Friday, October 14, 2011

An LLP is Not a Registered Organization

An LLP is Not a Registered Organization –
A Short Morality Play
            Bank, your client, extended a substantial line of credit Hotshot and Bigmouth, a local (and highly profitable) mass-tort law firm.  The firm is organized in Delaware as a limited liability partnership (LLP), a fact you ascertained from the Secretary of State’s website and the LLP’s statement of foreign qualification.  KRS § 362.1-1102.  As part of documenting and closing the loan, you dutifully filed in Delaware an all assets UCC-1 against Hotshot and Bigmouth, LLP.  The line of credit was nearly immediately drawn down in full.
            That closing took place a week ago today.  As you were leaving the office last Friday you heard in the elevator that Hotshot and Bigmouth had each been indicted for defrauding clients in connection with the settlement of a diet drug class action.  So why is it now that today you are cleaning out your office and facing a job search is a dismal market?
         While Hotshot and Bigmouth LLP may be organized in Delaware as a limited liability partnership, it does not follow that UCC filings made against them are to be made in Delaware.  Under the UCC, the UCC-1 financing statement against a “registered organization” (See UCC § 9-102(a)(70); KRS § 355.9-102(1)(br) (“‘Registered organization’ means an organization organized solely under the law of a single state of the United States and as to which the state or the United States must maintain a public record showing the organization to have been organized.”)) is filed in its jurisdiction of organization (See UCC § 9-307; KRS § 355.9-307(5) (“A registered organization that is organized under the law of a state is located in that state.”)).  Your problem is that a LLP is not a registered organization in that it is not created by a state filing.  Rather, a partnership, for which no state filing is required, elects to be an LLP and, subsequent to that election, is the same entity that it was before.  See RUPA § 201(b); KRS § 362.1-201(2).  A valid UCC-1 filed against Hotshot and Bigmouth LLP must be filed in the jurisdiction of the partnership’s chief executive office.  See UCC § 9-307(b)(3); KRS § 355.9-307(2)(c).  While there is a question as to whether that office is in Ohio or Kentucky (the firm maintained offices in each city), it certainly was not Delaware.  As such, no valid UCC-1 having been filed against the assets of Hotshot and Bigmouth LLP in connection with the line of credit, the Bank in effect extended an unsecured loan.  See UCC § 9-307; KRS § 355.9-307(2)(c). 
      Hence, your employment status. 

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