Banking Interpretations

NYBL 590(1)
NYBL 591

To: Deputy Superintendent Rholda Ricketts
From: Walter Hack, Legal Division Summer Intern

June 28, 2010

Subject: Delaware Series Limited Liability Company


Should the Mortgage Banking Division permit a Delaware series limited liability company (series LLC) to be licensed or registered as a mortgage banker or broker?  Would a license or registration granted to the corporate entity apply to each series?


The licensing and registration requirements of New York Banking Law Section 590 apply to a “person, partnership, association, corporation, or other entity.”  Although a series LLC is an “other entity,” its limitation on liability is inconsistent with consumer protection.  Accordingly, either series LLCs should not be licensed or registered, or each series should be considered a separate entity for these purposes.


This issue has arisen as a result of an examination conducted by the Mortgage Banking Division.  Specifically, the Mortgage Banking Division has identified a company operating under this structure, with at least 22 series LLCs doing business under a single license.  The Division has requested the Legal Division’s analysis of the impact of this structure on its licensing activities.


Forming a Series LLC

A limited liability company is an unincorporated business form that is organized under state law to shield the assets of the members and managers from those of the company.  An LLC agreement governs the organization and operation of the company.  Most states’ LLC statutes are very flexible, allowing LLCs to have a single owner and to conduct nearly any lawful business. 

The first LLC series legislation was enacted in Delaware in 1996 under Title 6, Section 18 of the Delaware Code (attached).  The statute permits a LLC to designate a “series of members, managers, limited liability company interests or assets” with “separate rights, powers or duties.”  6 Del. Code §18-215(a).  Each series can operate in most respects as though it were a separate LLC, while avoiding the high administrative costs of actually organizing multiple LLCs.
Under the Delaware statute at issue here, an LLC may organize within it any number of series LLCs.  This structure was originally developed for use by mutual funds and unit investment trusts, allowing the original LLC to register under the Investment Company Act and then establish separate portfolios of assets in the various underlying series.  However, as illustrated by the present matter before the Mortgage Banking Division, the ease with which a series LLC can be created has led other businesses to take advantage of the series LLC structure.

In order to be considered a series LLC under the Delaware statute, the corporate entity: 1) must provide for the series in the LLC agreement; 2) keep separate records for each series and separately hold or account for the assets of each series; and 3) give notice of the limitation on liabilities of the series in the certificate of formation.  6 Del. Code §18-215(b).  These factors alone raise questions as to the suitability of the series LLC model in mortgage banking.  The record before the Legal Division does not include the LLC agreement for the company in question, but this document would be required to reflect, at the time of formation, its plan to function as a series LLC.  The LLC agreement also provides the only required notice of the limited liability between the corporate entity and the series.  Unless each series voluntarily discloses its limited liability, consumers do not have notice that they are doing business with a series LLC.

Characteristics a Series LLC

Beyond the requirements listed, there are few limitations on the structure and operation of a series LLC.  The statute permits each series LLC to have a separate “business purpose” from the other series and from the entity as a whole.  As indicated above, each series constitutes separate pools of assets.  The statute does not indicate any limit to the number of series, nor must the umbrella LLC maintain any specified capitalization levels in its various series.  Each series is managed and controlled separately by the members and managers associated with it.  6 Del. Code §18-215(b).  While a series LLC is not a separate legal entity because it exists solely under the LLC agreement of the original entity, it is possible for the relationship between an LLC and its series to be limited to the formation process since each series can have unique assets and management independent of the umbrella LLC and the other series.

Most importantly for the purposes of this analysis, each series in a properly designed and drafted series LLC has limited liability shielding its assets from those of the corporate entity and the other series.  Delaware law specifies:

 “the debts, liabilities, obligations and expenses incurred … 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 . . . none of the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to the limited liability company generally shall be enforceable against the assets of such series.” 

This arrangement has been referred to as an “internal shield.”  See Daniel S. Kleinberger & Carter G. Bishop, The Next Generation: The Revised Uniform Limited Liability Company Act, 62 Bus. Law. 515, 541 (2007) (attached).  Together with the separation of assets, this limited liability between series makes it likely that individual series will have enough “capital” to fund the mortgages it holds but not to pay damages for violations of the Banking Law or other laws.  The limited notice requirement for series LLCs makes it extremely difficult for a consumer to realize this risk.

Regulation of Mortgage Bankers and Brokers

In addition to the characteristics of series LLCs that make them susceptible to undercapitalization and other functional issues, the structure is inconsistent with the laws regulating mortgage bankers and brokers.  The application process for a mortgage banker’s license is governed by Section 591 of the Banking Law.  The measures set forth in the statute are designed to ensure that responsible, qualified mortgage bankers enter the market.  Applicants must provide the “names and complete business and residential addresses of each members, director and principal officer.”  It is unclear whether the series LLC in question has submitted this information with respect to all of the members or officers of the underlying series.  Moreover, Sections 594 and 594-b of the Banking Law mandate disclosure of changes of officers and directors and prior approval for changes in control.  Considering that 22 series have been identified so far and each series in such a structure is managed and controlled separately, it is possible these disclosures have not been made to the Department.

Applicants for a mortgage banking license must also demonstrate financial solvency under Section 591.  As discussed above, the nature of the series LLC structure lends itself to undercapitalization.  It is unclear whether the financial solvency of each series was affirmed or even addressed in the entity’s application process.

In addition to disclosure and affirmation, applicants must file a surety bond with the superintendant ranging from fifty thousand to five hundred thousand dollars.  From a practical standpoint, even a five hundred thousand dollar bond is unlikely to be sufficient to cover the consumer reimbursements, examination costs, penalties, or other costs potentially associated with 22 series LLCs operating as mortgage bankers or brokers.

Under Banking Law Section 591-a, applicants seeking to register as a mortgage broker must provide the same disclosures, affirmations, and guarantees as mortgage banking license applicants.  In addition, registered mortgage brokers are responsible for acting in accordance with Section 590-b.  This section sets forth the standards brokers must meet in the course of soliciting, processing, placing, and negotiating home loans.  In a series LLC structure, all of the series doing business as mortgage brokers must meet these standards.  In an organization with many series, this calls into question the oversight abilities of the corporate entity and the accountability of each series to the Department and to its customers.

Even if the internal shields between the series were not designed to insulate the assets of the members, the other series, or the corporate entity, the intent of the structure remains the isolation of liability and accountability within the series.  Given that series LLCs are not constrained in their business purposes or investment objectives under the Delaware Code, operating over twenty separate mortgage banking businesses under the authority of a single license would give rise to significant questions as to whether the licensee is operating so as to ensure that the mortgage banking entity is “operating fairly, honestly and efficiently, free from deceptive and anti-competitive practices” within the meaning of  New York Banking Law §589. 

Notwithstanding the above, it is also possible that a particular series LLC structure adequately protects the interests of consumers and the Department if extensive responsible measures are taken by the licensed entity.  For example, the licensed LLC may issue blanket guarantees covering all series members.  There may be other such protective structures available to businesses operating under the series LLC model.  Unfortunately, adequate background information in this regard has not been provided at this time.


I am of the opinion that uniform regulation of the mortgage banking industry is impeded by institutions that take advantage of the series LLC structure in order to operate widespread, compartmentalized businesses with virtually no accountability to the licensed LLC and highly unpredictable liability.  Segregating management, control, and liability in this manner is inconsistent with the structure of regulation in the industry.  Since it is likely that the legal effect of this compartmentalized structure has not been explained to consumers, and may undercut the Department’s financial responsibility rules, the Mortgage Banking Division should prohibit the use of series LLCs or require each series to licensed or registered.


Noted: M.E.G.