by John C. Murray
© 2003. All rights reserved.
Many states have recently enacted "conversion" statutes, which permit transfers from existing legal entities, such as general and limited partnerships, to LLCs. These statutes generally provide that the entity that has been converted remains for all purposes the same entity that existed before the conversion. See, e.g., Del. Code Ann. tit. 6, § 18-214(f); ILCS 180/37-15; MCL 450.4707. Such a statutory conversion does not result in a conveyance of property and is considered merely a "name change.' This statutory language would support the position that a "transfer or conveyance of such estate or interest" has not occurred within the meaning of paragraph 2 of the ALTA title policy's Conditions and Stipulations. Furthermore, the successor LLC would be deemed an "insured," as defined in the policy, because it would "succeed to the interest of such [original] insured by operation of law as distinguished from purchase." See Robert R. Nix II, Capturing the Benefits of the Limited Liability Company: Use of Transfers, Conversions, Mergers and Legislated Enhancements, The ACREL Papers 2000, American College of Real Estate Lawyers Annual Meeting, Boston, Massachusetts, Oct. 12-14, 2000, at Tab 13.
Whether an existing entity has been "converted" into an LLC may also affect whether the transferring entity may claim an exemption from the imposition of transfer taxes when real property owned by the converting entity is conveyed to the LLC. In Exton Plaza Associates v. Commonwealth of Pennsylvania, 763 A. 2d 521 (Pa. Cmwlth. 2000), a refinancing lender required that the shopping center owned by the borrower, a general partnership, be transferred to a "single purpose and bankruptcy remote entity" as a condition to obtaining the loan. The general partnership converted itself into a limited partnership of the same name, with each of the two general partners owning a 49.5 percent interest as limited partners in the new limited partnership. A new LLC, of which each of the original partners owned a 50 percent interest, was created to own a one-percent interest as the general partner of the new limited partnership. (The refinancing lender's loan commitment prohibited either of the individual general partners from serving as general partner in the new entity). The deed from the general partnership to the limited partnership recited a consideration of $1.00 and claimed a full exemption from payment of the Pennsylvania transfer tax, stating on the deed that "Principals of grantor and grantee are one and the same." The Commonwealth Court of Pennsylvania upheld the claim of exemption, finding that the deed in this case did not meet the statutory definition of "document" because it did not convey an interest to someone other than the grantor, i.e., it was merely a "name change" and "did not effect a meaningful transfer of title." Id. at 523. The court reasoned that the general partnership had merely "converted" to the limited partnership, transferring a one- percent interest to an LLC as the general partner. The court stated that, "the shopping center was essentially 'contributed' to the Limited Partnership, and the principals' property rights in the shopping center were essentially unchanged." Id. at 524.
In Illinois, 805 ILCS 180/37-15 of the Revised Act provides that the effect of a conversion of a general partnership or a limited partnership to a limited liability company is that the entity is unchanged. At the time the conversion takes effect, "all property owned by the converting partnership or limited partnership vests in the limited liability company." 805 ILCS 180/37-15(1). The LLC is considered "for all purposes" as the same entity that existed before the conversion, and "all of the rights, privileges, immunities, powers, and purposes of the converting partnership or limited partnership vest in the limited liability company." 805 ILCS 180/37-15(4). Furthermore, "all of the partners of the converting partnership continue as members of the limited liability company." 805 ILCS 180/37(5). It is unclear whether an Illinois court would hold, similar to the Pennsylvania court's ruling in Exton Plaza Associates, supra, that a deed from a partnership to an LLC (at least in those situations where the same individuals or entities that were the partners of the converting general or limited partnership continued as members of the new LLC) would not be subject to Illinois' statutory transfer tax.
With respect to Illinois LLC mergers, 805 ILCS 180/37-20 provides that an LLC "may be merged with or into one or more limited liability companies, foreign limited liability companies, corporations, foreign corporations, partnerships, or other domestic or foreign entities if merger with or into a limited liability company is permitted under the law governing the domestic or foreign entity." When the merger takes effect, the separate existence of each LLC and other entity (other than the surviving entity) terminates. 805 ILCS 180/37-20(1). Similar to the Illinois statutory provisions regarding partnership conversions to LLCs (see the preceding paragraph), all property owned by the each of the LLCs and other entities that are party to the merger vests in the surviving entity, and "all the rights, privileges, immunities, powers, and purposes of every limited liability company and other entity that is a party to a merger vest in the surviving entity." 805 ILCS 180/7-20(2) and (5). Under another Illinois statute, enacted in 2001, limited partnerships may merge with or into one or more other limited partnerships or limited liability companies wherever located, i.e., the merger may be into or with any such other entities organized in Illinois or in any other state or the District of Columbia, if the laws of the other state or states or the District of Columbia permit the merger. See 805 ILCS 210/210.
In connection with a conversion of a corporation to an LLC, one tax commentator has stated that "the principal methods [of conversion] are the contribution of all the stock to a newly formed L.L.C. in exchange for L.L.C. interests, followed by the liquidation of the corporation up to the L.L.C. shareholder; the liquidation of the corporation, followed by recontribution of the assets and liabilities to the new L.L.C.; a merger, with the L.L.C. surviving; and statutory conversion-election in those few states, such as Georgia, that permit it for corporations." John F. Walker, Jr., Taxation, The National Law Journal, June 3, 1996, at 84.
