97-5

January 31, 1997

Re: Inapplicability of Cal. Fin. Code Section 772 to Limited Liability Companies

Dear Mr. __________:

This replies to your letter of October 22, 1996.

Your letter asks whether the Banking Law (Division 1 (commencing with Section 99) of the Financial Code) prohibits a majority-owned corporate subsidiary of a bank from investing in a limited liability company (an “LLC”) that acts as an insurance agent or broker.

We assume for the purposes of this discussion that the corporate subsidiary has been or will be lawfully established by the bank under Financial Code Section 772 and the Superintendent’s regulations implementing Section 772. The questions then become:

1. May a majority-owned corporate subsidiary of a bank own an interest in an LLC?

2. If so, does Financial Code Section 772(b) prohibit such an LLC from acting as an insurance agent, or insurance broker?

For the reasons discussed below, in our view, the answer to question No. 1 is yes, and the answer to question No. 2 is no.

As you point out in your letter, Section 206 of the Corporations Code provides that a corporation subject to the Banking Law may engage in any business activity not prohibited by the statutes and regulations to which it is subject. No provision of the Banking Law or the Banking Regulations expressly prohibits a bank from owning an interest in an LLC. Therefore, it appears on its face that Corporations Code Section 206 authorizes a bank to own an interest in an LLC.

However, it has been suggested that because of the similarities between an LLC and a corporation, provisions of the Financial Code prohibiting or limiting a bank’s ownership of corporate shares might be applicable to a bank’s ownership of an interest in an LLC.

The Banking Law generally prohibits a bank from owning corporate stock. Financial Code Section 761 provides that, “[n]o bank shall purchase, acquire or hold the stock of any corporation except as expressly authorized by this division . . . .”

In addition, Subdivision (a) of Section 1335 provides:

“(a) A commercial bank may invest in gold and silver bullion and United States mint certificates of ascertained value, and purchase securities, except corporation shares, for its own account which in the informed opinion of the bank it is prudent to invest the funds of its depositors.” (Emphasis added.)

For purposes of this letter, we will assume, without deciding, that Section 1335 impliedly prohibits a bank from owning corporate shares.

Financial Code Section 772 creates an exception to the prohibitions set forth in Sections 761 and 1335. Financial Code Section 772 states:

“772. (a) Notwithstanding the provisions of Section 1335, and subject to such regulations and rules as the superintendent may prescribe, a bank may invest in the capital stock, obligations, or other securities of one or more corporations. (b) No such corporation may act as an insurance company, insurance agent, or insurance broker. This prohibition shall not be deemed to exclude other possible restrictions with respect to the activities of such corporations.”

A majority-owned corporate subsidiary of a bank is subject to the same limits on ownership of corporate stock as apply to the bank. Under the regulations implementing Financial Code Section 772, a majority-owned corporate subsidiary of a bank is considered to be controlled by the bank (10 CCR Section 10.19051(b)), and is therefore considered a “regulated corporation” (10 CCR Section 10.19051(a)(7)). As a regulated corporation, the subsidiary is subject to the prohibition on ownership of corporate stock set forth in Section 761 of the Financial Code, as well as to any exceptions thereto (10 CCR Section 10.19107), including the exceptions and qualifications set forth in Financial Code Section 772(b).

Therefore, if an LLC were considered the equivalent of a corporation, Section 772(b) would prohibit an LLC indirectly owned by a bank through a majority-owned corporate subsidiary from acting as an insurance agent or broker.

However, in our view, owning an interest in an LLC is not the equivalent of owning the stock of a corporation for purposes of Section 761 or of owning corporate shares for purposes of Section 1335.

This conclusion is consistent with well established rules of statutory construction.

“The rules governing statutory construction are well settled. We begin with the fundamental premise that the objective of statutory interpretation is to ascertain and effectuate legislative intent [Citation.]. ‘In determining intent, we look first to the language of the statute, giving effect to its plain meaning.’ [Citation.] Although we may properly rely on extrinsic aids, we should first turn to the words of the statute to determine the intent of the Legislature. [Citation.] Where the words of the statute are clear, we may not add to or alter them to accomplish a purpose that does not appear on the face of the statue or from its legislative history.” Burden v. Snowden, 2 Cal. 4th 556, 562 (1992).

It is clear that in creating LLCs through enactment of the Beverly-Killea Limited Liability Corporation Act (Stats 1994, Ch 1200) (the “LLC Act”), the Legislature did not intend LLCs to be viewed as corporations. This may be inferred from the fact that the LLC Act sets forth rules governing LLCs in a title of the Corporations Code which is separate and distinct from the provisions governing corporations. (Compare Corp. Code Title 2.5 (commencing with Section 17000) with Corp. Code Division 1 (commencing with Section 100), Title 1). The conclusion is confirmed by provisions of the LLC Act that amend or add definitional sections of the Corporations Code. These provisions expressly distinguish an LLC from a corporation. (Compare Corp. Code Section 162 with Section 174.5 and Corp. Code Section 17001(t) with Section 1700.1(ac)).

Accordingly, the plain meaning of the language of the statutes creating corporations and LLCs makes it clear that they are not intended to be construed as legal equivalents.

In addition, LLCs and corporations are not functional equivalents.

The primary point of similarity between an LLC and a corporation is that the members of an LLC, like the shareholders of a corporation, are not personally responsible for the liabilities of the company. See Corporations Code Section 17101. In other respects, such as governance, relationship of owners to the company, and relationships among owners, an LLC is vastly different than a corporation. For example, distributions to shareholders, the right of shareholders to elect directors and to vote on certain matters, and the instruments and contents of instruments specifying the governance of a corporation are well defined in the General Corporation Law (Division 1 (commencing with Section 100), Title 1 of the Corporations Code). The LLC Act, on the other hand, makes these subjects almost entirely a matter of agreement among the members of an LLC. (See Corporations Code Section 17005). In these respects, an LLC is far more similar to a partnership than it is to a corporation.

Moreover, in addition to amending the Corporations Code to create LLCs as a type of legal entity, the LLC Act amended a number of other codes to make their provisions apply to LLCs as well as to corporations and the other types of entities to which those codes had been applicable prior to enactment of the LLC Act.n1 Also, and most notably, Section 109, Chapter 1010 of the Statutes of 1994 amended Section 113 of the Banking Law to add LLCs to those entities embraced within the definition of the term “person.” Prior to the amendment, Section 113 listed corporations as among those entities considered “persons.” As a result of the amendment, the section now lists both LLCs and corporations as “persons.”

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n1For example, Sections 1 through 7 of the LLC Act amend the Business and Professions Code provisions relating to fictitious business names to cover LLCs. Similar amendments including LLCs within the coverage of various other laws are found in the LLC Act at Sections 36 and 37 (Penal Code), 38 (Public Resources Code), 39 through 77 (Revenue and Tax Code), 78 through 91 (Unemployment Insurance Code), and 92 (Vehicle Code).

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These amendments make it clear that the Legislature did not intend a statute which by its terms is applicable exclusively with respect to corporations to impliedly govern LLCs. It is a well recognized principle of statutory construction that when the Legislature has employed in a legislative act a term or phrase in one place and excluded it in another, it should not be implied where excluded. Pasadena Police Officers Assn. v. City of Pasadena 51 Cal.3d 564 (1990).

Put simply, an LLC is not a corporation for purposes of either of the Financial Code provisions that prohibit a bank from owning corporate shares.

By the same token, an LLC is not a corporation for purposes of Subdivision (b) of Section 772 of the Financial Code. Subdivision (b) of Section 772 prohibits only a corporation the shares of which are owned by a bank from acting as an insurance agent or broker. Neither Section 772(b) nor any other provision of the Financial Code prohibits an LLC owned by a bank from acting in those capacities.

In summary, it is our view that:

1. The Banking Law does not prohibit a bank from directly or indirectly owning an interest in an LLC, and

2. Financial Code Section 772(b) does not prohibit an LLC directly or indirectly owned by a bank from acting as an insurance agent or broker.

The foregoing views relate exclusively to the Banking Law. We express no opinion with respect to any other law, state or federal. Nor do we express any opinion as to whether an investment by a bank in any specific insurance agency or brokerage business would be considered a safe or sound banking practice.

If you have any questions, please feel free to contact me at (415) 263-8512.

Very truly yours,

CONRAD W. HEWITT
Superintendent of Banks

By

THOMAS M. LOUGHRAN
Senior Counsel

TML:arc

bcc: W. J. Mix
J. F. Carrig