US Court Opinion another step towards recognition of segregated business forms

Nigel Feetham is a senior partner at Hassans (a Gibraltar law firm) and Visiting Professor at Nottingham Law School, Nottingham Trent University. Nigel is also the author and co-author of a number of books, including “Protected Cell Companies: a Guide to their Implementation and Use” which was recently cited by the judge in Pac Re 5-AT v. AmTrust N.A., Inc., No. CV-14-131-BLG-CSO, 2015 U.S. Dist. LEXIS 65541 (D. MT, May 13, 2015). He has consulted widely for clients internationally on cell captives.

A fascinating judgment has just been handed down by the Court of Special Appeals of Maryland. The case is Kurz v. AMCP-1, LLC 2016 WL 547146 (unreported, 10 February 2016). It is not necessary to restate the facts in any detail. For present purposes my interest in the case is not its facts nor the decision but certain dicta in the judgment concerning “Series LLCs”.

A Series LLC is a segregated business form adopted in various States of the United States of America (with its origins in Delaware in 1996) akin to a Protected Cell Company (the latter also known in some jurisdictions as a Segregated Accounts Company (SAC) or Segregated Portfolio Company (SPC)). Readers will be aware that there is an open question regarding how courts would view the limitation of liability device in a foreign PCC/Series LLC where these do not exist under their local law.

In the case of the PCC, this is what spurred the writing of the book “Protected Cell Companies: a Guide to their Implementation and Use” (Spiramus Press, 2010, now 2nd Edition, Nigel Feetham and Grant Jones).

In the Preface to the 2nd edition we noted that the Series LLC shared essential features with the PCC and that: “In many ways, the subject discussed in this book is no longer just about ’the PCC’. It is about ‘segregated business structures’ and in future years the PCC will likely become part of this wider subjectmatter as what was once seen as a relatively new business form receives international acceptance from professionals, lawmakers, and of course, the judiciary.” It led us to add a new chapter to the book on the Series LLC.

Creation of a Series LCC (or not), but so what?

In Kurz v. AMCP-1, LLC three parties came together to acquire and develop certain properties.  Four LLC entities were created which in turn became members of another LLC with differing membership interests. A dispute ensured between the parties, specifically as to the terms and effect of the operating agreements and dilutions of ownership interests in the entities.

The trial court found that the parties acted as if this was all one, single project. The trial court further found that their attempts to keep the three projects separate by having separate LLC entities responsible for each did not reflect reality. In the words: “The evidence and conduct of the parties indicate that despite the creation of four separate AMCP entities that kept separate books, all of the parties considered the Project entities to be [part] [of] a single venture.” The trial judge consequently entered an order with regards to the diluted ownership interests and the plaintiff appealed that order.


One of the plaintiff’s arguments was that the trial court created a Series LLC (a new corporate structure that did not exist under local law) by, in effect, merging two entities into one entity.

The Court of Special Appeals held that the trial court did not combine two LLC entities into one larger Series LLC and rejected the plaintiff’s argument. It is of note that the plaintiff’s complaint was essentially that the trial court’s order “created an impermissible corporate structure”.  This was premised on the following: first, that the structure that the trial court’s order created was not a traditional Maryland LLC; second, that the trial court must instead have created a “Series LLC”; and third, that a Maryland court was prohibited from creating a Series LLC. The court addressed this argument in detail and found it to be wrong for three independent reasons. Briefly these were:

First, the Court was “not clear—at least in the abstract—that the distinctions between a family of traditional LLCs and a series LLC are as stark as Honey G–R would have us believe.” It noted that “The series LLC is a relatively new innovation” first emanating in Delaware, but was clearly not impressed by the argument that a Series LLC is an entity which the Maryland courts could not have recognised.  Per the Court Opinion: “Many of the benefits of a series LLC can be obtained by creating a family of traditional LLCs, with one master traditional LLC of which the members are, in turn, other traditional LLCs. The only differences that we perceive—at least in the abstract— are differences of nomenclature and the requirement for filing fees.”

Second, the Court noted the plaintiff’s argument that the Maryland legislature had not adopted legislation authorizing the use of the Series LLC form. In other words, it was not a business form known to local law. The Court made quick work of rejecting this outright: “While certainly true, to the best of our knowledge, the legislature hasn’t even considered whether to adopt such legislation. It certainly hasn’t done anything to suggest that adoption of the series LLC form will violate an important public policy of the State…Thus, we think the third step in Honey G–R’s argument, that a Maryland court is prohibited from ordering the creation of a series LLC (if that is what happened here), assumes a prohibition that simply does not exist.”

Third, the Court held that the trial judge did not create corporate structures, did not conclude as a matter of law what the validity of a Series LLC in Maryland would be and simply made findings of fact regarding what the parties had done in their dealings.

If the plaintiff on appeal had not raised the argument that the trial judge had, in effect, created a Series LLC we would not have the benefit of the Court’s dicta in this case. The dicta is important because it is the first case I am aware of where a court anywhere in the world was being asked, albeit in a round about way, not to recognise a segregated business form akin to a PCC on the basis that such a structure was unknown to local law. Therefore judicial commentary in this case is also relevant to PCCs.

The Court showed an appreciation for the underlying legal issues and quoted a commentator who stated “Series LLCs have not yet been very popular, because it is unclear whether the series liability shield will be respected by nonseries states or in bankruptcy”. It could easily have side-stepped the issue by just holding that the trial judge had not created a Series LLC and as a result it was not necessary for it to comment any further on this. Instead the Court chose not to dodge the question and in so doing has provided a much needed judicial authority in the area of segregated business forms generally.

Interestingly, in the 2nd edition of the PCC book we noted how in January 2010 the Delaware Series LLC received a significant boast when Delaware Insurance Commissioner Karen Weldin Stewart pioneered and licensed the world’s first series entity captive. As of December 31, 2015, the number of series captive insurers is now 740 (Delaware Department of Insurance, February 12, 2016) which is a remarkable statistic and an important industry endorsement for the Series LLC concept.

Protected Cell Company – the case for judicial recognition

The case for judicial recognition of PCCs is discussed in detail in “Protected Cell Companies: a Guide to their Implementation and Use”. Below is a summary of the arguments raised in the book, which applies equally to Series LLC and which in some respects echoes the arguments in the Maryland Court Opinion.

Protected Cell Company legislation was enacted primarily to encourage growth of the captive insurance industry, by bringing captive promoters together under a single corporate entity but enabling the segregation of assets between them for satisfying third party claims and limiting their liability accordingly. The clear statutory intention is therefore that the assets attributable to a particular ‘cell’ are not available to meet the claims of creditors of other cells.

The limitation of liability serves a similar purpose to the maritime laws that have existed for well over one hundred years in many nations around the world that limited the liability of ship-owners (both in contract and in tort) and also to the corporate fiction that limits the liability of shareholders in a not dissimilar way.

There are possibly three ways in which a PCC could be called into question in foreign court proceedings. First, if local legislation required local courts to ignore PCC legislation on the issue of liability. Second, if PCC legislation was deemed contrary to local public policy. Third, if PCC legislation was classified as procedural, rather than substantive. Let us take each in turn for the sake of argument.

The first is the easiest to dismiss. I am not aware of any statute anywhere in the world that purports to declare that a local court should not give effect to foreign PCC legislation. This is hardly surprising since such outright rejection of a foreign law would hardly sit well with the principle of comity of nations.

The second can also be given short shrift. Far from offending any notion of public policy (or principle of justice), PCC legislation underpins the fundamental principle of modern commerce that owners of capital should be able to deploy that capital in commercial enterprise and limit their liability to such capital and no more. All legal systems around the world recognise this as part of their substantive law in one way or another.

Indeed, many countries have other laws which are almost indistinguishable from the Protected Cell Company regime in what they are intended to achieve. It is therefore difficult to imagine how PCC legislation could be considered contrary to public policy or justice by a foreign court if its own local laws contained or recognised something similar. This is the case even in insolvency and it is an analysis developed in detail in the PCC book.

Lastly, absent any local rules to the contrary, and applying well established private international law principles recognised in most (if not all) civil and common law countries, it is not easy to conceive why a court would decline to give effect to foreign ‘substantive law’. To do otherwise would not only be an affront to principles of comity but also undermine international commerce.

Most countries around the world establish under their conflict-of-laws rules the distinction between the application of foreign substantive law (where the rule is that foreign laws containing substantive rights should be applied) and procedural law (where local rules of procedure are applied). Since all PCC legislation is undoubtedly intended to be substantive in nature, it is difficult to see why a foreign court should not recognise PCC legislation as such.

An examination of jurisprudence in this area suggests that when courts have classified foreign laws that were arguably substantive in nature as procedural instead, they appear to have done so more on the basis of an overriding principle of policy than on the application of cogent legal argument. That said, courts have generally tended to view foreign limitation of liability laws as a matter of substance (not procedure), and therefore on this basis alone should treat PCC legislation in the same way.

Ultimately, however, the argument that I think would prevail is this: if investors pursuing a bona fide commercial activity have sought the benefit of the capital protection laws afforded by PCC legislation (in much the same way they would have done had they decided to conduct their business through an ordinary limited company or limited partnership, or as ship-owners seeking the benefit of maritime limitation of liability laws have done for well over a century), why should they (and the body of creditors who have dealt with the PCC expecting that their rights will be determined in accordance with PCC laws) be deprived of such protection by the court? Viewed in this way, PCC legislation is, in effect, a capital and creditor protection rule like any other.

For a foreign court to hold otherwise would be to undermine the very principles on which international trade has developed since at least the eighteenth century, namely, the dual principle of limited liability for those that put capital at risk and also acceptance that in a global economy countries must recognise each others commercial laws.

Concluding Remarks

The late Professor Larry Ribstein, in his foreword to my PCC book, noted “it is likely that the use of [PCC/Series LLC] has spread widely enough that judicial clarification is an inevitable next step.” With the recent Maryland case and the Montana court decision last year (relating to PCCs) I believe we are now getting close to achieving this. Judicial commentary in both these cases will certainly be welcome not only in the US but in the EU and indeed around the world. This augurs well for the future of the PCC. The Maryland Court unreported opinion can be found here:

12 August 2024
5-6 November 2025

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