Maryland Appellate Court Says “No De Facto Series LLC”

Maryland Appellate Court Says “No De Facto Series LLC”
March 1, 2016

SUMMARY 

In Kurz, et al. v. AMCP-1, LLC, et al., an unpublished opinion filed on February 10, 2016, the Maryland Court of Special Appeals refused to accept the plaintiff’s argument that the trial court, in disregard of Maryland law, had created a de facto “series LLC” when it treated certain separate but identical LLCs as amalgamated for a certain limited purpose.

A series LLC (a “Series LLC”) is a form of limited liability company that, as a matter of statute, is permitted to have various series, or cells, within it. Each series may have its own members, may conduct its own business, and may have its own assets. As a matter of statute, neither the LLC nor any series is supposed to be liable for the debts of any other series within the LLC.

Delaware pioneered the Series LLC. However, because of concern that each series might be liable for the others’ debts despite the statutory shield, only a handful of states have adopted this form. Maryland is not one of them.

In Kurz, the plaintiff was a member of four separate, but identical, LLCs, that were organized to develop real estate on four parcels that were subdivided from a larger parcel. During the course of their relationship, the LLCs’ members were required to make additional capital contributions on account of the needs of specific LLCs. The operating agreement of each LLC provided that a member’s failure to contribute capital in response to a capital call would result in the reduction of the member’s interest in the specific LLC for which the call was made. Initially, the plaintiff fulfilled his obligations in response to capital calls, but, subsequently he failed to make his required contributions. In response, and apparently with his acquiescence, the other members reduced the plaintiff’s percentage interest in all of the LLCs, and not just in the LLC with respect to which the capital calls had been made. After the parties’ final capital call, however, the plaintiff objected to the reduction of his interest in all of the LLCs and filed suit.  

The trial court, ruling in the defendants’ favor, found that, in essence, all of the members had agreed, by their course of conduct, to modify certain terms of the operating agreement and treat a failure to make a required capital contribution as an event permitting the reduction of the defaulting member’s interest in all of the LLCs, even though the LLCs’ operating agreements did not so authorize. The plaintiff claimed that this ruling of the trial court was tantamount to the trial court’s creation of a Series LLC, without statutory imprimatur, and therefore should be invalidated.

The Maryland Court of Special Appeals dismissed the plaintiff’s argument, concluding that all that the trial court had done was its “job” and that it was simply enforcing the parties’ oral agreement that a member’s failure to make a capital contribution to one LLC would result in a reduction of the member’s interest in all of the LLCs. Although the LLCs’ operating agreements required modifications to be in writing, the trial court and the Court of Special Appeals, both citing Hovnanian Land, Inv. Group, LLC v. Annapolis Towne Center at Parole, LLC, 421 Md. 94 (2011), found that the members had mutually waived this provision by their practice, including acquiescence, in each instance, of repeatedly reducing the defaulting member’s interest in all LLCs. Thus, the last written word was not, in the Kurz case, the “last word.”

Although unpublished opinions cannot be cited in briefs or other filings with the court or used as precedent in Maryland, Kurz should serve as a caution to those counseling LLCs in their operation. Although the members may have agreed in their operating agreement that amendments must be in writing to be enforceable, Kurz may be a sign that a Maryland court will disregard the requirement of a writing when it believes that the facts so warrant.  

For more information on this ruling and how it may affect your business, please contact the authors or the attorney at the firm with whom you are regularly in contact.

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