RULLCA's little agency problem

Suppose you’re dealing with a member of a small LLC. You’re about to enter into a transaction that is clearly in the regular course of the LLC’s business. The person proves he’s a member and shows you articles of organization and an operating agreement providing that the LLC is managed by the members. Can the member bind the LLC?

Well, he could if this were an ordinary partnership. And he also could if this were an LLC governed by the laws of 49 of the 51 US jurisdictions. But if you’re unlucky enough to be dealing with an LLC organized in a RULLCA jurisdiction (Iowa or Idaho) (and if you're unlucky enough to have formed an LLC in one of those jurisdictions) you’ve got a problem.

Section 301 of RULLCA says:

(a) A member is not an agent of a limited liability company solely by reason of being a member.

(b) A person’s status as a member does not prevent or restrict law other than this [act] from imposing liability on a limited liability company because of the person’s conduct.

Analyze that. A person is not an agent “solely” because he’s a member. But what if the operating agreement says that members are managers? Should that be enough? Maybe. Or maybe not. After all, RULLCA 407(b)(1) says that “(b) In a member-managed limited liability company . . . (1) the management and conduct of the company are vested in the members. . ." Yet apparently that’s not enough to make a member an agent under 301(a). What difference does it make that the operating agreement and articles say the same thing?

Then you can go to RULLCA 301(b). That says that “other” law can impose liability. What other law? Must be referring to agency law. So what does agency law have to say about the authority of a RULLCA LLC member? Nada. There’s agency law dealing with LLC members’ authority under other acts, but that law is based on those other acts, not on RULLCA.

So I said in my paper, Are Partners Agents? [footnotes omitted]:

RULLCA leaves the law in limbo regarding the extent of members' apparent authority to bind the firm. An LLC member is not an agent – she is a member. As such, she should have some inherent power to bind the LLC. It is up to the statute to specify how much power, perhaps by analogizing to partnerships as do most LLC statutes and ULLCA. By omitting default rules like those in general and limited partnership and LLC statutes, RULLCA gives the courts no guidance on how to proceed. They cannot draw on agency law because a limited liability company is a particular type of firm whose rules are provided by the governing statute and not by agency law. Agency law provides the questions but not the answers.

In my Analysis of RULLCA (p. 61) I add [footnote omitted]: 

Although section 301(b) provides that “[a] person’s status as a member does not prevent or restrict law other than this [act] from imposing liability on a limited liability company because of the person’s conduct,” the courts have yet to develop this law.

I mention all this apropos of a new article in the current Business Lawyer, Rutledge and Frost, RULLCA Section 301 - The Fortunate Consequences (and Continuing Questions) of Distinguishing Apparent Agency and Decisional Authority.  You can access the article here if you're an ABA member. 

Note 57 of this article says:

This criticism [in my Are Partners Agents?] is not well placed. RULLCA section 301(a) is quite clear; member status alone does not convey apparent authority to bind the LLC. Further, it ignores RULLCA section 301(b), which makes express that “other law” may and indeed shall be applied to determine whether the actions of an individual member bind the LLC. See RULLCA § 301(b), 6B U.L.A. 469 (2008). See also RULLCA § 107, 6B U.L.A. 440 (2008) (“[U]nless displaced by particular provisions of this [act], the principles of law and equity supplement this [act].”).

So, readers, I’ll leave the issue with you. If you’re organizing an LLC, do you want to wander into the murk of RULLCA’s agency provision (not to mention the rest of RULLCA’s murk covered in my Analysis article linked above)? Or are you comfortable with “other law” and “principles of law and equity”? If the latter, I’ve got some completely reliable investments I’d like to sell you.

Comments

[Sterling A Minor]

Part of the problem here is the same as with some others: trying to apply LLC law as if it is partnership law.
While familiar to practitioners and other persons involved in business, the partnership law referred to on this is bad, still living in the world of the old aggregate theory. (Which is still the law of partnership in a few states.)
Officers/employees are by definition agents of the employer. The persons who are to be agents should be named officers (something that can be done in Minutes if not done earlier in the life of the LLC), or have been named Managers. The LLC law should make it quite easy for a person to have no status other than equity holder (Member) as RULLCA 301(a) provides. If RULLCA does not allow for officers, then that is the part that should be amended, and therefore RULLCA 301(b) will refer to that provision.

[Larry Ribstein]

Sterling:
First, part of the problem with RULLCA, as I have tried to explain, is that it is internally contradictory. In fact, members are managers by default. Second, you could provide consistently that LLC members are not managers or agents, but I don't think that would be the appropriate default rule. Third, a way to deal with the problem you propose is to have a simple mechanism for opting out of the default rule vis a vis third parties.

[Thomas Stephens]

I am completely behind the curve on this one. The Business Lawyer article seemed to posit that there was a problem because the authority to act vis-a-vis third parties was not separated from the authority to act regarding the internal management iof thre LLC. (I may not have this right. As I say, I am late to the party.)

My limited understanding of the entire structure of the LLC entity was that the "internal" ("inter se", I think, in the language of scholars) workings of the LLC were very nearly entirely the subject of contract in the operating agreement. At least in some jurisdictions, California, for example, the statutes "vesting" management in the members or managers are subject to provisions in the articles OR the operating agreement.

The selection of a designation as a "member-" or "manager-managed" LLC (and indeed, at least in some jurisdictions "single manager" or "multiple managers" managed LLCs) in the formational charter document (articles of organization or formation), while perhaps reflecting some elements of the agreement in the operating agreement, provide the notice of authority needed to conduct business with third parties.

To the extent this is not the case, wouldn't the simpler course be to make such a distinction clear in the model statute rather than the more ambiguous course selected by the drafters of the RULLCA?