September 20, 2021

Volume XI, Number 263

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September 20, 2021

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How Will The Courts Interpret This?

I recently commented on the awkwardness of Subdivisions (a) and (b) Corporations Code Section 17703.04 that seemingly are intended to establish that the members of an LLC aren’t liable qua members for the obligations of the LLC.  The statute also includes the following provision:

Nothing in this section [17703.04]  shall be construed to affect the liability of a member of a limited liability company to third parties for the member’s participation in tortious conduct, or pursuant to the terms of a written guarantee or other contractual obligation entered into by the member, other than an operating agreement.

Cal. Corp. Code § 17703.04(c).  The idea, here of course, is that members can voluntarily enter into contractual obligations or commit torts.  If they do, this statute won’t limit their personal liability.

But wait, there’s more!  Subdivision (e) of the same statute provides:

Notwithstanding subdivision (a), a member of a limited liability company may agree to be obligated personally for any or all of the debts, obligations, and liabilities of the limited liability company as long as the agreement to be so obligated is set forth in the articles of organization or in a written operating agreement that specifically references this subdivision.

What seems to be missing is whom the member may agree with.  Does the legislature mean the organizer?  This is implied by the reference to the articles of organization.  Does the legislature mean the other members?  This is implied by the reference to a written operating agreement.   There is a third possibility – the member may agree with a third party.  Moreover, how should this Subdivision (e) be read in the context of the entire statute?  It expressly overrides Subdivision (a), but what about Subdivision (c) which seems to override Subdivision (e)?  Does this statute mean that a member can’t enter into an enforceable agreement with a third party unless the member has agreed in the articles or written operating agreement?

Finally, what about managers, which are also covered by Subdivision (a)?

© 2010-2021 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume IV, Number 87
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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm
Partner

Keith Bishop works with privately held and publicly traded companies on federal and state corporate and securities transactions, compliance, and governance matters. He is highly-regarded for his in-depth knowledge of the distinctive corporate and regulatory requirements faced by corporations in the state of California.

While many law firms have a great deal of expertise in federal or Delaware corporate law, Keith’s specific focus on California corporate and securities law is uncommon. A former California state regulator of securities and financial institutions, Keith has decades of...

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