Bulletin: CO000009

Dear Associates:

C.R.S. 7-80-101 et.seq.

The Colorado Revised Statutes beginning at Section 7-80-101 contain the " Colorado Limited Liability Act". This Act has been amended this year by Senate Bill 94-107. A Colorado Limited Liability Company ("LLC") is specifically authorized to hold title to land. An LLC is empowered to encumber, sell or convey land and an LLC may engage in lending practices. Therefore, this type of entity is well suited for general real estate activities. The Act provides for limited liability on the part of investors and yet provides the investors with means to control the LLC's operations. Moreover, these LLC's are relatively easy to form.

Formation

Before title may be insured in a Colorado Limited Liability Company, it is necessary to determine that the LLC has been properly formed and actually exists. Formation is accomplished by the filing of Articles of Organization with the Secretary of State. When the Secretary determines that the submitted articles are in proper form, they will be stamped "Filed" and the date of filing endorsed thereon. The Secretary will retain one stamped copy and send another stamped copy to the LLC.

The articles of organization are required to set forth the names and business addresses of the initial manager or managers if management is vested in managers. If management is vested in managers rather than members, a statement to that effect must be placed in the articles of organization.

If management is not vested in managers, then the names and addresses of the initial member or members must be set forth. Colorado's original Act required managers to be elected. The new amendments allow members to manage the LLC directly.

"Members" are the owners of the LLC. They are like shareholders in a corporation or partners in a business. The LLC can be either managed by the members or by "Managers". If managers are used, they are elected by a majority of the members. Managers are like officers of a corporation or managing general partners of a limited partnership.

Company Policy: Instruments and documents utilized for the acquisition, mortgage or sale of real property are valid executed by one or more managers or if management is not vested in managers, by one or more members. You must review the articles of organization to determine whether management is vested in managers or members.

The date of formation of an LLC may be important. Courts have held that a purported conveyance to an entity not capable of taking title is void for want of a grantee. Therefore, any attempt to convey land to an LLC prior to its date of formation must be considered invalid for title insurance purposes. The Act provides that an LLC is formed upon the filing of its Articles of Organization or at a later date (not to exceed ninety days) if so provided in the Articles.

Company Policy: If real property is conveyed to an LLC within ninety days of the date of filing endorsed on the articles, you must examine the articles to determine the true date of formation. In no event should a purported deed to an LLC be insured if the deed is recorded prior to the date of the filing as endorsed on the articles.

Powers

After an LLC is legally formed, the original Act contemplated that LLC members would enter into a written Operating Agreement. Amendments contained in Senate Bill 94-107 now provide that operating agreements are no longer required to be in writing, so long as the LLC is formed after July 1, 1994 or the LLC files amended Articles of Organization electing to be governed by the new Act. The Articles of Organization and the Operating Agreement are the two documents which should be examined to determine the manner in which the LLC may deal with real property. However, as stated above, the Operating Agreement may not be in written form.

Company Policy: If you are requested to insure a conveyance into an LLC, out of an LLC or an encumbrance by an LLC you must require production of the articles of organization and the LLC's operating agreement. If you are told that the LLC does not maintain a written operating agreement, you must (a) confirm that the LLC was formed after July 1, 1994 or that the LLC has filed amended articles of organization electing to be governed by the new act, and (b) require a letter from a manager or member (depending on how management is vested in the articles of organization) confirming that the LLC has no written operating agreement.

The old Act required that all managers be natural persons eighteen years of age or over. Under Senate Bill 94-107 Managers need no longer be natural persons, but may also be entities such as corporations, partnerships or other LLC's. Additionally, whereas the old Act required LLC's to consist of two or more members, the amended Act now permits one-member LLC's.

Who may Act

As stated above, the affairs of the LLC are conducted by one or more designated managers or members. The initial managers or members are designated in the Articles of Organization. However, these managers or members may be replaced at subsequent membership meetings, or by amended Articles of Organization.

Company Policy: Prior to insuring a conveyance into an LLC, a conveyance out of an LLC or an encumbrance by an LLC you must in addition to requiring a copy of the articles of organization, and the operating agreement, if in writing; you must also require a copy of any minutes of the membership meeting which modify the members or managers designated to act on behalf of the LLC, and any amended articles of organization which designate new managers or members and which amended articles are approved by written consent of all members.

Membership Liability

Members and managers of an LLC are not liable under a judgment, decree or order of court or in any other manner for a debt, obligation or liability of the LLC. Moreover, the interest of members in an LLC is specifically construed to be personal property.

Company Policy: Judgment liens and federal tax liens against the LLC should not be considered as liens against the assets of the members or managers. Nor should liens of this type filed against individual managers or members be considered as liens against land owned in the name of the LLC.

In the event, issues arise regarding LLC's which are not specifically discussed here, please call State Underwriting Personnel.