In this series. The liability clause supplies the default only if it can be identified. This note grades three kinds of sentence. The repair, once the operative text is clear, is an amendment or an election, depending on whether classification is already relevant. The practice page is Cayman funds.
A fund can be named “limited,” constituted as limited liability in its first clause, and then state, in the operative liability chapter, that it does not limit holder liability. That is a real inconsistency. It is not three inconsistencies of the same kind. An operative clause and a signed adherence term are contractual. A risk-factor warning that investors may be called for capital is descriptive, and it is often language carried forward from a form. Reading all three as the same defect alarms people about a document that is doing more than one job.
The regulation points at one kind of text
Treasury Regulation section 301.7701-3(b)(2) bases limited liability on the statute or law under which the entity is organized. If that law allows the entity to specify in its organizational documents whether the members will have limited liability, the organizational documents may also be relevant. The regulation does not say that every sentence in the offering set is an organizational document, and it does not rank a risk factor against an operative clause.
The text that can matter is the text that specifies whether a holder has personal liability for the entity's debts by reason of being a holder. Personal liability, in the same paragraph, means that creditors may seek satisfaction of the entity's debts or claims from the member as such. A sentence that does not specify that point is not the sentence the regulation is describing.
Local counsel identifies which instrument the organizing law treats as the organizational document, and whether that law allows the document to set the liability regime. If the statute fixes liability and the documents cannot vary it, a contradictory sentence does not rewrite the statute paragraph (b)(2) looks to. That is a local-law conclusion. We ask for it. We do not make it.
Three grades of sentence
| Text | What it is | What it can do for the U.S. default |
|---|---|---|
| Operative liability clause | A term in the constitutional or governing document that states whether holders are personally liable. | The kind of organizational term the regulation says may be relevant, if local law lets the documents specify the regime. |
| Signed adherence | The holder's own agreement to a liability undertaking in a subscription or adherence instrument. | Part of the contract stack. Whether it overrides the constitution is a local priority question, then a question of what U.S. law treats as the organizational document. |
| Risk factor | A warning that further amounts might be called, or that a court might not respect limited liability. Often carried from a form. | Describes a risk. It does not specify the liability regime. |
Two operative clauses that specify opposite regimes are a defect in the instrument. The documents do not state one answer. The repair is to make them state one answer, or to leave the local-law position as it is and use a classification election if the U.S. classification is already relevant. The choice between those repairs is the difference between an amendment and Form 8832. Averaging the clauses is not a repair.
A signed adherence term is the holder's agreement. It can matter because the holder has undertaken it. It is still not automatically the organizational document. Priority between a constitution and a later adherence instrument is a question for counsel in the fund's jurisdiction. After that reading, U.S. counsel asks which instrument section 301.7701-3 is permitted to treat as relevant.
A risk factor that says investors may lose more than they invest, or that limited liability may not be respected in every forum, is a disclosure of risk. Funds carry those sentences from templates. Treating the warning as an operative grant of unlimited liability reads a caution as a covenant. The classification analysis does not do that.
What a calm reading produces
The product of the reading is a short list: which sentences specify liability, which sentences a holder has agreed to, and which sentences warn. Local counsel then answers the two questions the regulation actually poses. Does the organizing law allow the documents to set member liability? Which document is the organizational document? If the operative clauses conflict, they are conformed or the U.S. classification is elected, according to whether classification is already relevant. A risk factor is not the paragraph you amend in order to change a default.
We do not supply a case for which clause would win in a dispute. The regulation does not contain that ranking. A conflict between operative terms is first a drafting problem and a question for local counsel. The U.S. consequence follows that work. It does not replace it.
Recalde Law Firm, P.A. is a Florida law firm with an office in Miami, Florida. We advise on United States law only. We do not practice Cayman law (or the law of any other country). Formation of a Cayman (or other non-U.S.) vehicle, Cayman legal advice, and CIMA registration stay with qualified Cayman counsel. We coordinate; we do not replace them. This is general information, not an offer of fund interests, and not Cayman legal advice.