Is The LLC A Party To Its Own Operating Agreement?

Is an LLC a party to its own operating agreement?

California's new Revised Uniform Limited Liability Company Act (RULLCA) defines "operating agreement" as "the agreement, whether or not referred to as an operating agreement and whether oral, in a record, implied, or in any combination thereof, of all the members of a limited liability company, including a sole member, concerning the matters described in subdivision (a) of Section 17701.10."  Cal. Corp. Code §17701.02(s).  Because the statute refers only to an agreement "of all the members" and not an agreement of the members and the LLC, it seems that an LLC need not be a party to its own operating agreement.  This conclusion is further reinforced by the fact that the statute also provides that an operating agreement of an LLC having only one member is not be unenforceable by reason of there being only one person who is a party to the operating agreement.

But if the LLC isn't a party to the operating agreement, what exactly is the relationship of the operating agreement to the LLC?  Section 17701.10(a) provides that the operating agreement governs, among other things, "relations among the members as members and between the members and the limited liability company".  Thus, RULLCA creates an odd situation in which LLCs are bound by contracts that they did not execute and to which they seemingly are not parties.  This result is reinforced by Section 17701.11(a) which provides " A limited liability company is bound by and may enforce the operating agreement."

The practical ramifications of this result is illustrated by a ruling issued yesterday in Delaware by Vice Chancellor J. Travis Laster in Seaport Village Ltd. v. Seaport Village Operating Company, LLC, et al. C.A. No. 8841-VCL (Sept. 24, 2014).  That case involved the question of whether an LLC could enforce an attorney's fee provision in its operating agreement.  The defendant's only defense was that the LLC had not signed the operating agreement.  Vice Chancellor Laster noted that Section 18-101(7) of the Delaware Limited Liability Company Act provides that “[a] limited liability company is bound by its limited liability company agreement whether or not the limited liability company executes the limited liability company agreement.”

Perhaps this is all that is required to conclude that by virtue of being bound by the operating agreement, an LLC may enforce the agreement.  Note that California's statute, unlike Delaware's, expressly states that the LLC may enforce the operating agreement.  Vice Chancellor Laster, however, took one further logical leap.  He concluded "By statute, a limited liability company is a party to its own limited liability company agreement, regardless of whether the limited liability company executes its own limited liability company agreement."

If California law were applied (it wasn't), I would say that this conclusion is both unnecessary and wrong.  As noted above, the statutory definition of an "operating agreement" does not require an agreement on the part of the LLC.  The normal understanding of a "party" as opposed to a "third party" is someone who has made an agreement.  Historically, the term was used in indentures which were contracts in which the text was copied twice and then separated by a serrate cut.  The party of the first part received the top copy and the party of the second part received the bottom copy.  I believe that a more accurate description of the LLC's status is "quasi party".

By the way, Marsh's California Corporation Law has now been updated with a new Chapter 3A.  This chapter, which I authored, tackles California's new limited liability company law.

[Updated 9/25/2014]