Bulletin: NY000064

Dear Associates:

With the enactment of Chapter 576 of the Laws of 1994, a new form of business organization called a Limited Liability Company ("LLC") was created in New York. The LLC, which combines the tax benefits and management flexibility of a partnership with the limited liability protection of a corporation, will be available for use in this state when the statute becomes effective on October 24, 1994. Many of the provisions of the Limited Liability Company Law (which will be found in Chapter 34 of the Consolidated Laws) are similar to those contained in the New York Partnership Law and Business Corporation Law.

As title underwriters, we should be aware of 2 important documents, which establish the existence and govern the management and operation of an LLC. The first document is known as the Articles of Organization, which must be filed with the Department of State of New York. An LLC begins its existence once the filing of the Articles of Organization takes place. The name of the LLC as shown in the Articles of Organization must contain the words Limited Liability Company or the abbreviation L.L.C. or LLC. There is a requirement that the substance of the Articles of Organization be published, within 120 days of their filing with the Department of State, once a week for 6 successive weeks in 2 newspapers of the County in which the office of the LLC is located. Although failure to file proof of publication will not impair the validity of any contract or act of the LLC, it will prohibit it from bringing an action or special proceeding in this state until such proof is filed.

The second important document, known as the Operating Agreement, sets forth the agreement of the members concerning the management and operation of the LLC.

Management of the LLC is vested either in its members, who are really the owners of the Company, or, if the Articles of Organization so provide, it can be delegated to a manager or managers. The statute does not require that a manager be a member of the LLC. The powers and responsibilities of the members and managers of the LLC would be determined by the provisions of the Operating Agreement which is really the key document with regard to who has the authority to bind, manage and operate the Company.

The most significant attraction of an LLC to investors in comparison to more traditional types of business organization is that neither the members nor the managers are liable for debts, obligations or liabilities of the LLC, or those of other members or managers in the conduct of the business of the LLC, solely be reason of their being a member or manager. This limitation of liability is in sharp contrast to the much broader liability of general partners for the debts of a partnership where the partnership's assets are not sufficient to satisfy creditors. Income tax benefits and the availability of a highly flexible organizational structure also make the LLC an attractive form of business organization, but since those benefits have little or no impact on title matters, they will not be discussed in this memo.

Notwithstanding the above-referenced limitation of liability, where the members consent in writing, the Articles of Organization can provide that all or certain members of the LLC are liable for the debts of the Company. Furthermore, there is no prohibition in the law against a member acting as a guarantor or surety for an obligation of the LLC.

The new statute contains other provisions allowing for conversion of existing general or limited partnerships into LLC's and for the merger or consolidation of 2 or more LLC's into a single LLC. The statute recognizes foreign LLC's and, although they are required to obtain a Certificate of Authority to do business in this state, the failure to do so will not impair the validity of any contract or act of the LLC.

The statute provides for the creation of professional service limited liability companies. In this special LLC, a member or a manager who provides professional services is liable for his own negligent acts or misconduct, but creditors will not be able to reach the personal assets of other members or managers of the LLC.

The new law also authorizes existing general partnerships that provide professional services to register as limited liability partnerships by filing a registration statement with the Secretary of State of New York together with a $200.00 filing fee. The benefit of registration is that the partners get limited liability protection while continuing to operate under the existing partnership agreement.

In the very near future, the LLC could become the form of business organization chosen by many investors in connection with real property transactions in New York. In terms of establishing title guidelines for dealing with LLC's, we should be concerned about 4 matters:

1. Formation - Make sure that the LLC is properly formed by checking that its Articles of Organization were filed with the Department of State. We should also check to determine whether the publication requirement has been complied with. (Although failure to file proof of publication does not appear to affect the validity of the LLC, it could impact on the LLC's ability to bring an action or legal proceeding in this state.)
   
   
2. Composition & Management of the LLC - We should require that the Articles of Organization and the Operating Agreement be produced and considered to determine who the members or managers of the LLC are and what provisions govern the operation of the LLC We should also require a certification from a member or manager that there has been no change in the makeup or composition of the LLC and there have been no amendments to the Operating Agreement. If there have been changes, they must be disclosed and reviewed by the Company prior to closing.
   
   
3. Authority to Act - This is a critical area from a title perspective and we should look to the Operating Agreement to determine who has authority and what action is required to bind the LLC and execute documents on its behalf in connection with the sale, lease or mortgage of real estate.
   
   Where the Operating Agreement is silent and the limited liability company is being managed by a member or members, we shall require a certificate or affidavit from a member
   1) that the sale, lease, or mortgage of property of the LLC was approved by the affirmative vote of a majority of the members of the LLC, entitled to vote thereon, at a meeting, duly called, at which a quorum was present and which quorum acted throughout such meeting;
   2) that (include the name of the member or members who are to act as signatories) is authorized to execute and deliver such instruments as are necessary to effectuate such sale, mortgage or lease;
   3) that the certificate or affidavit has been executed and delivered in order to induce Stewart Title Insurance Company to issue a policy of title insurance insuring (fee owner, mortgagee or lessee's name).
   
   The only time that a greater than majority approval would be required would be
   1) to approve a dissolution of the LLC or
   2) to approve its merger or consolidation with another LLC, or
   3) to approve the sale, exchange, lease, mortgage, pledge or other disposition of all or substantially all of the assets of the LLC.
   
   In such a case, the consent of 2/3 of the members entitled to vote thereon is required and that the certificate or affidavit should state that such approval was obtained.
   
   Where no meeting was held, the written consent of a majority (or 2/3 of the members where such greater percentage of consent is required) of the members entitled to vote must be obtained and the certificate or affidavit must state that such consent was obtained.
   
   Where management has been delegated to a manager or managers, a similar affidavit should be obtained from a manager. There are only 2 exceptions to this rule. The first would be where consent of 2/3 of the members is required as stated above, in which case the affidavit should come from a member rather than a manager. The second is that a majority of members entitled to vote thereon, would be required in order to :
   1) admit a person as a member, or
   2) approve the incurrence of debt by the LLC other than in the ordinary cause of business, or
   3) adopt, amend, restate or revoke the Articles of Organization or Operating Agreement.
   
   Again, in this case, the affidavit regarding consent should come from a member rather than a manager.
   
   Where no meeting was held (and the LLC is being managed by managers) the written consent of all managers must be obtained to authorize any actions by the LLC (except where the consent of members is required). The certificate or affidavit delivered at closing should state that such unanimous consent was obtained.
   
   
4. Proof of Payment of Fees -
   
   a. proof of payment of the New York State Annual Fee pursuant to Sec. 658(c) of the Tax Law will be required.
   
   b. proof of payment of the New York City Annual Fee pursuant to Section 1304(c) of the Tax Law will be required. Such taxes will be applicable for tax years commencing after November 1994.
   
   c. a certificate of Good Standing from the Secretary of State of New York should be called for.

As we become more familiar with the LLC and its operation, the above-mentioned guidelines may be amended, changed or supplements. In the interim, the above guidelines, currently being drafted into formal underwriting exceptions by Paul Prinzivalli, Chief Underwriting Counsel, should be followed in all transactions involving LLC's.

Should you have any questions, please contact Company Counsel.