Archive for the ‘Uncategorized’ Category

Incorporation Transparency and Law Enforcement Assistance Act (S. 569.IS)

Thursday, July 9th, 2009

Who owns America?  American business entities?  That’s what Senator Carl Levin (MI) wants to know.   In 2008, Senator Levin (and co-sponsors, including then Senator Obama) introduced the Incorporation Transparency and Law Enforcement Act (S. 2956).   Earlier this year, Senator Levin (and co-sponsors) reintroduced the Act as S.569.IS.  on June 18, 2009, the Senate Homeland Security and Governmental Affairs Committee held a hearing on Examining State Business Incorporation Practices: A Discussion of the Incorporation Transparency and Law Enforcement Assistance Act.  Leslie Reynolds of the National Association of Secretaries of State (NASS) gave this summary of the hearing:

* * *  Sec. Elaine Marshall, NC Secretary of State and NASS Company Formation Task Force Co-Chair was one of the witnesses invited by Chair Lieberman (I-CT).

There were a total of five witnesses (all of their prepared testimony can be found on the [Senate Homeland Security and Governmental Affairs (HSGAC)] hearing page,along with the webcast of the hearing.) Witnesses representing the state perspective were Secretary Marshall and Harry Haynsworth, ULC drafting committee chair for the Uniform Law Enforcement Access to Entity Information Act (ULEAEIA). The Justice Department (DOJ), Immigration & Customs Department (ICE) and the ADA’s office in New York City had witnesses testifying from the perspective of law enforcement.

Three Senators were present for the hearing – Chair Lieberman (I-CT), Sen. Levin (D-MI) and Sen. Carper (D-DE). Chair Lieberman stayed for the first round of questions, but left and asked Sen. Levin to chair the second round of questions. The hearing lasted two and a half hours, with a 20 minute break for a floor vote.

The full opening statements of the Senators present can be found on the HSGAC hearing page.  Chair Lieberman commended the work of the Permanent Subcommittee staff and the commitment of Sen. Levin on this issue. He said there should be a way to draft balanced “sunshine” legislation which would provide the information that law enforcement needs and protect investor privacy without burdensome administrative costs to implement. Sen. Levin said that states were forming 2 million businesses each year without knowing who is behind them. He also said that states were reluctant to admit there was a problem. Sen. Carper (D-DE) said that he hoped that the committee seriously considered the offer of Haynsworth and the ULC to move forward working together and that the solution will be a balance of interests between privacy and transparency.

Janice Ayala of ICE said that her agency has recognized for quite some time that the state incorporation process poses a serious threat . She cited several examples of investigations that have taken place over the past few years and said that shell companies (those that exist only on
paper – her definition) are being formed by criminals in the US and then they are opening bank accounts overseas. She also said that criminals are purchasing “shelf companies – aged companies” that are being promoted on the Internet and used to conduct criminal activities. She
said that the solution is federal legislation but does not credit S.569 as the solution.

Jennifer Shasky of DOJ said that federal legislation must include four components:

   (1) law enforcement must have access to the names and contact information for those who have control over a company and the company’s assets;

   (2) define “beneficial owner” the same across all 50 states and collect name, address and photo ID from ALL recognized as beneficial owner,

   (3) obtain beneficial ownership information in an accurate and timely fashion which means it must be maintained on site in the state of formation, and it must be updated any time info changes and it must be certified annually, and

   (4) there must be a federal enforcement component.

Secretary Marshall outlined the work of the NASS task force, our request of the Uniform Law Commissioners and the ABA on drafting Uniform Law and the impact that S. 569 would have on NC specifically from a filing office standpoint. She explained, in detail, the challenges that state offices would face implementing S.569 – that you would be the front lines when it came to implementing- and the public education challenges you would face both in staffing and in costs.

Mr. Kaufman of the NY City ADA’s office said his office supports S.569 because they deal with the fallout of “shell companies” everyday. He called the issue a “no-brainer” and said that “these shell companies ust come to an end.” He said that as a country we have a “moral obligation” to lead on this issue and it is embarrassing when conducting an investigation with international authorities. He said that from a law enforcement perspective, the Uniform Law Commissioners draft is “worse than nothing” because it alerts an entity directly when they are being investigated. Often the law enforcement officials represented appeared to believe that those engaged in criminal activity would file truthful information. When Sec. Marshall pointed out that it was unlikely that criminal enterprises would file truthful information, Mr. Kaufman of the ADA’s office said false information was still helpful because once caught, prosecutors could show criminal intent with the filing of false information – this still wouldn’t aid in the investigation.

Harry Haynsworth of the Uniform Law Commissioners said that the solution has to be state legislation with a uniform standard because corporate law has been a matter for states. He is concerned that S.569 would result in massive unintentional non-compliance and that information would be frequently be outdated. He made an offer to move forward, working with the committee, to work on federal legislation that would require states to implement ULC version or they would be subject to federal legislation (S.569). The federal legislation would also include funding and federal penalties for non-compliance.

Sen. Levin asked Ms. Shasky if DOJ supported his bill. She said that DOJ thinks the bill needs to be amended to include photo ID for all beneficial owners not just international owners. DOJ also wants the beneficial ownership information updated anytime there is a change, not just updated annually. DOJ also wants to add an annual certification of the information. She did clarify that the Administration does not have an official position on S.569. ICE reported that Homeland Security is working on a position. Kaufman of the ADA’s office again said he thinks that the issue is a no-brainer and he doesn’t understand the state and business community perspective that the requirements will impose a burden. Law enforcement witnesses made it clear that they wanted the referenced provisions in place to address what they acknowledged were [0.1%] of the businesses out there conducting illegal activity.  Secretary Marshall and Harry Haynsworth referenced the fact that they were working on behalf of the 99.9% of the businesses conducting legitimate activities. Levin said that his approach to collecting the information was much simpler than the ULC approach.

Marshall and Haynsworth argued that the definition of beneficial ownership was extremely difficult to implement from a business filing perspective. Sen. Levin and law enforcement did not agree and said that the U.S. Treasury, Financial Action Task Force and S.569 all defined “beneficial ownership.” To support his point, Mr. Haynsworth read from the July 5, 2007 Financial Action Task Force Third Mutual Evaluation Report of the United Kingdom, page 234 Sec. 1132 and 1133.

(list spacing and hot-links added).

The NASS has established a Company Formation Task Force on this issue.  Its website has a veritable history on this issue, with links to more information.

posted by Gary Rosin

Texas Closes Door on Ederer Liability to Other Partners in LLPs

Friday, June 19th, 2009

In Ederer v. Gursky, 9 N.Y.3d 514, 881 N.E.2d 204, 851 N.Y.S.2d 108, 2007 N.Y. Slip Op. 09960 (2007), the New York Court of Appeals interpreted the New York LLP shield to allow claims by partners for breach of obligations of other partners, or of the partnership.  See my earlier post, Liability of LLP partners To Each Other

Section 47 of Senate Bill 1442 amends Section 152.801(a) of the Texas Business Organizations Code to read as follows:

     (a) Except as provided by Subsection (b) or the partnership agreement, a partner in a limited liability partnership is not personally liable to any person, including a partner, directly or indirectly, by contribution, indemnity, or otherwise, for a debt or obligation of the partnership incurred while the partnership is a limited liability partnership.

Oddly, the Legislature chose to add "or the partnership agreement" to the introductory exception.  Like the RUPA, Texas has a central provision regarding partner autonomy and its limits.  TBOC § 152.002.  While the Legislature may have felt a "belt and suspenders" approach was necessary to catch the attention of the courts, it seems bad policy to start dropping in references to the partnership agreement.

posted by Gary Rosin

Contracting re Fiduciary Duties in Texas UBEs

Wednesday, June 17th, 2009

Yet another way in which unincorporated business entities (UBEs) under the Texas Business organizations code ("TBOC") differ is the ability to contract as to fiduciary duties.

General Partnerships (Chapter 152).  Section 152.002(B)(2)-(4) are parallel to RUPA section 103(b)(3)-(5).  That is, no eliminations of the Section 152.204-.207 duties, but excluded specific activities or standards, so long as not manifestly unreasonable.

Limited Partnerships (Chapter 153).  Chapter 153 is a RULPA-type statute, so Section 153.003(a) generally incorporates Chapter 152, and a general partner has the same rights, powers and restrictions, and liabilities as a partner in a general partnership, § 153.152.

Limited Liability Companies (Chapter 101).  Section 101.401 is based on the early version of Delaware LLC 18-1101(c)(2):  the company agreement may "expand or restrict" duties, including fiduciary duties, and related liabilities.  As suggested by the Delaware Supreme Court in Gotham Partners, L.P. v. Hallwood Realty Partners, L.P.,817 A.2d 160, expanding or restricting probably does not include eliminating.  Id. at  166-68.  Such an interpretation would be consistent with Section 152.002(b)(2-(4), but without an express "manifestly unreasonable" limitation.  Would a "manifestly unreasonable" limitation be the equivalent of an elimination?

posted by Gary Rosin

More Texas & Creditors of Owners

Tuesday, June 16th, 2009

We have already noted the preemption of Sections 9.406 & 9.408of the Texas UCC and the elimination of the right to foreclose a charging order on an ownership interest in a Texas LLC.  The rights of creditors of owners of interests in Texas unincorporated business entities (UBEs) under the Texas Business Organizations Code ("TBOC") vary widely, depending on the form of UBE:

  • Ownership interests in all forms of Texas UBEs subject to TBOC–(general) partnerships, limited partnerships and LLCs–are excluded from 9.406 and 9.408 of the Texas Business & Commerce Code.  TBOC §§ 101.106(c) & 154.001(d) (added by Sections 39 and 57 of Senate Bill 1442) (TBOC Chapter 154 is one of two mini-hubs that apply to both (general) partnerships and limited partnerships).
  • TBOC chapter 152, and its predece

ssor statute, deleted the concept of charging orders, as applied to interests in (general) partnerships.  Compare TBOC §§ 152.401-.406 with TBOC §§ 101.108-.112 and TBOC §§ 153.251-.257.  As a result, the traditional remedies–attachment, garnishment, etc.–are available to creditors of owners of interests in (general) partnerships.

  • A charging order is the exclusive remedy for a judgment creditor of an owner to reach an ownership interests in either a limited partnerships or an LLC.  TBOC §§ 101.112 (LLCs) & 153.256 (limited partnerships).
  • Senate Bill 1442 amended TBOC Section 101.112 by adding Subsection (c), which prohibits foreclosure of charging orders on ownership interests in LLCs.  SB 1442, § 40.  [Correction]  A similar change was made to TBOC Section 153.256 (charging orders against ownership interests in limited partnerships).  SB 1442 § 53. [Hat tip to Stephen Paine for reminding me of the dangers of posting when you are tiered!.

    In part, these differences are a matter of path dependence (adoption of new statutes at different times).  I had hoped that the most-recent legislative session might harmonize creditor remedies.  Instead, they beefed up the limited partnership and LLC charging order provisions, and left general partnerships hanging. 

    To paraphrase the old saw, when the legislature is session, you need to lock-up your spouses, children and pets!  That's why we only let them meet for five months every two years!

    posted by Gary Rosin
    (with edits 06/16/2009)

  • More Texas Hurdles for Creditors of LLC Members or Limited Partners

    Friday, June 12th, 2009

    Tom Rutledge has already pointed out that SB 1442 pre-emptsSection 9.406 and 9.408 of the Texas UCC.  Sections 40 and 53 of the bill go even further, and adds language that prohibits the foreclosure of a "charging order lien", whether "under this code or any other law," for ownership interests in LLCs and in limited partnerships.  Tex. Bus. Org. Code §§ 101.112(c) & 153.256(c)  (emphasis added).

    posted by Gary Rosin
    revised 06/19/2009

    Texas Adopts Series LLCs

    Friday, June 12th, 2009

    Among things, SB 1442 amends the Texas Business Organizations Code  to provide for series LLCs. § 45 (adding Subchapter M, §§ 101.601 et/ seq.).  The Bill Analysis describes the amendment as follows:

    S.B. 1442 authorizes the creation of a series limited liability company by allowing a limited liability company agreement to establish or provide for the establishment of one or more designated series of members, managers, membership interests, or assets

       that has separate rights, powers, or duties with respect to specified property or obligations of the company or profits and losses associated with specified property or obligations, or

       that has a separate business purpose or investment objective.

    The bill sets out provisions relating to

       the enforceability of the obligations and expenses of a series against its assets,

       the holding of assets associated with a series, and

       the requirements for a notice of limitation on the liabilities of a series.

    The bill 

       establishes the general powers of a series;

       provides that a member or manager associated with a series or a member or manager of the company is not liable for a debt, obligation, or liability of a series unless the company agreement specifically provides otherwise; and

       allows the company agreement to expand or restrict any duties, including fiduciary duties, and related liabilities that a member, manager, officer, or other person associated with a series has to the series or the company, a member or manager associated with the series, or a member or manager of the company.

    The bill

       authorizes the company agreement to establish classes or groups of members or managers associated with a series and

       sets forth provisions relating to

    the governing authority of a series,

    the effect of certain events on a manager or member with respect to a series,

    the status of a member with respect to a distribution,

    the establishment of a record date for allocations and distributions, and

    the making of distributions with respect to a series.

    The bill establishes that the provisions of law related to limited liability companies apply to a series limited liability company and its associated members and managers, to the extent the provisions governing each company are not inconsistent.

    The bill

       authorizes a series and its business and affairs to wind up and terminate without causing the winding up of the company[,]

       provides that the series terminates on the completion of the winding up process[,}.

       … specifies the conditions that require the winding up of a series and sets out procedures for the winding up and termination[, and]

       …  provides for the revocation of a voluntary winding up, the cancellation of an event requiring a winding up, the authority of a series to continue business following either situation, and the winding up by order of a district court with appropriate jurisdiction.

    Id. at 4-5 (indentations added).

    While the general approach of Subchapter M is a statute-within-a-statute, Section 101.609 includes a general incorporation of Chapter 101 (The tex. Bus. Org. Code "spoke" for LLCs):


         (a) To the extent not inconsistent with this subchapter, this chapter applies to a series and its associated members and managers.

         (b) For purposes of the application of any other provision of this chapter to a provision of this subchapter, and as the context requires:

         (1) a reference to "limited liability company" or "company" means the "series";

         (2) a reference to "member" means "member associated with the series"; and

         (3) a reference to "manager" means "manager associated with the series."

    posted by Gary Rosin

    Texas adopts 9-406/408 Carve-outs for LLC and Partnership Interests

    Tuesday, May 26th, 2009

    Section 39 of Texas S.B. 1442 provides, inter alia, for 9-406 and 9-408 carve-outs for membership interests in an LLC. Specifically, it is provided that a new subsection (c) will be added to Section 101.106 of the Texas Business Organizations Code to provide:

    Sections 9.406 and 9.408, Business & Commerce Code, do not apply to a membership interest in a limited liability company, including the rights, powers and interests arising under the company’s certificate of formation or company agreement or under this code. To the extent of any conflict between this subsection and Section 9.406 or 9.408, Business & Commerce Code, this subsection controls. It is the express intent of this subsection to permit the enforcement, as a contract among the members of a limited liability company, of any provision of a company agreement that would otherwise be ineffective under Section 9.406 or 9.408, Business & Commerce Code.

    A similar revision appears at section 57, there addressing interests in a partnership. You may also want to take a look at sections 60 and 61 of that bill, which amend 9-406 and 9‑408 to expressly provide that they do not apply to interests in either an LLC or a partnership.

    The effective date is 9/1/09.

    posted by Thomas E. Rutledge

    Update:  The House Bill Analysis of Section 39 describes the amendments as follows:

    Provides that Sections 9.406 (Discharge of Account Debtor; Notification of Assignment; Identification and Proof of Assignment; Restrictions on Assignment of Accounts, Chattel Paper, Payment Intangibles, and Promissory Notes Ineffective) and 9.408 (Restrictions on Assignment of Promissory Notes, Health-Care-Insurance Receivables, and Certain General Intangibles Ineffective), Business & Commerce Code, do not apply to a membership interest in a limited liability company, including the rights, powers, and interests arising under the company's certificate of formation or company agreement or under this code. Provides that to the extent of any conflict between this subsection and Section 9.406 or 9.408, Business & Commerce Code, this subsection controls. Provides that it is the express intent of this subsection to permit the enforcement, as a contract among the members of a limited liability company, of any provision of a company agreement that would otherwise be ineffective under Section 9.406 or 9.408, Business & Commerce Code.

    Id. at 9 (emphasis added).

    posted by Gary Rosin

    Revised Prototype LLC Act v. 2.02 (Jan. 2009)

    Wednesday, January 14th, 2009

    Today the Revised Prototype LLC Act Task Force of the Committee on LLCs, Partnerships and Unincorporated entities of ABA Section on Business Law released for comments the January 2009 Draft of the Revised Prototype LLC Act v. 2.02 (Jan. 2009) (note:  You must be a member of the Committee to be able to access the draft online).  Comments should be addressed to:

    According to Task Force co-chair Scott Ludwig, the Task Force is still reviewing

    1. several variations of "series" and the best methods to implement such in the Act
    2. the Delaware retroactive addition of members
    3. reviewing the issue of whether "management rights" should be defined as not being a property right so as to prohibit a bankruptcy trustee from stepping into the shoes of the person exercising such "management rights"
    4. the comments that are to be provided with the Act.

    For those members of the LLC, etc Committee who are interested in the work of the Task Force can subscribe to the Task Force’s listserv.  For more information, go to the Task Force’s ABA website.

    posted by Gary Rosin