states:

A limited liability company agreement may establish or provide for the establishment of one or more designated series of members, managers, limited liability company interests or assets. Any such series may have separate rights, powers or duties with respect to specified property or obligations of the limited liability company or profits and losses associated with specified property or obligations, and any such series may have a separate business purpose or investment objective. 6 Del. Code §18-215(a).

If notice and record-keeping requirements in the statute are satisfied, the Delaware statute provides:

[T]he debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to a particular series shall be enforceable against the assets of such series only, and not against the assets of the limited liability company generally or any other series thereof, and, unless otherwise provided in the limited liability company agreement, none of the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to the limited liability company generally or any other series thereof shall be enforceable against the assets of such series. 6 Del. Code §18-215(b).

Several Potential Reasons for Using a Series LLC. Although filing fees in a few states (notably, for example, Illinois) made a series LLC attractive on that basis alone, most lawyers saw more promise in the internal liability shields of series LLCs. Thus, for example, it has been suggested that a Series LLC might be used as a mechanism by which an integrated oil company could organize liability shields between different oil fields and other assets and in real estate by isolating liabilities of one parcel from the value of other parcels. As with any new, not well-understood statute, some early adopters have pushed the envelope beyond breaking by utilizing a series LLC to own a personal speedboat and to own a diamond ring and, in separate series, an automobile, and a personal residence. GxG Management LLC v. Young Brothers and Co. Inc., 2007 WL 551761 (D. Mo. 2007) (speedboat); In re Mastro, 2011 WL 4498834 (Bkrty. W.D. Wash. 2011) (Delaware Series LLC with a Home Series, a Jewelry Series, and an Automobile Series).

Individual Series Generally not a Separate State Law Entity. Under the majority of state Series LLC acts, including Delaware, the entity for state law purposes is the juridical LLC formed by a filing with the state filing office and not the Series within the LLC. Stated differently, the Series within the LLC is not a separate entity under the laws of the state of Delaware. Although an individual series of a Delaware Series LLC has “the power and capacity to, in its own name, contract, hold title to assets (including real, personal and intangible property), grant liens and security interests, and sue and be sued,” 6 Del. Code §18-215(c), a series may not enter into a merger or conversion. Delaware permits a “domestic limited liability company” to enter into a merger or conversion. 6 Del. Code §18-209(a). Further, Delaware defines a “limited liability company” and a ”domestic limited liability company” as “a limited liability company formed under the laws of the State of Delaware and having one or more members.” 6 Del. Code §18-101(6). A series within a Series LLC is not “formed” under Delaware law but rather pursuant to the limited liability company agreement of the Series LLC. Members are not admitted as members of an individual Series but, rather, are members of the Series LLC and are “associated” with one or more Series and may or may not have any economic interest in the Series LLC itself other than an interest in one or more Series. 6 Del. Code §18-215(e)-(k). Some states, namely Kansas, Illinois and Iowa, and the District of Columbia, have considered this issue and have permitted (but not required) that a Series within a Series LLC to be a separate entity. Six of the current ten domestic Series LLC statutes, however, are like Delaware, in which a Series within a Series LLC is not a separate entity.

Significance of Non-Separate Entity Status. This feature of Series LLCs creates issues when determining how to satisfy foreign entity qualification requirements when an individual Series does business outside the state of formation of the Series LLC and, more importantly, whether the internal liability shields of a Series LLC will be respected outside its state of formation.

Foreign Qualification Issues—Non-Series State. If an individual Series wishes to carry on activities in a non-Series State that will constitute “doing business” in that State for purposes of the registration of foreign entities, it is likely to be unclear precisely how the Series, or the juridical Series LLC, should comply. That is, should the filing be in the name of the Series or of the juridical Series LLC? In Colorado, a non-Series state, for example, the statute provides that “a foreign entity shall not transact business or conduct activities in this state … until its statement of foreign entity authority is filed in the records of the secretary of state.” C.R.S. §7-90-801. The Colorado statute defines “foreign entity” as “a foreign corporation, …a foreign limited liability company, or any other organization or association that is formed under a statute or common law of a jurisdiction other than this state or as to which the law of a jurisdiction other than this state governs relations among the owners and between the owners and the organization or association and is recognized under the law of such jurisdiction as a separate legal entity.” C.R.S. §7-90-102(23) (emphasis added). Because an individual series of a Delaware Series LLC is not treated as a separate legal entity under Delaware law, if such an individual series began doing business in Colorado, the juridical Series LLC would be required to file a statement of foreign entity authority. The records of the Colorado Secretary of State disclose that in many cases an individual series has filed a statement of foreign authority in the name of the individual series. Assuming such a filing could not be characterized as a filing by the juridical Series LLC, there does not appear to have been compliance with the Colorado statute.

Internal Liability Shields in a Non-Series State. A more important question in most cases is whether a court in a non-Series State will respect the internal liability shields of Series LLC legislation. This concern arises most directly in tort cases—persons who contract with an individual Series in a Non-Series state may protect themselves through appropriate contractual provisions. While the general rule is that the law of the state of formation should govern the regulation of the internal affairs of an entity, including the liability of an owner of the entity for obligations of the entity, it would appear to be a stretch for a jurisdiction without Series LLCs to recognize the liability limitation function of the Series within the LLC on the basis of the internal affairs doctrine. The effect of the liability limitation function applies to third party creditors of a Series, not just to the internal affairs of the entity and its members inter se nor, unless a veil-piercing claim is involved, to the liability of a member for debts of the Series or the Series LLC. If the internal affairs doctrine does not apply, the next question is whether a non-Series state would be required to recognize the internal liability shields of a Series LLC because of the Full Faith and Credit Clause of the United States Constitution:

Full faith and credit shall be given in each state to the public acts, records, and judicial proceedings of every other state. And the Congress may by general laws prescribe the manner in which such acts, records, and proceedings shall be proved, and the effect thereof. U.S. Const. Art. IV, Sec. 1.

In other words, if an individual Series of a Delaware Series LLC is doing business in a non-Series state, such as Colorado, does the Full Faith and Credit Clause require a Colorado court to respect the internal liability shield of the Delaware Series LLC legislation in a suit brought by a Colorado resident seeking to hold the juridical Series LLC and all its Series liable for an accident caused by the activities of one of the Series in Colorado? The short answer is no. Although it is well-established that a state’s statutes are “public acts” for purposes of the Full Faith and Credit Clause, Bradford Electric Light Company v. Clapper, 286 U.S. 145, 154-55 (1932), a state is not required “to substitute the statutes of other states for its own statutes dealing with a subject matter concerning which it is competent to legislate.” Pacific Employers Ins. Co. v. Industrial Accident Commission, 306 U.S. 493, 501 (1939). The Court cited Pacific Employers approvingly in 1998 in Baker v. General Motors Corporation, 522 U.S. 222, 233 (1998) (Although a court may be guided by the forum state’s public policy in determining the law applicable to a controversy, the Court’s decisions support no roving “public policy exception” to the full faith and credit due judgments.) Further, “a rigid and literal enforcement of the full faith and credit clause, without regard to the statute of the forum, would lead to the absurd result that, whenever the conflict arises, the statute of each state must be enforced in the courts of the other, but cannot be in its own.” Pacific Employers Ins. Co, 306 U.S. 493, 501-502, quoting Alaska Packers Association v. Industrial Accident Commission, 294 U.S. 532, 547. (1935). Accordingly, a court in a non-Series state could, without running afoul of the Full Faith and Credit Clause, refuse to uphold the internal liability shields of a Series LLC on the ground that the forum state’s legislature, by not enacting series legislation, had expressed a public policy that internal liability shields within a single entity should not be recognized. By contrast, the Full Faith and Credit Clause applies quite differently to judgments of a sister State:

A valid judgment in one State of the United States will be recognized and enforced in a sister State even though the strong public policy of the latter State would have precluded recovery in its courts on the original claim. Restatement (Second) of Conflicts ’117 (1971); Baker, 522 U.S. at 233.

Indeed, if a Colorado court were to render a money judgment against a Delaware Series LLC because of an act of one Series of the Series LLC in Colorado, the Full Faith and Credit Clause would require a Delaware court to recognize and enforce that judgment. Baker, 522 U.S. at 235, Fauntleroy v. Lum, 210 U.S. 237 (1908). In Fauntleroy v. Lum, the Court required a Mississippi court to enforce a judgment of a Missouri court that, in a case brought in Missouri, enforced a contract entered into in Mississippi that was illegal under Mississippi law.

The author suggests that until there is wider adoption of Series LLC legislation, or favorable clarification of the issues discussed above, the prudent course for an attorney advising a Series LLC that wants to do business in a non-Series state would be to advise that the Series LLC form a single-member LLC subsidiary to carry out business activity in the non-Series state.

Working Group on Legal Opinions—May 13–14, 2013

Herrick K. Lidstone, Jr., Burns, Figa & Will, P.C.

I attended the ABA’s Working Group on Legal Opinions conference in New York on May 13 and 14 as the representative of the Business Law Section of the Colorado Bar Association. With 677 pages of materials, it was an amazing educational session among lawyers from throughout the United States, Canada, and Europe. The title of the conference was “Fuld@40,” a celebration of James J. Fuld’s seminal article on legal opinion practice, Legal Opinions in Business Transactions—an Attempt to Bring Some Order Out Of Chaos, 28 The Bus. L. (ABA) 915 (1973). In the introduction to the article, Mr. Fuld states:

Today, in important business transactions such as sales of businesses, mergers, bank loans or sales of securities, legal opinions are almost always required as a condition precedent to the closing of the transaction. Many clients and lawyers believe that, next to the conveyancing instruments, the legal opinions are the most important papers delivered at the closing.

Yet I can find hardly any cases considering the substance and form of legal opinions; there is virtually no printed word on the subject in the law books or articles; so far as I know, neither the law schools nor the institutes for practicing lawyers consider the subject; and unlike the accountants, the lawyers do not have any generally accepted principles covering opinions.

Now, substantial literature is available.

Order Out Of Chaos was the spark that first led to the 1979 report by the TriBar legal opinion committee, followed then by the Silverado conference that resulted in the 1991 Legal Opinion Accord. Since then, TriBar has issued its 1998 report and a number of follow-up reports, and more than 20 states have issued legal opinion guidance as have the Legal Opinions Committee of the American Bar Association Business Law Section and the American College of Real Estate Lawyers (ACREL) (most recently ACREL’s 2012 report). The literature has become equally voluminous with there being at least five treatises and innumerable articles (including two in The Colorado Lawyer by Ed Barad (December 1989 and January 1990) and the author of this article with Colleen Belak (April 2009)). The 2013 WGLO papers are only the latest in sixteen semi-annual conferences held by the WGLO and does not include the papers presented at the meetings of the Business Law Section’s Legal Opinion Committee and in other fora.

Major Theme: Risk Management. The focus of the conference was not looking backwards, but looking to the future of legal opinion practice. The major focus of the conference was risk management in the litigious 21st century. There were a number of sessions and break-outs focusing on matters surrounding risk management and issues that may reduce the risk of litigation over an opinion or, when litigation develops, how to get out of the litigation early. Litigator speakers advised that if a law firm could not obtain a dismissal on summary judgment, defense of significant legal opinion cases could amount to more than $10 million. An example of an opinion that went bad, but which ultimately had a good result for the lawyers involved, was Fortress Credit Corp. v. Dechert LLP, 934 N.Y.S.2d 119 (NY App. Div. 2011). In that case, Dechert LLP obtained summary judgment against the opinion recipient’s claims of negligence and negligent misrepresentation in a case where it had issued an opinion in a fraudulent transaction. New York attorney Marc Dreier had forged relevant signatures to contract documents on which Dechert opined. The court dismissed the case at the appellate level because Dechert had included an express assumption as to the genuineness of signatures and the authenticity of documents.

There were many discussions of risk management expressed throughout the conference. Of course, one of them was not to give an opinion. Not all transactions are worth the cost of proper opinion due diligence and preparation.

The Unworthy Client? A focus of at least two speakers was the “unworthy client” issue because an unworthy client (no matter how large the retainer) creates potential risk for the law firm. The appropriateness of a client needs to be determined at client intake. Perhaps it can be confirmed by a background check; perhaps a review of the client’s past litigation record. Has the client a history of changing law firms? Is the client’s business deal suspect in that it makes little business sense? Unworthy clients with questionable deals are more likely to result in litigation, and when an opinion has been given, the attorneys are more likely to be involved.

Legal Opinion Specialists? Another focus was the question whether the legal opinion work has become so specialized, it should be the province of specialists. It was pointed out that a number of sources contemplate that legal opinions should be “prepared and understood in accordance with the customary practice of lawyers who regularly give and review them for clients.” (ABA’s Statement on the Role of Customary Practice In the Preparation and Understanding of Third-Party Legal Opinions, 63 The Bus. L. (ABA) 1277 (2008) (approved by the CBA’s Business Law Section in November 2008 and Real Estate Law Section in February 2009)). Similar language is included in comment b to Section 52 of the Restatement of Law Governing Lawyers.

Countering that view is the concern that the opinion specialist is frequently not involved in the transaction, does not know the client, and is not familiar with the transaction documents. Adding another senior lawyer to a deal for the purposes of studying the documents and preparing an opinion is probably cost-prohibitive to the client. Clearly there is a need for cooperation and communication among all lawyers and general training about legal opinion issues and customary practice, and it is always best to have someone familiar with customary practice involved in the law firm’s legal opinion process.

One of the conclusions expressed was that each law firm should have opinions reviewed by an opinion committee that is formally structured and that is populated by persons who are trained in customary practice. One person also suggested that the opinion committee be under the control of the law firm’s general counsel and that it encourage communication between the attorneys who are opinion givers and the associates and junior partners who prepare opinions. Of course many (if not most) of the participants in the WGLO are large east-coast and west-coast law firms. In many cases, this may not work for smaller law firms. This does suggest that some smaller law firms in the regular practice of giving real estate or other transactional opinions may want to associate with others when appropriate.

Opinions Across State Lines? Another interesting issue discussed and for which few conclusions were reached involved legal opinions across state lines, and the difference between a state-by-state practice and a national opinion practice. For example, Colorado has not adopted any state report on legal opinions, but as noted, a large number of states have adopted such reports.

If, for example, a Colorado lawyer is giving an opinion to a person located in, say, Florida, must the Colorado lawyer be familiar with the Florida opinion report? Will not the Florida recipient (and its Florida counsel) be looking at that opinion under the umbrella of the Florida report? Should the opinion refer to customary practice as explained by (say) the TriBar reports, the ABA’s Legal Opinion Principles (as recommended by the Boston Bar Association model) or some other defined course? One litigator suggested that if you incorporate a specific description of customary practice by reference into the opinion letter, the opinion giver’s chances for success on a motion for summary judgment improve by eight times.

Assumptions, Exceptions and Qualifications? As a part of that discussion in a couple of panels, the discussion centered on assumptions, exceptions and qualifications—whether they be of the “kitchen sink” variety or a more limited list which assumes (for example) that “validity of signatures” need not be set forth since that is inherent in “customary practice.” On the other hand, in the Fortress Credit Corp. case, Dechert LLP obtained summary judgment in a case where it issued an opinion where attorney Marc Dreier had forged relevent signatures—because Dechert had included an express assumption as to the genuineness of signatures and the authenticity of documents. The claims dismissed included negligence and negligent misrepresentation.

Can that same result be achieved by adopting a state law report in the opinion to define “customary practice” for the purposes of that opinion? For example, the 1998 TriBar report (Section 2.3(a)) specifically states that opinion givers customarily assume that documents given to them for review are authentic and signatures are genuine. It goes on to state that “[a]s a matter of customary practice, assumptions of general application need not be stated in opinion letters.” The ABA’s Principles contains similar language. While that should lead to the same judicial result, will it? If an opinion letter contains a laundry list of common assumptions but omits the one at issue, does that change the calculus? Perhaps. Can any list be all-inclusive? Probably not.

Risk Management: Other Strategies? Should legal opinions contain a cap on damages, a choice of law, or a choice of forum so that the recipient of the legal opinion is tied to the opinion giver’s selection? The argument for these provisions is that they are usually included in the underlying transaction documents; why wouldn’t they be acceptable for the opinion giver too? This is not a common practice currently, but may become so. It was noted that one of the benefits of an arbitration forum in legal opinion practice is that the decision-makers can be more skilled in commercial transactions than the average judge or jury.

Alternative Entities. There was also a significant discussion on legal opinions in connection with alternative entities such as limited liability companies and partnership entities. We discussed Delaware alternative entities and those of other states. A major point made was the obvious—alternative entities such as LLCs are not corporations. As an example, a “fully-paid” and “non-assessable” opinion in the alternative entity context is not the same as in the corporate context where the statute addresses the issue. In the alternative entity context, the contract (operating agreement or partnership agreement) is important. Those who agree to provide the “fully-paid” and “non-assesable” opinion ensure that the contract defines the result. But then the question remains that, in the case of a wrongful distribution under a statute such as 7-80-606, does that result in an “assessment” or not? Since LLCs and partnerships are primarily creatures of contract as compared to statute, the contract law is at least as important as the respective entity formation statutes.

Delaware law is frequently a focus of these conferences. Many lawyers feel competent (as required by CRPC Rule 1.1) to offer an opinion under the Delaware General Corporation Law but which exclude case law interpretations; by contrast, how many feel competent to offer an opinion under the Delaware limited liability company act? The DGCL is primarily statutory; the Delaware LLC Act is statutory, but primarily governed by contract. Of what value is an opinion that includes the LLC statute but not case law interpreting contracts?

Program Materials. The program was replete with valuable information. The materials are available at the WGLO’s website.

Business Law Section Activities

Please Note on Your Calendars: Neither the Mergers and Acquisitions Subsection nor the Financial Institutions Subsection will hold their CLE Breakfast and Luncheon Programs during the summer months of June, July, and August.

CBA-CLE Information

Unless otherwise noted, all programs are at the CBA-CLE offices, 1900 Grant St., Ste. 300, Denver

Essential Legal Research Methods and Resources for Colorado—Thursday, June 20

To solve any research problem, a researcher needs a research plan and knowledge of resources. In this CLE program, three law librarians from the University of Colorado Law School use a current legal problem to demonstrate research resources and methods to find applicable law and locate background information. The legal facts and issues are about hydraulic fracturing, or fracking, which is a major issue in Colorado. As oil and gas companies utilize this technique to extract natural gas resources trapped in shale rock, state and local governments are grappling with laws to balance the competing interests of companies, consumers and citizens. The instructors teach techniques to develop a research plan for the problem and use various online resources to locate background information. Additionally, the instructors work the research plan to locate appropriate statutes, regulations, cases, and local government law using free, low cost and subscription resources. Throughout the program, the law librarians provide research tips and guidance for efficient and cost effective researching.

The program is from 8:30 a.m. to noon. Three general CLE credits are available.

View the detailed agenda and register online, or call 303-860-0608 (toll free 888-860-2531).

Bankruptcy Law Update—Friday, June 21

Co-sponsored by the CBA Bankruptcy Subsection

This annual Bankruptcy Update is designed to equip you with the latest information in the consumer bankruptcy practice area. Experienced bankruptcy attorneys and distinguished Bankruptcy Court judges will share vital knowledge and expertise. Whether you are a seasoned bankruptcy practitioner or you are about to step into the arena for the first time, this program will help you get up to speed on recent developments that affect your bankruptcy practice, the ethical issues you are bound to face, and just what is expected of you and what you can expect in return from the Bankruptcy Court. The Bankruptcy Court Judges provide invaluable tips for successfully handling your cases in their courtrooms, including useful practice pointers that you can take back to the office.

The program is from 9 a.m. to 4:30 p.m. Seven general CLE credits, including one ethics, are available.

View the detailed agenda and register online, or call 303-860-0608 (toll free 888-860-2531).

ESOPs Overview—Monday, June 24

Attend this complimentary event for information on an important option for businesses—employee stock ownership plans. Nationally recognized authority Corey Rosen will provide an overview on tax benefits and how to take advantage of ESOPs in succession planning, financing growth, rewarding employees and matching 401k deferrals. Following Mr. Rosen’s presentation, join him and your colleagues for a beer tasting hosted by New Belgium, a 100 percent employee-owned Colorado brewery.

The program is from 4 to 4:50 p.m, followed by refreshments hosted by New Belgium brewery. No CLE credits are offered for this program.

View the detailed agenda and register online, or call 303-860-0608 (toll free 888-860-2531).

The Business of Marijuana: Accounting, Tax, and Legal Issues After Amendment 64—Thursday, July 18

In November 2012, Colorado voters passed Amendment 64, which under Colorado law, makes the personal, non-medical use, possession, and limited home-growing of marijuana legal for adults 21 years of age and older. The Amendment to the Colorado Constitution provides for the regulation of marijuana like alcohol, and allows for the lawful operation of marijuana-related facilities. Amendment 64 presents issues of first impression in Colorado and in the United States, as no other state except Washington State has legalized marijuana for non-medical, adult use in the face of federal legal restrictions. This seminar will provide answers to the tax, accounting, and legal implications for people involved in marijuana-related businesses in Colorado.

The program is from 9 a.m. to 4 p.m. Six general CLE credits are available.

View the detailed agenda and register online, or call 303-860-0608 (toll free 888-860-2531).

CBA-CLE Featured Publications

American Bar Association Business Law Books

CBA-CLE carries a complete list of ABA books focused on business law. Titles include:

  • Advising the Small Business: Forms and Advice for the Legal Practitioner
  • Corporate Director’s Guidebook
  • Directors and Officers Liability Insurance Deskbook
  • Financial Statement Analysis and Business Valuation for the Practical Lawyer
  • Fundamentals of Corporate Governance—A Guide for Directors and Corporate Counsel
  • Intellectual Property Deskbook for the Business Lawyer—A Transactions-based Guide to Intellectual Property
  • The Guide to Business Divorce
  • The Keys to Banking Law—A Handbook for Lawyers
  • The Role of Independent Directors in Corporate Governance

For more information or to order books, call 303.860.0608 or 800.860.2531 or click here.

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Contact Ed Naylor at or 303-292-2900

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