Legislature Shuts The Barn Door After The Horse Has Bolted And Then Burns Down The Barn

by Allen Matkins

Not many people use horses as a means of transportation in the U.S. anymore, but numerous horse related expressions and aphorisms persist in everyday speech, including:

  • Don’t look a gift horse in the mouth;
  • You can lead a horse to water but you can’t make it drink;
  • A wink is as good as a nod towards a blind horse;
  • Hold your horses;
  • Back the wrong horse;
  • A dark horse;
  • Don’t change your horses in the middle of the stream;
  • Put the cart before the horse; and
  • Shutting the barn door after the horse has bolted.

There are many others, but the last is apropos to today’s post as it seems to me that the legislature may have done exactly that when it enacted the California Revised Uniform Limited Liability Company Act (RULLCA), Cal. Corp. Code §§ 17701.01 et seq.  The legislature wanted the RULLCA to replace the Beverly-Killea Limited Liability Company Act, former Corp. Code §§ 17000 et seq. but there was just one problem.  When the legislature enacted the Beverly-Killea Act it failed to include a provision reserving the right to amend or repeal that act.  This created a problem of constitutional proportions because Article I, Section 10 of the U.S. Constitution flatly forbids states from impairing the obligations of contracts, a point made by no less a constitutional luminary than Chief Justice John Marshall.  Dartmouth College v. Woodward, 17 U.S. 518 (1819).

The legislature can’t claim not to have known about the advisability of including a reservation clause in the Beverly-Killea Act because it had taken care to do so when it enacted the General Corporation Law, Cal. Corp. Code § 100(b) (“This title of the Corporations Code, or any division, part, chapter, article or section thereof, may at any time be amended or repealed.”) and when it had enacted the Uniform Partnership Act of 1994, Cal. Corp. Code 17713.05 (“This title, or any division, part, chapter, article, or section thereof, may at any time be amended or repealed.”).

Upon learning of this oversight, however, the legislature’s response was nothing short of bizarre.  It added a reservation clause to the Beverly-Killea Act when it enacted the RULLCA in 2012.  See former Cal. Corp. Code § 17657(a), added by 2012 Cal. Stat. ch. 419, § 19.  I don’t know whether the legislature actually believed that it could reserve the right to repeal the Beverly-Killea Act ex post facto.  But then it did something even more outré – it repealed the reservation provision effective January 1, 2014.  See former Cal. Corp. Code § 17657(b).

As a result, LLCs formed under the Beverly-Killea Act fall into two categories:

  • those formed before January 1, 2013, when the addition of the reservation clause became operative.  See Cal. Const. Art. IV, § 8 and 2012 Cal. Stat. ch. 419, § 32; and
  • Those formed in 2013 when Section 17657(a) was operative and before the Beverly-Killea Act was repealed.

Most LLCs will be in the first category and they exist under a looming legal question mark – was the legislature’s repeal of the Beverly-Killea Act LLCs constitutional as to these LLCs?

By the way, the legislature didn’t forget to include a reservation provision in the new LLC act.  Cal. Corp. Code § 17713.05.

? ? ?

Since the Academy Awards ceremony was held last evening, I’m closing with a movie suggestion - The Attorney.  This is a very exciting film inspired by the early legal career of the late Roh Moo-Hyun (???, also Romanized as No Mu-hyeon) who rose from an impoverished background to become the ninth president of the Republic of Korea.  Remarkably, Mr. Roh became a lawyer even though he had not graduated college or law school.  The movie is a moving tribute to constitutional government and democratic ideals that should inspire even the most jaded lawyer.


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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