THE IMPACT OF THE INTERNAL AFFAIRS DOCTRINE ON SERIES LLCS

By , January 3, 2014 2:44 pm

Some lawyers appear to believe that under the choice-of-law doctrine known as the “internal affairs doctrine,” the courts of State X must respect the liability shield of an LLC series formed by a series LLC under the LLC act of State Y.   This belief is completely wrong.  The internal affairs doctrine requires State X to respect only those provisions of the LLC act of State Y that govern the relations among the members of State Y LLCs.  It does not govern the relation between the members of a State Y LLC and that LLC with third parties (such as parties suing that LLC).  As noted in the post by Doug Batey in his LLC Law Monitor blawg for which I posted a link a couple of days ago, this is the clear holding of Alphonse v. Arch Bay Holdings, L.L.C. (5th Cir. Dec. 11, 2013).   The Alphonse case is unpublished and thus is not authority, but it is highly persuasive—in fact, compelling.

The bottom line:  Don’t recommend to your clients that they use series LLCs if there’s any significant possibility that they will be sued in a non-series state.

By my count, there are presently 14 U.S. jurisdictions, including 12 states, under whose LLC acts series LLCs can be formed.  39 states don’t permit the formation of series LLCs.  (I’ve done my best to compile this list accurately, but if you know of any error in the list below, please let this group know.)

The 14 series LLC jurisdictions, in alphabetical order, are these:

1.        Delaware

2.         District of Columbia

3.         Illinois

4.         Iowa

5.         Kansas

6.         Minnesota

7.         Nevada

8.         North Dakota

9.         Oklahoma

10.       Tennessee

11.       Texas

12.       Utah

13.       Wisconsin

14.       Puerto Rico

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