Why does a limited liability company (LLC) need an operating agreement?

The Delaware Limited Liability Company Act provides an outline for the operating of every limited liability company in the form of default rules. All of these default rules can be modified by the company’s Operating Agreement, with the exception of the implied contractual covenant of good faith and fair dealing.

For a single member LLC, the need for an operating agreement is less obvious than for an LLC that has 2 or more members.

The Delaware LLC Act provides that the operating agreement may “written, oral or implied”, however each Delaware LLC must in fact adopt an operating agreement in one of those forms. If the LLC claims to have an oral or implied agreement, there is no evidence of what the parties supposedly agreed to when a dispute or disagreement arises.

The single member LLC should have a written operating agreement to evidence that it is in compliance with the Act. The fact is that most banks require that you provide a copy of your operating agreement when you open a bank account. I you are sued, the first thing that the plaintiff’s attorney will ask for is a copy of your operating agreement.

With a multi-member LLC, the need for an operating agreement should be obvious to you. How will your LLC be managed? Who will have the responsibility to manage the LLC? If more than one person will manage the LLC, how will decisions be made and will each person managing the LLC have equal votes? How will profits be distributed or will profits be distributed rather than retained and invested back into the LLC? Will there be distributions so that I can pay my taxes? Do I have an obligation to contribute additional funds to the LLC over and above my capital contribution? What happens when a member does not contribute additional funds mandated by the operating agreement? What happens if there is a disagreement between members? Can a member sell his or her interest in the LLC to an outsider? Can a member transfer all or part of his or her interest to a spouse or children without the approval of the other members? What happens if a member dies or becomes disabled? If things aren’t working for me, how do I get out of this LLC?

These and other question are addressed in a well drafted operating agreement. When a member of an LLC comes to an attorney to discuss an internal business problem or dispute, the first question asked is whether the LLC has a written operating agreement. A well drafted LLC operating agreement should answer most, but maybe not all questions.

Delaware Corporate Agents, Inc., offers for sale a single member operating agreement and relatively straight forward multi-member operating agreement. The adoption of an operating agreement is important enough to discuss the agreement with your attorney. Buying forms from Delaware Corporate Agents, Inc., is not a short cut around your attorney. It is important that you review the forms with your attorney before signing the document. The form may not fit for your transaction or you may need/want addition provision and protections added to the form by your attorney.

 

Why does my corporation need organizational minutes?

The Delaware General Corporation Law (DGCL) provides in Section 108 in part: 

(a) After the filing of the certificate of incorporation an organization meeting of the incorporator or incorporators, or of the board of directors if the initial directors were named in the certificate of incorporation, shall be held, either within or without this State, at the call of a majority of the incorporators or directors, as the case may be, for the purposes of adopting bylaws, electing directors (if the meeting is of the incorporators) to serve or hold office until the first annual meeting of stockholders or until their successors are elected and qualify, electing officers if the meeting is of the directors, doing any other or further acts to perfect the organization of the corporation, and transacting such other business as may come before the meeting.

(c) Any action permitted to be taken at the organization meeting of the incorporators or directors, as the case may be, may be taken without a meeting if each incorporator or director, where there is more than 1, or the sole incorporator or director where there is only 1, signs an instrument which states the action so taken.

The DGCL says that the organizational meeting ”shall be held”, not may be held. A corporation that has not had an organizational meeting is not properly organized under law.

The initial director(s) are either named in the Certificate of Incorporation or in a written action by the incorporator naming the initial director(s).

The organization meeting most typically occurs by way of written consent minutes rather than a physical meeting of directors.

The topics typically covered in the organizational meeting minutes are:

  • Ratification of the actions of the incorporator for incorporating the corporation
  • Adoption of written bylaws
  • Approval of the form of stock certificate
  • Fix the fiscal year
  • Organize the Board of Directors by naming the Directors and officers of the Board
  • Election of initial officers of the corporation
  • Determining Director compensation, if any
  • If the Directors or officers are to be employed by the corporation, their compensation, employment contract and other employment terms
  • Issuance of stock to stockholders and recitation of the consideration received by the corporation in exchange for the stock
  • Qualification to do business in other states
  • Banking resolution
  • Authorization to pay fees and expenses of incorporation
  • Authorize the application for a taxpayer identification number
  • Making a Subchapter S election
  • Establishing books and records

The Organizational Minutes are placed at the front of the corporation’s minute book.

Delaware Corporate Agents, Inc., offers for sale a form of organizational minutes which you can fill in. Additionally Delaware Corporate Agents sells a selection of minute books at various price points to meet your corporation’s need to keep its records in a single place. Additionally, the minute books contain custom printed stock certificates.

 

Should I form a series LLC?

The short answer is do not form a series LLC unless your series LLC will not be an “active operating company” but will be limited to the passive business of holding intangible assets such as securities, automobile title loans, mortgages or similar intangible assets.

Let’s start at the beginning, what is a “series LLC”? A series LLC is an LLC formed under a statute similar to Section 18-215(b) of the Delaware LLC Act. Section 18-215(a) provides:

(a) A limited liability company agreement may establish or provide for the establishment of 1 or more designated series of members, managers, limited liability company interests or assets. Any such series may have separate rights, powers or duties with respect to specified property or obligations of the limited liability company or profits and losses associated with specified property or obligations, and any such series may have a separate business purpose or investment objective.

Subsection (b) provides the manner in which the series is established and that once established, and provided that the required records are maintained, the debts and other obligations of a series may not be enforced against the assets of any other series.

(b) Notwithstanding anything to the contrary set forth in this chapter or under other applicable law, in the event that a limited liability company agreement establishes or provides for the establishment of 1 or more series, and if the records maintained for any such series account for the assets associated with such series separately from the other assets of the limited liability company, or any other series thereof, and if the limited liability company agreement so provides, and if notice of the limitation on liabilities of a series as referenced in this subsection is set forth in the certificate of formation of the limited liability company, then the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing 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, unless otherwise provided in the limited liability company agreement, none of the debts, liabilities, obligations, and expenses incurred, contracted for or otherwise existing with respect to the limited liability company generally or any other series thereof shall be enforceable against the assets of such series.

That seems clear enough, so what is the problem? Section 18-215 was established at the behest of the mutual fund industry. Most mutual funds were then established as Massachusetts Business Trusts, requiring the services of a Massachusetts bank as a trustee. Each fund established by a mutual fund company must have its own trust. The idea with a series LLC was that the fund could establish one LLC with multiple series. It avoided the problems and costs forced upon them by Massachusetts Laws. The industry did not want each separate series to be a “separate legal entity” because, under SEC registration and rules, as long as the LLC was a single entity they could file a single registration statement covering all of their funds, rather than separate registration statement for each separate legal entity. The use of series LLC’s has widened and are now used in many different “fund” transactions where the fund holds passive, intangible, assets, such as automobile titling trusts, and other investment funds.

In recent years a cottage industry has established itself selling series LLC’s as the panacea for all troubles. The promoters urge their customers to authorize them to establish a series LLC, then they sell the customer their “form” series LLC operating agreement and then direct the customer to place his or her assets, each asset in a separate series of the LLC. Some of the promoters characterize the transaction as an “asset protection”, “liability shield” or a “tax shield”. These, promoters are sometimes referred to by lawyers and accountants as “snake oil salesmen”. These promotions have found a home in the real estate industry where they urge the investor to place each real estate investment into a separate series of the series LLC.

So, what is the problem? There are several problems. Not all states recognize series LLC’s. All states, territories and the District of Columbia have LLC acts and recognize the LLC’s established under other state laws, these laws may not apply to series LLC’s.

Let’s say that you own or intend to acquire 2 or more buildings which you plan to rent.  Your plan is the establish a Delaware Series LLC, you then plan to place each building in a separate series of the LLC. Under Delaware Law and the series acts of other states, the assets and liabilities of each series will be considered as a legal matter to be separate from the assets  and liabilities of each other series and the LLC, provided that adequate records are maintained. The debts of one series cannot be collected from another series. By doing this you have saved your state’s LLC Tax for each series beyond the initial cost of the LLC, additionally, you have saved the annual registered agent fee. Sounds good so far.

If, however, the buildings are not located in the state where the series LLC was established, or in another state that recognizes the series laws of the state of formation, in any lawsuit against that building, will the individuality of each series be subject to the LLC act of the state where the building is located or the laws of the state where the series was created? If, the state where the building is located does not have a series provision in its LLC act, who knows what the outcome might be.

Remember that I said that a series is not a “separate legal entity”. Now, let’s assume that one of your buildings has serious financial problems and you want to reorganize that property under the Federal Bankruptcy Act. Well, you can’t. To obtain protection under the Federal Bankruptcy Act, the party filing for protection must be a separate legal entity. Your series LLC does not qualify to be a debtor. The only way that your LLC can obtain protection from creditors is to place the entire LLC into bankruptcy, thus exposing the assets of all series to the claim of creditors. It is not clear at all what will happen if a petition in bankruptcy is filed against the LLC by creditors.

Is there an answer? I recommend to my clients that they first establish a “holding company”. The holding company is the entity where the members of the LLC have their business deal. The holding company becomes the sole member of each property LLC. Each separate property is then placed into a separate property LLC owned by the holding company.  Under Federal Tax rules, a single member LLC is considered a “disregarded entity”, therefore the company’s accountants need only prepare one tax filing for the holding company including the income and expense of each of the single-member LLC’s holding the properties. So, you say, this will cost me the LLC Tax for each of the property holding LLC’s and the registered agent fee and I lose all of my series LLC “savings”. Yes, you do, but you get true asset protection. Each property holding LLC will be recognized under state law as “separate” without any risk of a state court not recognizing the series laws of another state and you have the full protection of the Federal Bankruptcy Act without risking all of your assets.

I can be reached at steven@stevengoldberg.net

Why does a corporation need bylaws?

The short answer is that the bylaws of a corporation define the internal workings of the corporation. How many directors will the corporation have? What are the titles of the officers and how many offices will be held by the same person? When will stockholder meetings occur and how will the meetings be called. How will notices be communicated to stockholders? How will indemnification of officers and employees be governed? Will officers, directors and employees be entitled to have their expenses of litigation be advanced by the corporation prior to the culmination of the litigation?

These and other important issues are addressed in the corporation’s bylaws.

Sections 108 and 109 of the DGCL mandate the adoption of bylaws.

Without the adoption of bylaws, a corporation is not properly organized. Simply holding a certificate of incorporation is not sufficient to organize a corporation, it is simply the first step.

Delaware Corporate Agents, Inc., sells a form of bylaws applicable to most for profit  and a separate form for not for profit corporations. If your corporation has elected Subchapter S status under the US tax laws, you should consider Delaware Corporate Agents, Inc., form of bylaws with Subchapter S protections so as to avoid the unintended termination of Subchapter S status.

 

Why should I incorporate my business or form my LLC in Delaware?

This is a straightforward question with a less than straightforward answer.

First let us tell you what Delaware is not, Delaware is not a tax haven. A corporation or LLC formed in Delaware will pay the same federal taxes as a corporation or LLC formed in any other state. Delaware will not, however, impose an income tax on a company formed or incorporated in Delaware that does not do business in Delaware. Having a registered agent or a mailing address in Delaware is not “doing business” for tax purposes. That being said, a “Delaware Investment Holding Company” which holds only intangible property which it licenses to other companies, is not subject to Delaware income taxes on its income. (The DIHC holds patents which it licenses to third parties or affiliates, the licensing income is not subject to Delaware tax.)

Then why should you form or incorporate your company in Delaware? Here are a few short answers.

    • Delaware permits a single person to form or incorporate a company.
    • A Delaware LLC need only have a single member and Delaware affords that single member the same limitation of liability protection as it affords a LLC with multiple members.
    • A company can be formed quickly in Delaware, in as little as one hour.
    • Delaware is business friendly, usually ranked first in the nation for business-friendly states.
    • Delaware’s business laws give deference to the decisions of management.
    • Delaware’s Court of Chancery is generally considered the finest, fairest and the quickest business court in the nation. The Court of Chancery hears business disputes almost exclusively. It does not hear criminal cases or civil cases seeking only monetary damages.
    • The judges of the Court of Chancery (the Chancellor is the Chief Judge and the associate judges are referred to a Vice Chancellors) serve a 12-year term and are nominated by the Judicial Nominating Commission, a non-partisan commission which includes both lawyers and non-lawyers. Delaware does not elect judges so that non-lawyer appearing before the Court of Chancery is beholding to a judge for a campaign contribution.
    • Delaware has 200 years of judicial precedent for its corporation laws and was one of the first states to adopt a limited liability company act. This history permits Delaware attorneys to advise their clients with certainty which does not exist in other states.
    • Delaware considers flexibility in its corporate and LLC laws to be important. This flexibility permits companies to construct transactions without the concern that it has to meet rigid corporate or LLC structures imposed by statute.
    • Taken as a whole, investors, bankers and ordinary business people prefer dealing with a Delaware corporation of LLC. These people know and are generally familiar with Delaware Law and know that if they must enforce their agreements in a Delaware court that they will receive a fair and impartial hearing with no home court advantage for any party.
    • Privacy. There is no annual filing for a LLC which requires public disclosure of the names of members or managers. Corporations must annually disclose the name and business address of an officer and the names and business addresses of directors, there is no requirement that the names of stockholders be publicly disclosed. Officers and directors need not be stockholders.

Do Not Form A Series LLC

Let’s start at the beginning, what is a “series LLC”? A series LLC is an LLC formed under a statute similar to Section 18-215 of the Delaware LLC Act. Section 18-215(a) provides:

(a) A limited liability company agreement may establish or provide for the establishment of 1 or more designated series of members, managers, limited liability company interests or assets. Any such series may have separate rights, powers or duties with respect to specified property or obligations of the limited liability company or profits and losses associated with specified property or obligations, and any such series may have a separate business purpose or investment objective.

Subsection (b) provides the manner in which the series is established and that once established, and provided that the required records are maintained, the debts and other obligations of a series may not be enforced against the assets of any other series.

(b) Notwithstanding anything to the contrary set forth in this chapter or under other applicable law, in the event that a limited liability company agreement establishes or provides for the establishment of 1 or more series, and if the records maintained for any such series account for the assets associated with such series separately from the other assets of the limited liability company, or any other series thereof, and if the limited liability company agreement so provides, and if notice of the limitation on liabilities of a series as referenced in this subsection is set forth in the certificate of formation of the limited liability company, then the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing 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, unless otherwise provided in the limited liability company agreement, none of the debts, liabilities, obligations, and expenses incurred, contracted for or otherwise existing with respect to the limited liability company generally or any other series thereof shall be enforceable against the assets of such series.

That seems clear enough, so what is the problem? Section 18-215 was established at the behest of the mutual fund industry. Most mutual funds were then established as Massachusetts Business Trusts, requiring the services of a Massachusetts bank as a trustee. Each fund established by a mutual fund company must have its own trust. The idea with a series LLC was that the fund could establish one LLC with multiple series avoided the problems and costs forced upon them by Massachusetts Laws. The industry did not want each separate series to be a “separate legal entity” because, under SEC registration rules, they could file a single registration statement covering all of their funds, rather than separate registration statement for each separate legal entity. The use of series LLC’s has widened and are now used in many different “fund” transaction where the fund holds passive, intangible, assets, such as automobile titling trusts, and other investment funds.

In recent years a cottage industry has established itself selling series LLC’s as the panacea for all troubles. The promoters urge their customers to authorize them to establish a series LLC, then they sell the customer their “form” series LLC agreement and then direct the customer to place his or her assets, each, in separate series of the LLC. Some of the promoters characterize the transaction as an “asset protection”, “liability shield” or a “tax shield”. These promotions have found a home in the real estate industry.

So, what is the problem? There are several problems. Not all states recognize series LLC’s. All states, territories and the District of Columbia have LLC acts and recognize the LLC’s established under other state laws, this does not apply to series LLC’s.

Let’s say that you own or intend to acquire 2 or more buildings which you will rent.  Your plan is the establish a series LLC, you then plan to place each building in a separate series. Under Delaware Law and the series acts of other states having series acts, the assets and liabilities of each series will be separate and provided that adequate records are maintained, the debts of one series cannot be collected from another series. By doing this you have saved your state’s LLC Tax for each series beyond the initial cost of the LLC, additionally, you have saved the annual registered agent fee. Sounds good so far.

If, however, the buildings are not located in the state where the series LLC was established, in any lawsuit against that building will be subject to the LLC act of the state where the building is located, and, if, that state does not have a series provision in its LLC act, who knows what the outcome might be.

Remember that I said that a series is not a “separate legal entity”. Now, let’s assume that one of your buildings has serious financial problems and you want to reorganize that property under the Federal Bankruptcy Act. Well, you can’t. To obtain protection under the Federal Bankruptcy Act, the party filing for protection must be a separate legal entity. Your series LLC does not qualify to be a debtor. The only way that your LLC can obtain protection from creditors is to place the entire LLC into bankruptcy, thus exposing the assets of all series to the claim of creditors. It is not clear at all what will happen if a petition in bankruptcy is filed against the LLC by creditors.

Is there an answer? I recommend to my clients that they first establish a “holding company”. The holding company is the entity where the members of the LLC have their business deal. The holding company becomes the sole member of each property LLC. Each separate property is then placed into a separate property LLC owned by the holding company.  Under Federal Tax rules, a single member LLC is considered a “disregarded entity”, therefore the company’s accountants need only prepare one tax filing for the holding company including each of the single-member LLC’s holding the properties. So, you say, this will cost me the LLC Tax for each of the property holding LLC’s and the registered agent fee and I lose all of my series LLC “savings”. Yes, you do, but you get true asset protection. Each property holding LLC will be recognized under state law as “separate” without any risk of a state court not recognizing the series laws of another state and you have the full protection of the Federal Bankruptcy Act without risking all of your assets.

I can be reached a steven@stevengoldberg.net

Don’t Write a Delaware LLC Agreement Unless You Know All Phases of Delaware Law.

What experienced attorney would write an agreement to be controlled by the laws of a state where she or he is not admitted to practice or give a legal opinion on the laws of a state where she or he is not admitted? You, as a responsible and experienced attorney are undoubtedly thinking to yourself that you would never do that, you would seek out local counsel. But, when a client tells you that it wants to form a Delaware LLC and wants you to write the Limited Liability Company Agreement, or Operating Agreement (LLC Agreement), many of you would not think twice about accepting the engagement.

Our practice focuses on delivering legal opinions on single member Delaware LLC Agreement to meet the lender requirements for multi-family Fannie Mae, Freddie Mac and CMBS loans. We also organize Delaware LLC’s and draft for clients both single member and multi member LLC Agreements. In many instances we are asked to review LLC Agreement drafted by the client’s or borrower’s non-Delaware counsel. (Though lenders prefer the LLC to be single member, in some instances where the LLC is existing and there are real estate transfer taxes involve in the drop down of the property, the lender will accept the multi-member LLC as the borrower.) These agreement, particularly the multi-member agreements, run the gamut from embarrassingly terrible to well-organized and well drafted, however the former are the largest group of agreement we see. Where do these poorly drafted agreements come from? The internet is likely the largest source of these documents, the other significant source is “other people’s agreements”. These are the LLC Agreements which an attorney received from another attorney in another deal, which the attorney saved to her or his computer and then reused in the deal submitted to us. Each of these bad agreements have one thing in common, the attorney submitting the agreement did not have a good, working knowledge of the Delaware Limited Liability Company Act and likely did not actually understand the agreement itself. Sometimes we wonder whether the attorney actually read the agreement prior to submitting it to us.

Delaware did not invent the LLC, but its Limited Liability Company Act has become the preeminent LLC act in the US. In sophisticated deals and in multi-state deal, attorneys default to selecting Delaware as the forum, notwithstanding the fact that their knowledge of the Delaware LLC Act may be limited. The Delaware Act, in Section 18-1101(b) provides that it is the policy of the Delaware Act “to give maximum effect to the principle of freedom of contract and to the enforcement of  limited liability company agreements…”. The Delaware Act contains some limited default provisions, all, with the exception of the implied contractual covenant of good faith and fair dealing, may be expanded, revised or eliminated in a LLC Agreement. The LLC Agreement is itself a contract under Delaware law. A Delaware corporation is governed by the Delaware General Corporation Law, Title 8, Delaware Code, Section 101, et seq. (the DGCL) The DGCL provides a statutory framework for the organization and operation of a Delaware corporation. While the DGCL provides a statutory framework, the LLC Act is enabling in nature and permits the parties to substitute contractual provisions for statutory provisions in their LLC Agreement. That is all well and good if the drafter is schooled and has kept current on Delaware LLC law, Delaware limited partnership law, Delaware corporate law and Delaware contract law. The Delaware LLC Act and its amendments can be found in the many available statutory treatises  and through such services as Westlaw® and Lexis®. The treatises and services will show  the current law and cases decided under the LLC Act. What the treatises and services will not show are Delaware court decisions involving Delaware contract law generally. To draft a Delaware LLC Agreement the drafter must not only remain current on Delaware LLC law, but also must have a good working and current knowledge of Delaware limited partnership  law, Delaware contract law and Delaware corporate law. Delaware courts, when faced with a novel issue, will often look to the DGCL and the cases determined there under, to reach its conclusion. The attorney must also understand the Delaware Revised Uniform Limited Partnership Act (LP Act) and the cases decided under that Act as the provision of the LLC and LP Acts are reciprocal. Provisions found in the LLC Act are found in the LP Act under the same sub-section numbers in the other Act. A LP decision will have equal weight in determining a LLC issue.

Professor Daniel Kleinberger,  who is the principle drafter of the Uniform Limited Liability Company Act, is a frequent commentator and sometime critic of the Delaware Act, wrote in the July, 2017, edition of the American Bar Association’s publication, Business Law Today, an article titled “Don’t Dabble in Delaware.” He posits that keeping up with Delaware case-law is “almost a full-time job”. He points to another article which stated that “… when an attorney is asked for a formal legal opinion pertaining to a Delaware limited liability company ‘[i]t is …he responsibility of the opinion-giver to navigate Delaware common law [especially contract law] prior to rendering a Delaware LLC opinion, and to keep abreast of its shifting landscape’.”

Professor Kleinberger points out in his article may of the strengths and weaknesses of the Delaware LLC Act. In examining why practitioners gravitate to Delaware he states “The answer lies in the reputation of the Delaware Judiciary. The Delaware Court of Chancery has jurisdiction over claims relating to the internal affairs of a Delaware LLC, and that court is the preeminent business court in the United States. It is comfortable with business disputes and is capable of handling esoteric and even arcane issues of law. The Delaware Supreme Court is likewise capable; many of its judges have served previously in the Court of Chancery.”

He continues by stating ‘[b]oth the Court of Chancery and the Delaware Supreme Court accept and adhere to the policy of the Delaware Act ‘to give maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements’ under Section 18-1101(b). Indeed, Delaware courts are conservative about contracts in general. They lean away from modernist notions that all agreement are necessarily indeterminate and toward the old-fashioned approach that a contract is a contract and that a court is not a proper forum for salving the pain of ‘buyer’s remorse’.”

One aspect of Delaware’s courts which Professor Kleinberger did not address is that Delaware judges are appointed from a slate submitted to the Governor by a non-partisan Judicial Nominating Commission, and are not elected. Delaware’s court of Chancery’s jurisdiction is limited to matters of Equity which generally break down to business disputes, real property disputes and matters involving trusts. The Chancellor and Vice Chancellors do not hear any criminal cases nor do they hear accident cases as is the case with elected judges in most states which do not have separate business courts with full-time, dedicated business judges.

Before a non-Delaware attorney accepts an engagement to draft a Delaware LLC Agreement the attorney needs to understand the issues involved in drafting that contract. Certainly there are small deals where the client will not be willing to spend the money to engage Delaware Counsel to assist her or his local attorney. When faced with that issue the attorney should consider with the client whether Delaware is the proper venue for the small deal or whether the LLC should be formed in the jurisdiction where the attorney practices. When faced with a larger deal the non-Delaware attorney should seek assistance from a Delaware LLC attorney to assist with the Delaware contract drafting. Under no circumstances should a non-Delaware attorney ever consider issuing an opinion under Delaware law, it is an invitation to malpractice.

Delaware Single Member LLC Opinions (What are they and why do I need one?)

This post was prepared by Steven D. Goldberg, a Delaware attorney who regularly practices in the area of limited liability companies and limited liability company opinions (sgoldberg@stevendgoldberg.com)

A large portion of our practice involves the delivery of Delaware single member LLC opinions and authority to file bankruptcy opinions in connection with CMBS, Freddie Mac and Fannie Mae loans. The single member opinion has a customary form among experienced Delaware attorneys. The opinion generally deals with issues relating to the enforcability of the loan documents against the borrower or and guarantor which is a Delaware entity. The CMBS opinions are more limited than the Freddie Mac and Fannie Mae opinions. Both Freddie mac and Fannie Mae have required forms of opinion which must be delivered in connection with the loan. Most of the opinions and form language cannot be modified by the opinion giver. The opinion giver must get comfortable with the required language, some of which is not commonly used in connection with opinions. Fannie and Freddie will ask that they receive an opinion that the loan documents are “duly executed”. The opinion giver must parce the words. Contrary to the usual conclusion, the opinion does not deal with the physical act of signing and does not require an “authenticity” opinion as to the signature. The opinion only provides that the signer had power and authority to execute the document. Notwithstanding that conclusion, we will seek to take an assumption that all “signatures on the documents are genuine” so as to avoid any later revisionist interpretation in the event of a forgery.

The authority to file bankruptcy opinion is a long, reasoned, opinion dealing with what law will be applied by a bankruptcy court to determine what person or entity has the power to file a petition in bankruptcy on behalf of the borrower. The actual opinion paragraph reads:

  • Based upon the foregoing, and upon our examination of such questions of law and statutes as we have considered necessary or appropriate, and subject to the assumptions, qualifications, limitations and exceptions set forth herein, we are of the opinion that a federal bankruptcy court would hold that Delaware law, and not federal law, governs the determination of what persons or entities have authority to file a voluntary bankruptcy petition on behalf of the Borrower.  Our opinion is based on the assumption that in any case in which this question is considered, the question will be competently briefed and argued.  Our opinion is reasoned and also presumes that any decision rendered will be based on existing legal precedents, including those discussed below.

I say that the opinion is “reasoned” because there is no existing binding law on the subject. The opinion extends to 12 pages.

It is not unusual in our practice to receive a call or email from Borrower’s counsel the week of or several days before closing. The Delaware opinion was on the closing check list from the beginning, but Borrower’s counsel or the Borrower itself hoped that Lender’s counsel would waive the requirement or let Borrower’s counsel to deliver the Delaware opinion. Often the Borrower objects to its counsel spending any more money. For what ever reason it is not unusual to receive the request to deliver the opinion at the last minute.

Traditionally purchasers, lenders and other parties to transaction have requested a legal opinion from the seller/borrower’s counsel that such party exists in good standing under the laws of the jurisdiction in which it is formed and that it has the power and authority to enter into the transaction and perform its obligations under the transaction documents. Other opinions specific to the transaction are often requested. Historically, Delaware attorneys have delivered such opinions respecting Delaware corporations. As the Delaware General Corporation law (DGCL) has become the default “national corporate law” in the US, attorneys not admitted in Delaware have become comfortable with delivering these opinions in certain circumstances and third parties have  also become comfortable with accepting these opinions when delivered by non-Delaware admitted attorneys in certain circumstances. This change has been accelerated by a general belief that the  DGCL as it applies to these opinions is almost completely statutory and that, to the extent that the opinion implicates Delaware Jurisprudence, that information is readily available on electronic services. Delaware corporate opinions given by non-Delaware admitted attorneys are generally limited to Delaware’s DGCL and generally do not implicate contract or other state specific bodies of law.

The trend toward the use of a Delaware limited liability company (DLLC) and particularly the use of a Delaware single member limited liability company (DSMLLC) as the borrower or other vehicle in transactions has changed the opinion landscape. At the present time most rating agencies either require or prefer that the entity serving as the borrower be a DSMLLC. Likewise most lender will require that the borrower be a DSMLLC. The preference or requirement is simple to understand. Delaware has been the leader in the field of limited liability company law; lenders and rating agencies understand their rights under Delaware law and do not necessarily understand or even like their rights under the laws of another jurisdiction. Using a DSMLLC is simpler for the lender and its counsel as it does not have to spend time parcing through another state’s act with which they are not familiar.

As noted earlier in this note, non-Delaware attorneys and their firm’s opinion committees have developed a comfort level in delivering limited Delaware corporate opinions. Opinion committees almost universally deny authority to their firms attorneys to deliver Delaware LLC opinions. An LLC agreement under most state laws is governed by the state’s contract laws. The state LLC act will create a framework of default terms, but the LLC agreement or operating agreement is a specie of contract which is interpreted under state contract law jurisprudence, not just statutory terms. Experienced and responsible attorneys do not deliver legal opinions on contracts subject to the laws of a state in which they are not admitted. That is an invitation to a malpractice case. In some corporate opinions, opinion recipients will permit the opinion giver to assume the laws of the forum state are the same as the laws in the state in which the opinion giver is admitted. However, as the LLC’s agreement or operating agreement are so inextricably tied to Delaware law, few opinion recipients will permit the “same as” assumption and will require that the opinion be delivered by an attorney admitted in Delaware.

The elements of the Delaware Single Member LLC Opinion:

First, the opinion giver will describe the engagement:

We have acted as special Delaware counsel for _______LLC a Delaware limited liability company (the “Company”), solely for the purpose of delivering this opinion in connection with the loan (the “Loan”) made by you to the Company on or about the date hereof. The Loan is secured by the Company’s real property located at ________ (the “Property”).

The term “special Delaware counsel” is understood by the opinion recipient to mean that the engagement is limited as stated in the paragraph. Some judges, however, in jurisdictions where legal opinions are not common have interpreted “special” to be the same as “extremely knowledgeable, of special”

Second, the opinion giver will list the documents which it has reviewed in order to deliver the opinion. Those documents at a minimum include a certified copy of the certificate of formation as filed with the Delaware Secretary of State, Division of Corporations, the limited liability company or operating agreement as in effect as the date of the transaction and a certificate of good standing as issued by the Delaware Secretary of State, Division of Corporations. If the opinion giver is to opine on any documents, such as loan documents, the opinion giver will list the documents reviewed.

Following the list of documents reviewed, the opinion giver will explain that they have not reviewed any other documents or any documents referred to or incorporated into the documents reviewed. The opinion giver will also state whether or not they have conducted any independent factual investigation. Typically the opinion giver will disclaim any responsibility to conduct any such investigation and state that they have relied solely upon such documents in giving the opinion. Delaware counsel is often engaged by the Borrower’s law firm and has not contact whatsoever with the Borrower itself or its principals.

Fourth, the opinion will set out a group of assumption made by the opinion giver in delivering the opinion:

For purposes of this opinion, we have assumed (i) except to the extent provided in paragraph 1 below[ the good standing opinion], that each party to the documents examined by us is duly organized or formed, as the case may be, and validly exists in good standing under the laws of the jurisdiction governing its organization or formation and that each natural person who is a signatory to the documents examined by us have the legal capacity to sign such documents, (ii) except to the extent provided in paragraph 3 below [the opinion that a Delaware Court would conclude that the provisions of the LLC agreement requiring the consent of the Special or Springing Member to the filing of a petition in bankruptcy is enforceable], that each of the parties to the documents examined by us has the power and authority to execute and deliver, and to perform its obligations under, such documents, and (iii) that all of the documents examined by us have been duly authorized, executed and delivered by all parties thereto and that all signatures on such documents are genuine.

Fifth, the opinion giver will define the laws under which the opinion is delivered and what is excluded:

This opinion is limited to the laws of the State of Delaware (excluding the securities and blue sky laws of the State of Delaware), and we have not considered and express no opinion on the laws of any other jurisdiction, including federal laws (including federal bankruptcy law) and rules and regulations relating thereto.  Our opinions are rendered only with respect to Delaware laws and rules, regulations and orders there under that are currently in effect.  In rendering the opinions set forth herein, we express no opinion concerning (i) except as provided in Opinion 4 below [the UCC opinion], the creation, attachment, perfection or priority of any security interest, lien or other encumbrance, or (ii) the nature or validity of title to any property.

The first opinion is generally the “good standing ” opinion. Contrary to general belief, in Delaware, the concept of good standing is not derived from a legal analysis similar to the analysis of fact and law necessary to reach the other opinions delivered. The only way in which a person may determine whether the LLC or any other Delaware registered entity is in good standing is to receive a certificate from the Secretary of State. Good standing means with respect to a LLC that the certificate of formation has been filed and accepted by the Secretary, that no certificate of cancellation has been filed, that no certificate of merger has been filed whereby the LLC is merged out of existence and the LLC tax has been paid in full. With respect to a corporation good standing also includes the filling and paying the fee to file the annual report required of corporations but not LLC’s.

The opinion is in two parts, first: The Company is duly formed as a limited liability company. To give this opinion the opinion giver must review all documents which have been filed with the Division of Corporations. The opinion giver must confirm that the LLC has adopted a LLC agreement. Under Delaware law the LLC agreement may be written, oral or implied. Oral or implied agreements present particular challenges to opinion givers. We will not give an opinion on an oral or implied agreement.

The second part of the first opinion is :

  • Based solely on the Good Standing, the Company exists in good standing as a limited liability company under the laws of the State of Delaware.

Some opinion givers use the phrase “validly exists”, however the Good Standing certificate only states that the LLC “is duly formed under the laws of the State of Delaware and is in good standing and has a legal existence [emphasis added] so far as the records of this office show, as of [the date of the certificate]. “Validly exists” with respect to a Delaware LLC is a meaningless term.

The second opinion is short, however it requires the greatest legal analysis of the LLC agreement. The opinion giver must analyze the entire LLC agreement under both Delaware LLC law and Delaware contract law, to determine that the agreement is valid, binding and enforceable against the member and any special or springing member. Opinion givers do not want to see LLC agreements that contain economic terms such a buy/sell, put/call, employment provisions, etc., as such terms, depending on circumstances and terms may not be “entirely” valid or enforceable and may be subject to various exceptions which the opinion recipient will not want to see in an otherwise “clean” opinion:

  • The LLC Agreement constitutes a legal, valid and binding agreement of the Member, and is enforceable against the Member and the Springing Member, in accordance with its terms.

In most loans today in excess of five million dollars the lender will require that the LLC agreement include a “special member” or “springing member” or “an independent manager or director”. The function of this person is first to avoid the problem under the Delaware Act that he LLC automatically dissolves when it no longer has a member and second this person acts as a second set of eyes with special, enumerated duties in the case of the filing of bankruptcy. There are carve outs from default fiduciary duties. The agreement will require that prior the filing of a petition in bankruptcy the company must receive the unanimous consent of all members, including the special or springing member or the independent manager or director. The opinion recipient will want an opinion that the section of the agreement requiring the consent of the springing member, special member, independent manager or independent director will be enforceable.

  • If properly presented to a Delaware court, a Delaware court applying Delaware law would conclude that (i) for so long as a mortgage lien exists on the Property, in order for a Person to file a voluntary bankruptcy petition on behalf of the Company, the prior written consent of the Springing Member or Special Member, as provided for in Section  __ of the LLC Agreement, is required, and (ii) such provision, contained in Section __ of the LLC Agreement, that requires, for so long as a mortgage lien exists on the Property, the prior written consent of the Springing Member or Special Member in order for a Person to file a voluntary bankruptcy petition on behalf of the Company, constitutes a legal, valid and binding agreement of the Member, and is enforceable against the Member, in accordance with its terms. 

The fourth opinion deals with the issue of charging orders. Charging orders are the traditional manner in which the creditor of a partner in a partnership could charge the interest of the partner in the partnership and receive any distribution to which the debtor would otherwise be entitled under the partnership agreement. Traditionally the judgment creditor could “foreclose” on the charging order so as to sell the interest at sale. This concept has been brought over into section 18-703 of the Delaware Act. The lender is concerned that the creditor may have some right to receive specified property owned by the LLC in discharge of the member’s debt or have the right to foreclose on the LLC interest and to have the LLC interest sold under a judicial or quasi-judicial sale. To resolve those concerns Delaware has created 18-703 (d) and (e):

(d) The entry of a charging order is the exclusive remedy by which a judgment creditor of a member or a member’s assignee may satisfy a judgment out of the judgment debtor’s limited liability company interest and attachment, garnishment, foreclosure or other legal or equitable remedies are not available to the judgment creditor, whether the limited liability company has 1 member or more than 1 member.

(e) No creditor of a member or of a member’s assignee shall have any right to obtain possession of, or otherwise exercise legal or equitable remedies with respect to, the property of the limited liability company.

The fourth opinion reads as follows:

  • While under the LLC Act, on application to a court of competent jurisdiction, a judgment creditor of the Member may be able to charge a Member’s share of any profits and losses of the Company and the Member’s right to receive distributions of the Company’s assets (a “Member’s Interest”), to the extent so charged, the judgment creditor has only the right to receive any distribution or distributions to which a Member would otherwise have been entitled in respect of such Member’s Interest.  Under the LLC Act, no creditor of a Member shall have any right to obtain possession of, or otherwise exercise legal or equitable remedies with respect to, the property of the Company.  Thus, under the LLC Act, a judgment creditor of a Member may not satisfy its claims against a Member by asserting a claim against the assets of the Company.

The fifth opinion is generally included, but not in all opinions. The fifth opinion deals with the enforceable of a UCC security interest granted to the secured party. The opinion does not opine on “priority”. If the secured party seeks a priority opinion the will not receive that opinion from a knowledgeable attorney and will be told to purchase a UCC policy from a title insurance company which commonly will insure priority. Some opinion recipients will accept the UCC opinion from the Borrower’s counsel.

  • A valid and enforceable security interest in favor of Lender has been granted by Borrower in the personal property collateral referred to in the Security Instrument (the “Collateral”) to the extent a security interest can be created therein under the Uniform Commercial Code as enacted in the State of Delaware (the “UCC”).  The Delaware Financing Statement is in proper form so as to comply with the filing requirements of the U.C.C.  Upon filing of the Delaware Financing Statement with the Secretary of State, Lender’s security interest in the Collateral will be perfected to the extent a security interest in such Collateral can be perfected by filing in the State of Delaware of UCC-1 financing statements under the UCC.

The sixth opinion implicates  an analysis of Section 18-201(b):

(b) A limited liability company is formed at the time of the filing of the initial certificate of formation in the office of the Secretary of State or at any later date or time specified in the certificate of formation if, in either case, there has been substantial compliance with the requirements of this section. A limited liability company formed under this chapter shall be a separate legal entity, the existence of which as a separate legal entity shall continue until cancellation of the limited liability company’s certificate of formation.

The opinion provides:

  • Under the LLC Act, (i) the Company is a separate legal entity, and (ii) the existence of the Company as a separate legal entity shall continue until the cancellation of the LLC Certificate.

The final opinion generally delivered provides that under the Act and the Agreement, the bankruptcy of the member will not cause the company to dissolve and wind up its affairs.    Section  18-304 deals with the bankruptcy of a member. The section provides that “Unless otherwise provided in a limited liability agreement…” the bankruptcy of a member causes the member to ceases to be a member of the company and then has the status of an “assignee”. The typical agreement for a loan transaction contains savings language which provides generally:

  • Notwithstanding any other provision of this Agreement, no Bankruptcy Action with respect to the Member or a Special Member shall cause the Member or Special Member, respectively, to cease to be a member of the Company and upon the occurrence of such an event, the Company shall continue without dissolution.
  • Notwithstanding any other provision of this Agreement, each of the Member and each Special Member waives any right it might have to agree in writing to dissolve the Company upon a Bankruptcy Action of the Member or a Special Member or the occurrence of an event that causes the Member or a Special Member to cease to be a member of the Company.

The opinion reads:

  • Under the LLC Act and the LLC Agreement, the Bankruptcy or dissolution of the Member will not, by itself, cause the Company to be dissolved or its affairs to be wound up.

While these are the most common opinions, the following are also often given particularly in Freddie Mac and Fannie Mae guaranteed transactions where they are required conditions of their loan commitments:

  • Borrower has the authority under its Operating Agreement to execute, deliver and perform its obligations under the Loan Documents.
  • The execution and delivery of the Loan Documents by or on behalf of Borrower, and the consummation by Borrower of the transactions contemplated thereby, and the performance by Borrower of its obligations there under, have been duly and validly authorized by or on behalf of Borrower.
  • The execution and delivery of, and the performance of the obligations under, the Loan Documents, will not violate the Organizational Documents of Borrower.
  • Based solely upon (a) our knowledge and (b) the Borrower’s Certificate, the execution and delivery of the Assumption Documents will not (i) cause Borrower to be in violation of, or constitute a material default under the provisions of any agreement to which Borrower is a party or by which Borrower is bound, (ii) conflict with, or result in the breach of, any court judgment, decree or order of any governmental body to which Borrower is subject, and (iii) result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of the property or assets of Borrower, except as specifically contemplated by the Loan Documents.
  • Based solely upon (a) our knowledge and (b) the Borrower’s Certificate, there is no litigation or other claim pending before any court or administrative or other governmental body or threatened against Borrower, the Mortgaged Property, or any other properties of Borrower, Guarantor or Key Principal, except as identified on Exhibit __. [In all transactions where we deliver an opinion we require that each party upon which we opine delivers to us a General Certificate on our firm’s form which makes factual representations about the party upon which we may rely in delivering the opinion.]
  • Based solely on (a) our knowledge and (b) the Borrower’s Certificate, no authorization, consent, approval, or other action by, or filing with, the State of Delaware or federal court or governmental authority is required in connection with the execution and delivery by Borrower of the Assumption Documents.

 

2014 Delaware LLC Act Amendments

The 2014 Amendments to the Delaware Limited Liability Company Act were adopted by the Delaware General Assembly and became effective August 1, 2014. 2014 LLC Act Amendments The 2014 Delaware LLC Act Amendments are not extensive.

Section 1, amends 18-104(g). Section 18-104(g) requires that each company provide to its registered agent the name, address and business telephone number of a natural person who is either a member, manager, officer, employee or designated agent of the company who is authorized to receive communications on behalf of the registered agent. Since the adoption of 18-104(g) pressure has mounted by governmental agencies, both in the US and abroad for the disclosure of the beneficial owners of LLC’s. The amendment to 18-104(g) now provides that when a request is received by the company from the communications contact, that it shall provide the communications contact with the name, business address and business telephone number of a natural person who has access to the record required to be maintained by 18-305(h), which includes a list of members. While this does not provide the names of the beneficial owners, it does provide law enforcement a natural person to deal with on behalf of the company and a person who has access to the member list. The amendment further defines what is an “electronic transmission” for the purpose of the subsection to avoid arguments that the form of request does not meet the requirements of the statute.

Section 2, amends 18-302(d). This amendment specifically provides that a consent may be given by a member which will have a future effective date.

Section 3, amends 18-305. The amendment to 18-305(a) clarifies that a member, in making a demand for books and records, may do so in person, by an attorney or other agent. Subsection(e) is amended to delete a reference which implied  that only an attorney may make a demand on behalf of the member.  The amendment adds additional language to subsection (e) that a demand made by an attorney or agent must be accompanied by a power of attorney or “such other writing which authorizes the attorney or other agent to so act on behalf of the member.” The amendment adds a new subsection (h) which provides that “A limited liability company shall maintain a current record that identifies the name and last known business, residence or mailing address of each member and manager”. It was subsumed in other sections of the Act that the company must maintain these records, this amendment clarifies that requirement.

Section 4, amends 18-404(d). Like with 18-302(d), 18-404(d) now provides that a manager may give a consent with a future effective date.

Section 5, amends 18-806. This section deals with the revocation of a dissolution. As previously written the consent of all remaining members was required to revoke a dissolution, though the determination to dissolve did not require the unanimous consent of all members. As amended, the revocation of dissolution, prior to the filing of a certificate of cancellation, requires the affirmative vote, or written consent of the members in accordance with the requirements in the company agreement for electing to dissolve.

Delaware LLC and LP Opinions

A large part of our legal practice is the delivery of legal opinions in connection with loans being made to Delaware LLC’s and LP’s. Generally the underlying transaction involves the financing or re-financing of real estate owned by the LLC or LP, however some opinions are delivered in connection with business transactions not involving real estate. Lenders insist that the borrowing entity be a single member LLC or a LP with only one limited partner. The LLC or LP agreement for the borrower will contain “SPE” or “Special Purpose Entity” language which limits the powers of the borrower to the operation and protection of the property and provides specific language in the case of a bankruptcy filing. Each lender has its own SPE language which they require to be included in the Operating Agreement or LP Agreement of the borrower. The operating agreement of the Manager of the borrower or its General Partner will contain SPE language and an obligation on the part of the the Manager or General Partner to ensure the observation of the borrower to these limitations. Most lender language is similar, but not exactly the same. Most transactions are divided into three entity levels. The first level is the borrower, the second level is the member or limited partner of the borrower and the third level is the manager of the LLC or the general partner of the LP. The single member and the limited partner are generally LLC’s. The single member’s operating agreement or the limited partner’s operating agreement are generally the entity agreement which contains the investors and the agreement contains the business deal among the investors and the promoter. Most rating agencies and lenders prefer for the borrower and any manager or general partner to be Delaware entities. The preference is pragmatic. Both they and their counsel understand the rights of the lender under both the Delaware LLC and Limited Partnership acts. They do not have to learn or understand the laws of an additional state. Additionally, as both Delaware acts specifically provide that a third party which is not a member or partner may be given rights under the agreement, the agreement typically provide rights to the lender such that the agreement may not be amended without the consent of the lender which the loan is outstanding.

There are three types of opinions which we deliver, based upon the type of financing. Fannie Mae and Freddie Mac have their own forms of opinion which they insist to be used. While each permit some minor deviation from the form in the provisions and assumptions, other than the actual opinions, they permit few deviations in the actual opinion paragraphs.

The third type of opinion is given in connection with loans which will be sold into CMBS pools. While there is not a CMBS opinion form, per se, Delaware attorneys have by consensus adopted somewhat of a standard form of opinion for such loans.

While the three opinions differ in their format all three opinions will contain a recitation of the organizational documents which were reviewed as well as the loan documents which were reviewed and sets forth certain limitations and assumptions. The first opinion opines that the borrower is “duly formed” and that it validly exists in good standing under the laws of the State of Delaware. The second opinion general is that the LLC or LP agreement is a valid and binding obligation of the member or partners and that the agreement is enforceable against the member or the partners. The opinion also opines as to the power and authority of the borrower to operate and conduct its business; that the execution and delivery of the loan documents have been authorized by all necessary company action; that a valid and enforceable security interest has been created by the UCC-1 financing statement; that the company is a separate legal entity; that the bankruptcy or dissolution of the member or partner will not cause the borrower to dissolve; and that upon the occurrence of an event which causes the last remaining member or partner to cease to be a member or partner, that the springing member will automatically be admitted and that the company will not dissolve. An additional opinion that is included relates to charging orders. The opinion provides that the sole remedy of the creditor is the charging order and that the judgment creditor may not satisfy its claim against the assets of the Company.

In addition to the three opinions discussed above, with some larger loans the lender will seek an opinion that in the event that the company file a petition in bankruptcy, that the Federal Bankruptcy Court would recognize the terms of the operating agreement or LP agreement in determining who has authority to file bankruptcy on behalf of the company. In these loans the lender will require that the company has one or two “special members”, sometimes called “independent managers” or “independent directors” depending upon the structure of the company. In each case the operating agreement or the LP agreement will contain extensive language limiting the actions which the company may take. One of these limitation is who has the authority to file a petition and the process upon which the action may be approved. These companies are referred to as special purpose entities or SPE’s. Each lender has a variation of the language. The language dealing with bankruptcy generally looks like the following:

Special Member

As long as any Obligation is outstanding, the Member shall cause the Company at all times to have at least [**one/two**] Special Member[**s**] who will be appointed by the Member.  To the fullest extent permitted by law, including Section 18‑1101(c) of the Act, each Special Member shall consider only the interests of the Company, including its respective creditors, in acting or otherwise voting on a Bankruptcy Action.  No resignation or removal of a Special Member, and no appointment of a successor Special Member, shall be effective until such successor shall have executed a counterpart to this Agreement.  In the event of a vacancy in the position of Special Member, the Member shall, as soon as practicable, appoint a successor Special Member.  All right, power and authority of each Special Member shall be limited to the extent necessary to exercise those rights and perform those duties specifically set forth in this Agreement and no Special Member shall have any authority to bind the Company.  Except as provided in the second sentence of this Section __, in exercising their rights and performing their duties under this Agreement, any Special Member shall have a fiduciary duty of loyalty and care similar to that of a director of a business corporation organized under the General Corporation Law of the State of Delaware.  No Special Member shall at any time serve as trustee in bankruptcy for any Affiliate of the Company.  The Special Member is a “manager” within the meaning of the Act.

While I have not been involved in a loan where the SPE language prohibits the filing of bankruptcy, I understand that some lender have included such language. The general wisdom is that such language would be considered to be against public policy and unenforceable as the right to file bankruptcy is a constitutional right.

The question presented in the opinion is:

You have requested our opinion as to whether a federal bankruptcy court would hold that Delaware law, and not federal law, would govern the determination of what persons or entities have authority to file a voluntary bankruptcy petition on behalf of the Borrower.

The opinion itself is a 13-14 page reasoned opinion, as no appellate court has ruled on the question. The opinion given is:

Based upon the foregoing, and upon our examination of such questions of law and statutes as we have considered necessary or appropriate, and subject to the assumptions, qualifications, limitations and exceptions set forth herein, we are of the opinion that a federal bankruptcy court would hold that Delaware law, and not federal law, governs the determination of what persons or entities have authority to file a voluntary bankruptcy petition on behalf of the Borrower.  Our opinion is based on the assumption that in any case in which this question is considered, the question will be competently briefed and argued.  Our opinion is reasoned and also presumes that any decision rendered will be based on existing legal precedents, including those discussed below.

In connection with the delivery of any of the opinions, a careful review of the operating agreement of LP agreement is necessary so as to determine whether the agreement supports the opinions which are to be delivered. We require that the company delivers to us a general certificate setting out certain factual matters upon which we will rely, additionally the general certificate set out matters required under the USA Patriot Act.

We can be reached at sgoldberg@stevendgoldberg.com. our telephone number is 302.351.4490