The North Carolina Limited Liability Company Act (G. S. Chapter 57C effective October 1, 1993) governs domestic and foreign limited liability companies operating in this State (G. S. 57C-1-03(8); G. S. 57C- 7-01 et seq.). It is the result of efforts to create a business entity having the legal benefits of a corporation while retaining the tax benefits of a partnership and it has been speculated that in most instances, such a form of business organization will replace the typical partnership.

A minimum of two or more persons is required to organize a limited liability company formed under the North Carolina statutes. It must have a name containing the words “limited liability company,” or the abbreviations “L.L.C.” or “LLC” or a combination of these elements (G. S. 57C- 2-20(a)). The organizers must file executed “Articles of Organization” with the Secretary of State. This is conclusive evidence of the organization of the company as against all parties except the state (G. S. 57C-2- 20(b)(2)). The act specifies that the document is effective on the date filed or on the date specified in the articles (G. S. 57C-1-23(a)).

The North Carolina Limited Liability Company Act sets forth statutory powers for the limited liability company formed under the act which apply unless limited by its articles of organization or unless the act provides otherwise (G. S. 57C-2-02). The powers given the company are the same powers an individual have in carrying out business affairs. The extensive list in the statute includes the power to purchase, receive, lease or otherwise acquire, and own, hold, improve, use sell, convey, mortgage and otherwise dispose of and deal with real property or any legal or equitable interest therein (G. S. 57C- 2-02). Other provisions of the act restrict a transfer of all, or substantially all, of the company’s assets (G. S. 57C-3-03(3)) and specify who can execute documents (G. S. 57C-3-23 through 57C-3-25).

The persons executing the articles of organization of a limited liability company become members and the act makes provision for admission of new members as well as the cessation of membership, it also specifies acts resulting in cessation of membership (G. S. 57C-3). Unless otherwise provided for in the articles of organization or written operating agreement, the affirmative consent of all members shall be required to admit members; to sell, transfer or otherwise dispose of all or substantially all of the assets of a limited liability company before its dissolution, or to merge with another limited liability company(G. S. 57C-3-03) .A1I members are managers of a limited liability company unless the articles of organization state otherwise, together with any other managers designated in a written operating agreement. Management of affairs is vested in the managers, and their authority may be limited by the articles of organization or a written operating agreement. Similar to partnership rules, every manager is an agent of a limited liability company for the purpose of its business and the act of every manager for apparently carrying on in the usual way the business of the company binds the company unless the manager has no authority to act in the matter and the person dealing with the manager has knowledge of the lack of authority. This authority expressly includes the authority to execute instruments. An act that is apparently not carrying on the usual course of the business of the company does not bind the company unless authorized or ratified by the company’s managers (G. S. 57C-3-23). The authority of a manager can be delegated to persons other than a manager if a written operating agreement so provides. The delegation may be general or may be limited to specific matters. If the person acts within the scope of the authority delegated, the limited liability company is bound as it would be by the act of the manager. An exception is when the delegation is revoked and the person with whom they are dealing has actual knowledge of the revocation (G. S. 57C-3- 24(a)).

A manager can be an individual; a trust; an estate; an unincorporated association; a domestic or foreign (1) corporation, (2) professional corporation, (3) partnership, (4) limited partnership or (5) limited liability company; or another entity (G. S. 57C-1-03(17)). An instrument required by law to be executed by a limited liability company and required by law to be filed, registered or recorded shall be sufficiently executed if signed on its behalf by one of its managers (G. S. 57C-3-25(c)). Title insurance claims have already arisen and therefore in transfers involving single asset LLCs it is recommended that all managers sign when feasible. Forms of execution by an individual manager, a corporate manager and a general partnership manager were set forth in our September 1996 issue (Vol. 2, No. 9). The seal of the manager should be sufficient just as the seal of a partner would suffice in the case of a partnership conveyance. Nevertheless, some attorneys insert seals as noted in the suggested forms. The acknowledgment must be prepared for use in conjunction with the execution of the instrument. The forms suggested in the September issue apply to an individual manager, a corporate manager and a general partnership manager. Since entities other than corporations can be managers of a limited liability company, other acknowledgments will have to be drafted for the particular entity. When a corporation is a manager, the other corporate acknowledgment forms in the statutes can be used as a basis of an acknowledgment alternative.

A person dealing with a limited liability company or a foreign limited liability company may rely conclusively upon its most recent annual report (and amendments) filed with the Secretary of State as to the identity of its managers, except to the extent that the person has actual knowledge that a person identified is not a manager(G. S. 57C-3-25(a)). Under G. S. 57C-2-23(a), the names and addresses of the managers must be included in the report. A document can be authenticated by any manager. The written authentication can be relied upon conclusively by any person not having actual knowledge that the authentication is false. A person can obtain a certificate from the Secretary of State regarding the report and it would seem that this could be relied upon by a title examiner (G. S. 57C-1-27).

A member’s interest in a limited liability company is personal property and a member has no interest in specific property (G. S. 57C-5-O1). A judgment creditor of a member can obtain a charging order against the member’s interest but here would be no lien upon the company’s real property (G. S. 57C-5-03). A membership interest is assignable except as provided in the articles of organization or written operating agreement and such assignment does not cause dissolution (G. S. 57C-5-02). The act provides for when an assignee becomes a member unless it is otherwise provided for in the articles of organization or in the operating agreement. If a member dies or is adjudicated incompetent, the member’s legal representative (for example, his executor or guardian) may exercise the member’s rights for purposes of settlement (G. S. 57C-5-05).

Article 6 of the act provides that dissolution of a limited liability company can be caused by the occurrence of the time or event specified in the articles of organization or written operating agreement or by the written consent of all members. Unless the articles of organization or operating agreement states otherwise, a cessation of membership causes dissolution. However, if, within 90 days after the event of withdrawal all remaining members agree in writing that the business shall continue, there is no dissolution. Dissolution can also occur by virtue of judicial or administrative dissolution as outlined in the statutes. Reinstatement can occur within two years after administrative dissolution (G. S. 57C-6-03(c)). When dissolution has occurred, “winding up” of the company’s affairs is required by G. S. 57C-6-04(a). The duty to wind up falls upon the company’s managers. The statutes make provision for winding up in absence of managers. Winding up includes disposing of the company’s property. Mere dissolution does not transfer title to property (G. S. 57C-6-04(c)). Upon dissolution, assets are distributed in accordance with the priorities established by G. S. 57C-6-05, with
creditors of the company having first priority. Upon dissolution by any method and commencement of winding up, articles of dissolution shall be filed with the Secretary of State setting forth the effective date of the dissolution (G. S. 57C-6-06).

The North Carolina Limited Liability Company Act includes Article 7 pertaining to foreign limited liability companies which should be consulted when dealing with such an organization. The laws of the state in which the company was formed govern its organization, internal affairs and liability of its members and managers. A foreign company shall not transact business in North Carolina without a certificate of authority from the Secretary of State (G. S. 57C-7-02(a)). Certain activities do not constitute transacting business in North Carolina and G. S. 57C-7-02(b) contains a non-exclusive list of these activities. This list includes making or investing in loans with or without security including mortgages and deeds of trust, the conducting of foreclosures and acquiring property at foreclosures (provided no office or agency therefor is located in North Carolina) and owning real property. A company with a valid certificate of authority has the same rights and privileges and is subject to the same duties, restrictions, penalties and liabilities as a domestic limited liability company (G. S. 57C-7-01). When a foreign limited liability company required to obtain a certificate of authority does not, it is subject to fines and cannot use the courts of North Carolina but the validity of any company act is not affected (G. S. 57C-7-03(a).and G. S. 57C-7-03(c)). A certificate of authority can be revoked for reasons specified in G. S. 57C-7-14, the certificate of revocation is filed with the Secretary of State’s office and authority ceases at that time.

The North Carolina Limited Liability Company Act also contains provisions governing merger. Any one or more of such companies can merge into another such company, foreign or domestic (G. S. 57C-9-01). The surviving company succeeds to all rights and powers of each company that is a party to the plan. Real property, other property and debts vest in the surviving company without further act or deed (G. S. 57C-9- 05(4)). Title does not revert and is not impaired. (G. S. 57C-9-05(5)). When the name of a domestic or foreign limited liability company is changed or when title to real property in North Carolina is transferred by merger, a certificate shall be recorded in the office of the register of deeds of the county or counties where the real property is located. The recordation is done in the same manner as a deed, including fees for recording and no formalities as to acknowledgment or probate are required (G. S. 57C-2-34). The same statute provides that the former name of the company holding title before the name change or merger shall appear in the grantor index and the new name of the company holding title as a result of the name change or merger shall appear in the grantee index. Liens are not impaired by a merger (G. S. 57C-9-05(7)).

Any person may request the Secretary of State to furnish a certificate of existence for a domestic limited liability company or a certificate of authorization for a foreign limited liability company. Subject to qualifications stated in the certificate, the certificate is conclusive evidence of existence or authority to do business in North Carolina (G. S. 57C-1-28).

Limited liability companies are now subject to the rules pertaining to administrative suspension in G. S. 105-230, G. S. 105-231, and G. S. 105-232. which were amended effective October 1, 1993, to apply to all corporations and limited liability companies and discussed in our February 1996 newsletter (Vol. 2, No. 2) .

These issues are particularly important if the grantor in the current transaction is a limited liability company If a transfer by such a company is in the back chain of title, many title examiners do not concern themselves with matters that are unknown to the attorney or the title examiner or do not appear in the local real estate records.

1.General Comments Tacking on to a prior owner’s policy is expressly permitted by the bar association’s ethics opinions. RPC 99. Tacking on to a prior loan policy can also be allowed as discussed below.

2.The Preliminary Opinion And What The Title Insurer Looks For - Prior Policy Is An Owner’s Policy

The Bar Association’s preliminary opinion sets forth the following paragraph on the front of the form and the following standard exception No. 3 on the reverse side, respectively:

Updating From Previous Title Insurance Policy? Yes [ ]; No [ ] (Attach Copy). If “Yes”, has a search of the public records been accomplished for such period of time within which judgments, liens or other matters could affect the property, regarding the owner(s) of the property on and after the date of said policy? Yes [ ]; No [ ].
___3. Matters which would be revealed by a review of the public records regarding the proposed purchaser/borrower, who is not a current owner of the property.

EXAMPLE: Bar form preliminary #1 for transaction #1 deals with a transfer for cash from A to B. B obtains no loan. A must be checked for encumbrances. B need not be, since owner’s policy #1 insuring B will exclude liability for judgments, etc., created by B. Exclusion From Coverage, paragraph 3(a).

However, when preliminary #2 for transaction #2 is prepared for a transfer from B to C (with or without C getting a loan) and prior policy #1 is “tacked on to,” B must be checked for all encumbrances whenever they attached. It is wrong to say that the tacking can commence from the effective date of policy #1. If C is obtaining no loan secured by a deed of trust, C need not be checked for encumbrances since owner’s policy #2 insuring C will exclude liability for such encumbrances created by C. If C is obtaining a loan all proceeds of which are to go toward the purchase from B and closing costs, which loan is to be secured by a deed of trust to M, C should still be checked for all encumbrances if M is to be insured by a loan policy This is not necessary if the encumbrance is a federal tax lien or judgment lien other than a judgment lien in favor of the United States or one of its agencies (hereinafter “USA”). This is because of the “purchase money rule.” Smith Builders Supply, Inc. v. Rivenbark, 231 N.C. 213, 56 SE. 2d 431 (1949); Carolina Builders Corp. v. Howard-Veasey Homes, Inc., 72 NC. App. 224, 324 SE. 2d 626, cert den. 313 NC.597, 330 SE. 2d 606 (1985). However, a recent federal law governing judgments in favor of the USA states that: “This chapter shall preempt State law to the extent such law is inconsistent with a provision of this chapter.” 28 U.S.C. Sec. 3003(d). “A lien created under subsection (a) shall have priority over any other lien or encumbrance which is perfected later in time.” 28 U.S.C. Sec. 320 1(b). This has been interpreted to mean that such a judgment does not get the benefit of the “purchase money rule” cited above. Also, if such a purchase money loan is not involved but a construction loan deed of trust securing M is involved and is to be insured, the “purchase money rule” does not apply and C should be checked for all liens against C. Further, if M’s deed of trust to be insured secures both purchase
money and construction loan proceeds, the deed of trust will not have "purchase money rule" priority to the extent of the construction loan proceeds. Dalton Moran Shook, Inc. v. Pitt. Dev. Co., 113 NC. App. 707, 440 SE. 2d 585 (1994). In this case, C would have to be checked for all liens.

In sum, since the above quoted provisions of the bar form were promulgated before 28 U.S.C. Secs. 3003(d) and 320 1(b), it is wise to check C for all liens (whatever the effective date or filing date) when preliminary opinion #2 applies for a loan policy insuring M even if M’s deed of trust secures purchase money.

3. Tacking Onto A Prior Loan Policy
A prior loan policy can be tacked on to. However, since that loan policy might insure, for example, M’s first lien position because a prior deed of trust securing X was subordinated to M’s lien and X’s lien was not noted as a subordinate matter in M’s policy, it is prudent to check the borrower in M’s policy for liens as well as that borrower’s predecessor in title if that predecessor was in title with the last 10 years. There have been serious and large claims when this caution is not employed, It is Statewide Title’s practice to list in M’s loan policy subordinated mortgages or deeds of trust for information purposes in order to avoid tacking problems.