La Debacle – California’s Flawed Bid To Enact The NCCUSL’s LLC Act

For some time, I’ve been sounding the alarm against SB 323 (Vargas).  As introduced, this bill would have repealed California’s Beverly-Killea Limited Liability Company Act, Corporations Code Section 17000 et seq., and enact a version of the Uniform Limited Liability Company Act drafted by the National Conference of Commissioners on Uniform State Laws.  The revised uniform act has was completed in 2006 and has only been enacted by a handful of jurisdictions (District of Columbia, Idaho, Iowa, Nebraska, Utah, Wyoming).  Whatever the merits of the uniform act,  SB 323 is freighted with problems. 

SB 323 was amended on August 6 and again on August 14.  In its most recent iteration, the bill would apply the new law to all limited liability companies existing on or after January 1, 2014 and to the actions of managers or members on or after that date.  See proposed Corporations Code Section 17713.04(a).   This would include the many thousands of limited liability companies formed under the Beverly-Killea Act.  The bill would continue to apply the Beverly-Killea Act to “all acts or transactions by a limited liability company occurring, or contracts entered into, prior to that date [January 1, 2014]”.  See proposed Corporations Code Section 17713.04(b).   This language presents several problems. 

As an initial matter, these provisions are too limited.  They appear to “grandfather” only acts or transactions by the companies themselves.  They do not “grandfather” the acts or transactions by the members or managers.  Moreover, a separate provision of the bill (proposed Section 17657(b)) “repeals” the Beverly-Killea Act.  This leads to the question of what law, if any, applies to the acts or transactions of members or managers prior to January 1, 2014?  What law governs omissions to act by managers or members whether the omission occurs before or after January 1, 2014?

Second, the new law would apply to actions taken by managers or members, acts or transactions by limited liability occurring, and contracts entered into on or after January 1, 2014.  As a result, operating agreements entered into before that date will continue to be governed by the Beverly-Killea Act (by virtue of the grandfathering provision) while the actions of managers, members and the limited liability companies themselves taken on or after that date will be governed by the new law.  In other words, the contract will be governed by one law while the actions of members and managers pursuant to that contract will be governed by a different law.  Further questions arise if the operating agreement is amended.  Will only the amendment be subject to the new law as a contract entered into on or after January 1, 2014 or will the entire operating agreement become subject to the new law?  Questions like this will effectively force all existing limited liability companies to review and amend their operating agreements so as to conform to the new law.  This will impose substantial costs on these companies in terms of legal and accounting fees.  

Even more remarkably, there is the constitutional problem.  As explained in “The Shades Of Samson Occum, Daniel Webster And John Marshall Haunt New LLC Act Bill“, the legislature failed to include a “savings clause” in the Beverly-Killea Act, thereby limiting its constitutional power to amend or repeal that act.

It seems likely that SB 323 will be enacted.  As Dr. Krakower said to Carmela Soprano:  “One thing you can never say is that you haven’t been told.”  The Sopranos: Second Opinion (2001).