Bill Would Mandate Indemnification Of LLC Agents

California’s current limited liability act permits indemnification of any person (including any manager, member, officer, employee, or agent of the limited liability company) against judgments, settlements, penalties, fines, or expenses of any kind incurred as a result of acting in that capacity. Cal. Corp. Code § 17155(a). The statute excepts liability for a manager’s breach of fiduciary duty to the company and its members as set forth in Section 17153.

In less than a year, California’s ill-considered Revised Uniform Limited Liability Company Act will become operative. See California’s New LLC Act – Call Me Laocoon, But I Foresee A Mess! The new law appears to be similar on its face, but is in fact very different. Section 17704.08(a) provides:

A limited liability company shall reimburse for any payment made and indemnify for any debt, obligation, or other liability incurred by a member of a member-managed limited liability company or the manager of a manager-managed limited liability company in the course of the member’s or manager’s activities on behalf of the limited liability company, if, in making the payment or incurring the debt, obligation, or other liability, the member or manager complied with the duties stated in Section 17704.09.

First, the new statute mandates, rather than permits, indemnification. Second, the new statute is limited to members (in the case of a member-managed company) or the manager (in the case of manager-managed company). Unlike the current statute, the new statute makes no mention of officers, employees or agents. Third, the statute is conditioned upon compliance with the duties stated in Section 17704.09. These duties are not the same as those set forth in Section 17153. This one example should put to rest any claim that there are only minor differences between the current law and the new law.

Recently, Assembly Member Scott Wilk has introduced a bill to amend Section 17704.08 even before it becomes operative. AB 1355 would require a limited liability company to indemnify its agent, as defined, in proceedings, as defined, for the successful defense or settlement of claims brought against the agent by reason of his or her agent status.

The Revised Uniform Limited Liability Company Act portends to be as disastrous as Athens’ decision to invade Sicily. Rather than tinkering with indemnification provisions, the legislature should address the fact that if the new law becomes operative next year, the operating agreements of every existing California limited liability company will be involuntarily re-written. Because the current law does not include a savings clause, this presents an obvious constitutional issue. See The Shades Of Samson Occum, Daniel Webster And John Marshall Haunt New LLC Act Bill. Assembly Member Wilk would provide a far better service to small and large businesses by amending his bill to address these problems or to delay the operative date of the new law until these problems are worked out.

The Appeal That No Party Wanted

Yesterday, I wrote about the California Supreme Court’s decision in Greb v. Diamond Int’l Corp., 2013 Cal. LEXIS 1114 (Feb. 21, 2013). One interesting aspect of the case that I didn’t mention was the fact that the parties had stipulated to a dismissal of the case before the Court of Appeal had issued its opinion. However, the Court of Appeal decided to issue its opinion because the matter had been fully briefed and raised issues warranting an opinion. The case that the parties didn’t want to proceed, proceeded and resulted in a Supreme Court opinion.

 

Topics:  Fiduciary Duty, Indemnification, Limited Liability Act, LLC, RULLCA

Published In: Business Organization Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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