The Impact of Transferring a Property in or out of an LLC on the Underlying Mortgage

The purpose of the Garn-St. Germaine Depository Institutions Act of 1982 is the “permanent preemption of state prohibitions on the exercise of due-on-sale clauses by all lenders, whether federally or state-chartered, [and] to reaffirm the authority of Federal savings associations to enforce due-on-sale clauses, and to confer on other lenders generally comparable authority with respect to the exercise of such clauses.”

That said, the Act contains some limitations on that authority:

§ 591.5  Limitation on exercise of due-on-sale clauses.

(a)  General.  Except as provided in § 591.4(c) and (d)(4) of this part, due-on-sale practices of Federal savings associations and other lenders shall be governed exclusively by the Office’s regulations, in preemption of and without regard to any limitations imposed by state law on either their inclusion or exercise including, without limitation, state law prohibitions against restraints on alienation, prohibitions against penalties and forfeitures, equitable restrictions and state law dealing with equitable transfers.

(b)  Specific limitations.  With respect to any loan on the security of a home occupied or to be occupied by the borrower,

(1)  A lender shall not (except with regard to a reverse mortgage) exercise its option pursuant to a due-on-sale clause upon:

(i)  The creation of a lien or other encumbrance subordinate to the lender’s security instrument which does not relate to a transfer of rights of occupancy in the property: Provided, That such lien or encumbrance is not created pursuant to a contract for deed;

(ii)  The creation of a purchase-money security interest for household appliances;

(iii)  A transfer by devise, descent, or operation of law on the death of a joint tenant or tenant by the entirety;

(iv)  The granting of a leasehold interest which has a term of three years or less and which does not contain an option to purchase (that is, either a lease of more than three years or a lease with an option to purchase will allow the exercise of a due-on-sale clause);

(v)  A transfer, in which the transferee is a person who occupies or will occupy the property, which is:

(A)  A transfer to a relative resulting from the death of the borrower;

(B)  A transfer where the spouse or child(ren) becomes an owner of the property; or

(C)  A transfer resulting from a decree of dissolution of marriage, legal separation agreement, or from an incidental property settlement agreement by which the spouse becomes an owner of the property; or

(vi)  A transfer into an inter vivos trust in which the borrower is and remains the beneficiary and occupant of the property, unless, as a condition precedent to such transfer, the borrower refuses to provide the lender with reasonable means acceptable to the lender by which the lender will be assured of timely notice of any subsequent transfer of the beneficial interest or change in occupancy. (Emphasis supplied)

A cursory reading of this statute will demonstrate that though transfers to inter vivos trusts are exempted from the due-on-sale provisions of Garn-St. Germain, for example, transfers to LLCs are not. Thus, if your clients deeds her personally own, mortgage-encumbered rental property into her single-member LLC (SMLLC) of which she is the sole member, she risks her mortgage lender calling the loan—that is, the loan being immediately due and payable.

What to do? Interestingly, different attorneys give different advice. Some will say that the safest path is to call the mortgage lender and let them know what is going on—essentially ask permission. They’ll then say, “but why bother? The lender will never find out anyway.” Actually, it may be true that lenders don’t spend much time policing property records in an effort to catch borrowers transferring real estate into their LLCs—I’ve heard this a lot, but who knows if it’s true? However, the safest path is also the best path, and in most cases, it will be a relatively easy one. But when you make that call, make sure you keep talking until you talk to a person who knows what they’re doing.

The due-on-sale concern will arise in two situations: 1. In a new purchase where the lender says the purchaser/borrower must buy the property in her own name, and the purchaser/borrower intends to transfer it into an LLC post purchase; and 2. Where the purchaser/borrower has owned the property in his own name for a while and decides he wants to transfer it into an LLC—the old purchase.

New Purchases. In this situation, it’s simply a matter of being up front with the lender from the beginning. The borrower should explain their intentions and get the lender’s approval in writing prior to signing the loan, when she has leverage. Lenders see these situations all the time, and most will agree and even facilitate the transaction. Some may require guarantees by the LLC, signed by its members or managers accompanied by a resolution or other statement of authority evidencing their authority to sign.

Old Purchases. This situation is more problematic. The lender has the leverage, and if rates are up, it’s in the lender’s interest to call the loan. In such an environment, it may be worth the risk to transfer to the LLC and ask forgiveness later—if ever. Chances are, the lender will never know. But if the lender discovers that your client transferred the property and if rates are up and the client’s financial situation has deteriorated, trouble may ensue. If rates haven’t changed much and if the client is able to refinance if necessary, the existing lender may be more willing to allow the transfer without calling the loan.

It’s virtually always best to talk to your lender before you make a transfer; otherwise, you risk the lender calling your loan. And besides, do you want a good or a bad relationship with your lender. Yeah, I thought so.

More than Just the Tetons: A New Chancery Court Makes Wyoming Well Worth Discovering

Geyser Basin, Yellowstone Park, Wyoming (like the title says, more than the Tetons)

But for the missing photo of the magnificent Tetons, volume 11, number 1 of the 2011 Wyoming Law Review might be mistaken for a sales piece published by the Wyoming Business Council—the state’s economic development agency. Two articles in the journal tout Wyoming’s business and trust friendly laws. “The Undiscovered Country: Wyoming’s Emergence as a Leading Trust Situs Jurisdiction,”[1] Christopher Reimer argues that the state’s laws on directed trusts, trust protectors, self-settled trusts, and private trust companies, among other tools justify that claim. A few pages earlier, Dale Cottam and four others make similar claims with regard to limited liability companies. Not only did the new 2010 Limited Liability Company Act (“LLC Act”) replace Wyoming’s original—and first-in-the-nation—act, they point out, it included some “home cooking” that makes the Cowboy State the place to be . . . organized.[2] Come for the Tetons; stay for the business and trust friendly laws and the lack of a state income tax.

Seven years later, Amy Staehr revisited that theme in her piece “The Discovered Country: Wyoming’s Primacy as a Trust Situs Jurisdiction.”[3] In it, she updates what Wyoming’s part-time legislature had been up to in the intervening years. Among other things, new legislation provided more privacy protection to trusts and better asset protection with a new Wyoming Qualified Spendthrift Trust. Likewise, limited liability companies could now have a more flexible management structure. The message was again clear: Yes, the vistas are expansive and the sunsets beautiful, but have you looked at our business and trust friendly laws lately? “I think it’s exciting what Wyoming’s trying to do with its laws,” says Michael Greear, a state representative and member of the state’s Chancery Court Committee. “Anything we do to get more business and still keep the population at 500,000 is all good.”

But there was a hitch: Wyoming’s court system. It had essentially two tiers: Nine District Courts of general jurisdiction and a Supreme Court, the state’s only appellate court. And only the Supreme Court reported its cases online. In 2019 it issued 151 opinions, just 3 of them involving trusts and businesses, down from the 159 it heard in 2018, again, only 3 of them dealing with trusts and businesses. In short, Wyoming had great new business and trust laws, but too few court opinions published online to help interested observers discern how Wyoming courts might interpret those laws, an essential ingredient to a stable climate for business entities and trusts.

It didn’t help that recently—and unfortunately—the Court’s 2014 GreenHunter Energy case put the fear of creditors into the hearts of businessmen and women. The case’s result was certainly just, but the rule of the case appeared to ignore new veil piercing provisions in the LLC Act. It’s worth noting that the Wyoming legislature did its part to provide stability. Almost immediately after the Court issued its opinion, the legislature amended the LLC Act to essentially reset the law clearly and unequivocally to pre-GreenHunter days.[4]

In its 2019 session, the Wyoming Legislature acted again, this time to increase the size and density of the paper trail created by Wyoming courts in hopes of becoming the Delaware of the West. Delaware has a Chancery court, its docket devoted to trusts and business; so should Wyoming. And voila! After a concerted effort by some forward-thinking legislators and a stroke of the Governor’s pen, Wyoming has a Chancery Court dedicated to hearing nothing but trust and business cases.  Senate File 0104, the bill that started it all, now sits ensconced as Chapter 13 of Title 5 of the Wyoming Code. Where the court will sit and when it will open is another matter. “Two things will dictate when the factory is up and running: the adoption of court rules and making sure we’ve got the IT—the caseload management system and e-filing—in place,” says Senate President Drew Perkins, sponsor of the bill.

The Act mandates $1,500,000.00 of initial funding for the court and contains a broad outline for how the court should operate, among other things. In April 2019, the Supreme Court issued an order establishing the Chancery Court Committee to fill in the details of that outline. Justice Kate Fox was appointed its chairperson. “She gets two thumbs up,” Greear says. “She put together a great committee.”

The Committee did its job, particularly in developing court rules. Finally on January 7, 2020, an email went out to the Wyoming Bar, asking for comments on the proposed rules. The comment period ends on May 15, 2020, and final rules will go into effect six months later on November 15, 2020. That date makes sense because there is still a lot to work through, according to Justice Fox. That includes the rules, but also who the judges will be and where their court will sit. “The plan is to appoint judges with expertise in the statutory areas, much like in Delaware. Wyoming Chancery Court judges must be experienced or knowledgeable in the subject matter jurisdiction of the court,” she explains.

The court’s jurisdiction includes everything from breach of contract to fraud and misrepresentation, from statutory violations of laws governing asset sales and protecting trade secrets to transactions involving the Uniform Commercial Code and the Uniform Trust Code. Disputes concerning employment agreements, insurance coverage, and dissolution of corporations, LLCs, and other entities can all be heard by the Chancery Court. The statute says the Court “shall employ “alternative nonjury trials, dispute resolution methods and limited motion practice and shall have broad authority to shape and expedite discovery,” [5] a good idea, given that the new law requires “effective and expeditious resolution of disputes,” a term of art that means a majority of the actions filed in the court must be resolved with 150 days of filing. “The sponsors of the bill view the Chancery Court as kind of a business draw,” Fox says. “A speedier court with more particular [business and trust] expertise should be attractive to businesses who are considering incorporating in or coming to Wyoming.”

As for where the court will sit, “it will likely be in Casper or Cheyenne, just because they are bigger,” she continues. “But it’s also possible, depending on the case and where the parties are, that the judges could be mobile and hear cases in places like Jackson.”

The smart money is on Casper. It’s centrally located, new money was recently appropriated for a new state office building there, and it has good air service. “Last week I had meetings in New York with our investment bankers,” says Greear, who lives in Worland, Wyoming, where he’s the CEO of Wyoming Sugar Company. “I flew out of Casper, had a nice dinner in New York, met with my bankers and was home the next day. United and Delta service Casper really well.”

Perkins, who lives and works in Casper, hopes there will eventually be one or more courts outside of his hometown, maybe one in Cody or Sheridan and one in Cheyenne, for example. “That’s my vision for it, anyway. The idea is not about having the court in Casper; it’s about having the court available for quick resolution.”

As they say, time will tell. The job now is to get the first court up and running with a judge knowledgeable about business and trust law expeditiously issuing opinions. The hope is that, when published, those opinions will consistently and clearly demonstrate how things are done in the Wyoming. And done right, it’s all good—for the Equality State and the businesses that locate there.

[UPDATE] After this story went to press at the ABA, the Wyoming legislature failed to fund a variety of construction projects during the recent legislative session, including the construction of the Chancery Court in Casper. With the COVID-19 pandemic and the drop in oil prices, even Drew Perkins, a sponsor of the Chancery Court, thought it good to wait and watch.


[1] Pg. 165 (2011).

[2] “The 2010 Wyoming Limited Liability Company Act: A Uniform Recipe with Wyoming ‘Home Cooking,” pg. 49 (2011).

[3] Wyoming Law Review, Volume 18, Number 2, pg. 283.

[4] See “Wyoming Supreme Court Upholds Decision to Pierce the Veil of Single-Member LLC,” Rutledge, Thomas; November 13, 2014, https://kentuckybusinessentitylaw.blogspot.com/2014/11/wyoming-supreme-court-upholds-decision.html (accessed 2/26/2020); and “Wyoming Cleans up Veil Piercing in LLC Act,” Fershee, Joshua; March 29, 2016, https://lawprofessors.typepad.com/business_law/2016/03/wyoming-cleans-up-veil-piercing-in-llc-act.html (accessed 2/26/2020).

[5] Wyo. Stat. § 5-13-111

I wrote the piece above for the April, 2020 issue of The LLC & Partnership Reporter, a publication of the ABA.

Series LLCs: (Some of) What You Need to Know

A series LLC, a relatively recently authorized form of LLC, is composed of a master LLC—the Mother Ship—which houses a series of LLCs. Each series, silo, or cell (the potential synonyms are almost endless) within the series LLC often has separate owners, and each must always maintain separate records, especially records that account only for the assets of that series—at least if the series LLC is formed in Utah or Wyoming and other ULLCA states that allow for series LLCs.

Series, Silos, or Cells: more protection at less cost?

Similar to a corporate/subsidiaries business model and like their more well-known parent LLCs, series LLCs offer asset-protection benefits, but they avoid the complexities of corporate taxes, structure, and other required formalities. 

This type of entity is well suited for certain businesses that may benefit from its relative simplicity, reduced costs, and increased asset protection. But especially because they are so new, there are also some uncertainties associated with the series LLC.

Potential Benefits of the Series LLC:

1. Simplicity

  • Reduced Administration

Although each series must be administered separately, series LLCs have the potential to save time and administration costs.

2. Reduced Costs

  • One Registration

Each of the individual series is formed and governed by the master LLC’s operating agreement.  In most states—Wyoming and Utah, included—only the master LLC must be registered with the state, which means reduced fees.

  • Potential Sales Tax Savings

Some states may not require sales tax to be paid on rent that one series pays to another series.

3. Asset Protection

  • Mixed Signals

Under most series LLC statutes, each series is protected from judgments against assets in other series under the master LLC.  But it’s not clear that this protection will be respected in bankruptcy proceedings or in states that don’t recognize series LLCs.

Potential Downsides of the Series LLC:

1.  Some Additional Costs

  • Registered Agent

Many states require a separate registered agent for each series in the series LLC, which may mean additional expenses.

  • Formation Cost

The up-front registration fee for a series LLC may be higher than the registration fee of a regular LLC.  In some states, it may be less expensive to register multiple single-member LLCs rather than a series LLC with multiple series. This is generally not the case in Wyoming and Utah.

2. Governance Issues

  • Overlap Jeopardy

The operations may not be as streamlined as anticipated. The records of each series must be maintained separately, and each series must have its own separate bank accounts.  Can administrative functions among the series overlap without jeopardizing the limited liability? Can the ownership or management overlap? Does inadequate capitalization of one series impact the other series in the series LLC? At this point, these types of questions remain unanswered.

3. Liability Questions

  • Bankruptcy Issues

Federal bankruptcy laws do not yet address series LLC issues.  Can an

individual series within a series LLC file for bankruptcy? Are the assets of the non-filing series and the master LLC protected from the filing series?  At this time, there are no clear answers to these and other bankruptcy-related questions.

  • Choice-of-Law Issues

If a series LLC gets sued by a third party in a state that doesn’t authorize series LLCs, the assets of each series and the master LLC may be at risk. For LLCs that operate in states with and without series LLC statutes, this may make a series LLCs much less attractive.

The series LLC is potentially a star on the rise and is definitely worth watching.  If your business is particularly well suited to this compartmentalized approach—real estate investing, for example—and you live in one of the states[1] that currently authorizes series LLCs, you may want to this novel entity.


[1] As of November 2019, Alabama, Delaware, DC, Illinois, Indiana, Iowa, Kansas, Missouri, Montana, Nevada, North Dakota, Oklahoma, Tennessee, Texas, Utah Wisconsin, Wyoming, and Puerto Rico provide for series LLCs in their statutues.

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