The California legislature recently enacted the California Revised Uniform Limited Liability Company Act which made some important changes to existing California law affecting both lenders and limited liability company borrowers, especially regarding determination of the authority of managers of a limited liability company to enter into loan transactions on behalf of the limited liability company.
In terms of background, the California Revised Uniform Limited Liability Company Act (often called the RULLCA and codified in Sections 17701.01 through 17713.12 of the California Corporations Code) took effect on January 1, 2014. The RULLCA completely displaces previous California law governing limited liability companies. Lenders and limited liability company borrowers should take note that the RULLCA automatically applies to all California limited liability companies and all foreign limited liability companies registered with the Office of the California Secretary of State and does not require such existing limited liability companies to file any further documents with any governmental agency in order to “opt in.”
Although it does not prohibit a limited liability company to be managed by a manager or managers as opposed to its members, the RULLCA provides that a limited liability company is deemed to be member-managed unless the limited liability company’s articles of organization and operating agreement expressly state that the limited liability company will be managed by its manager(s). The language to be used to designate that the limited liability company is to be managed by its managers is set forth in Corporations Code Section 17704.07(a).
The RULLCA also requires, in most cases, that the authority of a manager of a limited liability company to enter into a loan transaction be expressly set forth in the limited liability company’s operating agreement. In particular, the RULLCA provides that, unless otherwise set forth in the operating agreement, the consent of all members of the limited liability company is required to undertake any action “outside of the ordinary course of the limited liability company’s activities.” Although the term “ordinary course” is not defined in the RULLCA, it would seem that entering into a loan transaction would be outside the ordinary course of activities for most limited liability companies. This requirement that the operating agreement expressly state the authority of a manager of a limited liability to undertake any action outside of the ordinary course of the limited liability company’s activities is a departure from previous California law which set a different, and in some cases much lower, threshold of when a manager was authorized to enter into a loan transaction on behalf of the limited liability company.