February 17, 2020

A captive insurance company (usually just referred to as a “captive” in short) is an insurance company that is set up to provide for the insurance needs of its owners, and them only. There are many types of captives, and they can be organized in many ways, most typically as corporations but also as LLCs and some other more exotic types of entities. A captive can be organized — and many are — as a Series LLC. That particular form of LLC is very complex, and consists of a larger LLC (called the “series organization”) which is then subdivided into many smaller units (called “protected series”). Very similar in many respects to a parent/subsidiaries structure, Series LLCs offer certain benefits in the captive insurance field when it comes to insurance licensing and capital requirements. In 2016, the National WW II Museum (New Orleans) ordered a steel truss canopy from Gava Steel, Inc., and paid about $3 million. To protect itself, the Museum obtained a bond in the same amount from Talisman Casualty Insurance Company, LLC, which is purportedly managed (which is different than owned) by Jeffrey Schaff of Louisiana. For whatever reason, Gava Steel didn’t perform as promised, and the Museum made a claim on Talisman’s bond. Claiming that no valid bond was ever issued, Talisman didn’t honor the bond. So, Museum sued Talisman in the Civil District Court of the Parish of Orleans. Talisman then removed the case to the U.S. District Court for the Eastern District of Louisiana. claiming diversity jurisdiction since Talisman was organized in Nevada and the Museum is in Louisiana. As an aside, federal law requires what is known as “complete diversity” of citizenship in order for diversity jurisdiction to apply, i.e., no plaintiff can be from the same state as any defendant. Where a party is an LLC, the court looks through the LLC to see where its members are located. Museum then filed a motion to remand the case back to the Parish of Orleans court, arguing that because Talisman was an LLC, and because its (undefined) owner is a resident of Louisiana, both the plaintiff and the defendant were located in Louisiana and so there was no complete diversity such as would support diversity jurisdiction in the federal court. Talisman made two arguments why complete diversity was present. The first argument was that because Talisman was a licensed captive insurance company, it should be treated as a corporation with its location in Nevada, instead of as an LLC where the jurisdiction of its owner (Schaff) would place it in Louisiana. Second, and most interestingly, Talisman argued that it was a Series LLC, that only protected cell #01 was potentially liable on the bond, and that cell #01 didn’t have any members at all, much less any members in Louisiana — other of Talisman’s protected cells might have Louisiana members, but not protected cell #01. To support this second argument, Talisman submitted an affidavit which said that protected cell #01 had no members. All this resulted in the opinion of the U.S. District Court that I shall next relate. The court took these arguments in reverse. As to Talisman’s argument that protected cell #01 had no members, that argument immediately backfired. The court pointed out that under long-standing law, if an LLC has no members, then it is “stateless”, and a stateless LLC cannot establish diversity of jurisdiction. Since Talisman had submitted an affidavit that protected cell #01 had no members, it had effectively shot itself in the foot on this issue. Talisman’s other argument, that even though it was organized as an LLC, Talisman should be treated as a corporation because it was a licensed captive insurance company, also fell on deaf ears. The court noted that 175 years ago, the U.S. Supreme Court allowed corporations to be treated as citizens for purposes of diversity citizenship, but since then the Supreme Court has consistently restricted business entities’ access to the federal courts by way of diversity jurisdictions, to which Talisman’s argument for an expansion of such jurisdiction clearly ran counter. Moreover, in footnote 2, the court pointed out that the Museum had sued Talisman generally, and not just protected cell #01, and Talisman did in fact have its only member in Louisiana such that complete diversity was destroyed. ANALYSIS What this case highlights is that there are many nuances about Series LLCs that are yet to be discovered. While it may be possible to structure things with a Series LLC that could not be so structured with any other form of business entity, all the ramifications of doing that are probably impossible to predict. Here, for whatever reason, protected series #01 was structured in a way that it did not have any “members” in the sense that an ordinary LLC typically would, but that ended up having a negative repercussion as it defeated Talisman’s attempt to move the case out of Louisiana state court and into the federal courts. Yes, Series LLCs are extremely versatile: They are also dangerous. As I have pointed out on numerous occasions, if an ordinary LLC is a Cessna 172 with few systems and controls, a Series LLC is a 747 with hundreds of systems and controls thus making it very easy for a fatal mistake to be made. Or, as my friend and colleague Tom Rutledge is so fond of pointing out, for most folks the creation of a Series LLC is like giving an Uzi to a three-year old. On a more practical note, Talisman’s argument that protected series #01 did not have any members is probably technically incorrect, for the reason that in the absence of members the series organization itself is the member, in this case being Talisman the main company. Thus, the court could probably have correctly held that protected series #01’s member was Talisman, and Talisman’s member was Schaff, and so therefore protected series #01 was located in Louisiana for purposes of testing diversity jurisdiction. An alternative construct would be that without members, protected series #01